-----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, Tgnf+tgwEJp9EJPmS6bli6lPkfPQzf16G2RTpjHmIXL5ZwnDRqHq8A7JFuvzw5EZ heldhITX5cHMCZtsRZ7iVA== 0000906307-03-000019.txt : 20030728 0000906307-03-000019.hdr.sgml : 20030728 20030725175221 ACCESSION NUMBER: 0000906307-03-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20021102 FILED AS OF DATE: 20030728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUTRITIONAL SOURCING CORP CENTRAL INDEX KEY: 0000906307 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 650415593 STATE OF INCORPORATION: DE FISCAL YEAR END: 1101 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-63372 FILM NUMBER: 03804361 BUSINESS ADDRESS: STREET 1: 1300 NW 22ND STREET CITY: POMPANO BEACH STATE: FL ZIP: 33069 BUSINESS PHONE: 9549772500 MAIL ADDRESS: STREET 1: 1300 NW 22ND STREET CITY: POMPANO BEACH STATE: FL ZIP: 33069 FORMER COMPANY: FORMER CONFORMED NAME: PUEBLO XTRA INTERNATIONAL INC DATE OF NAME CHANGE: 19930527 10-K 1 a10k110202.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended __November 2, 2002___ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number: 33-63372 NUTRITIONAL SOURCING CORPORATION (Exact name of registrant as specified in its charter) Delaware 65-0415593 ------------------------------------ ----------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 1300 N.W. 22nd Street Pompano Beach, Florida 33069 ------------------------------------ ----------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (954) 977-2500 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 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] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X No voting stock of the Registrant is held by non-affiliates of the Registrant. Indicate by check mark whether the registrant has filed all documents and Reports required to be filed by Section 12, 13, or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the Court. YES ___ NO X_ Number of shares of the Registrant's Common Stock, $ .10 par value outstanding as of July 25, 2003 -- 200. DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I ITEM 1. BUSINESS Name of the Registrant Nutritional Sourcing Corporation was known as Pueblo Xtra International, Inc. until July 22, 2002. Effective that date its name was changed to Nutritional Sourcing Corporation ("NSC"). Financial Restructuring and Proceedings Under Chapter 11 of the United States Bankruptcy Code On September 24, 2002 NSC voluntarily consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court For The District of Delaware (the "Court"). The Court ordered such relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC was in response to an involuntary petition filed in the Court by certain creditors of NSC under title 11, United States Code (the "Chapter 11 Case"). The creditors' actions were taken as a result of NSC not paying the August 1, 2002 interest payment on its $177.3 million in notes outstanding which were due in August of 2003. The interest was not paid as a result of NSC's operating subsidiaries not paying interest they owed to NSC; this non- payment was consented to by the operating subsidiaries' lender banks. The relief under the Chapter 11 Case pertained to NSC only, not its operating subsidiaries. However, the bank debt of the operating subsidiaries, which was guaranteed by NSC, was due on February 1, 2003. On January 30, 2003 a new bank lender assumed the existing bank debt and committed to lend the operating subsidiaries additional funds at the time NSC emerged from bankruptcy. The new bank lender also obtained the guarantee of NSC. On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30, 2003 confirmation order from the Court. The impact of the Chapter 11 Case on NSC's operations for the year ended November 2, 2002 and its financial condition as of that date are disclosed in the consolidated financial statements and related footnotes included in Item 15 of this Form 10-K. The impact, including new bank debt and issuance of new Notes, of the financial restructuring and emergence from proceedings under Chapter 11 of the United States Bankruptcy Code, both of which occurred subsequent to November 2, 2002, are discussed in more detail in NOTE 16 - SUBSEQUENT EVENTS of the footnotes to the consolidated financial statements included in Item 15 of this Form 10-K. General Unless otherwise specified statements herein are as of November 2, 2002 or for the period or periods then ended. The Company is a Delaware holding company that owns all of the membership units of Pueblo International, LLC and all the common stock of Pueblo Entertainment, Inc., both Delaware companies. Throughout this report, unless the context otherwise requires, "Company" refers to NSC together with its subsidiaries. Further, throughout this report Pueblo International, LLC, together with its subsidiaries, is referred to as Pueblo and Pueblo Entertainment, Inc. is referred to as Pueblo Entertainment. Pueblo Entertainment was organized on January 28, 2001 to own and operate the video rental store assets in Puerto Rico. Prior to that date those assets were owned and operated by Pueblo International, Inc. Pueblo International, Inc. was converted to a Delaware limited liability company on November 4, 2001 and its name was changed to Pueblo International, LLC. Pueblo owns all of the common stock of FLBN Corporation ("FLBN") formerly Xtra Super Food Centers, Inc., the subsidiary that operates the Company's supermarkets and video rental stores in the U.S. Virgin Islands. The name change to FLBN Corporation became effective on March 27, 2003. Pueblo, which was founded in 1955 with the opening of the first mainland-style supermarkets in Puerto Rico, is one of the leading supermarket chains in the Commonwealth of Puerto Rico and the Territory of the U.S. Virgin Islands. In addition, the Company, through its ownership of Pueblo and Pueblo Entertainment, is the leading operator of video rental outlets in Puerto Rico and the U.S. Virgin Islands through its franchise rights with Blockbuster, Inc. ("BI"). As of November 2, 2002, the Company operated 41 supermarkets in Puerto Rico and 6 supermarkets in the U.S. Virgin Islands. As of November 2, 2002, the Company also operated 39 video rental stores in Puerto Rico and 2 video rental stores in the U.S. Virgin Islands. On November 2, 2001 the Company and its subsidiaries changed their fiscal year end from the Saturday closest to January 31 to the Saturday closest to October 31. Consequently, the comparable period of the prior year being reported in this Annual Report on Form 10-K is the forty weeks ended November 3, 2001. On July 28, 1993, the Company acquired all of the outstanding shares of common stock of Pueblo for an aggregate purchase price of $283.6 million plus transaction costs (hereinafter referred to as the "Acquisition"). Pursuant to the Acquisition, Pueblo became a wholly-owned subsidiary of the Company. The Acquisition has been accounted for under the purchase method effective July 31, 1993 as discussed in the goodwill section of NOTE 1 to the notes to the Company's consolidated financial statements included in Item 15 of this Form 10-K. Business of the Company Supermarket Industry Overview The top four chains in the retail grocery industry in Puerto Rico account for approximately 75% of total industry sales, with the remainder divided among smaller chains and numerous independent operations. Total supermarket chain sales in calendar year 2001 were approximately $2.3 billion, a significant portion of which was attributable to the more densely populated greater San Juan metropolitan area, where the larger chains are concentrated. The grocery industry in less populated parts of the island is characterized by smaller family-run operations with limited selection and less competitive prices. No major U.S. supermarket chains have established operations in the Puerto Rico grocery market, although a number of national general merchandise chains have significant Puerto Rican operations. Wal-Mart purchased one of the top four chains, Supermercados Amigo, effective December 5, 2002. Amigo divested 6 of its stores to another party and Wal-Mart has indicated it intends to operate the remaining chain of 30 stores as Amigo stores. Wal-Mart also operates Sam's Clubs, Wal-Mart Supercenters and Wal-Mart stores on the island of Puerto Rico. National warehouse clubs and mass merchandisers, which have entered the Puerto Rico and U.S. Virgin Islands markets since 1990 offering various bulk grocery and general merchandise items, have increased pricing pressures on grocery retailers including the Company. Puerto Rico The Company operates its supermarkets under the names Pueblo and PuebloXtra with emphasis on service, variety and high quality products at competitive prices. In Puerto Rico, the Company has a grocery retailing market share of approximately 21%. During the 52 weeks ended November 2, 2002, the Company's stores in Puerto Rico averaged approximately 40,485 gross square feet and generated an average of approximately $442 of sales per selling square foot. U.S. Virgin Islands During the 52 weeks ended November 2, 2002, the six supermarkets in the U.S. Virgin Islands averaged 34,367 gross square feet and generated an average of approximately $400 of sales per selling square foot. The Company estimates a U.S. Virgin Islands grocery retailing market share of approximately 36%. Video Operations The Company has operated franchised video rental locations in Puerto Rico since 1989 and in the U.S. Virgin Islands since 1993 and operated 41 video rental locations in Puerto Rico and the U.S. Virgin Islands as of November 2, 2002. In Puerto Rico, the Company operates 16 video rental outlets that are in the same buildings as its supermarkets and 23 free-standing video rental stores, most of which are adjacent to its supermarkets. In the U.S. Virgin Islands, the Company operates two video rental stores. The Company's free-standing video rental stores average approximately 5,343 gross square feet, while the Company's video rental outlets that are in the same building as its supermarkets average approximately 4,108 gross square feet. In order to increase customer traffic in its supermarkets, the Company's typical video rental outlet that is in the same building as its supermarket has a separate entrance but its principal exit leads into the supermarket. In addition, the Company is able to take advantage of cross-marketing opportunities with its supermarket operations, including promotional video rental and merchandising offers. The Company's Video Rental Operations are currently the largest major video chain operating in Puerto Rico and the U.S. Virgin Islands. In the last several years Video Avenue has opened 16 stores in Puerto Rico in competition with the Company. Each of the Company's free-standing video rental locations carries an average of approximately 10,000 tapes dedicated to video rental whereas its video rental locations that are in the same building as its supermarkets average approximately 8,600 tapes. Each location also offers for sale a selection of recorded and blank video tapes, music compact discs, video game cartridges, self-activated cellular phones, prepaid phone cards, accessories, and snack food products. For promotions of its Video Rental Division operations, the Company primarily utilizes print, television, radio, billboards and in-store signage. The Company's franchisor also provides product and support services to the Company. These include, among other things, marketing programs and computer software. The Company's successful development of its video rental franchise has been the result of its ability to leverage its knowledge of Puerto Rico and existing market and retailing expertise. The Company's knowledge of real estate and its existing portfolio of desirable supermarket locations has enabled it to obtain attractive, high traffic locations for its Video Rental Operations. The Company continues to evaluate expansion opportunities in its markets. Each video rental location is subject to a Franchise Agreement with the Company's franchisor that provides the right for such location to conduct video rental operations for a 20-year period. Store Composition Since the Acquisition through November 2, 2002, the Company made capital expenditures of approximately $124.9 million in its supermarket operations in Puerto Rico and the U.S. Virgin Islands, including the opening of six new supermarkets, the acquisition of one new supermarket and the remodeling of 39 existing supermarkets. In the same period, the Company made capital expenditures totaling approximately $11.0 million in its Video Rental Division operations. The history of store openings, closings and remodelings, beginning with fiscal 1999, is set forth in the table below:
40 Weeks Fiscal Ended Fiscal Year Year November 3, --------------------- 2002 2001 2001 2000 1999 ---- ---- ---- ---- ---- Stores in Operation: At beginning of year . . . . . . . 89 91 93 94 94 Stores opened: Supermarkets . . . . . . . . . - - - - 1 video rental stores . . . . . . - - 1 - 1 Stores closed: Puerto Rico - Supermarket . . . 1 - 2 - 1* Puerto Rico - video rental . . - 2 1 1 1* ---- ---- ---- ---- ---- At end of year . . . . . . . . . 88 89 91 93 94 ==== ==== ==== ==== ==== Remodels . . . . . . . . . . . . . 2 2 8 9 2 ==== ==== ==== ==== ==== Store Composition at Year-End: By division: Supermarkets . . . . . . . . 47 48 48 50 50 video rental stores . . . . 41 41 43 43 44 ---- ---- ---- ---- ---- Total 88 89 91 93 94 ==== ==== ==== ==== ==== By location: Puerto Rico . . . . . . . . 80 81 83 85 86 U.S. Virgin Islands . . . . 8 8 8 8 8 ---- ---- ---- ---- ---- Total 88 89 91 93 94 ==== ==== ==== ==== ====
* Closed as a result of Hurricane Georges; will not be reopened. On November 20, 2002, subsequent to the year ended November 2, 2002, the Company opened one new supermarket and one new video rental outlet in the Isla Verde section of Carolina, Puerto Rico. Supermarket Purchasing and Distribution The Company's buying staff actively purchases products from distributors, as well as directly from the producer or manufacturer. The Company generally controls shipping from the point of purchase in an effort to reduce costs and control delivery times. The Company currently buys approximately 57% of its total dollar volume of product purchases directly from manufacturers and is seeking to increase this percentage to reduce costs and to obtain improved payment terms. The Company owns a full-line distribution center in greater San Juan with approximately 300,000 square feet. The only facility of its type on the island with both refrigerated and freezer capacity, the San Juan distribution center has capacity to store approximately 1.5 million cases of assorted products and serves as the Company's central distribution center for the island. The distribution center is equipped with a computerized tracking system which is integrated with the Company's purchasing, inventory management and shipping systems. This system enables the Company to make rapid procurement decisions, optimize inventory levels and increase labor productivity. During the fiscal year ended November 2, 2002, this facility provided approximately 56% of the goods (measured by purchase cost) supplied to the Company's stores in Puerto Rico. Supermarket Merchandising General The Company's merchandising strategies integrate one-stop shopping convenience, premium quality products, attractive pricing and effective advertising and promotions. The Company reinforces its merchandising strategies with friendly and efficient service, effective promotional programs, in-store activities, and both brand name and high quality private label product offerings. Product Offerings Over the past several years management greatly increased the number of items offered, analyzed the preferences of its customers, and then eliminated certain low demand items. The Company expanded its supermarket stock keeping units ("SKUs") from approximately 23,000 to approximately 67,000. Management believes the Company's supermarkets offer the greatest product variety within their market areas, as its competitors generally lack the sales volume, store size and procurement efficiencies to stock and merchandise the wide variety of products and services offered by the Company. The Company's management believes the convenience and quality of its specialty department products contribute to customer satisfaction. The following table sets forth the mix of products sold (as measured in sales dollars) in the Company's supermarkets for the fiscal periods indicated:
Fiscal Fiscal Year 40 Weeks Year Ended Ended Ended November 2, November 3, January 27, Product Category 2002 2001 2001 ----------- ----------- ----------- Grocery . . . . . . . . . . . . 43.3% 43.8% 45.2% Health/Beauty Care/General Merchandise 8.1 8.2 8.2 Dairy . . . . . . . . . . . . . . 18.6 18.6 17.8 Meat/Seafood . . . . . . . . . . . 16.0 15.7 15.1 Produce . . . . . . . . . . . . . . 9.2 9.1 9.1 Deli/Bakery . . . . . . . . . . . . 4.8 4.6 4.6 ------ ------ ------ Total . . . . . . . . . . . . 100.0% 100.0% 100.0% ====== ====== ======
Pricing As one of the largest grocery store chain operators in its markets, the Company is able to take advantage of volume purchase discounts and shipping efficiencies to offer competitive pricing at its supermarkets. The Company utilizes circulars distributed as inserts in newspapers and in its stores to emphasize special offers. The frequency of circular distribution varies from weekly in some periods to every other week in other periods. Private Label During fiscal 1998 the Company began selling Pueblo brand private label grocery, dairy, and frozen food items in its supermarkets. As of November 2, 2002, the Company continued to have approximately 274 SKUs of manufactured Pueblo brand items offered in its supermarkets. Product selection seeks to achieve quality that is equal to or better than competitive national brand products and sourcing that will enhance gross margin. Historically, the Company utilized only Food Club - manufactured private label products through the Company's membership with Topco Associates, Inc. Utilization of these products has not been discontinued and is intended to be expanded. Rather, product offerings among Pueblo private label products, Food Club private label products and national brands are chosen on the basis of quality, cost, gross margin and sales volume in order to offer what management believes is the best selection and value to its customers. The Company's private label program consists of the products discussed in the two preceding paragraphs as well as Pueblo private label products sold in its bakery and deli departments and a variety of brand labels sold exclusively at its supermarkets. During the fiscal year ended November 2, 2002 private label sales were approximately 13.5% of total supermarket sales. Category Management During fiscal 1998, the Company implemented a category management system designed to combine traditional buying, reordering and pricing functions under the leadership of corporate level category merchandisers. The system allows the Company to assign profit management to the individual responsible for a product category. The Company's management believes such a system improves sales, optimizes inventory levels, reduces purchase costs and thereby enhances gross profit and operating profit margins. Advertising and Promotion The Company primarily utilizes newspaper, radio, television and in-store advertising in Puerto Rico and the U.S. Virgin Islands. The Company's grocery operations run multi-page newspaper inserts and full-page color advertisements. In March of 2001, the Company introduced the new "PuebloCard" to its customers in Puerto Rico and the U.S. Virgin Islands. The PuebloCard serves many functions, including enhancing customer loyalty, through providing discounts available only to customers using the card, check cashing services, and target marketing. All advertising is created and designed through the Company's wholly-owned advertising agency, CaribAd, Inc. (dba "Adteam"). Adteam, based in Puerto Rico, develops promotional programs for all of the Company's markets, thereby providing advertising cost advantages over the Company's competitors. Competition The grocery retailing business is extremely competitive. Competition is based primarily on price, quality of goods and service, convenience and product mix. The number and type of competitors, and the degree of competition experienced by individual stores, vary by location. The Company competes with local food chains, such as Supermercados Amigo, Supermercados Grande, Supermercados Econo, Mr. Special Supermarkets, Plaza Gigante Supermarkets, and Supermercados Selecto in Puerto Rico, and Plaza Extra and Cost-U-Less in the U. S. Virgin Islands, as well as numerous independent operations throughout Puerto Rico and the U.S. Virgin Islands. In addition, several warehouse clubs and mass merchandisers, such as Sam's Club, Wal-Mart, Kmart (including its Big K format), Costco and Walgreens, have opened new locations in Puerto Rico and the U.S. Virgin Islands. Although the Company's Video Rental Operations constitute the largest video chain in Puerto Rico and the U.S. Virgin Islands, the Company competes with 16 Video Avenue stores, numerous local independent video retailers, and mass merchandisers in the category of sell thru movie and games video. In addition, the Company's video rental stores compete against cable, television, satellite broadcasting, movie theaters, the Internet, and other forms of entertainment. Management Information Systems The Company believes high levels of automation and technology are essential to its operations and has invested considerable resources in computer hardware, systems applications and networking capabilities. These systems integrate all major aspects of the Company's business, including the monitoring of store sales, inventory control, merchandise planning, labor utilization, distribution and financial reporting. All of the Company's stores are equipped with state-of-the-art point of sale terminals with full price look-up capabilities that capture sales at the time of transaction down to the SKU level through the use of bar-code scanners. These scanners facilitate customer check-out and provide, by store, valuable stock-replenishment information for buyers and financial information used by management. Similar scanning technology is used by each store to electronically record goods received and orders generated. To provide the best service possible, the Company has installed a labor scheduling system that schedules optimal staffing based on sales, customer traffic and defined service objectives. In addition, the Company has installed software to monitor cash register check out transactions, by cashier, according to type and frequency in order to improve check out operations and reduce inventory shrinkage. The Company's management information systems at its Video Rental Operations are state-of-the art systems which are licensed to the Company by its franchisor. Employees As of November 2, 2002, the Company had approximately 4,650 employees (full- and part-time), of whom approximately 3,700 were employed at the supermarket level, 500 at the administrative and financial services offices and distribution center and 450 by the Video Rental Division. Approximately 66% of the Company's supermarket employees were employed on a part-time basis and approximately 3,275 store employees were represented by a nonaffiliated collective bargaining organization under a four year contract expiring in July 2006. The Company considers its relations with its employees to be good. Trademarks, Tradenames and Service Marks The Company owns certain trademarks, tradenames and service marks used in its business, which are registered with the U.S. Patent and Trademark Office, and the appropriate governmental authorities in Florida, Puerto Rico, the U. S. Virgin Islands, and selected foreign jurisdictions. The Company believes that its trademarks, tradenames, and service marks, including Pueblo, PuebloXtra, and Xtra, are valuable assets due to the fact that brand name recognition and logos are important considerations in the Company's consumer markets. As a franchisee, the Company has exclusive rights to use the franchisor's trademark in its specified franchise territories. Regulation Compliance by the Company with federal, state and local environmental protection laws has not had, and is not expected to have, a material effect on capital expenditures, earnings or the competitive position of the Company. Risk Factors Supermarket Industry The retail grocery industry is extremely competitive and is characterized by high inventory turnover and narrow profit margins. The Company's results of operations are therefore, sensitive to, and may be materially adversely impacted by, among other things, competitive pricing, promotional pressures and additional store openings by competitors. The Company competes with national, regional and local supermarkets, warehouse club stores, drug stores, convenience stores, discount merchandisers and other local retailers in the market areas it serves. Competition with these outlets is based on price, store location, advertising and promotion, product mix, quality and service. Some of these competitors may have greater financial resources, lower merchandise acquisition costs and lower operating expenses than the Company, and the Company may be unable to compete successfully in the future. Video Operations The Company's video rental franchise faces significant competition and risks associated with technological obsolescence, and the Company may be unable to compete effectively. The home video and home video game industries are highly competitive. The Company competes with local, regional and national video retail stores, and with mass merchants, specialty retailers, supermarkets, pharmacies, convenience stores, bookstores, mail order operations, online stores and other retailers, as well as with noncommercial sources, such as libraries. As a result of direct competition with others, pricing strategies for videos and video games is a significant competitive factor in the Company's video rental business. The Company's home video and home video game businesses also compete with other forms of entertainment, including cinema, television, sporting events and family entertainment centers. If the Company does not compete effectively with competitors in the home video industry or the home video game industry or with providers of other forms of entertainment, its revenues and/or its profit margin could decline and its business, financial condition, liquidity and results of operations could be adversely affected. Geographic Considerations; Regulation The Company is concentrated in the densely populated greater San Juan metropolitan area of Puerto Rico and in the U.S. Virgin Islands. As a result, the Company is vulnerable to economic downturns in those regions, as well as natural and other catastrophic events, such as hurricanes and earthquakes, that may impact those regions. These events may adversely affect the Company's sales which may lead to lower earnings, or even losses, and may also adversely affect its future growth and expansion. Further, since the Company is concentrated on three islands, opportunities for future store expansion may be limited, which may adversely affect its business and results of operations. Additionally, the Company is subject to governmental regulations that impose obligations and restrictions and may increase its costs. Reemergence from Bankruptcy As discussed in greater detail in Financial Restructuring and Proceedings Under Chapter 11 of the United States Bankruptcy Code and in NOTE 16 - SUBSEQUENT EVENTS - in the notes to the Company's consolidated financial statements included in Item 15 of this Form 10-K, the Company recently emerged from bankruptcy and has a substantial amount of indebtedness and debt service obligations, which could adversely affect its financial and operational flexibility and increase its vulnerability to adverse conditions. The Company could incur substantial additional indebtedness in the future, including indebtedness that would be secured by its assets. If the Company increases its indebtedness, the related risks that it now faces could intensify. For example, it could: - require the Company to dedicate an increased portion of its cash flow to payments on its indebtedness; - limit the Company's ability to borrow additional funds; - increase the Company's vulnerability to general adverse economic and industry conditions; - limit the Company's ability to fund future working capital, capital expenditures and other general corporate requirements; - limit the Company's flexibility in planning for, or reacting to, changes in its business and the industry in which it operates or taking advantage of potential business opportunities; - limit the Company's ability to execute its business strategy successfully; and - place the Company at a potential competitive disadvantage in its industry. Company is Highly Leveraged The Company's ability to satisfy its indebtedness obligations will depend on its financial and operating performance, which may fluctuate significantly from quarter to quarter and is subject to economic, industry and market conditions and to risks related to its business and other factors beyond its control. The Company cannot provide assurance that its business will generate sufficient cash flow from operations or that future borrowings will be available to it in amounts sufficient to enable it to pay its indebtedness or to fund its other liquidity needs. Further, as NSC is a holding Company, indebtedness at the NSC level is effectively subordinated to indebtedness and other obligations at the operating subsidiary level. See Iten 7 MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and NOTE 16 - SUBSEQUENT EVENTS - to the consolidated financial statements included in Item 15 of this Form 10-K. Market Risk In addition to the foregoing, the market price of the Company's debt securities may be significantly affected by change in market rates of interest, yields obtainable from investments in comparable securities, credit ratings assigned to the Company's debt securities by third parties and perceptions regarding its ability to pay its obligations on its debt securities. ITEM 2. PROPERTIES The following table sets forth information as of November 2, 2002 with respect to the owned and leased stores and support facilities used by Pueblo in its business:
Owned (1) Leased Total ----------------- ----------------- ---------------- No. Gross Sq. Ft. No. Gross Sq. Ft. No. Gross Sq. Ft --- ------------- --- ------------- --- ------------ Supermarkets . . . . . . . 6 273,000 41 1,593,000 47 1,866,000 Video rental stores . . . 3 17,000 38 183,000 41 200,000 Distribution center & offices 1 300,000 1 13,000 2 313,000
(1) For four of the owned stores the Company owns the building and leases the land. Three of these are in Puerto Rico and one is in the U.S. Virgin Islands. The majority of the Company's supermarket operations are conducted on leased premises which have initial terms generally ranging from 20 to 25 years. The lease terms typically contain renewal options allowing the Company to extend the lease term in five to ten year increments. The leases provide for fixed monthly rental payments subject to various periodic adjustments. The leases often require the Company to pay percentage annual rent and certain expenses related to the premises such as insurance, taxes and maintenance. See NOTE 6 - LEASES of the notes to the Company's consolidated financial statements included in Item 15 of this Form 10-K. The Company does not anticipate any difficulties in renewing its leases as they expire. The construction of new owned facilities and remodeling of existing facilities are financed principally with internally generated funds. All owned properties of Pueblo were pledged as collateral (by a pledge of the assets of the Company's subsidiaries) under the Company's bank credit agreement dated as of April 29, 1997 (the "April 1997 Bank Credit Agreement") with a syndicate of banks (see NOTE 5 - DEBT in the notes to the Company's consolidated financial statements included in Item 15 of this Form 10-K). See also NOTE 16 - SUBSEQUENT EVENTS in the notes to the Company's consolidated financial statements included in Item 15 of this Form 10-K for a description of the Company's current financings. The Company owns its general offices, which includes the supermarket and Video Rental Division offices and the distribution center located in Carolina, Puerto Rico (near San Juan), and leases its administrative offices located in Pompano Beach, Florida. The Company's management believes that its properties are adequately maintained and sufficient for its business needs. ITEM 3. LEGAL PROCEEDINGS On September 24, 2002 NSC voluntarily consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court For The District of Delaware (the "Court"). The Court ordered such relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC was in response to an involuntary petition filed in the Court by certain creditors of NSC under title 11, United States Code (the "Chapter 11 Case"). At November 2, 2002, the Company was party to a number of legal proceedings involving claims for money damages arising in the ordinary course of conducting its business which are either covered by insurance or are within the Company's self-insurance program, and in a number of other proceedings which are not deemed material. Management believes there were no material contingencies as of November 2, 2002. It is not possible to determine the ultimate outcome of these matters; however, management is of the opinion that the final resolution of any threatened or pending litigation at such date is not likely to 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 There were no matters submitted to a vote of security holders during the 52 weeks ended November 2, 2002. PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information There is no established public trading market for the Company's common equity. Holders The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc., a Delaware corporation ("Holdings"). Shares of Holdings are indirectly beneficially owned by a trust primarily for the benefit of the family of Gustavo Cisneros, and a trust primarily for the benefit of the family of Ricardo Cisneros, with each trust having a 50% indirect beneficial ownership interest in the shares of Holdings. These trusts are referred to herein as the "Principal Shareholders." Messrs. Gustavo and Ricardo Cisneros disclaim beneficial ownership of the shares. Dividends No cash dividends have been declared on the common stock since NSC's inception. Certain restrictive covenants in the April 1997 Bank Credit Agreement imposed limitations on the declaration or payment of dividends by NSC. Additionally, dividend payments by Pueblo and Pueblo Entertainment to NSC were restricted under the terms of the April 1997 Bank Credit Agreement. The April 1997 Bank Credit Agreement, however, provided that so long as no default or event of default (as defined in the April 1997 Bank Credit Agreement) exists, or would exist as a result, Pueblo was permitted to pay cash dividends to NSC in an aggregate amount necessary to pay interest on NSC's 9.5% Senior Notes due 2003 (the "Notes") and NSC's 9.5% Series C Notes due 2003 (the "Series C Senior Notes") then due and payable in accordance with the terms thereof. See Notes 1, 5, 8, 9, and 16 to the Company's consolidated financial statements included in Item 15 of this Form 10-K for a discussion of the Notes and Series C Senior Notes, issuance of new 10.125% Senior Secured Notes to the Holders, and the replacement of the April 1997 Bank Credit Agreement. ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except average sales per selling square foot amounts)
Fiscal Year 40 Weeks Fiscal Year Ended Ended Ended ------------------------------------- November 2, November 3, January 27, January 29, January 30, 2002 2001 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Operating Statement Data Net sales $588,179 $433,342 $622,050 $674,145 $784,774 Cost of goods sold 396,239 290,997 423,755 456,143 528,395 --------- --------- --------- --------- --------- Gross profit 191,940 142,345 198,295 218,002 256,379 Selling, general and admin- istrative expenses 154,371 116,541 165,667 163,785 172,964 Gain on insurance settlement(1) (14,693) - (2,464) (15,066) - Store Closings: Exit costs (2) 246 - 685 - - Write down of impaired assets (2) - - 3,534 - - Depreciation and amortization 28,260 22,671 34,142 31,632 36,529 --------- --------- --------- --------- --------- Operating profit (loss) 23,756 3,133 (3,269) 37,651 46,886 Interest expense-debt and capital lease obligations (8) (20,946) (18,376) (28,830) (30,371) (29,556) Interest and investment income, net 291 415 2,500 2,750 1,379 Loss on sale of real property (3) - - - (1,291) - Reorganization items (3a) (995) - - - - Gain on early extinguishment of debt (4) - - 33,867 - - -------- ---------- -------- ---------- --------- (Loss) Income before Income Tax 2,106 (14,828) 4,268 8,739 18,709 Income tax (expense) benefit (2,785) 6,612 (1,573) (4,015) (9,832) --------- --------- --------- --------- --------- Net (loss) income $ (679) $ (8,216) $ 2,695 $ 4,724 $ 8,877 ========= ========= ========= ========== =========
As of ------------------------------------------------------------------- November 2, November 3, January 27, January 29, January 30, 2002 2001 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Balance Sheet Data Cash and cash equivalents (5) $17,992 $ 2,169 $34,833 $95,711 $55,500 Working capital (deficit) (4,718) 252 (6,899) 22,214 1,578 Property and equipment, net 102,847 111,227 118,598 122,263 129,860 Total assets 398,725 394,159 434,790 521,564 507,002 Total debt and capital lease obligations (9) 220,526 218,277 218,047 283,705 276,032 Stockholder's equity 34,706 35,385 43,601 40,906 36,182
See notes to Selected Financial Data at the end of this Item 6.
Fiscal Year 40 Weeks Fiscal Year Ended Ended Ended -------------------------------------- November 2, November 3, January 27, January 29, January 30, 2002 2001 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Certain Financial Ratios and Other Data EBITDA (as defined) (6) *** $52,016 $25,804 $34,407 $69,283 $83,415 Cash flow (used in) provided by investing activities (3) (7,352) (5,240) (17,249) 1,077 (8,209) Cash flow provided by (used in)financing activities 1,376 (503) (31,685) (576) (591) Cash flow provided by (used in) operating activities 21,779 (26,921) (11,944) 39,710 35,530 Capital expenditures 7,391 5,271 17,452 21,650 * 15,271 EBITDA (as defined) margin (6) 8.8% 6.0% 5.5% 10.3% 10.6% Debt to EBITDA (as defined) 4.24:1 6.65:1** 6.34:1 4.09:1 3.30:1 * Excludes replacements of approximately $13.1 million as a result of damages from Hurricane Georges. ** For comparison purposes, this ratio was computed using the EBITDA for the trailing 52 week period. *** Includes a gain from the Hurricane Georges insurance claim of $14,693, $2,464, and $15,066 for the fiscal years ended November 2, 2002, January 27, 2001, and January 29, 2000, respectively.
40 Weeks Fiscal Ended Fiscal Year Year November 3, ---------------------------- 2002 2001 2001 2000 1999 ----------- ----------- -------- -------- -------- RETAIL FOOD DIVISION DATA Puerto Rico Number of stores (at fiscal year-end) 41 42 42 44 44 Average sales per store (7) $ 12,125 $ 8,698 $ 11,943 $ 12,901 $ 14,804 Average selling square footage 29,393 28,895 28,149 28,243 27,179 Average sales per selling square foot (7) $ 442 $ 319 $ 452 $ 491 $ 590 Total sales $500,624 $365,311 $522,059 $567,658 $650,816 Same store sales % change 4.1% (7.6)% (7.6)% (13.1)% (17.8)% U.S. Virgin Islands Number of stores (at fiscal year-end) 6 6 6 6 6 Average sales per store (7) $ 7,729 $ 5,916 $ 8,085 $ 8,364 $ 11,326 Average selling square footage 19,421 19,421 19,421 19,421 19,421 Average sales per selling square foot (7) $ 400 $ 305 $ 414 $ 427 $ 580 Total sales $ 46,376 $ 35,497 $ 48,509 $ 50,185 $ 67,958 Same store sales % change (1.0)% (4.5)% (3.3)% (26.2)% (21.7)% VIDEO RENTAL DIVISION DATA Video Rental Stores Number of stores (at fiscal year-end) 41 41 43 43 44 Average sales per store (7) $ 973 $ 702 $ 1,000 $ 1,146 $ 1,381 Average weekly sales $ 781 $ 740 $ 837 $ 962 $ 1,184 Total sales $ 39,893 $ 29,421 $ 42,954 $ 49,920 $60,972 Same store sales % change (0.5)% (7.8)% (13.5)% (18.6)% 10.8%
See notes to Selected Financial Data at the end of this Item 6. NOTES TO SELECTED FINANCIAL DATA (1) The Company realized a gain from an insurance settlement relating to Hurricane Georges on the excess of replacement costs over book value of assets replaced that were damaged by the storm. (2) The Company recorded a charge of $0.7 million and $0.2 million for the estimated carrying costs of stores that were closed for the fiscal years ended January 27, 2001 and November 2, 2002, respectively, and $3.5 million for the write down of related assets for the fiscal year ended January 27, 2001. (3) The Company received $35.5 million in cash and incurred a loss in a sale/leaseback of real estate. (3a) Restructuring items during the fiscal year ended November 2, 2002 consist primarily of the costs of the Company's and its noteholders' financial and legal professionals advising the parties on matters pertaining to the Company's Chapter 11 proceedings. (4) The fiscal year ended January 27, 2001 amount relates to a gain on early extinguishment of debt. (5) Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. (6) EBITDA (as defined) represents earnings before interest, taxes, depreciation, amortization, the loss on sale/leaseback transaction, sundry, the write down of impaired assets, and reorganization items. EBITDA (as defined) is not intended to represent cash flow from operations as defined by accounting principles generally accepted in the United States of America and should not be considered as an alternative to net income (loss) as an indication of the Company's operating performance or to cash flows as a measure of liquidity. EBITDA (as defined) is included as it is the basis upon which the Company assesses its financial performance. EBITDA (as defined) margin represents EBITDA (as defined) divided by net sales. Included below is a reconciliation of Operating profit (loss) to EBITDA:
Fiscal Year 40 Weeks Fiscal Year Ended Ended Ended ------------------------------------- November 2, November 3, January 27, January 29, January 30, 2002 2001 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Operating profit (loss) $23,756 $ 3,133 $(3,269) $37,651 $46,886 Add: Write down of impaired assets (2) - - 3,534 - - Depreciation and amortization 28,260 22,671 34,142 31,632 36,529 ----------- ----------- ----------- ----------- ----------- EBITDA (as defined) $52,016 $25,804 $34,407 $69,283 $83,415 =========== =========== =========== =========== ===========
(7) For all periods presented, average sales are weighted for the period of time each store is open during the period. (8) The fiscal year ended November 2, 2002 amount does not include contractual interest expense on pre-petition debt totaling approximately $2.7 million for the period from September 4, 2002 through November 2, 2002. (9) The balance as of November 2, 2002 includes the carrying value of the Notes and Series C Senior Notes totaling approximately $176.2 million, which are included as Liabilities Subject to Compromise in the Company's consolidated financial statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company was organized in 1993 to acquire Pueblo in the Acquisition. In connection with the Acquisition, the Company incurred significant indebtedness and recorded significant goodwill. Following the Acquisition, the Company continued an existing operating strategy designed to expand its supermarket penetration through new supermarket openings in Puerto Rico and Florida and new video rental locations in Puerto Rico. The number of the Company's supermarkets in Puerto Rico and the U.S. Virgin Islands grew from 46 to 47 and the number of the Company's video rental locations (including conversions) grew from 20 to 41, in each case measured from the Acquisition through the end of the fiscal year ending November 2, 2002. During the fiscal year ended November 2, 2002, the Company closed one under-performing supermarket in Puerto Rico, reducing the number of supermarkets to 47. On November 2, 2001 the Company changed its fiscal year end from the Saturday closest to January 31 to the Saturday closest to October 31. Consequently, the fiscal period being reported as the prior year's numbers in this Annual Report on Form 10-K is the 40 weeks ended November 3, 2001. Throughout this time period, the Company's markets have been affected by an increasing level of competition from local supermarket chains, independent supermarkets, warehouse club stores, mass merchandisers, department stores, discount drug stores and convenience stores. Warehouse club stores and mass merchandisers, which began entering the Puerto Rico and U.S. Virgin Islands markets in 1990 offering various grocery and general merchandise items, have increased pricing pressures on grocery retailers including the Company. In addition, low inflation in food prices in recent years has made it difficult for the Company and other grocery store operators to increase prices and has intensified the competitive environment by causing such retailers to emphasize promotional activities and discount pricing to maintain or gain market share. The Company's focus from the date of Acquisition through the end of fiscal 1997 on new supermarket development rather than supermarket operations, as well as the effects of increased competition, resulted in declines in both net sales and same store sales and in consolidated operating results. In October 1995, William T. Keon, III was named President and Chief Executive Officer of the Company. Following his arrival at the Company, Mr. Keon conducted a thorough review of the Company's operating business practices and its financial performance. As a result of such review, the Company determined in January 1996 to discontinue its retail operations in the competitive Florida market in order to focus on its core markets where it has a stronger competitive position and greater profit opportunities. In fiscal 1996, management also began to take several other actions designed to improve the financial performance of the Company, including the closing of two under-performing supermarkets in Puerto Rico, an increase in the Company's advertising expenditures in Puerto Rico, and the conversion of six Pueblo Video Clubs into in-store Video Rental Division outlets. Throughout fiscal 1997 and fiscal 1998, the Company completed its conversion of Pueblo Video Clubs into Video Rental Division outlets. During fiscal 1998 Mr. Keon put a new management team in place which embarked on converting the Puerto Rico and U. S. Virgin Islands supermarkets to "combo" stores which offer expanded grocery items, a wide selection of health and beauty care products and general merchandise. In addition, services such as banks and private postal services were added to many of the supermarkets. Management also embarked on a program to remodel the supermarkets and open new stores where appropriate. A total of twenty-five supermarkets were remodeled from fiscal 1997 through November 2, 2002. Although the remodeling program was delayed in the latter part of fiscal 1999, and the early part of fiscal 2000, due to the business interruption as a result of Hurricane Georges, the Company continued the program in fiscal 2000. From fiscal 2000 through the end of fiscal 2002 the Company completed 27 remodels (nine in fiscal 2000, eight in fiscal 2001, two during the 40 weeks ended November 3, 2001 and two in fiscal 2002). During the same period, from fiscal 1997 through November 2, 2002, the Company constructed two new supermarkets and two new video rental stores. One of the supermarkets and one of the video rental stores were opened during fiscal 1999. The remaining supermarket and video rental store were constructed during fiscal 2002 but were not opened as of November 2, 2002. These stores were opened on November 20, 2002. NSC has no operations of its own, and its only assets are its equity interests in Pueblo and Pueblo Entertainment and intercompany notes issued to NSC by its subsidiaries in connection with its investment of the net proceeds of the 9.5% Senior Notes (the "Notes") and the 9.5% Series C Senior Notes Due 2003 (the "Series C Senior Notes"). NSC has no source of cash to meet its obligations, including its obligations under the Notes and the Series C Senior Notes, other than payments by its subsidiaries on such intercompany notes, which are restricted and effectively subordinated to Pueblo's obligations under the April 1997 Bank Credit Agreement, and dividends from its subsidiaries. The April 1997 Bank Credit Agreement contains an exception to the restriction on the payment of dividends which provides that so long as no default or event of default (as defined in the April 1997 Bank Credit Agreement) exists, or would exist as a result thereof, Pueblo is permitted to pay cash dividends to the Company in an aggregate amount necessary to pay interest on the Notes and the Series C Senior Notes then due and payable in accordance with the terms thereof. On September 24, 2002 NSC voluntarily consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court For The District of Delaware (the "Court"). The Court ordered such relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC was in response to an involuntary petition filed in the Court by certain creditors of NSC under title 11, United States Code (the "Chapter 11 Case"). The creditors' actions were taken as a result of NSC not paying the August 1, 2002 interest payment on its $177.3 million in notes outstanding which were due in August of 2003. The interest was not paid as a result of NSC's operating subsidiaries not paying interest they owed to NSC; this non- payment was consented to by the operating subsidiaries' lender banks. The relief under the Chapter 11 Case pertained to NSC only, not to its operating subsidiaries. However, the bank debt of the operating subsidiaries, which was guaranteed by NSC, was due on February 1, 2003. On January 30, 2003 a new bank lender assumed the existing bank debt and committed to lend the operating subsidiaries additional funds at the time NSC emerged from bankruptcy. The new bank lender also obtained the guarantee of NSC. On June 5, 2003, NSC emerged from bankruptcy pursuant to an April 30, 2003 confirmation order from the Court. The impact of the Chapter 11 Case on NSC's operations for the year ended November 2, 2002 and its financial condition as of that date are disclosed in the Company's consolidated financial statements and related footnotes included in Item 15 of this Form 10-K. The impact of the financial restructuring and emergence from proceedings under Chapter 11 of the United States Bankruptcy Code, both of which occurred subsequent to November 2, 2002, are discussed in more detail in NOTE 16 - SUBSEQUENT EVENTS of the footnotes to the Company's consolidated financial statements included in Item 15 of this Form 10-K. Hurricane Georges Hurricane Georges struck all of the Company's operating facilities on September 20 and 21, 1998. All of the Company's stores, with the exception of two, were reopened. During fiscal year 2000, the Company settled the property portion of its hurricane insurance claims for approximately $42.0 million. As a result the Company recorded gains associated with the property settlement during fiscal 2000 and 2001 of $15.1 million and $2.5 million, respectively ($9.2 million and $1.5 million, respectively, net of applicable income tax). The Company's insurance also includes business interruption coverage which provides for reimbursement for lost profits as a result of the storm. On December 1, 2000 the Company submitted to its insurance carriers a $69.4 million proof of loss for business interruption losses to its grocery stores and video outlets in Puerto Rico and the U.S. Virgin Islands (the "claim") as a result of Hurricane Georges. The claim was based on the Company's management's estimate of the impact the storm had on its business from the time the storm occurred through September 9, 2000, which was, in management's opinion, the end of the applicable indemnity period. The claim was settled in July of 2002 for $18.2 million after a prolonged appraisal process (similar to an arbitration process). The settlement resulted in recording a gain, during fiscal 2002, of $14.7 million, net of claim and appraisal expenses of $3.5 million. Results of Operations 52 Weeks Ended November 2, 2002 vs. 52 Weeks Ended November 3, 2001 As of November 2, 2002, the Company operated a total of 47 supermarkets and 41 video rental locations in Puerto Rico and the U. S. Virgin Islands. During the fiscal year ended November 2, 2002, the Company closed one of its supermarkets in Puerto Rico. Additionally, the Company continued its reengineering including the remodeling process scheduled for its stores. Total sales for the 52 weeks ended November 2, 2002 were $588.2 million versus $576.6 million in the comparable period of the prior year, an increase of 2.0%. For the comparable 52 week periods, same store sales were $586.1 million for the year ended November 2, 2002 versus $570.0 million for the prior year, an increase of 2.8%. "Same stores" are defined as those stores that were open as of the beginning of both periods and remained open through the end of the periods. Same store sales in the Retail Food Division increased 3.1% for the 52 weeks ended November 2, 2002 as compared to the same period of the prior year. The principal factors contributing to the increase in same store sales in the Retail Food Division, despite continued growth in competition, were the Company's PuebloCard and the Company's repositioning efforts, both beginning in March of 2001. Video Rental Division same store sales decreased 0.5% for the 52 weeks as compared to the same period in the prior year due to a decline in the number of new movie releases and in customer response to new releases for both rental and sell- through videos. Gross profit for the 52 weeks ended November 2, 2002 was $191.9 million versus $187.9 million for the comparable period of the prior year, an increase of $4.0 million. Gross profit for the Retail Food Division was $160.2 million for the 52 weeks ended November 2, 2002 compared to $156.4 million for the comparable period of the prior year, a $3.8 million increase. The $3.8 million increase in gross profit for the Retail Food Division was a result of the increase in sales. Gross profit for the Retail Food Division was 29.2% of sales in both the 52 weeks ended November 3, 2001 and the 52 weeks ended November 2, 2002. The gross profit for the Video Rental Division for the 52 weeks ended November 2, 2002 was $31.7 million versus $31.5 million for the comparable period of the prior year, an increase of $0.2 million. The gross profit rate for the Video Rental Division increased by 0.2%, to 79.6% in the 52 weeks ended November 2, 2002. The increase in the gross profit rate was a result of an increase in video rentals, which have a higher gross margin rate than product sales, as a percentage of total Video Rental Division sales. Selling, general and administrative expenses were $154.4 million for the 52 weeks ended November 2, 2002 compared to $155.1 million for the comparable period of the prior year. The decrease of $0.7 million in the 52 weeks ended November 2, 2002 from the comparable period of the prior year was a result of cost reductions implemented in April of 2001. Depreciation and Amortization was $28.3 million for the 52 weeks ended November 2, 2002 compared to $30.9 million for the comparable period of the prior year, a decrease of $2.6 million. This decrease was primarily a result of reduced capital expenditures. Interest expense, net of interest income, decreased by $2.6 million between the 52 weeks ended November 2, 2002 and the comparable period of the prior year primarily as a result of the Company discontinuing to record interest expense on the Company's 9.5% Senior Notes and Series C Senior notes as of the date of the voluntary petition for Chapter 11, and by lower interest rates on the Company's $32.0 million in borrowings under the Company's revolving credit facility. Restructuring items during the fiscal year ended November 2, 2002 consisted primarily of the costs of financial and legal professionals providing financial and legal services to both the Company and the Company's noteholders on matters pertaining to the Company's Chapter 11 proceedings. Income tax expense for the 52 weeks ended November 2, 2002 was $2.8 million compared to a benefit of $9.8 million in the comparable period of the prior year, an increase of $12.6 million. The effective rates for the 52 weeks ended November 2, 2002 and the comparable period of the prior year were 132.2% and 46.0%, respectively. Variances in the effective tax rates were primarily due to the relationship of items of permanent difference between (Loss) Income Before Income Taxes for financial reporting purposes and pretax income for income tax return reporting purposes to (Loss) Income Before Income Taxes. Net loss for the 52 weeks ended November 2, 2002 was $0.7 million, an improvement of $10.8 million from the net loss in the comparable period of the prior year. Net loss for the 52 weeks ended November 3, 2001 was $11.5 million. During the 52 weeks ended November 2, 2002, the Company recorded reorganization cost of approximately $1.0 million. Also, during the 52 weeks ended November 2, 2002 the Company recorded a $14.7 million pre-tax gain from the settlement of the Company's business interruption insurance claim as a result of Hurricane Georges which occurred in September of 1998. The impact on net income is a gain of approximately $6.8 million, net of income taxes. 40 Weeks ended November 3, 2001 vs. 40 Weeks ended November 4, 2000 As of November 3, 2001, the Company operated a total of 48 supermarkets and 41 video rental locations in Puerto Rico and the U.S. Virgin Islands. During the fiscal period ended November 3, 2001, the Company closed two of its video rental stores in Puerto Rico. Additionally, the Company continued its reengineering including the remodeling process scheduled for all of its stores. Total sales for the 40 weeks ended November 3, 2001 were $433.3 million versus $478.8 million for the 40 weeks ended November 4, 2000, a decrease of 9.5%. For the comparable 40 week periods, same store sales were $432.7 million for the 40 weeks ended November 3, 2001 versus $470.9 million for the 40 weeks ended November 4, 2000, a decline of 8.1%. "Same stores" are defined as those stores that were open as of the beginning of both periods and remained open through the end of the periods. Same store sales in the Retail Food Division declined 8.1% for the 40 weeks ended November 3, 2001 as compared to the 40 weeks ended November 4, 2000. The principal factors contributing to the decline in same store sales in the Retail Food Division were increased competition and weakness in the economy in both Puerto Rico and the U.S. Virgin Islands. Video Rental Division same store sales decreased 7.8% for the 40 weeks ended November 3, 2001, as compared to the 40 weeks ended November 4, 2000. Gross profit for the 40 weeks ended November 3, 2001 was $142.3 million versus $152.7 million for the 40 weeks ended November 4, 2000, a decline of $10.4 million. Gross profit for the Retail Food Division was $119.0 million for the 40 weeks ended November 3, 2001 compared to $127.8 million for the 40 weeks ended November 4, 2000, a $8.8 million decline. The $8.8 million decline in gross profit for the Retail Food Division was a result of the decline in sales and was offset by a 0.9% increase in the rate of gross profit, from 28.6% of sales in the 40 weeks ended November 4, 2000 to 29.5% of sales in the 40 weeks ended November 3, 2001. The primary reason for the improvement in the rate of gross profit was the impact of the Company's loyalty program, which began in March of 2001. In addition to providing loyal customers with enhanced values, the program provides the Company the ability to improve control of its promotional programs. The program is based on the PuebloCard which identifies the card holder as a member of the program and the special pricing the card holder is entitled to on the specific item(s) being checked out. Currently, Pueblo is the only supermarket retailer offering such a program in Puerto Rico and the U.S. Virgin Islands. The gross profit for the Video Rental Division for the 40 weeks ended November 3, 2001 was $23.4 million versus $25.0 million for the 40 weeks ended November 4, 2000, a decline of $1.6 million. The gross profit rate for the Video Rental Division increased by 1.7%, to 79.5% in the 40 weeks ended November 3, 2001. The increase in the gross profit rate was a result of an increase in video rental sales, which have a higher gross margin rate than product sales, as a percentage of total Video Rental Division sales. Selling, general and administrative expenses were $116.5 million for the 40 weeks ended November 3, 2001 compared to $127.1 million for the 40 weeks ended November 4, 2000. The decrease of $10.6 million in the 40 weeks ended November 3, 2001 from the 40 weeks ended November 4, 2000, was a result of the decline in sales and cost reductions implemented in April of 2001. Depreciation and Amortization was $22.7 million for the 40 weeks ended November 3, 2001 compared to $25.9 million for the 40 weeks ended November 4, 2000, a decrease of $3.2 million. This decrease was primarily a result of the write off, during the 40 weeks ended November 4, 2000, of property, plant and equipment that had been replaced during fiscal years 2001 and 2000 when the majority of the Company's remodels were completed. Interest expense, net of interest income, decreased by $3.1 million between the 40 weeks ended November 3, 2001 and the 40 weeks ended November 4, 2002 primarily as a result of the Company's purchase of $87.7 million principal amount of its Notes and Series C Senior Notes which occurred on October 2, 2000. This reduction was partially offset by interest on $30.0 million in borrowings under the Company's revolving credit facility. Income tax benefit for the 40 weeks ended November 3, 2001 was $6.6 million compared to income tax expense of $4.8 million for the 40 weeks ended November 4, 2000, an increase of $11.4 million. The income tax expense for the 40 weeks ended November 4, 2000 included the impact of a $13.3 million income tax provision related to the Company's extraordinary gain on the purchase of $87.7 million principal amount of its Notes and Series C Senior Notes. The effective rates for the 40 weeks ended November 3, 2001 and the 40 weeks ended November 4, 2000 were 44.6% and 44.4%, respectively. Variances in the effective tax rate were a result of variances in tax rates among the tax jurisdictions in which the Company operates and the results of operations in those specific jurisdictions. Net loss for the 40 weeks ended November 3, 2001 was $8.2 million, a decrease of $14.2 million from the net income for the 40 weeks ended November 4, 2000. Net income for the 40 weeks ended November 4, 2000 was $6.0 million. The 40 weeks ended November 4, 2000 include a $20.6 million extraordinary gain, net of applicable income taxes, from early extinguishment of the Company's debt. The 40 weeks ended November 4, 2000 also include a charge of $2.7 million, net of applicable income taxes, pertaining to the write-down of assets of stores closed and a $1.5 million gain, net of applicable income taxes, related to the final accounting for the property damaged by Hurricane Georges in September of 1998. Liquidity and Capital Resources The Company's financial restructuring and proceedings under Chapter 11 of the United States Bankruptcy Code are discussed below and in the General section of the Management's Discussion and Analysis and footnotes 1, 5, 8, 9, and 16 to the consolidated financial statements included in Item 15 of this Form 10-K. Historically Company operations, along with its available credit facility, have provided adequate liquidity for the Company's operational needs. As to cash provided or used during fiscal 2002 the following pertains: As of November 2, 2002, the Company had borrowings of $32.0 million under its April 1997 Revolving Credit Facility. The weighted average per annum interest rate on these borrowings for the 52 weeks ended November 2, 2002 and November 3, 2001 was 5.927% and 8.930%, respectively. After giving effect to outstanding standby letters of credit in the amount of $3.9 million, as of November 2, 2002, the borrowing availability on a revolving basis under the terms of the April 1997 Bank Credit Agreement was $2.1 million. Cash provided by operating activities was $21.8 million during the 52 weeks ended November 2, 2002 compared to $2.8 million in the comparable period of the prior year. The improvement is a result of a decline in net loss from operations, including the gain from settling the business interruption portion of the insurance claim that resulted from hurricane Georges, and a decrease in cash used for components of working capital including the impact of not making the $8.4 million interest payment due on the Company's notes on August 1, 2002. Net cash used in investing activities was $7.4 million and $6.5 million in the 52 weeks ended November 2, 2002 and the comparable period of the prior year, respectively. The increase is a result of an increase in the purchases of property and equipment during the 52 weeks ended November 2, 2002 as compared to the comparable period of the prior year due to the construction of a new supermarket and a new video rental outlet during the year. These two stores opened subsequent to November 2, 2002, on November 20, 2002. Net cash provided by financing activities was $1.4 million for the 52 weeks ended November 2, 2002 while net cash used in financing activities was $0.8 million in the comparable period of the prior year. During the 52 weeks ended November 2, 2002, the Company borrowed an additional $2.0 million, net, under its revolving credit facility. On May 23, 2003 the Company's operating subsidiaries entered into a new Loan and Security Agreement, and the Company entered into an Amended and Restated Guarantor General Security Agreement (collectively the "May 2003 Bank Agreement") with the lender thereunder (the "2003 Bank Lender"). The initial term of the May 2003 Bank Agreement expires June 22, 2008 and will continue on a year-to-year basis unless sooner terminated. The borrowers granted the 2003 Bank Lender a security interest in all assets, tangible and intangible, owned or hereafter acquired or existing as collateral. In addition, the May 2003 Bank Agreement is collateralized by a pledge of the capital stock of, and inter-company notes issued by the Company's operating subsidiaries and by the capital stock of the Company. The Company is required, under the terms of the May 2003 Bank Agreement, to meet certain financial covenants including minimum consolidated net worth (as defined) levels, minimum working capital (as defined) levels, minimum earnings before net interest, income taxes, depreciation and amortization (EBITDA) as defined, minimum net revenues, a minimum fixed charge coverage ratio (as defined) and maximum debt to EBITDA ratio (as defined). The May 2003 Credit Agreement also contains certain other restrictions, including restrictions on additional indebtedness and the declaration and payment of dividends. The May 2003 Bank Agreement provides both a revolving loan (with amounts available based on a borrowing base formula, not to exceed, except in the lender's discretion, $35 million outstanding) and term loans facilities for various specified purposes and in certain specified amounts, aggregating $45 million in outstandings Funding took place on June 5, 2003 at which time the existing bank debt for borrowed money outstanding was repaid in full and the 2003 Bank Lender lent the operating subsidiaries a total of approximately $57.4 million, $12.4 million of which was borrowed under the revolving credit facility. See NOTE 16 - SUBSEQUENT EVENTS - of the footnotes to the Company's consolidated financial statements included in Item 15 of this Form 10-K. After giving effect to the funding on June 5, 2003 and the issuance of standby letters of credit in the amount of $3.9 million, availability under the revolving credit facility under the May 2003 Bank Agreement was $8.4 million. Working capital as of November 2, 2002 was a deficit of $4.7 million, a decrease of $5.0 million from the $0.3 million working capital as of November 3, 2001, producing a current ratio of 0.95:1 and 1.00:1, respectively. The primary reason for this decrease is the reclassification of the Company's borrowing under its revolving credit facility to a current liability. The Company's general liability and certain of its workers compensation insurance programs are self-insured. The Company maintains insurance coverage for claims in excess of $500,000 for 8 of its locations and $250,000 for all other locations. The current portion of the reserve, representing amounts expected to be paid in the next fiscal year, is $4.3 million as of November 2, 2002 and is anticipated to be funded with cash provided by operating activities. Capital expenditures for fiscal 2003 are expected to be approximately $6.2 million. This capital program (which is subject to continuing change and review) includes completion of the new stores, the remodeling of certain existing locations, and updating of equipment and software. Impact of Inflation, Currency Fluctuations, and Market Risk The inflation rate for food prices continues to be lower than the overall increase in the U.S. Consumer Price Index. The Company's primary costs, products and labor, usually increase with inflation. Increases in inventory costs can typically be passed on to the customer. Other cost increases must by recovered through operating efficiencies and improved gross margins. Currency in Puerto Rico and the U.S. Virgin Islands is the U.S. dollar. As such, the Company has no exposure to foreign currency fluctuations. Significant Accounting Policies For a discussion of the Company's significant accounting policies refer to NOTE 1 of the notes to the consolidated financial statements included in Item 15 of this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company does not trade or speculate in derivative financial instruments. The Company's primary market risk exposure relates to interest rate risk. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs. **** Forward Looking Statements Statements, other than statements of historical information, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K may constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, statements concerning anticipated capital expenditures. These statements are based on Company management's expectations and are subject to various risks and uncertainties. Actual results could differ materially from those anticipated due to a number of factors, including but not limited to the Company's substantial indebtedness and high degree of leverage, which continue as a result of the financial restructuring (including limitations on the Company's ability to obtain additional financing and trade credit, to apply operating cash flow for purposes in addition to debt service, to respond to price competition in economic downturns and to dispose of assets pledged to secure such indebtedness or to freely use proceeds of any such dispositions), the Company's limited geographic markets and competitive conditions in the markets in which the Company operates and buying patterns of consumers. **** ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages F-1 through F-42 appearing at the end of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with the Company's accountants on accounting and financial disclosure during the applicable periods. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following is a list, as of the date of this filing, of the names of the directors and executive officers of the Company, their respective ages and their respective positions with the Company. The terms of the directors and executive officers of the Company expire annually upon the holding of the annual meeting of stockholders.
Directors - --------- Name Age Position - ---- ---- -------- William T. Keon, III . . . . . 56 Director and Chairman of the Board of Directors; President and Chief Executive Officer; Chairman of the Executive Committee Steven I. Bandel . . . . . . . 49 Director; Member of the Executive Committee and Chairman of the Audit and Risk Committee; Chairman of the Compensation and Benefits Committee Cristina Pieretti . . . . . . 50 Director; Member of the Audit and Risk Committee Executive Officers - ------------------ William T. Keon, III . . . . . 56 President and Chief Executive Officer Daniel J. O'Leary . . . . . . 56 Executive Vice President and Chief Financial Officer, Chief Accounting Officer and Assistant Secretary Fernando J. Bonilla . . . . . 43 Vice President, General Counsel and Secretary
William T. Keon, III has been a Director of the Company since October 1995, at which time he assumed the position of President and Chief Executive Officer and was appointed Chairman of the Executive Committee. In July 2002, Mr. Keon was appointed Chairman of the Board of Directors in addition to his other duties. Since January 1983, Mr. Keon has served in senior managerial roles in the Cisneros Group. Steven I. Bandel has been a Director of the Company since the Acquisition. He was appointed to the Executive Committee in October 1995 and Chairman of the Audit and Risk Committee in July 2002. Since 1995, Mr. Bandel has held several senior management positions at companies within the Cisneros Group, with responsibilities in the areas of finance and business development. Mr. Bandel has the title of President and Chief Operating Officer of the Cisneros Group. He is also a member of the board of directors of America Online Latin America, Inc. Cristina Pieretti was appointed a Director in March 1997. Since February 1996, Ms. Pieretti has held a number of senior management positions within the Cisneros Group in the consumer goods, retail and telecommunications industries. From March 1995 to February 1996, Ms. Pieretti was a partner at Booz-Allen & Hamilton, a consulting firm. Ms. Pieretti has recently been appointed Executive Vice-President Venezuela for the Cisneros Group. She is also a member of the board of directors of America Online Latin America, Inc. Daniel J. O'Leary joined the Company in June 1997 as Executive Vice President and Chief Financial Officer. From December 1992 until the time he joined the Company, Mr. O'Leary served as Senior Vice President of Finance and Chief Financial Officer of Phar-Mor, Inc., a deep discount drugstore chain. Prior to that time, he served as a Director and, at various times, President and Chief Operating Officer, Executive Vice President, Vice President of Finance and Chief Financial Officer at Fay's, Inc., a multi-concept retailer with drugstores and auto parts stores. From 1969 to 1987, Mr. O'Leary was a member of the accounting firm of Touche, Ross & Co. (now known as Deloitte & Touche LLP). Fernando J. Bonilla joined the Company in September 1997 as Vice President, General Counsel and Secretary. Before joining the Company, Mr. Bonilla served as General Counsel and Secretary to the Board of Directors of the Puerto Rico Maritime Shipping Authority and a junior partner of Fiddler Gonzalez and Rodriguez, a law firm in Puerto Rico. Since February 2003, Mr. Bonilla is a member of the Board of Directors of the Authority of the Port of the Americas, a government corporation of the Commonwealth of Puerto Rico that is developing a transshipment port in southern Puerto Rico. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid or distributed by the Company through November 2, 2002 to, or accrued through such date for the account of the Chief Executive Officer as well as each of the four most highly compensated executive officers of the Company serving at November 2, 2002 (the "named executive officers") for services rendered to the Company during each of the last three fiscal years, if applicable. Pursuant to SEC rules, the table also sets forth information concerning the compensation of former executive officers of the Company who are also deemed by SEC rules to be named executive officers for fiscal 2002. All compensation was paid by Pueblo. SUMMARY COMPENSATION TABLE
Annual Compensation -------------------------------------------------------------- (a) (b) (c) (d) (e) (f) Other Name Annual All Other and Compen- Compen- Principal Fiscal Salary Bonus sation sation Position Year ($) ($) ($) ($) - -------------------------- -------- -------- --------- ----------- ----------- William T. Keon, III, (11) 2002 518,846 945,547 22,614(2) 44,235(1) President and Chief 2001(8) 384,616 240,000 15,021(2) 11,538(1) Executive Officer 2001 480,000 220,000 21,853(2) 24,592(1) Daniel J. O'Leary (11) 2002 281,846 219,162 18,904(3) - Executive Vice President; 2001(8) 203,846 - 10,413(3) - Chief Financial Officer 2001 259,000 60,000 17,332(3) - Fernando Bonilla (11) 2002 140,723 40,230 11,998(4) Vice President; General 2001(8) 103,846 15,000 9,355(4) Counsel; Secretary 2001 130,558 15,000 12,237(4) Charles R. Newsom 2002(9) 222,202 55,300 9,141(5) 41,980(1) Senior Vice President; 2001(8) 192,308 - 11,621(5) - President, Retail Food 2001 206,465 40,300 22,714(5) - Division Alicia Echevarria 2002(10) 116,245 20,300 8,711(6) - Vice President of 2001(8) 118,362 - 9,108(6) - Human Resources 2001 151,368 20,300 13,730(6) - Melissa Lammers (Started 1/8/01) 2002(10) 180,392 35,300 7,205(7) - Senior Vice President 2001(8) 184,616 8,322 7,723(7) - and Chief Marketing Officer 2001 13,846 - - -
NOTES TO SUMMARY COMPENSATION TABLE (1) Amount represents the Company's matching contribution to an elective non-qualified deferred compensation plan maintained by the Company. (2) Includes costs related to the reimbursement of executive medical expense of $10,264, $5,521, and $9,503 and an automobile allowance in the amount of $12,350, $9,500, and $12,350 for fiscal 2002, the 40 weeks ended November 3, 2001 and fiscal 2001, respectively. (3) Includes costs related to the reimbursement of executive medical expense of $8,504, $2,413, and $6,932 and an automobile allowance in the amount of $10,400, $8,000 and $10,400 for fiscal 2002, the 40 weeks ended November 3, 2001, and fiscal 2001, respectively. (4) Includes costs related to the reimbursement of executive medical expense of $2,898, $2,355, and $3,137, and an automobile allowance in the amount of $9,100, $7,000, and $9,100 for fiscal 2002, the 40 weeks ended November 3, 2001, and fiscal 2001, respectively. (5) Includes costs related to the reimbursement of executive medical expense of $1,703, $3,121, and $12,834 and an automobile allowance in the amount of $7,438, $8,500, and $9,880, for fiscal 2002, the 40 weeks ended November 3, 2001, and fiscal 2001, respectively. (6) Includes costs related to the reimbursement of executive medical expense of $2,236, $2,108, and $4,630 and an automobile allowance in the amount of $6,475, $7,000, and $9,100 for fiscal 2002, the 40 weeks ended Nov. 3, 2001, and fiscal 2001, respectively. (7) Includes costs related to the reimbursement of executive medical expense of $267, and $223 and an automobile allowance in the amount of $6,938, and $7,500 for fiscal 2002 and the 40 weeks ended November 3, 2001 (8) Represents the 40 weeks ended November 3, 2001. (9) Pursuant to his resignation effective July 11, 2002, Mr. Newsom left the employ of the Company and its operating subsidiaries. (10) Represents compensation for the period from November 4, 2001 to July 23, 2002. These individuals were officers of the Company and certain of its operating subsidiaries during this time period. Effective July 23, 2002 they resigned as officers of the Company. They continued as officers of the operating subsidiaries. (11) Effective March 15, 2003, the employment arrangements for Messrs. Keon, O'Leary and Bonilla were formalized in retention. PENSION PLAN TABLES ------------------- The Company sponsors two defined benefit plans. The Pueblo International, LLC Employees' Retirement Plan (the "Retirement Plan") is tax-qualified under the Internal Revenue Code and covers all full-time and certain part-time employees of the Company over age 21 with one year of service. It provides an annual benefit equal to 1% of the average annual compensation over a five-year period per year of service. The Supplemental Executive Retirement Plan (the "SERP") is non-qualified and covers all officers of the Company and its subsidiaries. It provides an annual benefit equal to 3% of the average compensation over a five-year period per year of service (up to 20 years). Full vesting for the Retirement Plan and the SERP occurs upon completion of five years of service. The following tables give the estimated annual benefit payable upon retirement for participants in the Retirement Plan and the SERP. The SERP benefits are offset by the Retirement Plan benefits and by 100% of social security benefits. These offsets are reflected in the benefits shown in the SERP table. The Company does not sponsor any other defined benefit or actuarial plans. Table 1. Retirement Plan
Years of Service --------------------------------------------------------------------------- Remuneration 5 10 15 20 25 30 35 --------------------------------------------------------------------------- 125,000 . . . . . . 6,250 12,500 18,750 25,000 31,250 37,500 43,750 150,000 . . . . . . 7,500 15,000 22,500 30,000 37,500 45,000 52,500 175,000 . . . . . . 8,750 17,500 26,250 35,000 43,750 52,500 61,250 200,000 . . . . . . 10,000 20,000 30,000 40,000 50,000 60,000 70,000
Table 2. Supplemental Executive Retirement Plan
Years of Service --------------------------------------------------------------------------- Remuneration 5 10 15 20 25 30 35 --------------------------------------------------------------------------- 150,000 . . . . . . . - 8,556 23,556 38,556 31,056 23,556 16,512 200,000 . . . . . . . - 18,556 38,556 58,556 48,556 38,556 29,012 250,000 . . . . . . . 6,056 33,556 61,056 88,556 78,556 68,556 59,012 300,000 . . . . . . . 13,556 48,556 83,556 118,556 108,556 98,556 89,012 350,000 . . . . . . . 21,056 63,556 106,056 148,556 138,556 128,556 119,012 400,000 . . . . . . . 28,556 78,556 128,556 178,556 168,556 158,556 149,012 450,000 . . . . . . . 36,056 93,556 151,056 208,556 198,556 188,556 179,012 500,000 . . . . . . . 43,556 108,556 173,556 238,556 228,556 218,556 209,012 550,000 . . . . . . . 51,056 123,556 196,056 268,556 258,556 248,556 239,012 600,000 . . . . . . . 58,556 138,556 218,556 298,556 288,556 278,556 269,012 650,000 . . . . . . . 66,056 153,556 241,056 328,556 318,556 308,556 299,012 700,000 . . . . . . . 73,556 168,556 263,556 358,556 348,556 338,556 329,012 750,000 . . . . . . . 81,056 183,556 286,056 388,556 378,556 368,556 359,012 800,000 . . . . . . . 88,556 198,556 308,556 418,556 408,556 398,556 389,012 850,000 . . . . . . . 96,056 213,556 331,056 448,556 438,556 428,556 419,012 900,000 . . . . . . . 103,556 228,556 353,556 478,556 468,556 458,556 449,012 950,000 . . . . . . . 111,056 243,556 376,056 508,556 498,556 488,556 479,012 1,000,000 . . . . . . 118,556 258,556 398,556 538,556 528,556 518,556 509,012 1,050,000 . . . . . . 126,056 273,556 421,056 568,556 558,556 548,556 539,012 1,100,000 . . . . . . 133,556 288,556 443,556 598,556 588,556 578,556 569,012 1,150,000 . . . . . . 141,056 303,556 466,056 628,556 618,556 608,556 599,012 1,200,000 . . . . . . 148,556 318,556 488,556 658,556 648,556 638,556 629,012 1,250,000 . . . . . . 156,056 333,556 511,056 688,556 678,556 668,556 659,012 1,300,000 . . . . . . 163,556 348,556 533,556 718,556 708,556 698,556 689,012 1,350,000 . . . . . . 171,056 363,556 556,056 748,556 738,556 728,556 719,012 1,400,000 . . . . . . 178,556 378,556 578,556 778,556 768,556 758,556 749,012 1,450,000 . . . . . . 186,056 393,556 601,056 808,556 798,556 788,556 779,012 1,500,000 . . . . . . 193,556 408,556 623,556 838,556 828,556 818,556 809,012
Compensation covered by the qualified Retirement Plan is equal to the total compensation (excluding compensation attributable to the redemption of certain stock options) paid to an employee during a plan year prior to any reduction under a salary reduction agreement entered into by the employee pursuant to a plan maintained by the employer which qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), or pursuant to a plan maintained by the employer which qualifies under Section 125 of the Code. Compensation in excess of $200,000 shall be disregarded, provided, however, that such $200,000 limitation shall be adjusted at the same time and in such manner as the maximum compensation limit is adjusted under Section 401(a)(17) of the Code. Compensation covered by the non-qualified Supplemental Executive Retirement Plan is the same as the qualified Retirement Plan, except that the $200,000 limit is not applicable. The estimated years of credited service and age, respectively, for purposes of calculating benefits through November 2, 2002 for Mr. Keon is nine and 56, respectively, and for Mr. O'Leary is five and 55, respectively. The benefits provided by both the Retirement Plan and the SERP are on a straight-life annuity basis, as are the examples in the Retirement Plan table. Mr. Keon's retention agreement calls for some pension benefit adjustments for employment under the common controlled ownership group. Compensation Committee Interlocks and Insider Participation Messrs. Keon and Bandel served as members of the Compensation and Benefits Committee of the Board of Directors of the Company during all or a portion of the year ended November 2, 2002 and the 40 weeks ended November 3, 2001. Mr. Keon also served as an officer of the Company during those periods. By July 2002, Mr. Keon resigned from the Committee. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT a) Security Ownership of Certain Beneficial Owners As discussed in Part II, Item 5 - Market for the Registrant's Common Equity and Related Shareholder Matters, the Company is a wholly-owned subsidiary of Holdings. The following table sets forth certain information regarding the beneficial ownership of more than 5% of the common stock of Holdings as of the date of this filing. By virtue of its ownership of the Holdings common stock, the following entity may be deemed to own a corresponding percentage of the Company's common stock.
Shares Beneficially Owned --------------------------------------------- Name and Address Number Percent - ------------------------------- --------------------- ------------------- Parkside Investments LLC Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 1,000 100.0%
The shares of Holdings described above are beneficially owned by the Principal Shareholders by virtue of their indirect ownership of the entity listed above. The principal business address of the Principal Shareholders is New Court, St. Swithin's Lane, London EC 4P 4DU, United Kingdom. (b) Security Ownership of Management As of the date of this filing, the directors and executive officers of the Company have no beneficial ownership of Holdings. (c) Changes in Control The borrowings outstanding under the April 1997 Bank Credit Agreement are collateralized by a pledge of the assets of the Company's subsidiaries, by the capital stock of, and intercompany notes issued by, the Company's subsidiaries and by the capital stock of the Company. The May 2003 Bank Agreement is also collateralized. See NOTE 16 - SUBSEQUENT EVENTS - of the footnotes to the Company's consolidated financial statements included in Item 15 of this Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, Company management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-14(c). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the date of that evaluation. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their Evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report: Page (1) Consolidated Financial Statements: Independent Auditors' Report F - 1 Consolidated Balance Sheets F - 2 through F - 3 Consolidated Statements of Operations F - 4 Consolidated Statements of Cash Flows F - 5 Consolidated Statements of Stockholder's Equity F - 6 Notes to Consolidated Financial Statements F - 7 through F -42 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts S - 1 (3) Exhibits: The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the indicated footnote or in the parenthetical thereafter. If no footnote is indicated or parenthetical appears after an exhibit, such exhibit is filed herewith.
INDEX TO EXHIBITS SEQUENTIALLY EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------------------- ------------------------------------------- ---------------- 2.1 TERMS OF PROPOSED RESTRUCTURING (INCORPORATED BY REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JANUARY 22, 2003). 2.2 STATEMENT OF FINANCIAL AFFAIRS (INCORPORATED BY REFERENCE TO EXHIBIT 99.2 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JANUARY 22, 2003). 2.3 AMENDED SUMMARY OF SCHEDULES (INCORPORATED BY REFERENCE TO EXHIBIT 99.3 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JANUARY 22, 2003). 2.4 DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.5 APENDIX A TO DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.2 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.6 APENDIX B TO DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.3 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.7 APENDIX C TO DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.4 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.8 APENDIX F TO DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.7 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.9 APENDIX G TO DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.8 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.10 APENDIX H TO DISCLOSURE STATEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.9 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.11 ORDER BY THE COURT AUTHORIZING THE COMPANY TO APPROVE THE EXTENSION AND MODIFICATION AGREEMENT AND MODIFYING THE AUTOMATIC STAY (INCORPORATED BY REFERENCE TO EXHIBIT 99.13 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 2.12 AMENDED SCHEDULE G, FILED WITH THE U.S. BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ON APRIL 1, 2003, TO THE AMENDED SUMMARY OF SCHEDULES, FILED WITH THE U.S. BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ON JANUARY 17, 2003 (INCORPORATED BY REFERENCE TO EXHIBIT 99.1 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED APRIL 9,2003).
SEQUENTIALLY EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------------------- ------------------------------------------- ---------------- 3.1 RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY (INCORPORATED BY REFERENCE TO EXHIBIT 3.1 TO THE COMPANY'S REGISTRATION STATEMENT NO. 33-63372 ON FORM S-1) 3.2 AMENDED AND RESTATED BY-LAWS OF THE COMPANY (INCORPORATED BY REFERENCE TO EXHIBIT 3.2 TO THE COMPANY'S REGISTRATION STATEMENT NO. 33-63372 ON FORM S-1) 4.1 SPECIMEN NOTE FOR COMPANY'S 9 1/2% SENIOR NOTES DUE 2003 (INCLUDED IN EXHIBIT 4.2)* 4.2 INDENTURE DATED AS OF JULY 28, 1993 BETWEEN THE COMPANY AND UNITED STATES TRUST COMPANY OF NEW YORK, AS TRUSTEE* 4.3 SPECIMEN NOTE FOR THE COMPANY'S 9 1/2% SERIES C SENIOR NOTES DUE 2003 (INCLUDED IN EXHIBIT 4.4) 4.4 INDENTURE, DATED AS OF APRIL 24, 1997, BETWEEN THE COMPANY AND UNITED STATES TRUST COMPANY OF NEW YORK, AS TRUSTEE (INCORPORATED BY REFERENCE TO EXHIBIT 4.2 TO THE COMPANY'S REGISTRATION STATEMENT NO. 333-27523 ON FORM S-3) 4.5 REGISTRATION RIGHTS AGREEMENT, DATED AS OF APRIL 29, 1997, BETWEEN THE COMPANY AND NATIONSBANC CAPITAL MARKETS, INC. AND SCOTIA CAPITAL MARKETS (USA) INC. (INCORPORATED BY REFERENCE TO EXHIBIT 4.3 TO THE COMPANY'S REGISTRATION STATEMENT NO. 333-27523 ON FORM S-3) 4.6 INDENTURE, DATED AS OF JUNE 5, 2003 BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANY, AS TRUSTEE (FILED HEREWITH) 4.7 SECURITY PLEDGE AND INTERCREDITOR AGREEMENT, DATED JUNE 5, 2003, BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANY, AS TRUSTEE (FILED HEREWITH) 10.1 CREDIT AGREEMENT AMONG THE COMPANY, PUEBLO MERGER CORPORATION, PUEBLO INTERNATIONAL, INC., XTRA SUPER FOOD CENTERS, INC., VARIOUS LENDING INSTITUTIONS, THE CHASE MANHATTAN BANK, N.A. AND SCOTIABANK DE PUERTO RICO, AS CO-MANAGING AGENTS AND SCOTIABANK DE PUERTO RICO, AS ADMINISTRATIVE AGENT (THE "OLD BANK CREDIT AGREEMENT")* 10.2 FIRST AMENDMENT, DATED AS OF AUGUST 2, 1993, OF THE OLD BANK CREDIT AGREEMENT* 10.3 SECOND AMENDMENT, DATED AS OF DECEMBER 15, 1993, TO THE OLD BANK CREDIT AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 6, 1993) 10.4 THIRD AMENDMENT, DATED AS OF JANUARY 31, 1994 (EFFECTIVE AS OF NOVEMBER 5, 1993), TO THE OLD BANK CREDIT AGREEMENT*
SEQUENTIALLY EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------------------- ------------------------------------------- ---------------- 10.11 MEMBERSHIP CORRESPONDENCE CONCERNING TOPCO ASSOCIATES, INC. (INCORPORATED BY REFERENCE TO EXHIBIT 10.3 TO COMPANY'S REGISTRATION STATEMENT NO. 33-63372 ON FORM S-1) 10.12 MORTGAGE NOTES DATED JUNE 6, AND 10, 1986 DUE FISCAL 1997 (INCORPORATED BY REFERENCE TO EXHIBIT 10.4 TO THE COMPANY'S REGISTRATION STATEMENT NO. 33-63372 ON FORM S-1) 10.13 AGREEMENT BETWEEN THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) (THE "BANK"), PUERTO RICO INDUSTRIAL, MEDICAL AND ENVIRONMENTAL POLLUTION CONTROL FACILITIES FINANCING AUTHORITY (THE "AUTHORITY") AND THE COMPANY; TRUST AGREEMENT BETWEEN THE AUTHORITY AND BANCO POPULAR DE PUERTO RICO, AS TRUSTEE; GUARANTEE AND CONTINGENT PURCHASE AGREEMENT BETWEEN THE REGISTRANT AND THE BANK; LOAN AGREEMENT BETWEEN THE AUTHORITY AND THE REGISTRANT; TENDER AGENT AGREEMENT AMONG THE AUTHORITY; BANCO POPULAR DE PUERTO RICO AS TRUSTEE; RE-MARKETING AGREEMENT BETWEEN CHASE MANHATTAN CAPITAL MARKETS CORPORATION AND THE REGISTRANT; EACH DATED OCTOBER 1, 1985, RELATING TO A $5,000,000 FINANCING IN OCTOBER 1985 (SUBSTANTIALLY IDENTICAL DOCUMENTS WERE EXECUTED FOR AN ADDITIONAL $5,000,000 FINANCING IN NOVEMBER 1985 AND $7,500,000 IN DECEMBER 1985) (INCORPORATED BY REFERENCE HEREIN AS FILED WITH PUEBLO'S REGISTRATION STATEMENT NO. 1-6376 ON FORM S-2 DATED JANUARY 23, 1986) 10.20 EXECUTED FOURTH AMENDMENT, DATED AS OF APRIL 8, 1994, TO THE OLD BANK CREDIT AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 21, 1994) 10.21 EXECUTED FIFTH AMENDMENT, DATED AS OF AUGUST 11, 1995, TO THE OLD BANK CREDIT AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 4, 1995) 10.22 EXECUTED SIXTH AMENDMENT, DATED AS OF NOVEMBER 3, 1995, TO THE OLD BANK CREDIT AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 10.2 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 4, 1995) 10.23 EMPLOYMENT AGREEMENT, DATED FEBRUARY 28, 1996, BETWEEN PUEBLO INTERNATIONAL, INC. AND EDWIN PEREZ** 10.24 AGREEMENT, DATED MARCH 1, 1996, BETWEEN PUEBLO INTERNATIONAL, INC. AND HECTOR G. QUINONES** 10.25 EXECUTED SEVENTH AMENDMENT, DATED AS OF JANUARY 26, 1996, TO THE OLD BANK CREDIT AGREEMENTS**
SEQUENTIALLY EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------------------- ------------------------------------------- ---------------- 10.29 RECEIPT AND AGREEMENT BY PXC&M HOLDINGS, INC. FROM BOTHWELL CORPORATION DATED OCTOBER 18, 1996 (INCORPORATED BY REFERENCE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 2, 1996) 10.30 RECEIPT AND AGREEMENT BY PUEBLO XTRA INTERNATIONAL, INC. FROM PXC&M HOLDINGS, INC. DATED OCTOBER 18, 1996 (INCORPORATED BY REFERENCE TO EXHIBIT 10.2 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 2, 1996) 10.31 CONSENT EXECUTED BY SCOTIABANK DE PUERTO RICO, AS ADMINISTRATIVE AGENT, DATED OCTOBER 18, 1996 (INCORPORATED BY REFERENCE TO EXHIBIT 10.3 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 2, 1996) 10.32 EIGHTH AMENDMENT, DATED AS OF NOVEMBER 1, 1996, TO THE OLD CREDIT AGREEMENT AMONG PUEBLO XTRA INTERNATIONAL, INC., PUEBLO INTERNATIONAL, INC., XTRA SUPER FOOD CENTERS, INC., VARIOUS LENDING INSTITUTIONS, THE CHASE MANHATTAN BANK, N.A. AND SCOTIABANK DE PUERTO RICO, AS ADMINISTRATIVE AGENT (INCORPORATED BY REFERENCE TO EXHIBIT 10.4 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 2, 1996) 10.33 NINTH AMENDMENT, DATED AS OF JANUARY 25, 1997, TO THE OLD CREDIT AGREEMENT AMONG PUEBLO XTRA INTERNATIONAL, INC., PUEBLO INTERNATIONAL, INC., XTRA SUPER FOOD CENTERS, INC., VARIOUS LENDING INSTITUTIONS, THE CHASE MANHATTAN BANK, N.A. AND SCOTIABANK DE PUERTO RICO, AS ADMINISTRATIVE AGENTS*** 10.34 EMPLOYMENT AGREEMENT, DATED MARCH 20, 1997, BETWEEN PUEBLO INTERNATIONAL, INC. AND DAVID L. ASTON**** 10.35 AMENDED AND RESTATED CREDIT AGREEMENT, DATED AS OF APRIL 29, 1997, OF THE OLD BANK CREDIT AGREEMENT (THE "NEW BANK CREDIT AGREEMENT")**** 10.36 FIRST AMENDMENT, DATED AS OF APRIL 15, 1999, TO THE NEW BANK CREDIT AGREEMENT***** 10.37 SECOND AMENDMENT, DATED AS OF AUGUST 11, 2000, TO NEW BANK CREDIT AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 12, 2000) 10.38 THIRD AMENDMENT , DATED AS OF JANUARY 26, 2001, TO THE NEW BANK CREDIT AGREEMENT ***** 10.39 FOURTH AMENDMENT, DATED AS OF AUGUST 11, 2001, TO THE NEW BANK CREDIT AGREEMENT (INCORPORATED BY REFERNECE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 11, 2001)******
SEQUENTIALLY EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ------------------- ------------------------------------------- ---------------- 10.40 FIFTH AMENDMENT, DATED AS OF NOVEMBER 2, 2001, TO THE NEW BANK CREDIT AGREEMENT****** 10.41 SIXTH AMENDMENT, DATED AS OF JANUARY 31, 2002, TO THE NEW BANK CREDIT AGREEMENT****** 10.42 CONSENT AGREEMENT DATED AS OF AUGUST 1, 2002 ("CONSENT AGREEMENT") MADE BY AND AMONG PXI, THE BORROWER, XTRA, THE AGENTS AND THE BANKS. (INCOPORATED BY REFERENCE TO EXHIBIT 10.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 10, 2002) 10.43 GUARANTEE AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.11 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 10.44 EXTENSION AND MODIFICATION AND SECURITY AGREEMENT WITH WESTERNBANK OF PUERTO RICO (INCORPORATED BY REFERENCE TO EXHIBIT 99.10 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 10.45 AMENDMENT NO. 1 TO LLC AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.12 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 10.46 SUBORDINATION AGREEMENT (INCORPORATED BY REFERENCE TO EXHIBIT 99.13 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 18, 2003). 10.47 RETENTION AGREEMENT, DATED MARCH 15, 2003, BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO ENTERTAINMENT, INC. AND WILLIAM T KEON III (FILED HEREWITH) 10.48 RETENTION AGREEMENT, DATED MARCH 15, 2003, BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO ENTERTAINMENT, INC. AND DANIEL O'LEARY (FILED HEREWITH) 10.49 RETENTION AGREEMENT, DATED MARCH 15, 2003, BETWEEN PUEBLO INTERNATIONAL, LLC AND PUEBLO ENTERTAINMENT, INC. AND FERNANDO J. BONILLA (FILED HEREWITH) 10.50 AMENDED AND RESTATED GUARANTOR AND GENERAL SECURITY AGREEMENT, DATED MAY 23, 2003, BY NSC IN FAVOR OF WESTERNBANK OF PUERTO RICO (FILED HEREWITH) 10.51 LOAN AND SECURITY AGREEMENT, DATED AS OF MAY 23, 2003 ("MAY 2003 BANK AGREEMENT") ENTERED INTO BY AND BETWEEN WESTERNBANK OF PUERTO RICO, PUEBLO INTERNATIONAL, LLC, FLBN CORPORATION (F/K/A. XTRA SUPER FOOD CENTERS, INC., PUEBLO ENTERTAINMENT, INC., XTRA MERFER CORPORATION, CARIBAD, INC. AND ALL TRUCK, INC. (FILED HEREWITH) 99.1 CEO CERTIFICATION PURSUANT TO SECTION 906 OF OF THE SARBANES-OXLEY ACT OF 2002 (FILED HEREWITH) 99.2 CFO CERTIFICATION PURSUANT TO SECTION 906 OF OF THE SARBANES-OXLEY ACT OF 2002 (FILED HEREWITH)
* Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 29, 1994. ** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 27, 1996. *** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 25, 1997. **** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 31, 1998. ***** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended January 27, 2001 ****** Previously filed and incorporated by reference to corresponding exhibits in the Company's Form 10-K for fiscal year ended November 3, 2001 (B) Reports on Form 8-K: The Company filed the following Current Reports on Form 8-K with the SEC since August 10, 2002 1. September 9, 2002 - to report that certain creditors of the Company filed an involuntary petition under title 11, United States Code in the United States Bankruptcy Court for the District of Delaware requesting an order for relief under Chapter 11 of the Bankruptcy Code (Title 11 of the United States Code). 2. October 9, 2002 - to report that on September 24, 2002, the Company voluntarily consented to an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court for the District of Delaware. The Court issued such a relief on September 27, 2002. 3. October 18, 2002 - to advise investors that it was substantially revising the information, including five year projections, that it had provided to an ad-hoc committee of the Company's noteholders at an August 22, 2002 meeting. 4. December 26, 2002 - Initial Monthly Operating Report and Monthly Operating Reports for the periods from September 4, 2002 to October 5, 2002 and October 6, 2002 to November 2, 2002 (subsequently amended, to correct a transmission error). The amended 8-K was filed on January 7, 2003. 5. January 16, 2003 - Monthly Operating Report for the periods from November 3, 2002 to November 30, 2002. 6. January 22, 2003 - to report that on January 17, 2003, the Company filed a motion for an order extending its exclusive periods to file a Plan of Reporganization and solicit acceptances thereof and the Company filed an emergency motion for an order authorizing the Court to approve the Company's Extension and Modification and Security Agreement with the 2003 Bank Lender. Additionally, the Company announced that it had reached an agreement with the Official Committee of Unsecured Creditors and its equityholders on the principal terms of a comprehensive financial restructuring as part of a Plan of Reorganization. The Company also announced that it would not timely file its Form 10-K for the fiscal year ended November 2, 2002. 7. February 11, 2003 - Monthly Operating Report for the periods from December 1, 2002 to December 28, 2002. 8. February 18, 2003 - to report than on January 31, 2003, the Company filed a Disclosure Statement and a motion for an order to approve such Disclosure Statement and set a date for confirmation of a Plan of Reorganization. Also, on January 30, 2003, the Company, as guarantor, and its subsidiaries entered into an Extension and Modification and Security Agreement with Westernbank of Puerto Rico. 9. March 5, 2003 - Monthly Operating Report for the period from December 29, 2002 to January 25, 2003. 10. April 9, 2003 - Monthly Operating Report for the period from January 26, 2003 to February 22, 2003. The Company also reported that, on April 1, 2003, it filed an amended Schedule G with the Court, to the Amended Summary Of Schedules, filed with the Court on January 17, 2003. The Company also announced that it would not timely file its Form 10-Q for the quarterly period ended February 22, 2003. 11. May 22, 2003 - Monthly Operating Report for the period from February 23, 2003 to March 22, 2003. The Company also reported that, at a hearing on April 30, 2003, the Court confirmed NSC's Plan of Reorganization, dated as of February 28, 2003, as modified. 12. June 6, 2003 - Monthly Operating Report for the period from March 23, 2003 to April 19, 2003. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT No annual report to security holders covering the Company's last fiscal year and no proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders has, as of the date hereof, been sent to security holders by the Company. If such report or proxy material is to be furnished to security holders subsequent to the filing of the annual report of this Form 10-K, the Company will furnish copies of such material to the Commission when it is sent to the security holders. SIGNATURES Pursuant to the requirement 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. NUTRITIONAL SOURCING CORPORATION Dated: July 25, 2003 /s/ Daniel J. O'Leary Daniel J. O'Leary, Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------- ------------------------------ ------------ /s/ William T. Keon, III Chairman; President; and Chief William T. Keon, III Executive Officer /s/ Daniel J. O'Leary Executive Vice President, Chief Daniel J. O'Leary Financial Officer and Chief Accounting Officer /s/ Evis H. Lois Controller Evis H. Lois /s/ Steven I. Bandel Director Steven I. Bandel /s/ Cristina Pieretti Director Cristina Pieretti
NUTIRITIONAL SOURCING CORPORATION Certificates pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, William T. Keon III, certify that: 1. I have reviewed this annual report on Form 10-K of Nutritional Sourcing Corporation; 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. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our 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. The registrant's other certifying officer and 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 our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: _July 25, 2003____ /s/ William T. Keon III_ William T, Keon III Chief Executive Officer I, Daniel J. O'Leary, certify that: 1. I have reviewed this annual report on Form 10-K of Nutritional Sourcing Corporation; 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. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our 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. The registrant's other certifying officer and 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 our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: _July 25, 2003____ /s/ Daniel J. O'Leary_ Daniel J. O'Leary Chief Financial Officer INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Nutritional Sourcing Corporation (formerly Pueblo Xtra International, Inc.): We have audited the accompanying consolidated balance sheets of Nutritional Sourcing Corporation (Debtor-in-Possession and formerly Pueblo Xtra International, Inc.) and its subsidiaries (the "Company") as of November 2, 2002 and November 3, 2001, and the related consolidated statements of operations, cash flows, and stockholder's equity, for the fifty two weeks ended November 2, 2002, the forty weeks ended November 3, 2001, and the fifty two weeks ended January 27, 2001. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of November 2, 2002 and November 3, 2001, and the results of its operations and its cash flows for the fifty two weeks ended November 2, 2002, the forty weeks ended November 3, 2001, and the fifty two weeks ended January 27, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, Nutritional Sourcing Corporation ("NSC") filed for reorganization under Chapter 11 of the Federal Bankruptcy Code and began operating its business as a debtor-in- possession on September 27, 2002. On June 5, 2003, NSC consummated its plan of reorganization and emerged from bankruptcy pursuant to an April 30, 2003 order entered by the Bankruptcy Court as further described in Note 16. Deloitte & Touche LLP Miami, Florida November 22, 2002 (June 5, 2003 as to the new bank financing and the emergence from bankruptcy described in Notes 1 and 16). F-1 NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
November 2, November 3, 2002 2001 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 17,992 $ 2,169 Accounts receivable, net of allowance for doubtful accounts of $321 at November 2, 2002 and $520 at November 3, 2001 3,226 3,450 Inventories 51,660 54,228 Prepaid expenses and other current assets 11,018 8,997 Deferred income taxes 15,964 14,534 --------- --------- TOTAL CURRENT ASSETS 99,860 83,378 --------- --------- PROPERTY AND EQUIPMENT Land and improvements 6,307 6,299 Buildings and improvements 40,092 40,051 Furniture, fixtures and equipment 101,497 99,758 Leasehold improvements 44,511 43,736 Construction in progress 5,278 2,803 --------- --------- 197,685 192,647 Less accumulated depreciation and amortization 106,558 94,110 --------- --------- 91,127 98,537 Property under capital leases, net 11,720 12,690 --------- --------- TOTAL PROPERTY AND EQUIPMENT 102,847 111,227 GOODWILL, net of accumulated amortization of $46,561 at November 2, 2002 and $41,821 at November 3, 2001 145,477 150,217 DEFERRED INCOME TAXES 6,024 1,080 TRADE NAMES, net of accumulated amortization of $11,926 at November 2, 2002 and $11,059 at November 3, 2001 26,574 27,441 DEFERRED CHARGES AND OTHER ASSETS 17,943 20,816 --------- --------- TOTAL ASSETS $ 398,725 $ 394,159 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-2 NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)
November 2, November 3, 2002 2001 ----------- ------------ LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES NOT SUBJECT TO COMPROMISE CURRENT LIABILITIES Revolving credit facility $ 32,000 $ - Accounts payable 44,387 53,539 Accrued expenses 16,106 16,669 Accrued interest 73 4,432 Salaries, wages and benefits payable 10,358 7,862 Current obligations under capital leases 704 623 Current deferred tax liability 950 - --------- --------- TOTAL CURRENT LIABILITIES 104,578 83,125 LONG-TERM DEBT - revolving credit facility - 30,000 NOTES PAYABLE - 175,358 CAPITAL LEASE OBLIGATIONS, net of current portion 11,591 12,296 RESERVE FOR SELF-INSURANCE CLAIMS 5,240 6,008 DEFERRED INCOME TAXES 27,176 20,486 OTHER LIABILITIES AND DEFERRED CREDITS 29,226 31,501 --------- --------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 177,811 358,774 --------- --------- LIABILITIES SUBJECT TO COMPROMISE 186,208 - --------- --------- TOTAL LIABILITIES $ 364,019 $ 358,774 --------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 6, 8, 9, and 16) STOCKHOLDER'S EQUITY Common stock, $.10 par value; 200 shares authorized and issued - - Additional paid-in capital 91,500 91,500 Accumulated deficit (56,794) (56,115) --------- --------- TOTAL STOCKHOLDER'S EQUITY 34,706 35,385 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 398,725 $ 394,159 ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands)
52 weeks ended 40 weeks ended ------------------------ ----------------------- 52 weeks (unaudited) (unaudited) ended November 2, November 3, November 3, November 4, January 27, 2002 2001 2001 2000 2001 ---------- ---------- ---------- ---------- ----------- Net sales $ 588,179 $ 576,593 $ 433,342 $ 478,799 $ 622,050 Cost of goods sold 396,239 388,686 290,997 326,066 423,755 ---------- ---------- ---------- ---------- ---------- GROSS PROFIT 191,940 187,907 142,345 152,733 198,295 OPERATING EXPENSES Selling, general and administrative expenses 154,371 155,107 116,541 127,101 165,667 Gain on insurance Settlement (14,693) - - (2,464) (2,464) Store Closings: Exit costs 246 - - 685 685 Write down of impaired assets - (44) - 3,578 3,534 Depreciation and amortization 28,260 30,868 22,671 25,945 34,142 ---------- ---------- ---------- ---------- ---------- OPERATING PROFIT (LOSS) 23,756 1,976 3,133 (2,112) (3,269) Interest expense on debt (does not include contractual interest expense on pre-petition debt toaling approximately $2,700 for the period from September 4, 2002 to November 2, 2002 (19,126) (22,148) (16,967) (21,779) (26,960) Interest expense on capital lease obligations (1,820) (1,786) (1,409) (1,493) (1,870) Interest and investment income, net 291 659 415 2,256 2,500 Reorganization items (995) - - - - Gain on early extinguishment of debt - - - 33,867 33,867 ---------- ---------- --------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 2,106 (21,299) (14,828) 10,739 4,268 Income tax (expense) benefit (2,785) 9,806 6,612 (4,767) (1,573) ---------- ---------- ---------- ---------- ---------- NET (LOSS) INCOME $ (679) $ (11,493) $ (8,216) $ 5,972 $ 2,695 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
52 weeks ended 40 weeks ended ---------------------- ---------------------- 52 weeks (unaudited) (unaudited) ended November 2, November 3, November 3, November 4, January 27, 2002 2001 2001 2000 2001 ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (679) $(11,493) $ (8,216) $ 5,972 $ 2,695 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Gain on early extinguishment of debt - - - (33,867) (33,867) Depreciation and amortization of property and equipment 15,771 17,760 12,635 15,041 20,166 Amortization of intangibles, other assets and inventories 12,489 13,108 10,036 10,904 13,976 Amortization of bond discount 873 938 733 933 1,138 Gain on disposal of property and equipment, net (39) (48) (31) (102) (119) Adjustments to goodwill - 6,943 - - 6,943 Gain on insurance settlement - - - (2,464) (2,464) Accrual for exit costs on store closings - - - 685 685 Write down of impaired assets on store closings - (43) - 3,577 3,534 (Benefit) provision for deferred income taxes 1,266 (18,159) (6,203) 13,706 1,750 Provision for deferred charges and other assets - 351 - (17) 334 Reorganization items 995 - - - - Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 224 108 (1,327) 454 1,889 Inventories (2,814) (3,759) (5,843) (3,954) (1,870) Prepaid expenses and other current assets (3,016) 1,203 (1,622) (2,385) 440 Other assets 1,373 919 919 - - (Decrease) increase in: Accounts payable, accrued expenses and accrued interest (4,097) (4,932) (29,016) (49,216) (25,132) Salaries, wages and benefits payable 2,496 - - - - Other liabilities and deferred credits and reserve for self-insurance claims (3,043) (98) 1,014 (930) (2,042) Net cash provided by (used in) operating --------- --------- --------- --------- --------- activities 21,799 2,798 (26,921) (41,663) (11,944) -------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (7,391) (6,569) (5,271) (16,154) (17,452) Proceeds from disposal of property and equipment 39 50 31 184 203 --------- --------- --------- --------- --------- Net cash used in investing activities (7,352) (6,519) (5,240) (15,970) (17,249) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (624) (634) (503) (507) (638) Purchase of Senior Notes due 2003 - (139) - (50,908) (51,047) Repayment of Industrial Revenue Bonds - - - (10,000) (10,000) Borrowings under Revolving Credit Facility 4,000 25,000 - 30,000 30,000 Repayments of Revolving Credit Facility (2,000) (25,000) - - - Net cash provided by (used in) --------- --------- --------- --------- --------- financing activities 1,376 (773) (503) (31,415) (31,685) --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 15,823 (4,494) (32,664) (89,048) (60,878) Cash and cash equivalents at beginning of period 2,169 6,663 34,833 95,711 95,711 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period $ 17,992 $ 2,169 $ 2,169 $ 6,663 $ 34,833 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements F-5 NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY Fiscal year ended November 2, 2002, 40 weeks ended November 3, 2001, fiscal year ended January 27, 2001 and fiscal year ended January 29, 2000 (Dollars in thousands)
Additional Total Common Paid-in Accumulated Stockholder's Stock Capital Deficit Equity --------- ------------ ------------- ------------- Balance at January 29, 2000 - $ 91,500 $ (50,594) $ 40,906 Net income for the year - - 2,695 2,695 --------- ----------- ------------- ------------- Balance at January 27, 2001 - 91,500 (47,899) 43,601 Net loss for the 40 weeks ended November 3, 2001 (8,216) (8,216) --------- ----------- ------------- ------------- Balance at November 3, 2001 - 91,500 (56,115) 35,385 Net loss for the year - - (679) (679) --------- ----------- ------------- ------------- Balance at November 2, 2002 - $ 91,500 $ (56,794) $ 34,706 ========= =========== ============= =============
The accompanying notes are an integral part of these consolidated financial statements F-6 NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Organization Effective July 22, 2002 the registrant changed its name from Pueblo Xtra International, Inc. to Nutritional Sourcing Corporation ("NSC" or "Entity in Reorganization Proceedings"). The consolidated financial statements include the accounts of Nutritional Sourcing Corporation, and its wholly -owned subsidiaries (the "Company"). NSC is a wholly-owned subsidiary of PXC&M Holdings, Inc. Through its subsidiaries, Pueblo International, LLC and Pueblo Entertainment, Inc., NSC operates retail supermarkets and video rental locations in Puerto Rico and the U.S. Virgin Islands. Effective November 2, 2001, the Company changed its fiscal year end to the Saturday closest to October 31. Previously, the Company's fiscal year ended on the Saturday closest to January 31. Consequently, the previous fiscal period was the 40 weeks ended November 3, 2001. The fiscal years ended November 2, 2002 and January 27, 2001 ("Fiscal 2002" and "Fiscal 2001" respectively) were both 52-week years. Proceedings under Chapter 11 of the Bankruptcy Code and Basis of Presentation On September 24, 2002, NSC voluntarily consented to the entry of an order for relief under Chapter 11 of the Bankruptcy Code by filing a Consent to Entry of Order For Relief Under Chapter 11 in the United States Bankruptcy Court For The District of Delaware (the "Court"). The Court ordered such relief on September 27, 2002 (Case No: 02-12550 (PJW)). This action by NSC was in response to an involuntary petition filed in the Court by certain creditors of NSC under title 11, United States Code (the "Chapter 11 Case"). The creditors' actions were taken as a result of NSC not paying the August 1, 2002 interest payment on its $177,283 in notes outstanding which were due in August of 2003. The interest was not paid as a result of NSC's operating subsidiaries not paying interest they owed to NSC; this non-payment was consented to by the operating subsidiaries' lender banks. The relief under the Chapter 11 Case pertained to NSC only, not to its operating subsidiaries. However, the bank debt of the operating subsidiaries, which was guaranteed by NSC, was due on February 1, 2003. On January 30, 2003 a new bank lender assumed the existing bank debt and committed to lend the operating subsidiaries additional funds at the time NSC emerged from bankruptcy. The new bank lender also obtained the guarantee of NSC. On June 5, 2003, NSC consummated its emergence from bankruptcy pursuant to an April 30, 2003 confirmation order from the Court. The interim bank agreement, new bank financing and NSC's emergence from bankruptcy, including the settlement of liabilities subject to compromise, are discussed in detail in NOTE 16 - SUBSEQUENT EVENTS - to these consolidated financial statements. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) The accompanying consolidated financial statements have been presented in conformity with generally accepted accounting principles in the United States of America, including the provisions of the American Institute of Certified Public Accountants ("AICPA")'s Statement of Position 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," ("SOP 90-7"). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date, and identification of all transactions and events that are directly associated with the reorganization of the debtor. Reorganization items reflected in the Statement of Operations for the fiscal year ended November 2, 2002 are composed primarily of professional fees directly related to the bankruptcy case. The accompanying consolidated financial statements have been prepared on the going concern basis of accounting, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the ordinary course of business with the exception of liabilities subject to compromise and related interest expense. Intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Highly liquid investments with a maturity of three months or less are considered cash equivalents. Inventories Inventories held for sale are stated at the lower of cost or market. The cost of inventories held for sale is determined, depending on the nature of the product, either by the last-in, first-out (LIFO) method or by the first- in, first-out (FIFO) method. Videocassette rental inventories are recorded at cost, net of accumulated amortization. Videocassettes held for rental are amortized over 52 weeks on a straight-line basis. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and Equipment Property and equipment, including expenditures for remodeling and improvements, are carried at cost. Routine maintenance, repairs and minor betterments are charged to operations as incurred. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, in relation to leasehold improvements and property under capital leases, over the lesser of the asset's useful life or the lease term, not to exceed 20 years. Estimated useful lives are 20 years for buildings and improvements, 5 to 12 years for furniture, fixtures and equipment, 4 years for automotive equipment and 3 years for computer hardware and software. Upon the sale, retirement or other disposition of assets, the related cost and accumulated depreciation or amortization are eliminated from the accounts. Any resulting gains or losses from disposals are included in the consolidated statements of operations. Goodwill and Trade names Goodwill represents the excess of cost over the then estimated fair value of the net tangible and other intangible assets acquired in connection with the 1993 purchase of all the outstanding series of the common stock of Pueblo International, Inc. (the "Transaction"). Since the acquisition, approximately $18,100 of goodwill has been written off, including approximately $6,900 in the fiscal year ended January 27, 2001, resulting from adjustments to the acquired deferred tax liability. Trade names acquired at the time of the Transaction were recorded based on valuations by independent appraisers. Goodwill and trademarks are being amortized using the straight-line method over periods not exceeding 40 years. The carrying values of goodwill and trade names are being evaluated in connection with the adoption of SFAS No. 142 on November 3, 2002 which is discussed on Page F-11. Self-Insurance The Company's general liability, certain of its workers compensation, and certain of its health insurance programs are self-insured. The general liability and workers compensation reserves for self-insurance claims are based upon an annual review, by the Company and its independent actuary, of claims filed and claims incurred but not yet reported. Due to inherent uncertainties in the estimation process, it is at least reasonably possible that the Company's estimate of the reserve for self-insurance claims could change in the near term. The liability for self-insurance is not discounted. Individual self-insured losses are limited to $500 per occurrence for general liability claims for eight of the Company's retail locations and to $250 per occurrence for general liability at all other locations and for certain workers compensation claims. The Company maintains insurance coverage for claims in excess of the self-insurance amounts. The current portion of the reserve for general liability and workers compensation, representing the amount expected to be paid in the next fiscal year, was approximately $4,300 at both November 2, 2002 and November 3, 2001, and is included in the consolidated balance sheets as accrued expense. The reserve for health insurance programs was approximately $1,000 at November 2, 2002 and approximately $1,100 at November 3, 2001. It is included in the consolidated balance sheets caption entitled Salaries, wages, and benefits payable. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition The Company has two primary operating segments: retail food sales and video tape rentals and sales. Retail food sales - Revenues from the sale of products are recognized at the point of sale to the Company's customers. The discount earned by customers by using their preferred loyalty card is recorded as a reduction to the sales price to the customer. Rental income from in-store rental arrangements is recorded as a reduction of selling, general, and administrative expenses. Video tape rentals and sales - Revenues from video tape rentals and sales are recognized at the point of rental/sale. Late fees for video rentals are written off if not collected after sixty days. Vendor Allowances Vendor allowances consist primarily of promotional, advertising, exclusivity and slotting allowances. The Company uses vendor allowances to fund pricing promotions, advertising expenses and slotting expenses. Vendor allowances and credits relating to the Company's buying and merchandising activity are recorded in cost of sales and are recognized as earned according to the underlying agreement. The most significant agreements are based on volume and time. Long-Lived Assets Long-lived assets are reviewed on an ongoing basis for impairment based on comparison of carrying value against undiscounted future cash flows. If an impairment is identified, the assets carrying amount is adjusted to fair value. No such adjustments were recorded during the periods presented. Pre-Opening Expenses Store pre-opening expenses are charged to operations as they are incurred. Advertising Expenses Advertising expenses are charged to operations as they are incurred. During fiscal year 2002, the 40 weeks ended November 3, 2001, and fiscal year 2001, advertising expenses were approximately $9,400, $6,600, and $9,400, respectively. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires deferred tax assets and liabilities to be determined based on the difference between the financial statement carrying value and the tax bases of assets and liabilities using enacted tax rates currently in effect. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings Per Common Share The Company is a wholly-owned subsidiary of PXC&M Holdings, Inc. ("Holdings") with a total of 200 shares of common stock issued and outstanding. Earnings per share is not meaningful to the presentation of the consolidated financial statements and is therefore excluded. New Accounting Pronouncements In July 2000, the Financial Accounting Standards Board ("FASB") issued SFAS 138, "Accounting for Derivative Instruments and Hedging Activities (an amendment for FASB Statement No. 133)" which amends SFAS No. 133, to provide additional guidance and to exclude certain provisions. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value, and is effective for the Company's fiscal period ended November 3, 2001. The adoption of SFAS No. 133, as amended, did not have a material impact on the financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is currently analyzing the provisions of SFAS No. 149 to determine if there will be any impact of adoption, but does not believe that there will be any material impact on its consolidated financial statements. In July 2001, the FASB issued SFAS No.141 "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets. The statement applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill and intangible assets deemed to have indefinite lives should not be amortized, but shall be tested for impairment annually or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company adopted SFAS No. 142 on November 3, 2002 and discontinued the amortization of goodwill and tradenames. The Company performed an impairment test on the existing goodwill and tradenames determining that goodwill was impaired by approximately $140,000, at November 3, 2002. No impairment was indicated for tradenames. The goodwill impairment charge will be recorded in the first quarter of fiscal year 2003 as a cumulative effect of a change in accounting principle. Goodwill amortization expense was approximately $4,700 for the 52 weeks ended November 2, 2002, approximately $3,600 for the 40 weeks ended November 3, 2001 and approximately $5,000 for the 52 weeks ended January 27, 2001. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) In July 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long- lived assets. This statement supercedes SFAS No. 121 on the same topic and the accounting and certain reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as defined in that Opinion). This Statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal periods beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of the FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. " SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The adoption of SFAS 145 did not have a material effect on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities. " SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Under SFAS No. 146, a liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met. According to FASB Concepts Statement No. 6, Elements of Financial Statements, a liability is defined as a probable future sacrifice of economic benefit arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. An obligation becomes a present obligation when a transaction or event occurs that leaves an entity little or no discretion to avoid the future transfer or use of assets to settle a liability. Examples of costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, the Company cannot determine the potential effects that adoption of SFAS No. 146 will have on its consolidated financial statements. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (Continued) In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements Nos. 5, 57, 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirement of SFAS No. 5, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. This Interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company's adoption of FIN 45 did not have a material impact to the Company's financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of APB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company has determined that it is not reasonably possible that it will be required to consolidate information about a variable interest entity upon the effective date of FIN 46. Reclassifications Certain amounts in the prior year's consolidated financial statements and related notes have been reclassified to conform to the current year's presentation. NOTE 2 -- INVENTORIES The cost of approximately 76% and 78% of total inventories at November 2, 2002 and November 3, 2001, respectively, is determined by the LIFO method. The excess of current cost over inventories valued by the LIFO method was approximately $2,500 and $2,200 as of November 2, 2002 and November 3, 2001, respectively. For the 40 weeks ended November 3, 2001 and for the prior fiscal year ended January 27, 2001, inventory quantities were reduced resulting in a liquidation of certain inventory base layers carried at costs that were lower than the cost of current purchases, the effect of which reduced the net loss for the 40 weeks ended November 3, 2001 by $120 and increased net income by $20 in the fiscal year ended January 27, 2001. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets consists of the following:
November 2, November 3, 2002 2001 ------------ ------------- Favorable leases and leasehold interest $ 11,355 $ 12,421 Franchise fees and rights 3,395 3,834 Debt issue costs 1,224 2,554 Other 1,969 2,007 ------------ ------------- Deferred charges and other assets $ 17,943 $ 20,816 ============ =============
Favorable leases and leasehold interest represent the difference between the rent required per the leases and the higher value of rents in the market at the time of the Transaction of the leases (mostly as part of the 1993 Transaction). This asset is being amortized on a straight-line basis over the life of the particular lease. Franchise fees and rights include the unamortized portion of the franchise fees paid to the franchisor when each video rental store was opened and the unamortized portion of the step up in basis set up at the time of the 1993 acquisition. The franchise rights were valued at approximately $7,500 at the time of the acquisition and are being amortized over 17 years. Debt issue costs include: The un-amortized portion of bond issue costs (fees, attorney costs, etc.) incurred in connection with Senior Notes issued at the time the Company was acquired in 1993 and Series C Senior Notes issued in 1997. They are being amortized through August of 2003, when the Notes expire. The un-amortized portion of bank fees paid in connection with establishing the Company's April 1997 Bank Credit Facility (see Note 5 -- DEBT). They are being amortized through January 25, 2003, when the facility expires. Other includes, primarily, utility and other deposits required by the Puerto Rico and U.S. Virgin Islands power utilities and a trust to provide funding for a former employee's severance benefits. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- OTHER LIABILITIES AND DEFERRED CREDITS Other liabilities and deferred credits consists of the following:
November 2, November 3, 2002 2001 ------------ ------------- Retirement benefits and compensation: Deferred pension plan contribution $ 8,440 $ 9,051 Supplemental Employee Retirement Plan (SERP) 5,696 5,328 Deferred supplemental pension 646 727 Deferred compensation 671 704 Real Estate Related: Deferred gain on sale/leaseback 6,324 6,503 Deferred escalation in leases 3,850 3,187 Deferred gain on business interruption portion of the hurricane insurance claim - 4,279 Other 3,599 1,722 ------------ ------------- Other liabilities and deferred credits $ 29,226 $ 31,501 ============ =============
Deferred pension plan contribution and Supplemental Employee Retirement Plan represents the long-term reserves for benefits payable under the Company's Retirement Plan and SERP. For a complete discussion of the Company's liabilities pursuant to these plans, see NOTE 10 - RETIREMENT BENEFITS. Deferred supplemental pension represents agreements with certain former executives, who were not participants in the SERP. The plans are essentially defined benefit plans with the beneficiary receiving benefits until death. After their death, surviving spouses receive 50% of the beneficiary's defined benefit amount. Deferred compensation represents the present value of an actuarially determined liability to a former officer for severance pursuant to the terms of his employment contract. Under the terms of the agreement the former officer receives a monthly benefit for life equal to one half of his base salary at the time of retirement and is reduced by the monthly benefits paid to him from the Company's Retirement Plan and SERP. The payments are funded from the earnings of a trust (see NOTE 3 - DEFERRED CHARGES AND OTHER ASSETS). Deferred Gain on Sale/Leaseback represents the portion of the gain realized at the time the Company sold and leased back the related properties in June of 1999 that must be deferred and amortized over the initial 20 year term of the related leases pursuant to generally accepted accounting principles. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- OTHER LIABILITIES AND DEFERRED CREDITS (continued) Deferred escalation in leases represents the liability the Company is required to recognize as a result of certain of its operating leases having required rent increases during their fixed term. In such cases generally accepted accounting principles require that the Company recognize a rent expense in each period that is the proportionate share, for the period, of the total rent to be paid over the fixed term. Consequently, the rent recognized is a level (straight - line) amount regardless of the cash being paid. This liability is the difference between the cash paid and the level amount of rent expense recorded on the books. Deferred gain on business interruption portion of the hurricane insurance claim represents the difference between any advances the Company had received and any unreimbursed claim preparation expenses related to the Company's Hurricane Georges insurance claim (see NOTE 14 - HURRICANE GEORGES). This claim was settled during the 52 weeks ended November 2, 2002. NOTE 5 -- DEBT Total debt consists of the following:
November 2, November 3, 2002 2001 ----------- ----------- Notes and Series C Senior Notes due 2003, net of unamortized discount of $1,052 and $1,925 at November 2, 2002 and November 3, 2001, respectively $ 176,231 $ 175,358 Liabilities not subject to compromise: Revolving Credit Facility due 2003 32,000 30,000 ------------ ----------- $ 208,231 $ 205,358 Less: Current portion, not subject to compromise (32,000) - Liabilities subject to compromise (176,231) - ------------ ----------- Long-term debt, net - $ 205,358 ============ ===========
The discussion in this footnote relates to the debt that existed as of November 2, 2002. For the ultimate disposition of this debt as a result of events subsequent to November 2, 2002 see NOTE 16 - SUBSEQUENT EVENTS - to these consolidated financial statements. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - DEBT (continued) In 1993, NSC issued $180,000 in 10-year, 9.5% senior notes (the "Notes"). On April 29, 1997, the Company entered into a refinancing plan (the "April 1997 Refinancing Plan"), which included the issuance and sale of $85,000 principal amount of 9.5% Series C Senior Notes Due 2003 (the "Series C Senior Notes"), the terms of which are substantially identical to those of the Notes. The net proceeds from the sale of the Series C Senior Notes of approximately $73,900 after deducting expenses, together with available cash of the Company, were used to repay the senior secured indebtedness outstanding under a bank credit agreement dated July 31, 1993 (the "July 1993 Bank Credit Agreement"). During fiscal 2001, the Company purchased, at a gain, approximately $87,700 aggregate principal amount of its Notes and Series C Senior Notes. Additionally, the Company repaid $10,000 in industrial revenue bonds. The Notes and Series C Senior Notes, with a maturity date of August 1, 2003, are general unsecured obligations of the Company and are subordinate in right of payment to all existing and future liabilities (including, without limitation, obligations under the April 1997 Credit Facility) of its subsidiaries. The Notes and Series C Senior Notes may be called by the holders of the notes at 101% in the event of a change in control of the Company (as defined in the indenture). The Notes and Series C Senior Notes are senior to all future subordinated indebtedness which the Company may from time to time incur. The Notes and Series C Senior Notes bear interest at the rate of 9.50% per annum which is payable semiannually on February 1 and August 1. Terms of the Notes and Series C Senior Notes include covenants which restrict the Company and its subsidiaries from engaging in certain activities and transactions. NSC did not make the semi-annual interest payment on the Notes and the Series C Senior Notes which was due on August 1, 2002. See NOTES 1, 8, 9, and 16. In connection with the April 1997 Refinancing Plan, a subsidiary entered into an amended bank credit agreement (the "April 1997 Bank Credit Agreement"), which provides for a $65,000 revolving credit facility (the "April 1997 Credit Facility") with less restrictive covenants compared to the July 1993 Bank Credit Agreement. On August 1, 2002, the lender banks and the Company agreed to permanently reduce the total availability under the revolving credit facility to $38,000 through the termination date of the facility, which is February 1, 2003. Total availability had previously been reduced to $40,000. Additionally, the lender banks and the Company agreed to reduce the total principal amount the Company can borrow under the agreement to $36,000 through the termination date of the facility. As of November 2, 2002, the Company had standby letters of credit in the amount of approximately $3,900 and borrowings of $32,000 under the revolver. The Company pays a fee of .50% per annum on unused commitments under the $65,000 revolving credit facility. Interest on the April 1997 Credit Facility fluctuates based on the availability of Section 936 funds in Puerto Rico, Euroloan rates and the prime rate. Also in connection with the April 1997 Refinancing Plan, on April 29, 1997, the Company satisfied $10,000 of indebtedness payable to a related party by transferring its interest in two real estate properties from its closed Florida operations to such related party. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- DEBT (Continued) The April 1997 Credit Facility is collateralized by a pledge of the assets of the Company, by the capital stock of, and intercompany notes issued by, the Company's subsidiaries and by the capital stock of the Company. The Company is required, under the terms of the April 1997 Credit Facility, to meet certain financial covenants which include minimum consolidated net worth levels, interest and fixed charges coverage ratios and minimum EBITDA (earnings before interest, taxes, depreciation, and amortization) as defined in the April 1997 Credit Facility. The April 1997 Credit Facility also contains certain restrictions on additional indebtedness, capital expenditures and the declaration and payment of dividends. Because the Company's operating subsidiaries are not part of the Chapter 11 bankruptcy filing, interest payments on the April 1997 Credit Facility were made as specified in the agreement. Total interest paid on debt was approximately $10,300 for fiscal 2002, $19,200 for the 40 weeks ended November 3, 2001, and $28,300 for fiscal year 2001. Interest payable was approximately $10,100 and $4,400 as of November 2, 2002 and November 3, 2001, respectively. NSC ceased accruing interest on the Notes and Series C Senior Notes on September 4, 2002, in accordance with SOP 90-7. The Notes and Series C Senior Notes are included as liabilities subject to compromise in the accompanying 2002 consolidated financial statements. See NOTES 1, 8, 9, and 16. NOTE 6 -- LEASES The Company conducts the major part of its operations on leased premises which have initial terms generally ranging from 20 to 25 years. Substantially all leases contain renewal options which extend the lease terms in increments of 5 to 10 years and include escalation clauses. The Company also has certain equipment leases which have terms of up to five years. Realty and equipment leases generally require the Company to pay operating expenses such as insurance, taxes and maintenance. Certain store leases provide for percentage rentals based upon sales above specified levels. The Company leases retail space to tenants in certain of its owned and leased properties. The lease terms generally range from two to five years. Property recorded as assets under capital leases consists of real estate as follows:
November 2, November 3, 2002 2001 --------------- -------------- Real estate $ 19,192 $ 19,192 Less accumulated depreciation 7,472 6,502 --------------- -------------- Property under capital leases, net $ 11,720 $ 12,690 =============== ==============
F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- LEASES (continued) Depreciation of assets recorded under capital leases is included with depreciation and amortization expense in the consolidated statements of operations. Minimum rentals payments to be made under noncancelable leases at November 2, 2002 as well as rent to be received as lessor of owned property and as lessor in sublease rentals of portions of leased property are as follows:
Capital Operating Operating Lease Lease Lease Payments Payments Receipts Fiscal Years Ending (As Lessee) (As Lessee) (As Lessor) - -------------------------------- ------------ ------------ ------------ November 1, 2003 $ 2,439 $ 12,546 $ 136 October 30, 2004 2,259 11,922 109 October 29, 2005 2,176 11,627 109 October 28, 2006 2,126 10,946 85 November 3, 2007 1,944 9,947 68 November 1, 2008 and thereafter 18,899 78,843 452 ------------ ------------ ------------ 29,843 $135,831 $ 959 ============ ============ Less executory costs - ----------- Net minimum lease payments 29,843 Less amount representing interest 17,548 ----------- Present value of net minimum lease payments under capital lease obligations 12,295 Less: current portion 704 ---------- Capital lease obligations, net of current portion $ 11,591 ==========
Sublease rental receipts to be received from capital and operating leases: Capital Operating Leases Leases ----------- ------------ Total minimum sublease rentals to be received in the future $ 980 $ 9,142 =========== ============ Rent expense and the related contingent rentals under operating leases were approximately $16,200 and $200 for fiscal 2002, respectively, $11,800 and $200 for the 40 weeks ended November 3, 2001, respectively, and $16,100 and $200 for fiscal 2001, respectively. Contingent rentals under capital leases, which are directly related to sales, were approximately $60 for fiscal 2002, $30 for the 40 weeks ended November 3, 2001, and $100 for fiscal 2001. Interest paid on capital lease obligations was approximately $1,800 for fiscal 2002, $1,400 for the 40 weeks ended November 3, 2001, and $1,900 for fiscal 2001. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- LEASES (continued) Sublease rental income for operating and capital leases was approximately $4,300 for fiscal 2002, $3,700 for the 40 weeks ended November 3, 2001, and $4,100 for fiscal 2001. NOTE 7 -- INCOME TAXES As described in NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, the Company's method of accounting for income taxes is the liability method as required by SFAS No. 109. The components of income tax expense (benefit) are as follows:
52 weeks 40 weeks 52 weeks ended ended ended November 2, November 3, January 27, 2002 2001 2001 ----------- ----------- ------------ Current Federal $ 1,012 $ (429) $ 3,752 State 7 (3) - U.S. Possessions 493 23 (177) ----------- ----------- ------------ 1,512 (409) 3,575 ----------- ----------- ------------ Deferred Federal (85) (1,785) 6,753 State (1) (12) 388 U.S. Possessions 1,359 (4,406) (9,143) ----------- ----------- ------------ 1,273 (6,203) (2,002) ----------- ----------- ------------ Total income tax expense (benefit) $ 2,785 $ (6,612) $ 1,573 =========== =========== ============
F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- INCOME TAXES (Continued) The significant components of the deferred tax assets and liabilities are as follows:
November 2, November 3, 2002 2001 --------------- -------------- Deferred tax assets: Reserve for self-insurance claims $ 7,012 $ 7,153 Employee benefit plans 10,040 10,287 Property and equipment 6,852 7,167 Accrued expenses and other liabilities and deferred credits 11,863 11,555 Other operating loss and tax credit carry forwards 12,325 11,402 All other 2,654 5,316 Valuation Allowance (4,686) (3,788) --------------- -------------- Total deferred tax assets 46,060 49,092 --------------- -------------- Deferred tax liabilities: Property and equipment (13,803) (14,314) Tradenames (19,693) (20,674) Operating leases (7,905) (7,173) Inventories (7,267) (7,255) Other assets (2,501) (3,820) Accrued expenses and other liabilities and deferred credits (1,029) (721) --------------- -------------- Total deferred tax liabilities (52,198) (53,957) --------------- -------------- Net deferred tax liabilities $ (6,138) $ (4,865) =============== ==============
SFAS 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets may not be realized. Management believes that some portion of the deferred tax assets will not be realized based on this criterion. Consequently, the Company has recorded a valuation allowance of approximately $4,700 in Fiscal 2002 and $3,800 in the 40 weeks ended November 3, 2001. F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- INCOME TAXES (Continued) A reconciliation of the difference between actual income tax expense, and income taxes computed at U. S. Federal statutory tax rates is as follows :
52 weeks 40 weeks 52 weeks ended ended ended November 2, November 3, January 27, 2002 2001 2001 ----------- ----------- ----------- U.S. Federal Statutory rate of 35% applied to pretax income (loss) $ 738 $(5,190) $ 1,494 Foreign Income taxes paid at Rates different from US Federal statutory rate 58 (338) (1,354) Amortization of goodwill 3,109 2,356 3,233 State and local taxes 11 (17) 1,303 Branch taxes (possession - US/VI) (1,938) (4,993) (2,777) All others, net 807 1,570 (326) ----------- ----------- ----------- Income tax expense (benefit) $2,785 $ (6,612) $ 1,573 =========== =========== ===========
The Company's operations are located in U. S. possessions where they are subject to U. S. and local taxation. As of November 2, 2002, the Company has unused net operating loss carryforwards of approximately $10,200 and $27,000 available to offset future taxable income in the U.S. Virgin Islands and Puerto Rico, respectively, through fiscal years 2022 and 2009, respectively. Utilization of the tax net operating loss carryforward may be limited each year. The Company also has unused alternative minimum tax credits in the amount of approximately $200 to offset future income tax liabilities in Puerto Rico. This credit is carried forward indefinitely. Total income taxes paid were approximately $1,200 for the fiscal year ended November 2, 2002, $45 during the 40 weeks ended November 3, 2001 and $3,800 for the fiscal year ended January 27, 2001. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise ("prepetition") refers to liabilities incurred prior to the commencement of the Chapter 11 case. These liabilities consist primarily of amounts outstanding under NSC's Notes and Series C Senior Notes and also includes accrued interest. These amounts represent NSC's estimate of known or potential claims to be resolved in connection with the Chapter 11 case. The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below:
Notes and Series C Senior Notes due 2003, net of unamortized discount of $1,052 at November 2, 2002 $ 176,231 Accrued interest payable 9,977 ----------- Total liabilities subject to compromise $ 186,208 ===========
Contractual interest expense not accrued on prepetition debt totaled approximately $2,700 for the period from September 4, 2002 through November 2, 2002. See NOTE 16 - SUBSEQUENT EVENTS - to these consolidated financial statements for the resolution of these liabilities. F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CONDENSED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed combined financial statements are presented in accordance with SOP 90-7:
NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) AS OF NOVEMBER 2, 2002 -------------------------------------------------------------------- ENTITY IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINING COMBINED PROCEEDINGS PROCEEDINGS ENTRIES TOTALS -------------- --------------- ------------ ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 17,992 $ 17,992 Intercompany: Note receivable $ 173,533 $ (173,533) - Accounts receivable 11,575 (11,575) - Investment in subsidiaries 56,531 (56,531) - Inventories 51,660 51,660 Other current assets 1,443 28,765 30,208 --------- ---------- ----------- ---------- TOTAL CURRENT ASSETS 231,507 109,992 (241,639) 99,860 PROPERTY & EQUIPMENT INCLUDING PROPERTY UNDER CAPITAL LEASES, NET 102,847 102,847 GOODWILL, net 145,477 145,477 DEFERRED INCOME TAXES 1,579 4,445 6,024 TRADE NAMES, net 26,574 26,574 DEFERRED CHARGES AND OTHER ASSETS 353 17,590 17,943 --------- ---------- ----------- ---------- TOTAL ASSETS $ 233,439 $ 406,925 $ (241,639) $ 398,725 ========= ========== =========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Revolver borrowings $ 32,000 $ 32,000 Accounts payable 44,387 44,387 Intercompany accounts payable $ 11,575 $(11,575) Salaries, wages and benefits payable 10,358 10,358 Accrued interest 73 73 Other current liabilities 16,810 16,810 Current deferred tax liability 950 950 --------- --------- ----------- ---------- TOTAL CURRENT LIABILITIES 12,525 103,628 (11,575) 104,578 NOTES PAYABLE, intercompany 173,533 (173,533) - RESERVE FOR SELF-INSURANCE CLAIMS 5,240 5,240 DEFERRED INCOME TAXES 27,176 27,176 OTHER LIABILITIES AND DEFERRED CREDITS 40,817 40,817 --------- --------- ----------- ---------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 12,525 350,394 (185,108) 177,811 --------- --------- ----------- ---------- LIABILITIES SUBJECT TO COMPROMISE 186,208 186,208 --------- --------- ----------- ---------- TOTAL LIABILITIES 198,733 350,394 (185,108) 364,019 --------- --------- ----------- ---------- STOCKHOLDER'S EQUITY 34,706 56,531 (56,531) 34,706 ---------- --------- ----------- ---------- TOTAL LIABILITIES AND $ 233,439 $ 406,925 $(241,639) $ 398,725 STOCKHOLDER'S EQUITY ========== ========= =========== ==========
F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CONDENSED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY (continued) NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED NOVEMBER 2, 2002 ------------------------------------------------------------- ENTITY IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINING COMBINED PROCEEDINGS PROCEEDINGS ENTRIES TOTALS -------------- --------------- ------------ ----------- Net sales $ 588,179 $ 588,179 Cost of goods sold 396,239 396,239 ---------- ---------- ---------- ---------- GROSS PROFIT 191,940 191,940 OPERATING EXPENSES Selling, general and administrative expenses $ 3 154,368 154,371 Gain on insurance settlement (14,693) (14,693) Store Closings: Exit costs 246 246 Depreciation and amortization 28,260 28,260 ----------- ----------- ----------- ----------- OPERATING (LOSS) PROFIT (3) 23,759 23,756 Interest expense on debt (15,397) (23,466) $ 19,737 (19,126) Interest expense on capital lease obligations (1,820) (1,820) Interest and investment income, net 17,084 2,944 (19,737) 291 Equity in income of unconsolidated subsidiaries (757) 757 - Reorganization items (995) (995) ----------- ----------- ----------- ----------- (LOSS) INCOME BEFORE INCOME TAXES (68) 1,417 757 2,106 Income tax expense 611 2,174 2,785 ----------- ----------- ----------- ----------- NET(LOSS) INCOME $ (679) $ (757) $ 757 $ (679) =========== =========== =========== ===========
F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- CONDENSED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY (continued) NUTRITIONAL SOURCING CORPORATION AND SUBSIDIARIES (formerly Pueblo Xtra International, Inc.) (DEBTOR-IN-POSSESSION) CONDENSED COMBINED CASH FLOW STATEMENT (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED NOVEMBER 2, 2002 ----------------------------------------------------------- ENTITY IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINING COMBINED PROCEEDINGS PROCEEDINGS ENTRIES TOTALS -------------- --------------- ------------ --------- NET CASH FLOWS (USED IN)FROM OPERATING ACTIVITIES $ (1,633) $ 21,804 $ 1,628 $ 21,799 ---------- ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment - (7,391) - (7,391) All other 755 39 (755) 39 ---------- ---------- ---------- --------- Net cash (used in) provided by investing activities 755 (7,352) (755) (7,352) ---------- ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Revolving Credit Facility: Borrowings - 4,000 - 4,000 Repayments - (2,000) - (2,000) All other 873 (624) (873) (624) ---------- ---------- ---------- -------- Net cash provided by (used in) financing activities 873 1,376 (873) 1,376 ---------- ---------- ---------- -------- Net increase (decrease) in cash and cash equivalents (5) 15,828 - 15,823 Cash and cash equivalents at beginning of period 5 2,164 - 2,169 ---------- ---------- ---------- -------- Cash and cash equivalents at end of period $ - $ 17,992 $ - $ 17,992 ========== =========== =========== =========
F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- RETIREMENT BENEFITS The Company has a noncontributory defined benefit plan (the "Retirement Plan") covering substantially all full-time and certain part-time associates. Retirement Plan benefits are based on years of service and a base level of compensation. The Company funds retirement plan costs in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Retirement Plan assets consist primarily of stocks, bonds and U. S. Government securities. Full vesting for the Retirement Plan occurs upon the completion of five years of service. Net pension cost under the Retirement Plan includes the following components:
Fiscal Year 40 Weeks Fiscal Year Ended ended ended November 2, November 3, January 27, 2002 2001 2001 ----------- ----------- ----------- Service cost - benefits earned during the period $ 1,658 $ 1,119 $ 1,546 Interest cost on projected benefit obligation 1,717 1,293 1,668 Expected return on plan assets (1,048) (1,166) (1,477) Net amortization and deferrals (6) (135) (129) ----------- ----------- ----------- NET PENSION COST $ 2,321 $ 1,111 $ 1,608 =========== =========== ===========
The discount rates used in determining the actuarial present value of the net periodic pension cost for the Retirement Plan are 7.0%, 7.25%, and 7.75% for the fiscal years ended November 2, 2002, November 3, 2001 (40 weeks), and January 27, 2001, respectively. The average expected long-term rate of return on plan assets and rate of increase in future compensation levels used in determining the actuarial present value of the net periodic pension cost for the Retirement Plan are 9.0% and 5.0%, respectively, for all fiscal periods presented above. F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- RETIREMENT BENEFITS (Continued) The funded status and amounts recognized in the Company's consolidated balance sheets for the Retirement Plan are as follows: November 2, November 3, 2002 2001 --------------- ------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $15,941 at November 2, 2002 and $15,175 at November 3, 2001 $17,619 $ 16,393 =============== ============== Plan assets at fair value - beginning of the year/period $12,040 $ 17,940 Actual return on plan assets (2,333) (3,907) Employer contributions 2,719 795 Benefits paid (1,999) (2,788) --------------- -------------- Plan assets at fair value - end of the year/period 10,427 12,040 --------------- -------------- Projected benefit obligation for service rendered to date - beginning of the year/period (24,773) (23,332) Service cost (1,658) (1,119) Interest cost (1,717) (1,293) Actuarial gain (1,490) (1,817) Benefits paid 1,999 2,788 --------------- -------------- Projected benefit obligation for service rendered to date - end of the year/period (27,639) (24,773) --------------- -------------- FUNDED STATUS (17,212) (12,733) Unrecognized net gain 7,074 2,203 Unrecognized prior service cost (44) (50) --------------- ------------- NET PENSION LIABILITY $ (10,182) $ (10,580) =============== ============= The Company maintains a Supplemental Executive Retirement Plan (the "SERP") for its officers under which the Company will pay, from general corporate funds, a supplemental pension equal to the difference between the annual amount of pension calculated under the SERP and the amount the participant will receive under the Retirement Plan. Effective January 1, 1992, the Board of Directors amended the SERP in order to conform various provisions and definitions with those of the Retirement Plan. The pension benefit calculation under the SERP is limited to a total of 20 years employment and is based on a specified percentage of the average annual compensation received for the five highest consecutive years during a participant's last 10 years of service, reduced by the participant's annual Retirement Plan and social security benefits. Full vesting for the SERP occurs upon the completion of five years of service. F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- RETIREMENT BENEFITS (Continued) Net pension cost under the SERP includes the following components:
Fiscal Year 40 weeks Fiscal Year ended ended ended November 2, November 3, January 27, 2002 2001 2001 ----------- ----------- ------------ Service cost - benefits earned during the year/period $ 323 $ 274 $ 215 Interest cost on projected benefit obligation 376 255 255 Net amortization and deferrals 7 (41) (173) ----------- ----------- ------------ NET PENSION COST $ 706 $ 488 $ 297 =========== =========== ============
The discount rate used in determining the actuarial present value of the net periodic pension cost for the SERP are 7.0%, 7.25%, and 7.75% for the fiscal years ended November 2, 2002, November 3, 2001 (40 weeks), and January 27, 2001, respectively. The rate of increase in future compensation levels used in determining the actuarial present value of the net periodic pension cost for the SERP is 5.0% for all fiscal years presented above. The funded status and amounts recognized in the Company's consolidated balance sheets for the SERP are as follows: November 2, November 3, 2002 2001 --------------- -------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $5,184 at November 2, 2002 and $4,563 at November 3, 2001 $ 5,308 $ 4,668 =============== ============== Projected benefit obligation for service rendered to date $ (6,062) $ (5,359) --------------- -------------- FUNDED STATUS (6,062) (5,359) Unrecognized net gain (227) (540) Unrecognized prior service cost 12 19 --------------- -------------- NET PENSION LIABILITY $ (6,277) $ (5,880) =============== ============== F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- RETIREMENT BENEFITS (Continued) Change in benefit obligations was as follows: November 2, November 3, 2002 2001 --------------- -------------- Benefit obligation as of beginning of the year/period $ 5,359 $ 4,557 Service costs 323 274 Interest costs 376 255 Actuarial loss 313 503 Benefits paid (309) (230) --------------- -------------- Benefit obligation as of end of the year/period $ 6,062 $ 5,359 =============== ============== Change in plan assets were as follows: November 2, November 3, 2002 2001 --------------- -------------- Fair value of assets as of beginning of the year/period $ - $ - Employer contribution 309 230 Benefits paid (309) (230) --------------- -------------- Fair value of assets as of end of the year/period $ - $ - =============== ============== The Company has a noncontributory defined contribution plan covering its eligible associates in Puerto Rico. Contributions to this plan are at the discretion of the Board of Managers of Pueblo. The Company also has a contributory thrift savings plan in which it matches eligible contributions made by participating eligible associates in the United States and the U. S. Virgin Islands. The cost of these plans are recognized in the year the cost is incurred. The Company recognized an expense of $767 for these plans during the fiscal year ended November 2, 2002, a net credit during the 40 weeks ended November 3, 2001 of $12 and an expense of $697 during the fiscal year ended January 27, 2001. NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash equivalents, accounts receivable, accounts payable, accrued expenses, a revolving credit facility and the Notes and Series C Senior Notes. Cash equivalents, accounts receivable, accounts payable, accrued expenses - These accounts are carried at amounts that approximate their fair value due to their short-term nature. Revolving credit facility - Due to the variable interest rates, the fair value of the revolving credit facility approximates its carrying value. F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Notes and Series C Senior Notes - Due to the Chapter 11 proceedings, the Company believes that the value of the Notes and Series C Senior Notes is highly speculative. See NOTE 16 - SUBSEQUENT EVENTS for the ultimate disposition of these notes. At November 3, 2001, the fair value of these instruments was $26,592 based on market quotes. NOTE 12 -- CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its temporary cash investments with highly-rated financial institutions in investment grade short-term debt instruments. NOTE 13 -- CONTINGENCIES In addition to the Chapter 11 proceedings described in NOTE 1, at November 2, 2002, the Company was party to a number of legal proceedings involving claims for money damages arising in the ordinary course of conducting its business which are either covered by insurance or are within the Company's self-insurance program, and in a number of other proceedings which are not deemed material. It is not possible to determine the ultimate outcome of these matters; however, management is of the opinion that the final resolution of any threatened or pending litigation at such date is not likely to have a material adverse effect on the financial position or results of operations of the Company. NOTE 14 -- HURRICANE GEORGES Hurricane Georges struck all of the Company's operating facilities on September 20 and 21, 1998. All of the Company's stores, with the exception of two, were reopened. During fiscal year 2000, the Company settled the property portion of its hurricane insurance claims for approximately $42,000. As a result the Company recorded gains associated with the property settlement during fiscal 2000 and 2001 of $15,066 and $2,464, respectively ($9,200 and $1,500, respectively, net of applicable income tax). The Company's insurance also includes business interruption coverage which provides for reimbursement for lost profits as a result of the storm. On December 1, 2000 the Company submitted to its insurance carriers an approximately $69,400 proof of loss for business interruption losses to its grocery stores and video outlets in Puerto Rico and the U. S. Virgin Islands (the "claim")as a result of Hurricane Georges. The claim was based on the Company's management's estimate of the impact the storm had on its business from the time the storm occurred through September 9, 2000, which was, in management's opinion, the end of the applicable indemnity period. The claim was settled in July of 2002 for approximately $18,200 after a prolonged appraisal process (similar to an arbitration process). The settlement resulted in recording a gain, during fiscal 2002, of $14,693, net of claim and appraisal expenses of approximately $3,500. F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- DISCLOSURE ON OPERATING SEGMENTS The Company has two primary operating segments: retail food sales and video tape rentals and sales. The Company's retail food division consists of 47 supermarkets, 41 of which are in Puerto Rico and 6 of which are in the U.S. Virgin Islands. The Company also has the exclusive franchise rights to Blockbuster video stores for Puerto Rico and the U. S. Virgin Islands operated through 41 video rental stores, 39 of which are in Puerto Rico and 2 of which are in the U. S. Virgin Islands. Most of the video rental stores are adjacent to, or a separate section within, a retail food supermarket. Administrative support functions are located in Florida. Although the Company maintains data by geographic location, its segment decision making process is based on its two product lines. Reportable operating segment financial information is as follows:
Retail Food Video Rental Total Fiscal Year Ended 2002 Net sales $ 548,285 $ 39,894 $ 588,179 Depreciation and amortization (21,039) (7,221) (28,260) Operating profit 17,485 * 6,271 * 23,756 * Total assets 378,529 20,196 398,725 Capital expenditures (7,320) (71) (7,391) Video tape purchases N/A 5,611 5,611 40 weeks ended November 3, 2001 Net sales $ 403,921 $ 29,421 $ 433,342 Depreciation and amortization (16,508) (6,163) (22,671) Operating (loss) profit 1,158 1,975 3,133 Total assets 371,899 22,260 394,159 Capital expenditures (5,237) (34) (5,271) Video tape purchases N/A 4,831 4,831 Fiscal Year Ended 2001 Net sales $ 579,096 $ 42,954 $ 622,050 Depreciation and amortization (25,681) (8,461) (34,142) Operating profit (6,348)** 3,079 (3,269)** Capital expenditures (17,377) (75) (17,452) Video tape purchases N/A 6,937 6,937 * Includes a gain of $14,693 on the settlement of the business interruption portion of the Hurricane Georges insurance claim of which $13,421 was in the Retail Food segment and $1,272 was in the Video Rental segment. ** Includes a gain of $2,464 related to the final accounting for the property portion of the Hurricane Georges insurance claim.
Because the Retail Food and Video Rental Divisions are not segregated by corporate entity structure, the operating segment amounts shown above do not represent totals for any subsidiary of the Company. All overhead expenses, including depreciation on assets of administrative departments, are allocated to operations. Amounts shown in the total column above correspond to amounts in the consolidated financial statements. F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS Subsequent to November 2, 2002 the Company's operating subsidiaries repaid and replaced their bank debt and the Company emerged from bankruptcy. INTERIM BANK FINANCING: Based on its terms, the borrowers under the April 1997 Bank Credit Agreement were the Company's operating subsidiaries, the Company was guarantor and the agreement was due to expire on February 1, 2003. When NSC did not pay its noteholders the interest payment that was due on August 1, 2002, the operating subsidiaries had $32,000 outstanding for borrowed money and $3,900 in standby letters of credit outstanding under the April 1997 Bank Credit Agreement. The Company sought and obtained the forbearance of the lender banks from taking any action that would require accelerated repayment on the loan at the time, as non-payment of interest to the noteholders created a default under the April 1997 Bank Credit Agreement. However, the agreement to forebear terminated when, on September 27, 2002, the Court issued an order for relief in the Chapter 11 Case. The lender banks did not require accelerated repayment of the loans outstanding or terminate the letters of credit as a result of the Chapter 11 Case. On November 2, 2002 the operating subsidiaries continued to have $32,000 outstanding for borrowed money and $3,900 in standby letters of credit outstanding under the April 1997 Bank Credit Agreement. Between November 2, 2002 and January 9, 2003, the operating subsidiaries repaid $2,000 to the banks such that, as of January 30, 2003, there was $30,000 outstanding for borrowed money and $3,900 in standby letters of credit outstanding. On January 30, 2003, the bank debt for borrowed money and the letters of credit were assumed and extended by a new bank pursuant to an Extension and Modification Agreement, and other related agreements, between a new lender (the "2003 Bank Lender"), the operating subsidiaries as borrower(s) and the Company as guarantor. The Extension and Modification Agreement and other related agreements were approved by the Court on January 28, 2003. Per the terms of the Extension and Modification Agreement, the 2003 Bank Lender committed to lend the operating subsidiaries up to $35,000, subject to borrowing base formula limitations, on a revolving basis, and at the time the Company emerged from bankruptcy, loan the operating subsidiaries $45,000 in term loans. The agreement(s) also contained certain caveats in the event that the Company did not emerge from bankruptcy within a stipulated period of time. F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) NEW BANK FINANCING (THE "2003 BANK FINANCING") AND EMERGENCE FROM BANKRUPTCY: 2003 BANK FINANCING: On May 23, 2003 the Company's operating subsidiaries entered into a new Loan and Security Agreement, and the Company entered into an Amended and Restated Guarantor General Security Agreement (collectively the "May 2003 Bank Agreement") with the 2003 Bank Lender. The May 2003 Bank Agreement provides both a revolving loan and term loans facilities. The initial term of the May 2003 Bank Agreement expires June 22, 2008 and will continue on a year-to-year basis unless sooner terminated. The borrowers granted the 2003 Bank Lender a security interest in all assets, tangible and intangible, owned or hereafter acquired or existing as collateral. In addition, the May 2003 Bank Agreement is collateralized by a pledge of the capital stock of, and inter-company notes issued by the Company's operating subsidiaries and by the capital stock of the Company. The Company is required, under the terms of the May 2003 Bank Agreement, to meet certain financial covenants, including minimum consolidated net worth (as defined) levels, minimum working capital (as defined) levels, minimum earnings before net interest, income taxes, depreciation and amortization (EBITDA) as defined, minimum net revenues, a minimum fixed charge coverage ratio (as defined) and maximum debt to EBITDA ratio (as defined). The May 2003 Credit Agreement also contains certain other restrictions, including restrictions on additional indebtedness and the declaration and payment of dividends. The May 2003 Bank Agreement also stipulates the following prepayment penalties: From the date of the Agreement to and including August 31, 2003 $4,000 From September 1, 2003 to and $1,050 plus 3% of the then outstanding including June 22, 2005 balance of the Term Loans. From June 23, 2005 to and $700 plus 2% of the then outstanding including June 22, 2006 balance of the Term Loans. From June 23, 2006 to and $350 plus 1% of the then outstanding including June 21, 2008 balance of the Term Loan. Funding took place on June 5, 2003 at which time the bank debt for borrowed money outstanding under the Extension and Modification Agreement, and other related agreements, was repaid in full and the 2003 Bank Lender lent the operating subsidiaries a total of $57,427. In addition, there were $3,900 of standby letters of credit outstanding. F-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) Capitalized terms used below shall have the meaning set forth in the May 2003 Bank Agreement. The revolving loan facility provides that from time to time the operating subsidiaries may borrow no greater than an amount equal to (collectively the "borrowing base"): - 90 % of the Net Amount of Eligible Accounts plus... - Up to the lesser of (A) 65% of the Value of Eligible Inventory or (B) 80% of the "Net Recovery Percentage" for Eligible Inventory, plus... - Up to 100% of Pledged Cash, less... - Any Availability Reserves... - Provided that, except in the Lender's discretion, the aggregate amount of Revolving Loans at any time outstanding shall not exceed $35,000. For all practical purposes the operating subsidiaries do not have any Eligible Accounts and no cash is pledged. Consequently, the borrowing base consists of Eligible Inventory less Availability Reserves. The inventory values used for borrowing base purposes at the time of funding on June 5, 2003 were the inventories as of May 17, 2003, which was the last accounting period end prior to the closing. Availability under the revolving loan facility was determined as follows: UNAUDITED COMPUTATION OF AVAILABILITY UNDER REVOLVING CREDIT FACILITY Retail Food Video Rental Total ----------- ------------ ----------- May 17, 2003 inventory at cost, $46,385 $3,423 $49,808 Less ineligible inventory: Inventory in-transit (1,921) (1,921) Ineligible inventories (3,583) (1,512) (5,095) Step-up in the basis of inventory from the 1993 Transaction (992) (992) ----------- ------------ ----------- Eligible inventory $39,889 $1,911 $41,800 65% of Eligible inventory $25,927 $25,927 =========== 80% of Net Recovery Value of Eligible inventory $554 554 ============ ----------- Total availability 26,481 Less required excess availability Reserve (1,800) Availability net of excess ----------- availability reserve 24,681 Less: Letters of credit outstanding as of June 5, 2003 (3,900) Money borrowed on June 5, 2003 (12,427) Availability immediately after June ----------- 5, 2003 closing $8,354 =========== The revolving loan facility provides accommodations for letters of credit up to a maximum of $10,000. Fees for outstanding letters of credit are to be paid monthly, in arrears, at the rate of 2.5%, per annum, on the daily outstanding balance. Any issued and outstanding letters of credit reduce the amount available for borrowed money under the revolving loan facility. F-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) In addition, the facility provides for the Lender to charge, monthly, an Unused Line Fee of 0.5%, per annum, based on the difference between $30,000 and the sum of the average daily principal balance of the money borrowed under the facility plus letters of credit outstanding. Interest is payable monthly in arrears and, at the borrower's option with certain limitations, the interest rate on money borrowed under the revolving loan facility may be based on a spread over the Prime Rate or Eurodollar Rate. The spread over the Prime Rate is 1.5%, per annum, and the spread over Eurodollar Rate is 3.5% per annum. However, in no event shall the interest rate be less than 6% per annum. As of the date of the closing the interest rate was the 6% minimum. The term loan facility in the May 2003 Bank Credit Agreement provides for 3 term loans totaling $45,000 as follows: Term loan A $ 4,000 Term loan B 36,000 Term loan C 5,000 Term loan A is for the purpose of remodeling, relocating or opening new retail stores and purchasing new equipment for same in the original principal amount of up to the lesser of $4,000 or 70% of Eligible Construction Costs plus 70% of the equipment cost. The loan was drawn based on the costs of the Company's new supermarket and video rental outlet both of which opened on November 20, 2002. The loan is repayable in 60 equal monthly payments of principal with final payment due on June 1, 2008. Term loan B is for the purpose of partially refinancing existing indebtedness of the operating subsidiaries to the Company and for working capital in the lesser amount of $36,000 or 75% of the Net Fair Market Value of Eligible Real Property owned by the operating subsidiaries. Equal monthly repayments of principal are calculated on the basis of 180 months with the final payment being due on June 1, 2008. Term loan C is for working capital of the operating subsidiaries and in the lesser amount of $5,000 or 50% of the Net Value of Eligible Leaseholds. The loan is repayable in 60 equal monthly payments of principal with final payment due on June 1, 2008. As to all term loans, interest is payable monthly in arrears and, at the borrower's option with certain limitations, the interest rate may be based on a spread over the Prime Rate or Eurodollar Rate. The spread over the Prime Rate is 2.0%, per annum, and the spread over Eurodollar Rate is 4.0% per annum. However, in no event shall the interest rate be less than 7% per annum. As of the date of the closing the interest rate was the 7% minimum. EMERGENCE FROM BANKRUPTCY: On June 5, 2003, NSC emerged from Chapter 11 bankruptcy proceedings by consummating its Plan of Reorganization (the "Plan") which had been confirmed by the Court on April 30, 2003. The Plan was consummated by providing the following consideration to the prepetition noteholders: Principal amount of New 10.125% Senior Secured Notes $ 90,000 Cash Consideration 59,464 $149,464 F-36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) EMERGENCE FROM BANKRUPTCY: The New 10.125% Senior Secured Notes are due August 1, 2009 with interest payable February 1 and August 1 of each year commencing February 1, 2004. Interest is payable to holders of record on the July 15th and January 15th prior to each interest payment date. The New 10.125% Senior Secured Notes are secured, subordinate to the 2003 Bank Lender, by the equity of all First-tier subsidiaries of NSC and the inter-company notes between the Company and its operating subsidiaries. In addition, certain real property of the operating subsidiaries is collateral for one of the inter -company notes. The New 10.125% Senior Secured Notes are subordinate to both the 2003 Bank Lender and the trade creditors of the operating subsidiaries as to the collateral for the inter-company note. The New 10.125% Senior Secured Notes may be called by the holders of the Notes at 101% in the event of a change in control of NSC (as defined in the indenture). The New 10.125% Senior Secured Notes are senior to all future subordinated indebtedness which the Company may from time to time incur. Terms of the New 10.125% Senior Secured Notes restrict the Company and its subsidiaries from engaging in certain activities and transactions. The proceeds of the notes issued in 1993 and 1997 were advanced to the operating subsidiaries. At the time NSC emerged from bankruptcy on June 5, 2003 these advances were canceled and new inter-company notes were issued which are equal in amount, in total, to the New 10.125% Senior Secured Notes. The new inter-company notes consist of a $70,000 restated subordinated inter-company real estate note due to NSC from Pueblo International, LLC and a $20,000 subordinated inter-company note due NSC from Pueblo Entertainment, Inc. The source of the $59,464 of Cash Consideration consisted of $15,000 from the holders of Existing Equity and $44,464 from the Company. The source of the Company cash was Company funds and proceeds from the May 2003 Bank Agreement. The following four pages provide proforma information as to the impact of both the reorganization and the May 2003 Bank Agreement on the combined November 2, 2002 balance sheet in Note 9 as well as on the balance sheets of the Entity in Reorganization Proceedings and the Entities Not In Reorganization Proceedings as of that date. Had the funding of the May 2003 Bank Agreement and the reorganization of the Company taken place on November 2, 2002 the proforma impact on the combined assets, liabilities and stockholder's equity of the Company would have been as indicated in the following tables. For purposes of the proforma presentation included in the following tables the same "Additional Cash Consideration" has been used as was actually paid out at the time of the reorganization on June 5, 2003. F-37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued)
Unaudited Adjustments to record the impact of... (a) --------------------------------- Combined Proforma Totals As of Combined November 2 2002, New Consummation Totals As of As Included 2003 of Plan of November 2, 2002 In Note 9 Agreement Reorganization (unaudited) -------------- --------------- --------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 17,992 $ 31,106 (b) $ (48,098) (c) $ 1,000 Inventories 51,660 51,660 All other current assets 30,208 30,208 --------- ---------- ----------- ---------- TOTAL CURRENT ASSETS 99,860 31,106 (48,098) 82,868 PROPERTY & EQUIMPMENT INCLUDING PROPERTY UNDER CAPITAL LEASE, net 102,847 102,847 GOODWILL, net 145,477 145,477 DEFERRED INCOME TAXES 6,024 6,024 TRADE NAMES, net 26,574 26,574 DEFERRED CHARGES AND OTHER ASSETS 17,943 2,566 (d) 20,509 --------- ---------- ----------- ---------- TOTAL ASSETS $398,725 33,672 (48,098) 384,299 ========= ========== =========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Revolver borrowings $ 32,000 (11,255) (20,745) (e) - Accounts Payable 44,387 44,387 Salaries, wages and benefits payable 10,358 10,358 Accrued interest 73 (73) Other current Liabilities 16,810 16,810 Deferred tax liability 950 950 --------- --------- ----------- ---------- TOTAL CURRENT LIABILITIES 104,578 (11,328) (20,745) 72,505 REVOLVER BORROWINGS 20,745 (e) 20,745 TERM LOANS 45,000 45,000 NEW 10.125% SENIOR SECURED NOTES 90,000 90,000 RESERVE FOR SELF-INSURANCE CLAIMS 5,240 5,240 DEFERRED INCOME TAXES 27,176 27,176 OTHER LIABILITIES AND DEFERRED CREDITS 40,817 40,817 --------- --------- ----------- ---------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 177,811 33,672 90,000 301,483 --------- --------- ----------- ---------- LIABILITIES SUBJECT TO COMPROMISE 186,208 (186,208) --------- --------- ----------- ---------- TOTAL LIABILITIES $364,019 33,672 (96,208) 301,483 --------- --------- ----------- ---------- STOCKHOLDER'S EQUITY: Additional paid-in capital 91,500 15,000 (c) 106,500 Accumulated deficit (56,794) 33,110 (f) (23,684) --------- --------- ----------- ---------- TOTAL STOCKHOLDER'S EQUITY 34,706 48,110 82,816 ---------- --------- ----------- ---------- TOTAL LIABILITIES AND $398,725 $33,672 $ (48,098) $384,299 STOCKHOLDER'S EQUITY ========== ========= =========== ========== (a), (b), (c), (d), (e) and (f) are discussed on page F-41
F-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) The related proforma impact on the assets, liabilities and stockholder's equity of the entity in reorganization proceedings would have been as indicated below.
Unaudited Adjustments to record the impact of... --------------------------------- Consideration Provided to Prepetition Proforma Noteholders Reorganized Cash Received And Balance As of From Holders Cancellation Sheet of November 2, Of Existing Of Prepetition/ Entity In 2002, As Equity and Issuing New Reorganization Included Operating Inter-company Proceedings In Note 9 Subsidiaries Notes (unaudited) -------------- --------------- --------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents 63,098 (g) (63,098) (c) Inter-company: Notes receivable $ 173,533 (48,098) (c) (35,435) (h) 90,000 Investment in subsidiaries 56,531 23,860 (h) 80,391 All other current assets 1,443 1,443 --------- ---------- ----------- ---------- TOTAL CURRENT ASSETS 231,507 15,000 (74,673) 171,834 DEFERRED INCOME TAXES 1,579 1,579 DEFERRED CHARGES AND OTHER ASSETS 353 353 --------- ---------- ----------- ---------- TOTAL ASSETS $ 233,439 15,000 (74,673) 173,766 ========= ========== =========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Inter-company accounts Payable $ 11,575 (11,575) (h) Deferred tax liability 950 950 --------- --------- ----------- ---------- TOTAL CURRENT LIABILITIES 12,525 (11,575) 950 NEW 10.125% SENIOR SECURED NOTES 90,000 90,000 --------- --------- ----------- ---------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE 12,525 78,425 90,950 --------- --------- ----------- ---------- LIABILITIES SUBJECT TO COMPROMISE 186,208 (186,208) --------- --------- ----------- ---------- TOTAL LIABILITIES $ 198,733 (107,783) 90,950 --------- --------- ----------- ---------- STOCKHOLDER'S EQUITY: Additional paid-in capital 91,500 15,000 ( c) 106,500 Accumulated deficit (56,794) 33,110 (f) (23,684) --------- --------- ----------- ---------- TOTAL STOCKHOLDER'S EQUITY 34,706 15,000 33,110 82,816 ---------- --------- ----------- ---------- TOTAL LIABILITIES AND $ 233,439 15,000 (74,673) 173,766 STOCKHOLDER'S EQUITY ========== ========= =========== ========== (c), (f), (g) and (h) are discussed on pages F-41 and F-42
F-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) Accordingly, the proforma impact on the assets, liabilities and Stockholder's equity of the entities not in reorganization proceedings would have been as indicated below.
Unaudited Adjustments to record the impact of... ------------------------------- Proforma Consummation November 2, 2002 As of of Plan of Balance Sheet November 2, Reorganization Of Entities Not 2002 as May Of Entity In In Reorganization Included in 2003 Bank Reorganization Proceedings Note 9 Agreement Proceedings (unaudited) -------------- ------------ -------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 17,992 $ 31,106 (b) $(48,098) (c) $ 1,000 Inter-company accounts receivable 11,575 (11,575) (h) Inventories 51,660 51,660 All other current assets 28,765 28,765 --------- ---------- ----------- -------------- TOTAL CURRENT ASSETS 109,992 31,106 (59,673) 81,425 PROPERTY & EQUIPMENT INCLUDING PROPERTY UNDER CAPITAL LEASES, NET 102,847 102,847 GOODWILL, net 145,477 145,477 DEFERRED INCOME TAXES 4,445 4,445 TRADE NAMES, net 26,574 26,574 DEFERRED CHARGES AND OTHER ASSETS 17,590 2,566 (d) 20,156 --------- ---------- ----------- -------------- TOTAL ASSETS $ 406,925 33,672 (59,673) 380,924 ========= ========== =========== ============== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Revolver borrowings $ 32,000 (11,255) (20,745) (e) Accounts payable 44,387 44,387 Salaries, wages and benefits payable 10,358 10,358 Accrued interest 73 (73) Other current liabilities 16,810 16,810 --------- --------- ----------- -------------- TOTAL CURRENT LIABILITIES 103,628 ( 11,328) (20,745) 71,555 NOTES PAYABLE, inter-company 173,533 (83,533) (h) 90,000 REVOLVER BORROWINGS 20,745 (e) 20,745 TERM LOANS 45,000 45,000 RESERVE FOR SELF-INSURANCE CLAIMS 5,240 5,240 DEFERRED INCOME TAXES 27,176 27,176 OTHER LIABILITIES AND DEFERRED CREDITS 40,817 40,817 --------- --------- ----------- -------------- TOTAL LIABILITIES 350,394 33,672 (83,533) 300,533 --------- --------- ----------- -------------- STOCKHOLDER'S EQUITY Common stock 2 2 Additional paid-in capital 139,216 23,860 (h) 163,076 Accumulated deficit (82,687) (82,687) ---------- --------- ----------- -------------- 56,531 23,860 80,391 TOTAL LIABILITIES AND ---------- --------- ----------- -------------- STOCKHOLDER'S EQUITY $ 406,925 33,672 (59,673) $380,924 ========== ========= =========== ============== (b), (c), (d), (e) and (h) are discussed on pages F-41 and F-42
F-40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) Explanatory comments to proforma November 2, 2002 balance sheets on pages F-38 to F-40: (a) As required by SOP 90-7, the Company did not adopt fresh-start reporting because the holder of the Existing Equity in the Entity In Reorganization Proceedings retained 100% ownership of equity when the entity emerged from bankruptcy. (b) Net cash from term loans proceeds. (c) Cash consideration paid to prepetition noteholders $59,464 Cash for the payment of professional fees associated with the Plan 3,634 $63,098 Less cash received from Holder of Existing Equity (15,000) $48,098 The $48,098 was provided to the entity in reorganization proceedings by its operating subsidiaries which were not in reorganization. (d) Costs associated with the May 2003 Bank Agreement that will be amortized over the 5 year life of the agreement. Costs included the commitment/closing fee, recording fees, title insurance and legal fees. (e) To properly classify the revolver debt under the May 2003 Bank Agreement as long-term. (f) Liabilities subject to compromise $186,208 Less: Total cash paid to prepetition noteholders (59,464) New notes (90,000) Gain on early extinguishment of debt 36,744 Less payment of professional fees (3,634) $ 33,110 The gain is not tax affected as, based on the provisions of the United States Internal Revenue Code and the tax basis of the assets and liabilities after reorganization, the gain is not taxable currently nor will the tax basis of the assets be reduced by it. (g) Cash from holders of existing equity $15,000 Cash from operating subsidiaries 48,098 $63,098 F-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- SUBSEQUENT EVENTS (continued) (h) Inter-company Inter-company Notes Investment Accounts Receivable/ In Payable/ Payable Subsidiaries Receivable ------------- ------------ ------------- Balances as of November 2, 2002 before proforma effect of reorganization $ 173,533 $ 56,531 $ 11,575 Effect of reorganization: Cash received from operating Subsidiaries (48,098) Offset (11,575) (11,575) Contributed to additional paid-in capital of the operating subsidiaries (23,860) 23,860 ------------- ------------- ------------ Proforma November 2, 2002 balance $ 90,000 $ 80,391 $ 0 F-42 Schedule I NUTRITIONAL SOURCING CORPORATIONN & SUBSIDIARIES (DEBTOR-IN-POSSESSION) Valuation and Qualifying Accounts For the 52 weeks ended November 2, 2002, 40 weeks ended November 3, 2001 and 52 weeks ended January 27, 2001 (Dollars in thousands)
Balance at Additions Balance Beginning Charged to at End of Year/ Costs and of Year/ Description Period Expenses Deductions (1) Period (2) - ----------------------------- ----------- ----------- --------------- ----------- Fiscal 2002 (52 Weeks Ended November 2, 2002) Reserves not deducted from assets: Reserve for self- insurance claims.... $ 10,327 $ 2,819 $ 3,587 $ 9,559 40 Weeks Ended November 3, 2001 Reserves not deducted from assets: Reserve for self- insurance claims.... $ 10,980 $ 2,896 $ 3,549 $ 10,327 Fiscal 2001 (52 Weesk Ended January 27, 2001) Reserves not deducted from assets: Reserve for self- insurance claims.... $ 12,091 $ 4,233 $ 5,344 $ 10,980
- ---------- (1) Amounts consist primarily of payments on claims. (2) Amounts represent both the current and long-term portions. S-1 2 2 89 42 EX-4 3 a10kex46.txt EXHIBIT 4.6 EXECUTION COPY ************************************************************************** NUTRITIONAL SOURCING CORPORATION, as Issuer and WILMINGTON TRUST COMPANY, as Trustee __________________ Indenture Dated as of June 5, 2003 __________________ 10.125% Senior Secured Notes due 2009 ************************************************************************** TABLE OF CONTENTS Page RECITALS OF THE COMPANY 1 AND THIS INDENTURE FURTHER WITNESSETH 1 ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE 1 SECTION 1.01. Definitions 1 SECTION 1.02. Incorporation by Reference of Trust Indenture Act 15 SECTION 1.03. Rules of Construction 16 ARTICLE TWO THE SECURITIES 16 SECTION 2.01. Form and Dating 16 SECTION 2.02. Restrictive Legends 17 SECTION 2.03. Execution, Authentication and Denominations 18 SECTION 2.04. Registrar and Paying Agent 18 SECTION 2.05. Paying Agent to Hold Money in Trust 19 SECTION 2.06. Transfer and Exchange 19 SECTION 2.07. Book - Entry Provisions for Global Security 20 SECTION 2.08. Special Transfer Provisions 21 SECTION 2.09. Replacement Securities 22 SECTION 2.10. Outstanding Securities 22 SECTION 2.11. Temporary Securities 22 SECTION 2.12. Cancellation 23 SECTION 2.13. CUSIP Numbers 23 SECTION 2.14. Defaulted Interest 23 SECTION 2.15. Treasury Securities Deemed Outstanding 23 SECTION 2.16. Securities Obligations of Company Only 23 SECTION 2.17. Noteholder Lists 23 SECTION 2.18. Communication By Holders with Other Holders 24 ARTICLE THREE COVENANTS 24 SECTION 3.01. Payment of Securities 24 SECTION 3.02. Maintenance of Office or Agency 24 SECTION 3.03. Limitation on Indebtedness 25 SECTION 3.04. Limitation on Restricted Payments 27 SECTION 3.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries 29 SECTION 3.06. Intentionally Left Blank 30 SECTION 3.07. Limitation on Transactions with Shareholders and Affiliates 30 SECTION 3.08. Limitation on Liens 31 SECTION 3.09. Limitation on Asset Sales 32 SECTION 3.10. Limitation on Sale - Leaseback Transactions 35 SECTION 3.11. Repurchase of Securities upon Change of Control 35 SECTION 3.12. Corporate Existence 37 SECTION 3.13. Payment of Taxes and Other Claims 37 SECTION 3.14. Maintenance of Properties and Insurance 38 SECTION 3.15. Compliance Certificates; Certain Notifications 38 SECTION 3.16. Commission Reports and Reports to Holders 39 SECTION 3.17. Waiver of Stay, Extension or Usury Laws 39 ARTICLE FOUR SUCCESSOR CORPORATION 39 SECTION 4.01. When Company May Merge, Etc. 39 SECTION 4.02. Successor Corporation Substituted 40 ARTICLE FIVE DEFAULT AND REMEDIES 40 SECTION 5.01. Events of Default 40 SECTION 5.02. Acceleration 42 SECTION 5.03. Other Remedies 43 SECTION 5.04. Waiver of Past Defaults 43 SECTION 5.05. Control by Majority 43 SECTION 5.06. Limitation on Suits 44 SECTION 5.07. Rights of Holders to Receive Payment 44 SECTION 5.08. Collection Suit by Trustee 44 SECTION 5.09. Trustee May File Proofs of Claim 45 SECTION 5.10. Priorities 45 SECTION 5.11. Undertaking for Costs 46 SECTION 5.12. Restoration of Rights and Remedies 46 SECTION 5.13. Rights and Remedies Cumulative 46 ARTICLE SIX TRUSTEE 47 SECTION 6.01. Rights of Trustee 47 SECTION 6.02. Individual Rights of Trustee 48 SECTION 6.03. Trustee's Disclaimer 48 SECTION 6.04. Notice of Default 48 SECTION 6.05. Reports by Trustee to Holders 48 SECTION 6.06. Compensation and Indemnity 49 SECTION 6.07. Replacement of Trustee 49 SECTION 6.08. Successor Trustee by Merger, Etc 50 SECTION 6.09. Eligibility 51 SECTION 6.10. Money Held in Trust 51 SECTION 6.11. Preferential Collection of Claims Against the Company 51 ARTICLE SEVEN DISCHARGE OF INDENTURE 51 SECTION 7.01. Termination of Company's Obligations 51 SECTION 7.02. Defeasance and Discharge of Indenture 52 SECTION 7.03. Defeasance of Certain Obligations 54 SECTION 7.04. Application of Trust Money 55 SECTION 7.05. Repayment to Company 56 SECTION 7.06. Reinstatement 56 ARTICLE EIGHT AMENDMENTS, SUPPLEMENTS AND WAIVERS 56 SECTION 8.01. Without Consent of Holders 56 SECTION 8.02. With Consent of Holders 57 SECTION 8.03. Revocation and Effect of Consent 58 SECTION 8.04. Notation on or Exchange of Securities 59 SECTION 8.05. Trustee to Sign Amendments, Etc 59 ARTICLE NINE MISCELLANEOUS 59 SECTION 9.01. Trust Indenture Act of 1939 59 SECTION 9.02. Notices 59 SECTION 9.03. Certificate and Opinion as to Conditions Precedent 60 SECTION 9.04. Statements Required in Certificate or Opinion 60 SECTION 9.05. Rules by Trustee, Paying Agent or Registrar 61 SECTION 9.06. Payment Date Other Than a Business Day 61 SECTION 9.07. Governing Law 61 SECTION 9.08. No Adverse Interpretation of Other Agreements 61 SECTION 9.09. No Recourse Against Others 61 SECTION 9.10. Successors 62 SECTION 9.11. Duplicate Originals 62 SECTION 9.12. Separability 62 SECTION 9.13. Table of Contents, Headings, Etc. 62 ARTICLE TEN REDEMPTION 62 SECTION 10.01. Right of Redemption 62 SECTION 10.02. Notices to Trustee 62 SECTION 10.03. Selection of Securities to Be Redeemed 62 SECTION 10.04. Notice of Redemption 63 SECTION 10.05. Effect of Notice of Redemption 64 SECTION 10.06. Deposit of Redemption Price 64 SECTION 10.07. Payment of Securities Called for Redemption 64 SECTION 10.08. Securities Redeemed in Part 64 ARTICLE ELEVEN COLLATERAL AND SECURITY 64 SECTION 11.01. Security Pledge and Intercreditor Agreement 64 SECTION 11.02. Recording and Opinions 65 SECTION 11.03. Actions to Protect Collateral 66 SECTION 11.04. Receipt of Funds Under Security Documents 67 SECTION 11.05. Certificates of Fair Value 67 SIGNATURES EXHIBITS EXHIBIT A - Form of Security EXHIBIT B - Form of Security Pledge and Intercreditor Agreement Cross - reference sheet showing the location in this Indenture of the provisions inserted pursuant to Sections 310 through 318 inclusive of the Trust Indenture Act of 1939. TIA Indenture Section Section 310 (a)(1) ..................... 6.09 (a)(2) ..................... 6.09 (a)(3) ..................... Not Applicable (a)(4) ..................... Not Applicable (a)(5) ..................... Not Applicable (b) ..................... 6.09 (c) ..................... Not Applicable Section 311 (a) ..................... 6.11 (b) ..................... 6.11 (c) ..................... Not Applicable Section 312 (a) ..................... 2.17 (b) ..................... 2.18 (c) ..................... 2.18 Section 313 (a) ..................... 6.05 (b) ..................... 6.05 (c) ..................... 6.04, 6.05 (d) ..................... 6.05 Section 314 (a) ..................... 3.15, 3.16 (b) ..................... 11.02 (c) ..................... 9.03 (d) ..................... 11.05 (e) ..................... 9.04 (f) ..................... Not Applicable Section 315 (a)(1) ..................... 6.06 (a)(2) .................... 6.01(a)(i), 6.06 (b) ..................... 6.04 (c) ..................... 6.01(a)(vii),6.06 (d) ..................... 6.06 (e) ..................... 5.11 Section 316 (a) ..................... 5.04, 5.05, 5.06 (b) ..................... 5.07 (c) ..................... Not Applicable Section 317 (a)(1) .................... 5.08 (a)(2) .................... 5.09 (b) .................... 2.05 Section 318 (a) .................... 9.01 (c) .................... 9.01 INDENTURE, dated as of June 5, 2003 between NUTRITIONAL SOURCING CORPORATION, a Delaware corporation, as Issuer (the "Company"), and Wilmington Trust Company, a Delaware banking corporation, as Trustee (the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of up to $90,000,000 aggregate principal amount of the Company's 10.125% Senior Secured Notes Due 2009 (as authenticated and delivered hereunder, the "Securities") issuable as provided in this Indenture. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done and the Company has done all things necessary to make the Securities, when executed by the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Company, the valid obligations of the Company as hereinafter provided. This Indenture will be subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. AND THIS INDENTURE FURTHER WITNESSETH For and in consideration of the premises and the receipt of the Securities by the Holders thereof in connection with the Company's Disclosure Statement and Accompanying Plan of Reorganization, as confirmed by the Confirmation Order of the U.S. Bankruptcy Court for the District of Delaware, dated April 30, 2003 under Chapter 11 of Title 11 of the United States Code, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, as follows. ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person became a Restricted Subsidiary. "Adjusted Consolidated Net Income" means, for any Person for any period, the aggregate net income (or loss) of such Person and its consolidated Subsidiaries for such period determined in accordance with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income (or loss) of any Person (other than a Subsidiary) in which such Person or any of its Subsidiaries has a joint interest with a third party, except to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Subsidiaries by such other Person during such period, (ii) solely for the purpose of calculating the amount of Restricted Payments that may be made pursuant to the first paragraph of Section 3.04 of this Indenture (and in such case, except to the extent includible pursuant to clause (i) above), the net income (or loss) of any other Person accrued prior to the date it becomes a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or all or substantially all of the property and assets of such other Person are acquired by such Person or any of its Subsidiaries, (iii) the net income (or loss) of any Subsidiary of such Person to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter, of any judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary, or of any agreement or instrument containing encumbrances or restrictions other than those encumbrances and restrictions expressly permitted by Section 3.05(b) of this Indenture, (iv) any gains or losses (on an after - tax basis) attributable to Asset Sales, (v) any amounts paid or accrued as dividends on Preferred Stock of any Subsidiary of such Person and (vi) all extraordinary gains and extraordinary losses. Notwithstanding the foregoing, (i) solely for the purposes of calculating the Consolidated Fixed Charge Ratio (and in such case, except to the extent includible pursuant to clause (i) above), "Adjusted Consolidated Net Income" of the Company shall include the amount of all cash dividends received by the Company or any Subsidiary of the Company from an Unrestricted Subsidiary and (ii) "Adjusted Consolidated Net Income" shall include gains attributable to sales of equipment made in connection with store renovations and improvements in an amount not to exceed $1 million in any fiscal year of the Company. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the 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, by contract or otherwise. Solely for the purpose of the definition of "Change of Control," the term "Affiliate" shall be deemed to include, with respect to Gustavo Cisneros and Ricardo Cisneros, any member or members of the family of either Gustavo Cisneros or Ricardo Cisneros or any trust primarily for the benefit of one or more such Persons. "Agent" means any Registrar, Paying Agent, authenticating agent (if any) or co - registrar (if any). "Agent Members" has the meaning provided in Section 2.07(a) of this Indenture. "Asset Acquisition" means (i) an investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary of the Company or any of its Subsidiaries or shall be merged into or consolidated with the Company or any of its Subsidiaries or (ii) an acquisition by the Company or any of its Subsidiaries of the property and assets of any Person (other than the Company or any of its Subsidiaries) that constitute substantially all of an operating unit or business of such Person. "Asset Disposition" means the sale or other disposition by the Company or any of its Subsidiaries (other than to the Company or another Subsidiary of the Company) of (i) all or substantially all of the Capital Stock of any Subsidiary of the Company or (ii) all or substantially all of the property and assets that constitute an operating unit or business of the Company or any of its Subsidiaries. "Asset Sale" means, with respect to any Person, any sale, transfer or other disposition (including by way of merger, consolidation or sale - leaseback transactions) in one transaction or a series of related transactions by such Person or any of its Restricted Subsidiaries to any Person (other than to the Company or any of its Restricted Subsidiaries) of (i) all or any of the Capital Stock of any Subsidiary of such Person, (ii) all or substantially all of the property and assets of an operating unit or business of such Person or any of its Restricted Subsidiaries or (iii) any other property and assets of such Person or any of its Restricted Subsidiaries (including any issuances or transfers of Capital Stock of Restricted Subsidiaries owned by the Company or its Restricted Subsidiaries) outside the ordinary course of business and, in each case, that is not governed by Section 4.01; provided that such term shall exclude (x) sales or other dispositions of inventory, receivables and other current assets in the ordinary course of business and (y) transactions constituting Restricted Payments permitted under Section 3.04. "Attributable Indebtedness" means, when used in connection with a sale - leaseback transaction referred to in Section 3.10, at any date of determination, the product of (i) the net proceeds from such sale - leaseback transaction and (ii) a fraction, the numerator of which is the number of full years of the term of the lease relating to the property involved in such sale - leaseback transaction (without regard to any options to renew or extend such term) remaining at the date of determination and the denominator of which is the number of full years of the term of such lease (without regard to any options to renew or extend such term) measured from the first day of such term. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the product of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Bank Credit Agreement" means the Loan and Security Agreement dated as of May 23, 2003, among the Company, each of its Subsidiaries and Westernbank Puerto Rico, together with the related documents thereto (including any guaranties, security agreements, assignments, mortgages and other security documents executed pursuant thereto), consisting on the date hereof of a revolving credit facility and term loan facility, in each case as such Loan and Security Agreement may be subsequently amended (including any amendment and restatement thereof), supplemented, replaced, refinanced or otherwise modified from time to time in one or more transactions whether pursuant to any one or more successive debt facilities or otherwise, and whether pursuant to agreements with Westernbank Puerto Rico or otherwise. "Banks" means the lenders who are from time to time parties to the Bank Credit Agreement. "Board of Directors" means the Board of Directors of the Company or any committee of such Board of Directors duly authorized to act under this Indenture. "Board Resolution" means a copy of a resolution, certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in The City of New York or in the city of the Corporate Trust Office of the Trustee, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non - voting) of capital stock or other equity interests (including limited liability company membership interests) of such Person which is outstanding or issued on or after the Issue Date, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in accordance with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized Lease Obligation" means the rental obligations, as aforesaid, under such lease. "Change of Control" shall be deemed to have occurred at such time as (i) (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than Gustavo Cisneros, Ricardo Cisneros and their respective Affiliates, becomes the "beneficial owner" (as defined in Rule 13d - 3 under the Exchange Act) of more than 35% of the total voting power of the then outstanding Voting Stock of the Company or Holdings and (b) Gustavo Cisneros, Ricardo Cisneros and their respective Affiliates beneficially own, directly or indirectly, less than 50% of the total voting power of the then outstanding Voting Stock of the Company; or (ii) at any time when Gustavo Cisneros, Ricardo Cisneros or their respective Affiliates beneficially own, directly or indirectly, less than 50% of the total voting power of the then outstanding Voting Stock of the Company, individuals who at the beginning of any period of two consecutive calendar years constituted the board of directors of the Company or Holdings (together with any new directors whose election by the board of directors of the Company or Holdings or whose nomination for election by the shareholders of the Company or Holdings was approved by a vote of at least a majority of the members of the board of directors of the Company or Holdings then still in office who either were members of the board of directors of the Company or Holdings at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the board of directors of the Company or Holdings, as the case may be. "Change of Control Offer" has the meaning provided in Section 3.11 of this Indenture. "Change of Control Payment" has the meaning provided in Section 3.11 of this Indenture. "Change of Control Payment Date" has the meaning provided in Section 3.11 of this Indenture. "Collateral" means the property and assets of the Company with respect to which a Lien is granted as collateral security for the Securities pursuant to the Security Documents. "Collateral Account" means a cash collateral account established by the Trustee in its name to hold the cash proceeds to be deposited with it pursuant to Section 3.09 of this Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the TIA, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non - voting) of common stock of such Person which is outstanding or issued on or after the Issue Date, including, without limitation, all series and classes of such common stock. "Company" means the party named as such in this Indenture until a successor replaces it pursuant to Article Four of this Indenture and thereafter means the successor. "Consolidated EBITDA" means, with respect to any Person for any period, the sum of the amounts for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Fixed Charges, (iii) income taxes (calculated excluding the effect of extraordinary and non - recurring gains or losses on sales of assets), (iv) depreciation expense, (v) amortization expense, (vi) any premiums, fees and expenses (and any amortization thereof) payable in connection with the Reorganization Plan and (vii) all other noncash items reducing Adjusted Consolidated Net Income, less all noncash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for such Person and its consolidated Subsidiaries in conformity with GAAP; provided that, if a Person has any Subsidiary that is not a Wholly Owned Subsidiary of such Person, Consolidated EBITDA of such Person shall be reduced by an amount equal to the Adjusted Consolidated Net Income of such Subsidiary multiplied by the quotient of (x) the number of shares of outstanding Common Stock of such Subsidiary not owned on the last day of such period by such Person or any Subsidiary of such Person divided by (y) the total number of shares of outstanding Common Stock of such Subsidiary on the last day of such Period. "Consolidated Fixed Charges" means, with respect to any Person for any period, without duplication, the sum of (i) Consolidated Interest Expense, (ii) all but the principal component in respect of Capitalized Lease Obligations, and (iii) cash dividends payable on Preferred Stock issued by a Subsidiary of such Person and on Redeemable Stock, determined on a consolidated basis for such Person and its consolidated Subsidiaries in accordance with GAAP (except as otherwise expressly specified herein) excluding, however, any such amounts of any Subsidiary of such Person if the net income (or loss) of such Subsidiary for such period is excluded in the calculation of Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income (or loss) of such Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income for such Person pursuant to clause (iii) of the definition thereof). "Consolidated Fixed Charge Ratio" means, with respect to any Person on any Transaction Date, the ratio of (i) the aggregate amount of Consolidated EBITDA of such Person for the four fiscal quarters for which financial information in respect thereof is available immediately prior to such Transaction Date (the "Reference Period") to (ii) the aggregate Consolidated Fixed Charges of such Person during the Reference Period. In making the foregoing calculation, (a) pro forma effect shall be given to any Indebtedness Incurred during or after the Reference Period and on or before the Transaction Date, to the extent such Indebtedness is outstanding at the Transaction Date, in each case as if such Indebtedness had been Incurred on the first day of the Reference Period and after giving effect to the application of the proceeds thereof; (b) Consolidated Interest Expense attributable to interest on any Indebtedness (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months) had been the applicable rate for the entire period; (c) there shall be excluded from Consolidated Interest Expense any amounts relating to Indebtedness that was outstanding during the Reference Period or thereafter but which is not outstanding or which has been or is to be repaid with the proceeds of other Indebtedness Incurred during or after the Reference Period and on or before the Transaction Date; (d) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions that occur during or after the Reference Period and on or before the Transaction Date as if they had occurred on the first day of the Reference Period; (e) pro forma effect shall be given, in the same manner as provided in the foregoing clause (d), to asset dispositions and asset acquisitions made by any Person that has become a Subsidiary of the Company or has been merged with or into the Company or any Subsidiary of the Company during or after the Reference Period and on or before the Transaction Date and that would have been Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Subsidiary of the Company and (f) with respect to any Reference Period commencing prior to a Transaction Date, such Transaction Date shall be deemed to have taken place on the first day of the Reference Period. "Consolidated Interest Expense" means, with respect to any Person for any period, the aggregate amount of interest in respect of Indebtedness (including amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; and the net costs associated with Interest Rate Agreements); excluding, however, any premiums, fees and expenses (and any amortization thereof) payable in connection with the Reorganization Plan, all as determined for such Person and the consolidated Subsidiaries on a consolidated basis in conformity with GAAP. "Consolidated Net Tangible Assets" means, at any date of determination, the total amount of assets of the Company and its Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write - ups of capital assets (excluding write - ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of the Company and its consolidated Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the then most recently available consolidated balance sheet of the Company and its consolidated Subsidiaries prepared in conformity with GAAP. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the then most recently available consolidated balance sheet of the Company and its consolidated Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation), less any amounts attributable to Redeemable Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of Capital Stock of the Company or any of its Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at Rodney Square North, 1100 N. Market Street, Wilmington, DE 19890, Attention: Corporate Trust Administration. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in currency values to or under which the Company or any of its Subsidiaries is a party or a beneficiary. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Depositary" means The Depository Trust Company, its nominees and successors. "Event of Default" has the meaning provided in Section 5.01 of this Indenture. "Excess Proceeds" has the meaning provided in Section 3.09 of this Indenture. "Excess Proceeds Offer" has the meaning provided in Section 3.09 of this Indenture. "Excess Proceeds Payment" has the meaning provided in Section 3.09 of this Indenture. "Excess Proceeds Payment Date" has the meaning provided in Section 3.09 of this Indenture. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date applied on a basis consistent with the principles, methods, procedures and practices employed in the preparation of the Company's audited financial statements, including, without limitation, those 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 approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in this Indenture shall be computed in conformity with GAAP. "Global Security" means any Security issued hereunder in registered global form in the name of the Depositary or its nominee. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep - well, to purchase assets, goods, securities or services, to take - or - pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holder" is defined to mean the registered holder of any Security. "Holdings" means PXC&M Holdings, Inc., a Delaware corporation, and its successors. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that neither the accrual of interest (whether such interest is payable in cash or kind) nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (a) the fair market value of such asset at such date of determination and (b) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person, (viii) to the extent not otherwise included in this definition, all obligations of such Person under Currency Agreements and Interest Rate Agreements and (ix) all Preferred Stock of Subsidiaries and all Redeemable Stock, valued in each case at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Indenture" means this Indenture as originally executed or as it may be amended or supplemented from time to time by one or more indentures supplemental to this Indenture entered into pursuant to the applicable provisions of this Indenture. "Interest Payment Date" means each semiannual interest payment date on February 1 and August 1 of each year, commencing February 1, 2004. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Subsidiaries against fluctuations in interest rates to or under which the Company or any of its Subsidiaries is a party or a beneficiary. "Investment" means, with respect to any Person, any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person or its Subsidiaries) or other extension of credit or capital contribution to any other Person (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of Capital Stock, bonds, notes, debentures or other similar instruments issued by any other Person. For purposes of the definition of "Unrestricted Subsidiary" and Section 3.04, (i) the amount of any "Investment" in any Unrestricted Subsidiary shall include the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary of the Company is designated an Unrestricted Subsidiary, and the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company shall be treated as a reduction in Investments in Unrestricted Subsidiaries, subject to the limitation set forth in clause (3) of the first paragraph of Section 3.04 and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined by the Board of Directors in good faith. "Issue Date" means June 5, 2003, the date of original issuance of the Securities. "Joint Venture" means any Person (other than an Affiliate) in which the Company or a Restricted Subsidiary holds any direct or indirect equity or equivalent interest of 5% or more. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller, or any agreement to give any security interest). "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Subsidiary of the Company) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale computed without regard to the consolidated results of operations of the Company and its Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that is either (a) secured by a Lien on the property or assets sold or (b) required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Subsidiary of the Company as a reserve against liabilities associated with such Asset Sale, including, without limitation, pension and other post - employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP. "Ninety - Five Percent Owned Subsidiary" means, with respect to any Person, any Subsidiary of such Person if at least 95% of the Common Stock or other similar equity ownership interests (but not including Preferred Stock) in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned directly or indirectly by such Person. "Officer" means, with respect to the Company, the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary. "Officers' Certificate" means a certificate signed by two Officers. Each Officers' Certificate shall include the statements provided for in Section 9.04. "Opinion of Counsel" means a written opinion signed by legal counsel who is acceptable to the Trustee. Such counsel may be an employee of or counsel to the Company or the Trustee (including outside counsel). Each such Opinion of Counsel shall include the statements provided for in Section 9.04. "Paying Agent" has the meaning provided in Section 2.04, except that, for the purposes of Article Seven, the Paying Agent shall nor be the Company or a Subsidiary of the Company or an Affiliate of any of them. The term "Paying Agent" includes any additional Paying Agent. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights - of - way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or tangible personal property acquired after the Issue Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred (1) to finance the cost (including the cost of improvement or construction) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within 12 months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien does nor exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company or any of its Subsidiaries; (viii) Liens encumbering property or assets under construction arising from obligations of the Company or any of its Subsidiaries to make progress or partial payments relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease; provided that any sale - leaseback transaction related thereto complies with Section 3.10; (x) Liens arising from filing Uniform Commercial Code financing statements, chattel mortgages or similar documents regarding leases or by vendors in respect of inventory on which "advance money" has been paid; (xi) Liens on property of, or on shares of stock or Indebtedness of, any corporation existing at the time such corporation becomes, or becomes a part of, any Restricted Subsidiary; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens on any facilities, equipment or other property of the Company or any Subsidiary of the Company in favor of the United States of America or any State, or any department, agency, instrumentality or political subdivision thereof (including the Commonwealth of Puerto Rico and the United States Virgin Islands), in connection with the issuance of industrial revenue bonds or on any equipment or other property designed primarily for the purpose of air or water pollution control; provided that any such Lien on such facilities, equipment or other property shall not apply to any other assets of the Company or such Subsidiary of the Company; (xiv) Liens arising from the rendering of a final judgment or order against the Company or any Subsidiary of the Company that does not give rise to an Event of Default; (xv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xvi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business or otherwise permitted under the terms of the Bank Credit Agreement, in each case securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, futures contracts, futures options or similar agreements or arrangements designed to protect the Company or any of its Subsidiaries from fluctuations in the price of commodities; (xviii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Subsidiaries prior to the Issue Date; (xix) Liens on or sales of receivables; (xx) Liens on assets of Restricted Subsidiaries permitted by the Bank Credit Agreement as in effect on the Issue Date and other such Liens that are not materially more restrictive (in terms of, without limitation, the amount secured by such Lien and the scope of such Lien) than such Liens permitted by the Bank Credit Agreement; and (xxi) Liens on assets of Restricted Subsidiaries securing Indebtedness and other obligations permitted under clause (xiii) of Section 3.03(a). "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non - voting) of preferred or preference stock of such Person, including, without limitation, all series and classes of such preferred or preference stock. "principal" of a debt security, including the Securities, means the principal amount due on the Stated Maturity. "Redeemable Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Securities, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Securities or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Securities; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Securities shall not constitute Redeemable Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Sections 3.09 or 3.11 and such Capital Stock specifically provides that the Company will not repurchase or redeem any such Capital Stock pursuant to such provisions prior to the Company's repurchase of Securities required to be repurchased pursuant to the provisions of Sections 3.09 or 3.11. "Redemption Date" means, with respect to any Security to be redeemed, the date fixed for such redemption pursuant to this Indenture. "Redemption Price" means, with respect to any Security to be redeemed, the price at which such Security is to be redeemed pursuant to this Indenture. "Registrar" has the meaning provided in Section 2.04 of this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Reorganization Plan" means the Reorganization Plan of Nutritional Sourcing Corporation confirmed by the United States Bankruptcy Court for the District of Delaware on April 30, 2003, as amended. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice - chairman of the board of directors, the chairman or any vice - chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or assistant trust officer, or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Payments" has the meaning specified in Section 3.04 of this Indenture. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Securities" has the meaning set forth in the first paragraph of the recitals hereof. "Securities Act" means the Securities Act of 1933, as amended. "Security Documents" means the Security Pledge and Intercreditor Agreement and any financing statements, security instruments or other documents or instruments at any time executed by the Company or any Subsidiary to secure obligations under this Indenture and the Securities. "Security Pledge and Intercreditor Agreement" means a Security Pledge and Intercreditor Agreement dated as of Issue Date between the Company and the Trustee substantially in the form annexed hereto as Exhibit B, as the same shall be modified and supplemented and in effect from time to time. "Security Register" has the meaning provided in Section 2.04 of this Indenture. "Significant Subsidiary" means, at any date of determination, any Subsidiary of the Company that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "Stated Maturity" means, with respect to any debt security or any installment of interest thereon, the date specified in such debt security as the fixed date on which any principal of such debt security or any such installment of interest is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company, or by such Person and one or more other Subsidiaries of such Person; provided that, except as the term "Subsidiary" is used in the definition of "Unrestricted Subsidiary" described below, an Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the Company for purposes of this Indenture. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended (15 U.S. Code 77aaa - 77bbb), as in effect on the date this Indenture was executed, except as provided in Section 8.06 of this Indenture. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Company or any of its Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor replaces it in accordance with the provisions of Article Six of this Indenture and thereafter means such successor. "Uniform Commercial Code" means the Uniform Commercial Code as in effect in any applicable jurisdiction relating to the Collateral. "United States Bankruptcy Code" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time hereafter, or any successor federal bankruptcy law. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that either (a) the Subsidiary to be so designated has total assets of $1,000 or less or (b) if such Subsidiary has assets greater than $1,000, after giving effect to such designation, the Company would be in compliance with Section 3.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Company; provided that immediately after giving effect to such designation (1) the Company could Incur $1.00 of additional Indebtedness under clause (i) of Section 3.03(a) and (2) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof at any time prior to the Stated Maturity of the Securities, and shall also include a depositary receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. "Voting Stock" means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors of such Person. "Wholly Owned Subsidiary" means, with respect to any Person, any Subsidiary of such Person if all of the Common Stock or other similar equity ownership interests (but not including Preferred Stock) in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned directly or indirectly by such Person. SECTION 1.02. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities; "indenture security holder" means a Holder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule of the Commission and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. Rules of Construction. Unless the context otherwise requires, for purposes of this Indenture and the Security Documents: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it with GAAP: (iii) "or" is not exclusive; (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (vii) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth above; (viii) the word "include", "includes" and "including" shall mean "include, without limitation", "includes, without limitation" and "including, without limitation", respectively; and (ix) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated. ARTICLE TWO THE SECURITIES SECTION 2.01. Form and Dating. The Securities and the Trustee's certificate of authentication shall be substantially in the form annexed hereto as Exhibit A, which is incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. The Company shall approve the form of the Securities and any notation, legend or endorsement on the Securities. Each Security shall be dated the date of its authentication. The terms and provisions contained in the form of the Securities annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. To the extent any provision of the Securities conflicts with any provision of this Indenture, the terms of this Indenture shall govern and control. The definitive Securities shall be printed, lithographed, engraved or produced by any combination of these methods on a steel engraved border or steel engraved borders or may be produced in any other manner, all as determined by the Officers executing such Securities, as evidenced by their execution of such Securities. The Securities shall be issued initially in the form of one or more permanent Global Securities substantially in the form set forth in Exhibit A deposited with, or on behalf of the Depositary or with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Securities issued other than as described in the preceding paragraph shall be issued in the form of permanent certificated Securities in registered form in substantially the form set forth in Exhibit A (the "Physical Securities"). SECTION 2.02. Restrictive Legends. Each Global Security shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. SECTION 2.03. Execution, Authentication and Denominations. Two Officers shall execute the Securities for the Company by facsimile or manual signature in the name and on behalf of the Company. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee or authenticating agent authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate for original issue Securities in the aggregate principal amount of up to $90,000,000 upon a written order of the Company signed by at least one Officer; provided that the Trustee shall receive an Officers' Certificate and an Opinion of Counsel of the Company in connection with such uthentication of Securities. Such order shall specify the amount of Securities to be authenticated and the date on which the original issue of Securities is to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed the amount set forth above except as provided in Sections 2.09 and 2.10 of this Indenture. The Trustee may appoint an authenticating agent to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. The Securities shall be issuable only in registered form without coupons and Physical Securities shall be issuable only in denominations of $500 in original principal amount and any multiples of $1 in excess thereof. SECTION 2.04. Registrar and Paying Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Company will appoint an agent for service where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall cause the Registrar to keep a register of the Securities and of their transfer and exchange (the "Security Register"). The Company may have one or more co - registrars and one or more additional Paying Agents. The Company shall enter into an appropriate agency agreement, with any Agent not a party to this Indenture, which shall incorporate the terms of the TIA and the relevant terms of this Indenture and shall not be inconsistent with this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall give prompt written notice to the Trustee of the name and address of any such Agent and any change in the address of such Agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such Registrar or Paying Agent. The Company may remove any Agent upon written notice to such Agent and the Trustee; provided that no such removal shall become effective until (i) the acceptance of an appointment by a successor Agent to such Agent as evidenced by an appropriate agency agreement, entered into by the Company and such successor Agent and delivered to the Trustee, which shall incorporate the terms of the TIA and the relevant terms of this Indenture and shall not be inconsistent with this Indenture or (ii) notification to the Trustee that the Trustee shall serve as such Agent until the appointment of a successor Agent in accordance with clause (i) of this proviso. The Company, any Subsidiary of the Company, or any Affiliate of any of them may act as Paying Agent, Registrar or co - registrar, or agent for service of notice and demands. The Company initially appoints the Trustee as Registrar and Paying Agent. If, at any time, the Trustee is not the Registrar, the Registrar shall make available to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may reasonably request the names and addresses of the Holders as they appear in the Security Register. SECTION 2.05. Paying Agent to Hold Money in Trust. Not later than 10:00 a.m. New York City time on each due date of the principal and interest on any Securities, the Company shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal and interest so becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium and interest on the Securities (whether such money has been paid to it by the Company or any other obligor on the Securities), and such Paying Agent shall promptly notify the Trustee of any default by the Company (or any other obligor on the Securities) in making any such payment. The Company at any time may require a Paying Agent other than the Trustee to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon payment to the Trustee, the Paying Agent (solely in its capacity as such and not with respect to any obligations as Issuer or guarantor hereunder) shall have no further liability for the money so paid over to the Trustee. If the Company or any Subsidiary of the Company or any Affiliate of any of them acts as Paying Agent, it will, on or before each due date of any principal of or interest on the Securities, segregate and hold in a separate trust fund for the benefit of the Holders a sum sufficient to pay such principal or interest so becoming due until such sums shall be paid to such Holders or otherwise disposed of as provided in this Indenture, and will promptly notify the Trustee of its action or failure to act. Upon commencement of any bankruptcy or reorganization proceeding relating to the Company, the Trustee shall serve as Paying Agent for the Securities. SECTION 2.06. Transfer and Exchange. When Securities are presented to the Registrar or a co - registrar with a request to register the transfer or to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, that any Security presented or surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Holder thereof or by its attorney duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made to a Holder for any registration of transfer or exchange of the Securities, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or other similar governmental charge payable upon exchanges pursuant to Section 2.11, 3.09, 3.11, 8.04 or 10.08 of this Indenture). Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co - registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co - registrar shall be affected by notice to the contrary. The Issuer and the Registrar shall not be required to register the transfer of or to exchange (a) any Security for a period of 15 days next preceding the first mailing of notice of redemption of the Securities to be redeemed or (b) any Securities selected, called or being called for redemption in whole or part, except in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not so to be redeemed. SECTION 2.07. Book - Entry Provisions for Global Security. (a) The Global Security initially shall (i) be registered in the name of Cede & Co., as nominee of the Depositary, (ii) be deposited with, or on behalf of, the Depositary, or with the Trustee, as custodian for such Depositary, and (iii) bear legends as set forth in Section 2.02. Unless otherwise designated in writing by the Company, the Depository shall serve as Paying Agent with respect to any Global Security deposited with, or on behalf of, the Depository or with the Trustee as custodian for the Depository. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Security, and the Depositary shall be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Security. (b) Transfers of the Global Security shall be limited to transfers of such Global Security in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in the Global Security may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. In addition, if (i) the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Securities in the form of Physical Securities hereunder then, upon surrender by the Global Security Holder of its Global Security, Physical Securities will, upon written order of the Company, be authenticated and issued to each Person that the Global Security Holder and the Depositary identify as being the beneficial owner of the related Securities and the procedures in Section 2.07(c) or (d), as applicable, shall be followed by the Trustee and the Company. (c) In connection with any transfer of a portion of the beneficial interest in the Global Security to beneficial owners pursuant to subsection (b) of this Section, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and amount. (d) In connection with the transfer of the entire Global Security to beneficial owners pursuant to subsection (b) of this Section, the Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the Global Security, an equal aggregate principal amount of Physical Securities of authorized denominations. (e) The Holder of the Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. SECTION 2.08. Special Transfer Provisions. (a) If the proposed transferor is an Agent Member holding a beneficial interest in the Global Security, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and amount. (b) If the proposed transferee is an Agent Member, and the Securities to be transferred consist of Physical Securities, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures therefor, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Security in an amount equal to the principal amount of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Security so transferred and such Physical Security shall have no further effect. (c) The Registrar shall retain as required by law copies of all letters, notices and other written communications received pursuant to Section 2.07 or this Section 2.08. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 2.09. Replacement Securities. If a mutilated Security is surrendered to the Trustee or if the Holder claims that the Security has been lost, destroyed or wrongfully taken, then, in the absence of notice to the Issuer or the Trustee that such Security has been acquired by a bona fide purchaser, upon satisfaction of the requirements of this Indenture, the Company shall issue and the Trustee shall authenticate a replacement Security of like tenor and principal amount. If required by the Trustee or the Company, an indemnity bond must be furnished by the Holder that is sufficient in the judgment of both the Trustee and the Company to protect the Company, the Trustee or any Agent from any loss that any of them may suffer if a Security is replaced. The Company may charge such Holder for its expenses in replacing a Security. In case any such mutilated, lost, destroyed or wrongfully taken Security has matured or is about to mature, or has been called for redemption in full, the Company in its discretion may pay such Security instead of issuing a new Security in replacement thereof. Every replacement Security is an additional obligation of the Company and shall be entitled to the benefits of this Indenture equally and proportionately with all other Securities issued hereunder. SECTION 2.10. Outstanding Securities. Securities outstanding at any time are all Securities that have been authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, those reductions in the Global Security effected in accordance with the terms of this Indenture and those described in this Section 2.10 as not outstanding. A Security does not cease to be outstanding because the Company or one of its Affiliates holds the Security. If a Security is replaced pursuant to Section 2.09, it ceases to be outstanding unless and until the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the principal amount of any Security is considered paid under Section 3.01 hereof, such Security ceases to be outstanding and interest ceases to accrue thereon. If the Paying Agent (other than the Company or an Affiliate of the Company) holds on a maturity date money sufficient to pay Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them shall cease to accrue. SECTION 2.11. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have insertions, substitutions, omissions and other variations determined to be appropriate by the officers executing the temporary Securities, as evidenced by their execution of such temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Until so exchanged, the temporary Securities shall be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.12. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange or payment. The Trustee and no other Person shall cancel all Securities surrendered for transfer, exchange, payment (including any repurchase) or cancellation and shall destroy them in accordance with its normal procedure. The Company may not issue new Securities to replace Securities it has paid in full. SECTION 2.13. CUSIP Numbers. The Company in issuing the Securities may use CUSIP numbers (if then generally in use), and the Trustee shall use CUSIP numbers in notices of exchange as a convenience to Holders; provided that any such notice shall state that no representation is made by the Trustee as to the correctness of such numbers either as printed on the Securities or as contained in any notice of exchange and that reliance may be placed only on the other identification numbers printed on the Securities. SECTION 2.14. Defaulted Interest. If the Company defaults in a payment of interest on the Securities, it shall pay, or shall deposit with the Paying Agent money in immediately available funds sufficient to pay, the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. Nothing herein shall prohibit the Company from paying defaulted interest in any lawful manner. SECTION 2.15. Treasury Securities Deemed Outstanding. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, amendment, supplement, waiver or consent, Securities owned by the Company or an Affiliate of the Company or any of its Affiliates shall be deemed not to be outstanding except that, for the purpose of determining whether the Trustee or a Responsible Officer shall be protected in relying on any such direction, waiver or consent, only Securities which a Responsible Officer actually knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 2.16. Securities Obligations of Company Only. The Holders acknowledge, by their acceptance of Securities, that such Securities are solely obligations of the Company and that the Indebtedness under the Bank Credit Agreement constitutes obligations of one or more of the Company's Subsidiaries. SECTION 2.17. Noteholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. The Trustee shall update this list on or before each Interest Payment Date and at such other times as the Trustee may reasonably require. SECTION 2.18. Communication By Holders with Other Holders. Pursuant to TIA Section 312(b), Holders may communicate with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and the Paying Agent shall be entitled to the protections of TIA Section 312(c). ARTICLE THREE COVENANTS SECTION 3.01. Payment of Securities. The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities and this Indenture. An installment of principal or interest shall be considered paid on the date due if the Trustee or Paying Agent (other than the Company, a Subsidiary of the Company, or any Affiliate of any of them) holds on that date money designated for and sufficient to pay the installment. If the Company, any Subsidiary of the Company, or any Affiliate of any of them, acts as Paying Agent, an installment of principal or interest shall be considered paid on the due date if the entity acting as Paying Agent complies with the last sentence of Section 2.05 of this Indenture. The Company shall pay interest on overdue principal and interest on overdue installments of interest, to the extent lawful, at the rate per annum therefor indicated in the Securities. SECTION 3.02. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York an office or agency where Securities may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 9.02 of this Indenture. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the office of the Trustee, located in the Borough of Manhattan, The City of New York as such office of the Company in accordance with Section 2.04 of this Indenture. SECTION 3.03. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Indebtedness except: (i) Indebtedness of the Company if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Consolidated Fixed Charge Ratio of the Company would be greater than 2.25:1; (ii) Indebtedness under the Bank Credit Agreement in an aggregate principal amount not to exceed (x) $80,000,000 less (y) the amount of any repayment thereof pursuant to clause (B) in the second paragraph of Section 3.09(a); (iii) Indebtedness existing on the Issue Date (including Indebtedness represented by the Securities originally issued on the Issue Date); (iv) Indebtedness issued in exchange for, or the net proceeds of which are used to exchange, refinance or refund, outstanding Indebtedness of the Company or any of its Restricted Subsidiaries in an amount (or, if such new Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so exchanged, refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that (A) the Indebtedness issued does not mature prior to the Stated Maturity of, and does not have an Average Life shorter than, the Average Life of the Indebtedness being so exchanged, refinanced or refunded and (B) in case the Indebtedness to be exchanged, refinanced or refunded is expressly subordinated in right of payment to the Securities, (1) such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made subordinate in right of payment to the Securities at least to the extent that the Indebtedness to be exchanged, refinanced or refunded is subordinated in right of payment to the Securities, (2) such Indebtedness, determined as of the date of its Incurrence, does not mature prior to one year after the Stated Maturity of the Securities and (3) the Average Life of such Indebtedness, determined as of the date of its Incurrence, is at least one year longer than the remaining Average Life of the Securities; provided, further that any such Indebtedness that refinances Indebtedness of the Company may not be Incurred by a Person other than the Company, and any such Indebtedness that refinances Indebtedness of a Restricted Subsidiary may not be incurred by a Person other than such Restricted Subsidiary; (v) Indebtedness of the Company to any Restricted Subsidiary that is a Ninety - Five Percent Owned Subsidiary, or of a Restricted Subsidiary to the Company or to any other Restricted Subsidiary that is a Ninety - Five Percent Owned Subsidiary; (vi) Acquired Indebtedness; provided that, at the time of the Incurrence thereof, the Company could Incur at least $1.00 of Indebtedness under clause (i) of this Section 3.03(a), and refinancings thereof; provided further that any refinancing Indebtedness may not be Incurred by any Person other than the Company or the Restricted Subsidiary that is the obligor on such Acquired Indebtedness; (vii) Indebtedness in respect of performance bonds, bankers' acceptances and surety or appeal bonds provided in the ordinary course of business; (viii) Indebtedness under Currency Agreements and Interest Rate Agreements; provided that, in the case of Currency Agreements that relate to other Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company or any Subsidiary outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (ix) Indebtedness arising from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any Subsidiary pursuant to agreements providing for indemnification, adjustment of purchase price or similar obligations Incurred in connection with the disposition of any business, assets or Subsidiary of the Company, in a principal amount not to exceed the gross proceeds actually received by the Company or any Subsidiary in connection with such disposition (but excluding Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Subsidiary of the Company for the purpose of financing such acquisition); (x) Indebtedness incurred to finance capital expenditures in a principal amount not to exceed, together with other Indebtedness Incurred pursuant to this clause (x) during the preceding 12 - month period, $10 million in the aggregate; (xi) Incurrence of Capitalized Leases in an amount required to be capitalized on the Company's consolidated balance sheet not to exceed, together with other Indebtedness Incurred pursuant to this clause (xi), $3 million during the preceding 12 - month period or $12.5 million since the Issue Date; (xii) additional Indebtedness under the Bank Credit Agreement in an aggregate principal amount not to exceed $15 million; and (xiii) Indebtedness of the Company not otherwise permitted by this Section 3.03(a), in an aggregate amount not to exceed $5 million at any time outstanding and Indebtedness of Restricted Subsidiaries not otherwise permitted by this Section 3.03(a), in an aggregate amount not to exceed $25 million at any time outstanding. (b) For purposes of determining any particular amount of Indebtedness under this Section 3.03, Guarantees of, or obligations with respect to letters of credit supporting, Indebtedness otherwise included in the determination of such particular amount shall not be included. For purposes of determining compliance with this Section 3.03, (A) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify such item of Indebtedness and shall only be required to include the amount and type of such Indebtedness in one of such clauses and (B) the amount of Indebtedness issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in conformity with GAAP. SECTION 3.04. Limitation on Restricted Payments. The Company will not, and will not permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay any dividend or make any distribution on any class of its Capital Stock (other than dividends or distributions payable solely in shares of its or such Restricted Subsidiary's Capital Stock (other than Redeemable Stock) of the same class as such Capital Stock or in options, warrants or other rights to acquire shares of such Capital Stock) held by Persons other than the Company or any of its Restricted Subsidiaries which are Wholly Owned Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of the Company, any Restricted Subsidiary or any Unrestricted Subsidiary (including options, warrants or other rights to acquire any shares of such Capital Stock) held by Persons other than the Company or another Restricted Subsidiary that is a Wholly Owned Subsidiary, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance or other acquisition or retirement for value, of Indebtedness of the Company that is expressly subordinated in right of payment to the Securities, (iv) make any Investment in any Affiliate (other than the Company or a Restricted Subsidiary that is a Ninety-Five Percent Owned Subsidiary, including any Person that becomes such a Restricted Subsidiary by virtue of such Investment) or (v) make any Investment in any Joint Venture (such payments or any other actions described in clauses (i) through (v) being collectively "Restricted Payments") unless at the time of and after giving effect to the proposed Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing, (b) the Company could Incur at least $1.00 of Indebtedness pursuant to clause (i) of Section 3.03(a) and (c) the aggregate amount expended for all Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors and evidenced by a Board Resolution) after the Issue Date (together with any amounts paid after such date pursuant to clauses (i), (iv) and (vi) in the following paragraph) shall not exceed the sum of (1) 50% of the aggregate amount of Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such amount) of the Company accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter following the Issue Date and ending on the last day of the last fiscal quarter preceding the Transaction Date plus (2) the aggregate net proceeds (including the fair market value of noncash proceeds as determined in good faith by the Board of Directors, whose determination shall be evidenced by a Board Resolution) received by the Company from the issuance and sale of its Capital Stock (other than Redeemable Stock) to any Person other than a Subsidiary of the Company, including an issuance or sale for cash or other property upon the conversion of any Indebtedness of the Company subsequent to the Issue Date, or from the issuance of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, excluding any Redeemable Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the principal of the Securities) plus (3) an amount equal to the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of principal of or interest on Indebtedness, dividends or other transfers of assets, in each case to the Company or any Restricted Subsidiary from any Unrestricted Subsidiary, or from the redesignation of any Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case as provided in the definition of "Investments"), not to exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at the date of declaration, such payment would comply with the foregoing provision; (ii) (A) following an initial public offering of the Common Stock of the Company, the declaration and payment of dividends on the Common Stock of the Company of up to 6% per annum of the net proceeds received by the Company in such initial public offering, or (B) following an initial public offering of the Common Stock of Holdings, the declaration and payment of dividends to Holdings in an amount sufficient to permit Holdings to pay dividends on its Common Stock in an amount of up to 6% per annum of the net proceeds received by Holdings in such initial public offering and contributed to the capital of the Company; (iii) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company, Holdings or any Restricted Subsidiary, options on any such shares or related stock appreciation rights or similar securities held by officers or employees or former officers or employees (or their estates or beneficiaries under their estates) and which were issued pursuant to any stock option plan, upon death, disability, retirement, termination of employment or pursuant to the terms of such stock option plan or any other agreement under which such shares of Capital Stock, options, related rights or similar securities were issued, or the payment of dividends to Holdings in an amount sufficient to effect such purchase, redemption, acquisition, cancellation or other retirement for value by Holdings; provided that the aggregate cash consideration paid for such purchase, redemption, acquisition, cancellation or other retirement for value of such shares of Capital Stock, options, related rights or similar securities after the Issue Date does not exceed $5 million per annum or $10 million in the aggregate; (iv) the redemption, repurchase or other acquisition for value of Capital Stock of the Company or any Subsidiary of the Company in exchange for, or with the proceeds of a substantially concurrent offering of, other shares of Capital Stock of the Company (other than Redeemable Stock); (v) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Securities, including premium, if any, and accrued and unpaid interest, in exchange for, or with the proceeds or a substantially concurrent issuance of, Indebtedness Incurred under clause (iv) of Section 3.03(a); (vi) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness of the Company that is subordinated in right of payment to the securities including premium, if any, and accrued and unpaid interest, in exchange for, or with the proceeds of a substantially concurrent issuance of, shares of the Capital Stock of the Company (other than Redeemable Stock); (vii) the purchase of shares of Capital Stock of Holdings for contributions to the pension and other employee benefit plans of the Company and its Subsidiaries, provided that the aggregate consideration paid for such purchases do not, in any one fiscal year of the Company, exceed an aggregate amount of $1 million, (viii) the making of Investments in any Person (including in any Restricted Subsidiary that is not a Ninety - Five Percent Owned Subsidiary and any Unrestricted Subsidiary) in an aggregate amount for all such Persons not to exceed $40 million outstanding at any time; provided in each case, no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, or (ix) the payment of any dividend in cash by a Restricted Subsidiary of the Company to the holders of its Capital Stock on a pro rata basis. SECTION 3.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. (a) The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay interest on or principal of any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. (b) The provisions of paragraph (a) shall not restrict or prohibit any encumbrances or restrictions: (i) in the Bank Credit Agreement or any other agreements in effect on the Issue Date; (ii) in this Indenture or the Securities; (iii) with respect to any Person or the property or assets of such Person, acquired by the Company or any Restricted Subsidiary and existing prior to such acquisition, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in any agreement that extends, refinances, renews or replaces agreements containing restrictions referred to in clause (i), (ii) or (iii) above, which encumbrances or restrictions are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect pursuant to the agreements that are being extended, refinanced, renewed or replaced; (v) in the case of clause (iv) of the first paragraph of this Section 3.05, (A) restricting in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) arising by virtue of any transfer of, agreement to transfer, option or right with respect to, or any Lien on any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by this Indenture or (C) arising or agreed to in the ordinary course of business and that do not, individually or in the aggregate, detract from the value of the property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or such Restricted Subsidiary; (vi) that constitute Permitted Liens; or (vii) under or by reason of applicable law, rule or regulation (including, without limitation, applicable currency control laws and applicable state corporate statutes restricting the payment of dividends in certain circumstances). SECTION 3.06. Intentionally Left Blank. This Section 3.06 has been intentionally left blank. SECTION 3.07. Limitation on Transactions with Shareholders and Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) involving aggregate consideration in excess of $2 million with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Company or any Subsidiary of the Company or with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than could be obtained in a comparable arm's - length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to: (i) any transaction in the ordinary course of business between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; (ii) transactions approved by a majority of the disinterested members of the Board of Directors (if any); (iii) any payment of moneys or issuance of securities pursuant to employment arrangements and employee benefit plans, in each case approved by the Board of Directors; (iv) the payment of reasonable and customary regular fees to directors of the Company or any Subsidiary of the Company who are not employees of the Company or such Subsidiary of the Company, (v) any payments or other transactions pursuant to any tax- sharing agreement between the Company and any other Person with which the Company is required or permitted to file a consolidated tax return or with which the Company is or could be part of a consolidated group for tax purposes; (vi) any Restricted Payments permitted by Section 3.04; (vii) loans or advances by the Company or a Restricted Subsidiary to employees of the Company or a Restricted Subsidiary in the ordinary course of business; (viii) any transaction contemplated by any stock option plan of the Company; or (ix) the allocation of Indebtedness and interest expense under the Bank Credit Agreement among the Company and one or more Restricted Subsidiaries. SECTION 3.08. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any asset of the Company or such Restricted Subsidiary, without making effective provision for all of the Securities and all other amounts due under this Indenture to be directly secured equally and ratably with (or prior to) the obligation or liability secured by such Lien unless, after giving effect thereto, the aggregate amount of any such obligation or liability so secured, plus the Attributable Indebtedness for all sale - leaseback transactions restricted as described in Section 3.10, does not exceed 10% of Consolidated Net Tangible Assets. The foregoing limitation does not apply to, and any computation of Indebtedness secured under such limitation shall exclude: (i) Liens existing on the Issue Date; (ii) Liens securing obligations under the Bank Credit Agreement; (iii) Liens with respect to Acquired Indebtedness and refinancings thereof permitted under clause (vi) of Section 3.03(a); provided that such Liens do not extend to or cover any property or assets of the Company or any Subsidiary of the Company other than the property or assets of the Subsidiary acquired; (iv) Liens with respect to assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company or to a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company to secure Indebtedness owing to the Company or such other Restricted Subsidiary by such Restricted Subsidiary; (v) Liens granted in connection with the extension, renewal, refinancing or replacement, in whole or in part, of any secured Indebtedness permitted to be incurred under clause (iv) of Section 3.03(a); provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (vi) Liens in respect of Capitalized Leases Incurred pursuant to clause (xi) in Section 3.03(a); (vii) Permitted Liens; (viii) Liens securing obligations under the Securities, this Indenture and the Security Documents; and (ix) additional Liens securing Indebtedness or other obligations in an aggregate amount not exceeding $1,000,000. SECTION 3.09. Limitation on Asset Sales. (a) Neither the Company nor any Restricted Subsidiary shall consummate any Asset Sale (other than an Asset Sale in connection with a sale - leaseback transaction complying with Section 3.10) unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale having a value (including the value of any noncash consideration, as determined in good faith by the Board of Directors) at least equal to the fair market value (as determined in good faith by the Board of Directors) of the shares or assets subject to such Asset Sale, (ii) at least 80% of such consideration is in the form of cash (including, for purposes of this clause (ii), (A) the principal amount of any Indebtedness (as reflected on the Company's consolidated balance sheet) of the Company or any Restricted Subsidiary for which the Company and its Restricted Subsidiaries will cease to be liable, directly or indirectly, as a result of such Asset Sale; and (B) securities that are promptly converted into cash) and (iii) 100% of the Net Cash Proceeds with respect to such Asset Sale are applied by the Company or such Restricted Subsidiary as set forth in the succeeding paragraph. Notwithstanding the foregoing, any Asset Sale constituting the sale of all or any portion of the retail business of the Company and its Restricted Subsidiaries existing as of the date hereof that are not located in Puerto Rico or Florida (including the sale of individual stores) need not comply with clause (a)(ii) of the preceding sentence. In the event and to the extent that the Net Cash Proceeds received by the Company or any Restricted Subsidiary from one or more Asset Sales in any period of 12 consecutive months (other than Asset Sales by the Company or another Restricted Subsidiary to the Company or another Restricted Subsidiary) exceed 15% of Consolidated Net Tangible Assets in any one fiscal year (determined as of the date closest to the commencement of such 12 - month period for which a balance sheet of the Company and its Subsidiaries has been prepared), then within 12 months following the date of such event, the Company or such Restricted Subsidiary shall apply such excess Net Cash Proceeds (A) first, to the extent the Company or such Subsidiary elects, to invest (or to enter into a definitive agreement committing so to invest within 12 months after the date of such agreement) in property or assets that (as determined in good faith by the Board of Directors) are of a nature or type or are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or to the business of, the Company and its Restricted Subsidiaries existing on the date of such Asset Sale; (B) second, to the extent of the balance of such excess Net Cash Proceeds after application in accordance with clause (A) and to the extent the Company or such Restricted Subsidiary elects, to prepay, repay or purchase Securities or Indebtedness of any Restricted Subsidiary; provided that the Company or such Restricted Subsidiary shall repay such Indebtedness and cause the related loan commitment to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased and (C) third, to the extent of the balance of such excess Net Cash Proceeds after application in accordance with clauses (A) and (B), to make an offer to purchase Securities as set forth below. The amount of such excess Net Cash Proceeds required to be applied (or committed to be applied) during such 12 - month period as set forth in clause (A) or (B) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds". To the extent the property that is the subject of an Asset Sale consists of Collateral, the Company shall cause the Net Cash Proceeds thereof to be deposited with the Banks (or an agent or representative on their behalf) or, in the event that the Bank Credit Agreement shall have been paid in full (and no commitments thereunder shall be outstanding), with the Trustee in the Collateral Account, and shall maintain such deposit with the Banks (or such agent or representative), or with the Trustee in the Collateral Account, until such time as such Net Cash Proceeds shall be applied as provided above and, in that connection, the Trustee agrees to release any such Net Cash Proceeds (and, to the extent required, to authorize the Banks, or any such agent or representative, to release such Net Cash Proceeds) to the Company upon delivery of an Officers' Certificate to the Trustee stating that the Net Cash Proceeds to be released will be applied as provided above; provided that if any Net Cash Proceeds are reinvested in property or assets pursuant to clause (A) of the preceding paragraph, the Company shall ensure that any Capital Stock that is owned by the Company (whether previously owned by it or acquired by it as a result of such reinvestment) is pledged to the Trustee as Collateral under the Security Pledge and Intercreditor Agreement and the Company shall execute such appropriate documentation as shall be necessary to effect such pledge. (b) If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined below) totals at least $10 million, the Company must, not later than the fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer") to purchase from the Holders on a pro rata basis an aggregate principal amount of Securities equal to the Excess Proceeds on such date (rounded down to the nearest $500), at a purchase price equal to 101% of the principal amount of such Securities, plus, in each case, accrued interest (if any) to the date of purchase (the "Excess Proceeds Payment"). (c) The Company shall commence an Excess Proceeds Offer by mailing a notice to the Trustee and each Holder as of such record date as the Company shall establish (and delivering such notice to the Trustee at least five days prior thereto) stating: (i) that the Excess Proceeds Offer is being made pursuant to this Section 3.09 and that all Securities validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Excess Proceeds Payment Date"); (iii) that any Security not tendered will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Excess Proceeds Payment, any Security accepted for payment pursuant to the Excess Proceeds Offer shall cease to accrue interest on and after the Excess Proceeds Payment Date; (v) that Holders electing to have any Security purchased pursuant to the Excess Proceeds Offer will be required to surrender such Security, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Excess Proceeds Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Excess Proceeds Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Securities delivered for purchase and a statement that such Holder is withdrawing his election to have such Securities purchased; and (vii) that Holders whose Securities are being purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; provided that each Security purchased and each new Security issued shall be in a principal amount of $500 or multiples of $1 in excess thereof. At least five days prior to the date notice is mailed to each Holder, the Company shall furnish the Trustee with an Officers' Certificate stating the amount of the Excess Proceeds Payment. (d) On the Excess Proceeds Payment Date, the Company shall: (i) accept for payment on a pro rata basis Securities or portions thereof tendered pursuant to the Excess Proceeds Offer; (ii) deposit one day prior to the Excess Proceeds Payment Date with the Paying Agent money sufficient to pay the aggregate purchase price of all Securities or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee, all Securities or portions thereof so accepted, together with an Officers' Certificate specifying the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to each Holder of Securities so accepted payment in an amount equal to the purchase price of the Securities tendered by such Holder and accepted by the Company, and the Trustee shall promptly authenticate and mail to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered; provided that each Security purchased and each new Security issued shall be in a principal amount of $500 or multiples of $1 in excess thereof. The Company will publicly announce the results of the Excess Proceeds Offer as soon as practicable after the Excess Proceeds Payment Date. For purposes of this Section 3.09, the Trustee shall act as the Paying Agent. (e) The Company will comply with Rule 14e - 1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in the event that the Company is required to repurchase Securities as described above. The Trustee shall not be responsible for determining whether compliance with such Rule 14e - 1 is required or has been satisfied. SECTION 3.10. Limitation on Sale - Leaseback Transactions. The Company will not, and will not permit any Restricted Subsidiary to, enter into any sale - leaseback transaction, unless the aggregate amount of all Attributable Indebtedness with respect to such transactions, plus all Indebtedness secured by Liens (excluding secured obligations or liabilities that are excluded as described in the second paragraph of Section 3.08), does not exceed 10% of Consolidated Net Tangible Assets. The foregoing restriction does not apply to, and any computation of Attributable Indebtedness under such limitation shall exclude, any sale - leaseback transaction if: (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the sale or transfer of the property is entered into prior to, at the time of, or within 12 months after the later of the acquisition of the property or the completion of construction thereof; (iii) the lease secures or relates to industrial revenue bonds; (iv) the transaction is between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; or (v) within 12 months after the sale of any Property is completed, the Company or such Restricted Subsidiary applies an amount not less than the net proceeds received from such sale in the manner described in the second paragraph of Section 3.09(a). SECTION 3.11. Repurchase of Securities upon Change of Control. (a) Upon the occurrence of a Change of Control, each Holder shall have the right to require the Company to repurchase such Holder's Securities by the Company in cash pursuant to the offer described below (the "Change of Control Offer") at a purchase price equal to 101% of the principal amount thereof, plus accrued interest (if any) to the date of purchase (the "Change of Control Payment"). Prior to the mailing of the notice to Holders provided for in the succeeding paragraph, but in any event within 30 days following the occurrence of a Change of Control, the Company covenants to (i) repay or cause to be repaid in full all Indebtedness under the Bank Credit Agreement, or to offer to repay in full all such Indebtedness and to repay the Indebtedness of each Bank which has accepted such offer or (ii) obtain the requisite consents under the Bank Credit Agreement to permit the repurchase of the Securities, as provided for in the succeeding paragraph. The Company shall first comply with the covenant in the preceding sentence before it shall be required to repurchase Securities pursuant to this Section 3.11. The notice to Holders shall contain all instructions and material necessary to enable such Holders to tender Securities. (b) Within 30 days after the occurrence of a Change of Control, the Company shall mail a notice to the Trustee and each Holder as of such record date as the Company shall establish (and deliver such notice to the Trustee at least five days prior thereto) stating: (i) that a Change of Control has occurred, that the Change of Control Offer is being made pursuant to this Section 3.11 and that all Securities validly tendered will be accepted for payment; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Change of Control Payment Date"); (iii) that any Security not tendered will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Change of Control Payment, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest on and after the Change of Control Payment Date; (v) that Holders electing to have any Security purchased pursuant to the Change of Control Offer will be required to surrender such Security, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of such Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Change of Control Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Securities delivered for purchase and a statement that such Holder is withdrawing his election to have such Securities purchased; and (vii) that Holders whose Securities are being purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; provided that each Security purchased and each new Security issued shall be in a principal amount of $500 or multiples of $1 in excess thereof. (c) On the Change of Control Payment Date, the Company shall: (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer; (ii) deposit one day prior to the Change of Control Payment Date with the Paying Agent money sufficient to pay the aggregate purchase price of all Securities or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee, all Securities or portions thereof so accepted together with an Officers' Certificate specifying the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail, to each Holder of Securities so accepted, payment in an amount equal to the purchase price of the Securities tendered by such Holder and accepted by the Company, and the Trustee shall promptly authenticate and mail to such Holders a new Security equal in principal amount to any unpurchased portion of the Securities surrendered; provided that each Security purchased and each new Security issued shall be in a principal amount of $500 or multiples of $1 in excess thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 3.11, the Trustee shall act as Paying Agent. (d) The Company will comply with Rule 14e - l under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in the event that a Change of Control occurs under this Section 3.11 and the Company is required to repurchase Securities as described above. The Trustee shall not be responsible for determining whether compliance with such Rule 14e - 1 is required or has been satisfied. SECTION 3.12. Corporate Existence. Subject to Articles Three and Four of this Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each Restricted Subsidiary in accordance with the respective organizational documents of the Company and of each Restricted Subsidiary and the material rights (charter and statutory), licenses and franchises of the Company and its Restricted Subsidiaries; provided that the Company shall not be required to preserve any such right, license or franchise, or the corporate existence of any Restricted Subsidiary of the Company, if the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries taken as a whole and if the failure to preserve such right, license, franchise or corporate existence shall not be materially adverse to any Holder. SECTION 3.13. Payment of Taxes and Other Claims. The Company will pay or discharge, or cause to be paid or discharged, before any penalty accrues thereon (i) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary of the Company or upon the income, profits or property of the Company or any Restricted Subsidiary of the Company and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of the Company or any Restricted Subsidiary of the Company; provided that the Company shall not be required to pay or discharge, or cause to be paid or discharged, any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been made. SECTION 3.14. Maintenance of Properties and Insurance. The Company will cause all properties used or useful in the conduct of its business or the business of any Restricted Subsidiary of the Company and material to the Company and its Restricted Subsidiaries taken as a whole to be maintained and kept in normal condition, repair and working order, all as in the judgment of the Company may be necessary for the conduct of the business of the Company and its Restricted Subsidiaries in the ordinary course. The Company will provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self - insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties in such amounts, with such deductibles and by such methods as shall be customary for corporations similarly situated in the industry. SECTION 3.15. Compliance Certificates; Certain Notifications. (a) The Company shall deliver to the Trustee, within 60 days after the end of each of the first three fiscal quarters of each year and 120 days after the end of the last fiscal quarter of each year, an Officers' Certificate stating whether or not the signers know of any Default or Event of Default that occurred during such fiscal quarter. In the case of the Officers' Certificate delivered within 120 days of the end of the Company's fiscal year, such certificate shall contain a certification from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this Section 3.15, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. If such officers know of such a Default or Event of Default, the certificate shall describe any such Default or Event of Default and its status, and what action, if any, the Company proposes to take with respect thereto. The first certificate to be delivered pursuant to this Section 3.15(a) shall be for the first fiscal quarter ending after the Issue Date. (b) The Company shall deliver to the Trustee, within 120 days after the end of the Company's fiscal year, a certificate signed by the Company's independent certified public accountants stating (i) that their audit examination has included a review of the terms of this Indenture and the Securities as they relate to accounting matters, (ii) that they have read the Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this Section 3.15 for the last quarter of the fiscal year and (iii) whether, in connection with their audit examination, anything came to their attention that caused them to believe that the Company was not in compliance with any of the terms, covenants, provisions or conditions of Article Three and Section 4.01 of this Indenture as they pertain to accounting matters and, if any Default or Event of Default has come to their attention, specifying the nature and period of existence thereof; provided that such independent certified public accountants shall not be liable in respect of such statement by reason of any failure to obtain knowledge of any such Default or Event of Default that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards in effect at the date of such examination. (c) The Company shall deliver to the Trustee, and shall cause to be mailed to the Holders at their addresses appearing in the Security Register, within 30 days of the Incurrence of any Indebtedness under the Bank Credit Agreement utilizing the baskets set forth in clause (xii) or (xiii) of Section 3.03(a), a notification of such Incurrence setting out the amount of Indebtedness so Incurred pursuant to said clauses and the total amount of Indebtedness outstanding under the Bank Credit Agreement after giving effect to such Incurrence of Indebtedness. SECTION 3.16. Commission Reports and Reports to Holders. Within 15 days after the Company files with the Commission copies of its annual reports and other information, documents and reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that it is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, the Company shall file the same with the Trustee. So long as the Securities remain outstanding, the Company shall file with the Commission and deliver to the Trustee quarterly reports (containing unaudited financial statements) for the first three quarters of each fiscal year and annual reports (containing audited financial statements and an opinion thereon by the Company's independent certified public accountants) that it would be required to file under Section 13 of the Exchange Act if it had a class of securities listed on a national securities exchange and shall cause to be mailed to the Holders at their addresses appearing in the Security Register within 15 days of when such report would have been required to be filed under Section 13 of the Exchange Act. The obligation of the Company under this Section 3.16 shall commence with the first fiscal quarter ending at least 30 days after the Issue Date. The Company also shall comply with the other provisions of TIA Section 314(a). SECTION 3.17. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE FOUR SUCCESSOR CORPORATION SECTION 4.01. When Company May Merge, Etc. The Company shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company (other than a merger of the Company with (but not into) a Restricted Subsidiary with a positive stockholder's equity determined in accordance with GAAP; provided that, in connection with any such merger, no consideration (other than Common Stock in the Company) shall be issued or distributed to the stockholders of the Company) unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquires or leases such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all of the obligations of the Company on all of the Securities and under this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Company (or any Person that becomes the successor obligor on the Securities) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; (iv) any Indebtedness Incurred by the Company (or the successor obligor) as a result of, or in connection with, such transaction shall be permitted to be Incurred under Section 3.03(a) (other than under clause (iii) thereof); and (v) the Company delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clause (iii)) and Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture comply with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with. SECTION 4.02. Successor Corporation Substituted. Upon any consolidation or merger, or any sale, conveyance, transfer, lease or other disposition of all or substantially all of the property and assets of the Company in accordance with Section 4.01 of this Indenture, the successor corporation formed by such consolidation or into which the Company is merged or to which such sale, conveyance, transfer, lease or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein. ARTICLE FIVE DEFAULT AND REMEDIES SECTION 5.01. Events of Default. An "Event of Default" occurs with respect to the Securities if: (a) the Company defaults in the payment of principal of (or premium, if any, on) any Security, when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) the Company defaults in the payment of interest on any Security, as and when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in this Indenture, under the Securities or under the Security Pledge and Intercreditor Agreement and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the Securities; (d) the Company or any Significant Subsidiary fails to make (i) one or more payments of principal in respect of Indebtedness outstanding under the Bank Credit Agreement aggregating $1 million or more with respect to all such payments that shall remain unpaid at any one time, (ii) a principal payment of $10 million or more at the final (but not any interim) Stated Maturity of any issue of Indebtedness or (iii) principal payments aggregating $10 million or more at the final (but not any interim) Stated Maturity of more than one issue of Indebtedness and, in the case of clause (i), such defaulted payment shall not have been made, waived or extended within 30 days of the payment default and, in the case of clause (ii), all such defaulted payments shall not have been made, waived or extended within 30 days of the payment default that causes the amount described in clause (ii) to exceed $10 million, provided that in the case of any such defaulted payments under the Bank Credit Agreement aggregating $10 million or more, such 30 - day period shall be inapplicable and an Event of Default hereunder shall be deemed to have occurred hereunder immediately upon such failure to make such payments; (e) there occurs with respect to (i) any Indebtedness under the Bank Credit Agreement (to the extent the principal amount outstanding thereunder aggregates $1 million or more) or (ii) any other Indebtedness of the Company or any Significant Subsidiary having an outstanding principal amount, individually or in the aggregate, of $10 million or more, an event of default that has caused the holder or holders thereof, or representatives of such holder or holders, to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration, provided that in the case of any such declaration under the Bank Credit Agreement (to the extent the principal amount outstanding thereunder aggregates $10 million or more), such 30 - day period shall be inapplicable and an Event of Default hereunder shall be deemed to have occurred hereunder immediately upon such declaration; (f) final judgments or orders (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self - insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order in excess of $10 million individually or that causes the aggregate amount for all such final judgments or orders outstanding against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (i) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (iii) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (h) the Company or any Significant Subsidiary (i) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (ii) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary, or (iii) effects any general assignment for the benefit of creditors; or (i) subject to the provisions of this Indenture and the Security Documents, the Trustee, for the benefit of the Trustee and the Holders, does not have or ceases to have a valid and perfected security interest in the Collateral (subject to Permitted Liens) or any portion thereof. A Default under clause (c) is not an Event of Default until the Trustee notifies the Company in writing, or the Holders of at least 25% of the principal amount of the Securities outstanding notify the Company and the Trustee in writing, of the Default and the Company does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." Such notice shall be given by the Trustee if so requested in writing by the Holders of 25% of the principal amount of the Securities then outstanding. The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any event which constitutes an Event of Default or which with the giving of notice or the lapse of time or both would become an Event of Default under clause (c), (d), (e), (f) or (i), its status and what action the Company is taking or proposes to take with respect thereto. SECTION 5.02. Acceleration. If an Event of Default (other than an Event of Default specified in clause (g) or (h) above that occurs with respect to the Company) occurs and is continuing under this Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding, by written notice to the Company (and to the Trustee if such notice is given by such Holders (the "Acceleration Notice")), may, and the Trustee at the request of such Holders shall, declare the entire unpaid principal of, premium, if any, and accrued interest on the Securities to be due and payable. Upon a declaration of acceleration, such principal, premium, if any, and accrued interest shall become due and payable on the earlier of (x) an acceleration of Indebtedness under the Bank Credit Agreement and (y) the fifth day following such declaration (but only if the relevant Event of Default continues unremedied). In the event of a declaration of acceleration because an Event of Default set forth in clause (d) or (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (d) or (e) shall be remedied or cured by the Company or such Restricted Subsidiary or waived by the holders of the Indebtedness referred to in such clause within 60 days after such declaration of acceleration. If an Event of Default specified in clause (g) or (h) above occurs with respect to the Company, all unpaid principal of, premium, if any, and accrued interest on the Securities then outstanding shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in principal amount of the outstanding Securities, by written notice to the Company and to the Trustee, may waive all past Defaults or Events of Default and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default (other than the non - payment of the principal of, premium, if any, and interest on the Securities that have become due solely by such declaration of acceleration) have been cured or waived (subject to Section 5.04) and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. SECTION 5.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of, premium, if any, and interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture, including, to the extent permitted in the Security Documents, enforcing its rights in respect of the Collateral. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. SECTION 5.04. Waiver of Past Defaults. Subject to Sections 5.02, 5.07 and 8.02 of this Indenture, the Holders of at least a majority in principal amount of the outstanding Securities, by notice to the Trustee, may waive an existing Default or Event of Default and its consequences, except a Default in the payment of principal of or interest on any Security as specified in clause (a) or (b) of Section 5.01 of this Indenture. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. SECTION 5.05. Control by Majority. The Holders of at least a majority in aggregate principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that the Trustee is advised by counsel conflicts with law or this Indenture, that may cause the Trustee to suffer or incur personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Securities not joining in the giving of such direction. In addition, prior to taking (or refraining to take) any action hereunder, the Trustee shall be entitled to indemnification from the Holders on terms reasonably satisfactory to the Trustee against all losses and expenses arising from taking or not taking such action. SECTION 5.06. Limitation on Suits. A Holder may not pursue any remedy with respect to this Indenture, the Securities or the Security Documents unless: (i) the Holder gives to the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount of outstanding Securities make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60 - day period, the Holders of a majority in aggregate principal amount of the outstanding Securities do not give the Trustee a direction that is inconsistent with the request. For purposes of Section 5.05 of this Indenture and this Section 5.06, the Trustee shall comply with TIA Section 316(a) in making any determination of whether the Holders of the required aggregate principal amount of outstanding Securities have concurred in any request or direction of the Trustee to pursue any remedy available to the Trustee or the Holders with respect to this Indenture or the Securities or otherwise under the law. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. SECTION 5.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal of, premium, if any, or interest on the Security on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 5.08. Collection Suit by Trustee. If an Event of Default in payment of principal or interest specified in clause (a) or (b) of Section 5.01 of this Indenture occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor of the Securities for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate borne by the Securities, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 5.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.06 of this Indenture) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor of the Securities), its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any custodian in any such judicial proceedings is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 6.06 of this Indenture. To the extent that such payment of reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel out of the estate in any such judicial proceeding shall be denied for any reason, payment of the same shall be secured by a first lien on, and shall be paid out of, any and all dividends, distributions, monies, securities and other property that the Holders may be entitled to receive in such judicial proceedings, whether in liquidation or under any plan of reorganization, arrangement or otherwise. Nothing herein contained shall be deemed to empower the Trustee to authorize or consent to, or accept or adopt on behalf of any Holder, any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 5.10. Priorities. If the Trustee collects any money pursuant to this Article Five, or pursuant to the Security Documents, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 6.06 of this Indenture, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the reasonable costs and expenses of collection thereof by the Trustee; Second: to Holders for amounts then due and unpaid for principal of, premium, if any, and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively; and Third: to the Company or any other obligors of the Securities, as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Holders pursuant to this Section 5.10. At least 15 days prior to such record date, the Company (or upon the failure of the Company to act, the Trustee) shall mail by first - class mail to each Holder a notice that states the record date, the payment date and the amount to be paid. SECTION 5.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 5.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 5.07 of this Indenture, or a suit by Holders of more than 10% in principal amount of the outstanding Securities. SECTION 5.12. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.13. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Securities in Section 2.09 of this Indenture, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.14. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Five or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. ARTICLE SIX TRUSTEE SECTION 6.01. Rights of Trustee. (a) Subject to TIA Sections 315(a) through (d): (i) the Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document; (ii) before the Trustee acts or refrains from acting, it may require an Officers' Certificate and/or an Opinion of Counsel, which shall conform to Section 9.04 of this Indenture. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion; (iii) the Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care; (iv) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture or the Security Documents at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (v) the Trustee or Paying Agent shall not be liable for interest on any money received by it except as the Trustee or Paying Agent may agree in writing with the Company. Money held in trust by the Trustee or Paying Agent need not be segregated from other funds except to the extent required by law or expressly required hereunder; (vi) the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers; provided that the Trustee's conduct does not constitute negligence or bad faith; and (vii) if any Default or any Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and the Security Documents and use the same degree of care and skill in such exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) No provision of this Indenture or the Security Documents shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (c) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.01 and to the provisions of the TIA. SECTION 6.02. Individual Rights of Trustee. The Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. SECTION 6.03. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall no be accountable for any money paid to the Company under this Indenture or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement or recital in this Indenture, the Securities, the Security Documents or in any document issued in connection with the issuance of the Securities, other than its certificate of authentication. SECTION 6.04. Notice of Default. If any Default or any Event of Default occurs and is continuing and if such Default or Event of Default is actually known by a Responsible Officer of the Trustee charged with administration of this Indenture, the Trustee shall mail to each Holder in the manner and to the extent provided in TIA Section 313(c) notice of the Default or Event of Default within 45 days after it occurs, unless such Default or Event of Default has been cured; provided, however that, except in the case of a default in the payment of the principal of or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. The Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) if the Trustee is then the Paying Agent, any Event of Default occurring pursuant to Section 5.01(a) or 5.01(b) of this Indenture or (ii) any Default or Event of Default of which a Responsible Officer of the Trustee charged with administration of this Indenture shall have received written notification referring to this Indenture and the Default or Event of Default, or obtained actual knowledge, and such notification shall not be deemed to include receipt of information obtained in any report or other documents furnished under Section 3.16 of this Indenture, which reports and documents the Trustee shall have no duty to examine. SECTION 6.05. Reports by Trustee to Holders. Within 60 days after each April 1, beginning with April 1, 2004, the Trustee shall mail to each Holder as provided in TIA Section 313(c) a brief report dated as of such April 1 if required by TIA Section 313(a). The Trustee shall also comply with TIA Section 313(b). A copy of each report at the time of its mailing to Holders shall be filed with the Commission and each stock exchange (if any) on which the Securities are listed in accordance with TIA Section 313(d). The Company agrees to promptly notify the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 6.06. Compensation and Indemnity. The Company shall pay to the Trustee such compensation as shall be agreed upon in writing for its acceptance of this Indenture and its services. The compensation of the Trustee shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out - of - pocket expenses and advances incurred or made by it, in addition to its compensation. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. Subject to TIA Sections 315(a) through (d), the Company shall indemnify the Trustee for, and hold it harmless against, any loss, liability, damage, claim or expense (including taxes and reasonable attorney's fees) incurred by it (except to the extent resulting from the Trustee's negligence or bad faith in connection with the administration of this Indenture and its duties under this Indenture, the Securities and the Security Documents), including the costs and expenses of enforcing this Indenture and the Security Documents and of defending itself against any claim (whether asserted by the Company, a Holder or any other Person) or liability and of complying with any process served upon it or any of its officers in connection with the exercise or performance of any of its powers or duties under this Indenture, the Securities and the Security Documents. The Trustee shall notify the Company promptly of any claim asserted against the Trustee for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay reasonable fees and expenses of such counsel. The Company need not pay for any settlements made without its consent; provided that such consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. The obligations of the parties hereto under this Section shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 6.06, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, in its capacity as Trustee, except money or property held in trust to pay principal of and interest on the Securities. Such lien shall survive the satisfaction and discharge of this Indenture. If the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in clause (g) or (h) of Section 5.01 of this Indenture, the expenses and the compensation for the services will be intended to constitute (and shall have the priority accorded to) expenses of administration under Title 11 of the United States Bankruptcy Code or any applicable federal or state law for the relief of debtors. SECTION 6.07. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 6.07. The Trustee may resign, and shall be discharged from the trust created hereunder, by so notifying the Company in writing at least 30 Business Days prior to the date of the proposed resignation. The Holders of a majority in principal amount of the outstanding Securities may remove the Trustee by so notifying the Trustee in writing and (subject to the following paragraph) may appoint a successor Trustee with the consent of the Company. The Company may remove the Trustee if: (i) the Trustee fails to comply with Section 6.09 of this Indenture; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting. If the Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If the successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after the delivery of such written acceptance, subject to the lien provided in Section 6.06 of this Indenture, (i) the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, (ii) the resignation or removal of the retiring Trustee shall become effective and (iii) the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture and under the Security Documents. A successor Trustee shall mail notice of its succession to each Holder. If the Trustee fails to comply with Section 6.09 of this Indenture, any Holder who satisfies the requirements of TIA Section 310(b) may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 6.07, the Company's obligations under Section 6.06 of this Indenture shall continue for the benefit of the retiring Trustee. SECTION 6.08. Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation or national banking, association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee with the same effect as if the successor Trustee had been named as the Trustee herein. SECTION 6.09. Eligibility. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition. The Trustee and the Company shall comply with TIA Section 310(b), provided that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met, provided that nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the penultimate paragraph of TIA Section 310(b). SECTION 6.10. Money Held in Trust. The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law and except for money held in trust under Article Seven of this Indenture or under the Security Documents. SECTION 6.11. Preferential Collection of Claims Against the Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE SEVEN DISCHARGE OF INDENTURE SECTION 7.01. Termination of Company's Obligations. Except as otherwise provided in this Section 7.01, the Company may terminate its obligations under the Securities and this Indenture if: (i) all Securities previously authenticated and delivered (other than destroyed, lost or stolen Securities that have been replaced or Securities that are paid pursuant to Section 3.01 of this Indenture or Securities for whose payment money or securities have theretofore been held in trust and thereafter repaid to the Company, as provided in Section 7.05 of this Indenture) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder; or (ii) (A) the Securities mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Company irrevocably deposits in trust with the Trustee during such one - year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of any interest thereon, to pay principal and interest on the Securities to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default or Events of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound and (E) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. With respect to the foregoing clause (i), the Company's obligations under Section 6.06 of this Indenture shall survive. With respect to the foregoing clause (ii), the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.09, 2.14, 3.01, 3.02, 6.06, 6.07, 7.04, 7.05 and 7.06 of this Indenture shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations in Sections 6.06, 7.05 and 7.06 of this Indenture shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified above. SECTION 7.02. Defeasance and Discharge of Indenture. The Company will be deemed to have paid and will be discharged from any and all obligations in respect of the Securities on the 123rd day after the date of the deposit referred to in clause (A) of this Section 7.02, and the provisions of this Indenture will no longer be in effect with respect to the Securities, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same, except as to (i) rights of resignation of transfer and exchange, (ii) substitution of, apparently mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of Holders to receive payments of principal thereof and interest thereon, (iv) the Company's obligations under Section 3.02, (v) the rights, obligations and immunities of the Trustee hereunder and (vi) the rights of the Holders as beneficiaries of this Indenture with respect to the property so deposited with the Trustee payable to all or any of them; provided that the following conditions shall have been satisfied: (A) with reference to this Section 7.02, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 of this Indenture) and conveyed all right, title and interest for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Securities, and dedicated solely to, the benefit of the Holders, in and to (1) money in an amount, (2) U.S. Government Obligations that, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (A), money in an amount or (3) a combination thereof in an amount sufficient to pay and discharge, after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and interest on the outstanding Securities at the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Securities; (B) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (C) immediately after giving effect to such deposit on a pro forma basis, no Default or Event of Default shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (D) the Company shall have delivered to the Trustee (1) either (x) a ruling directed to the Company received from the Internal Revenue Service to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this Section 7.02 and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised or (y) an Opinion of Counsel to the same effect as the ruling described in clause (x) above, and (2) an Opinion of Counsel to the effect that (x) the creation of the defeasance trust does not violate the Investment Company Act of 1940 and (y) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (I) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (II) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (a) assuming such trust funds remained in the possession of the Trustee prior to such court ruling, to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute and (b) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; (E) if the Securities are then listed on a national securities exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Securities will not be delisted as a result of such deposit, defeasance and discharge; and (F) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 7.02 have been complied with. Notwithstanding the foregoing, prior to the end of the 123 - day period from the date of the deposit referred to in clause (A) above, none of the Company's obligations under this Indenture shall be discharged. Subsequent to the end of such 123 - day period with respect to this Section 7.02, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.09, 2.14, 3.01, 3.02. 6.06, 6.07, 7.05 and 7.06 of this Indenture shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations in Sections 6.06, 7.05 and 7.06 of this Indenture shall survive. If and when a ruling from the Internal Service or an Opinion of Counsel referred to in clause (D) above is able to be provided specifically without regard to, and not in reliance upon, the continuance of the Company's obligations under Section 3.01 of this Indenture, then the Company's obligations under such Section 3.01 of this Indenture shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 7.02. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations in the immediately preceding paragraph. SECTION 7.03. Defeasance of Certain Obligations. The Company may omit to comply with any term, provision or condition set forth in clauses (iii) of Section 4.01 and Sections 3.03 through 3.16 of this Indenture, and clause (c) of Section 5.01 of this Indenture with respect to clause (iii) of Section 4.01 and Sections 3.03 through 3.16 of this Indenture, and clauses (d), (e), (f) and (i) of Section 5.01 of this Indenture shall be deemed not to be Events of Default, in each case with respect to the outstanding Securities 123 days after the deposit referred to in clause (i) below if: (i) with reference to this Section 7.03, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 of this Indenture) and conveyed all right, title and interest to the Trustee for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Securities, and dedicated solely to, the benefit of the Holders, in and to (A) money in an amount, (B) U.S. Government Obligations that, through the payment of interest and principal in respect thereof an accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (i), money in an amount or (C) a combination thereof in an amount sufficient to pay and discharge, after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and interest on the outstanding Securities on the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Securities; (ii) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit; (iv) the Company has delivered to the Trustee an Opinion of Counsel to the effect that (A) the creation of the defeasance trust does not violate the Investment Company Act of 1940, (B) the Holders have a valid first - priority security interest in the trust funds, (C) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred and (D) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (1) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (2) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (x) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute and (y) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; (v) if the Securities are then listed on a national securities exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit, defeasance and discharge will not cause the Securities to be delisted; and (vi) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 7.03 have been complied with. SECTION 7.04. Application of Trust Money. Subject to Section 7.06 of this Indenture, the Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 7.01, 7.02 or 7.03 of this Indenture, as the case may be, and shall apply (or cause the Paying Agent to apply) the deposited money and the money from U.S. Government Obligations in accordance with the Securities and this Indenture to the payment of principal of, premium, if any, and interest on the Securities; but such money need not be segregated from other funds except to the extent required by law. SECTION 7.05. Repayment to Company. Subject to Sections 6.06, 7.01, 7.02 and 7.03 of this Indenture, the Trustee and the Paying Agent shall promptly pay to the Company upon request set forth in an Officers' Certificate any excess money held by them at any time (except for collateral consisting of funds deposited or segregated to satisfy conditions precedent hereunder, as to which collateral the Trustee may continue to possess and shall retain its Lien) and thereupon the Trustee and Paying Agent shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon request set forth in an Officers' Certificate any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years; provided that the Trustee or the Paying Agent shall cause to be published at the expense of the Company once in a newspaper of general circulation in The City of New York or mail to each Holder entitled to such money at such Holder's address (as set forth in the Security Register) notice that such money remains unclaimed and that after a date specified therein (which shall be at least 30 days from the date of such publication or mailing) any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease and be terminated. SECTION 7.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 7.01, 7.02 or 7.03 of this Indenture, as the case may be, by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 7.01, 7.02 or 7.03 of this Indenture, as the case may be (such revival and reinstatement to be deemed effective as of the date on which such deposit had occurred pursuant to Section 7.01, 7.02 or 7.03 of this Indenture, as the case may be), until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 7.01, 7.02 or 7.03 of this Indenture, as the case may be; provided that, if the Company has made any payment of principal of, premium, if any, or interest on any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE EIGHT AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 8.01. Without Consent of Holders. The Company, when authorized by a resolution of its Board of Directors, and the Trustee may amend or supplement this Indenture, the Securities or the Security Documents without notice to or the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency; (2) to comply with Article Four of this Indenture; (3) to comply with the obligation to secure the Securities pursuant to Section 3.08 of this Indenture; (4) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; (5) if necessary, in connection with any addition or release of Collateral permitted under the terms of this Indenture or Security Documents; (6) to provide for uncertificated Securities in addition to or in place of certificated Securities; (7) to provide additional Collateral for the Securities, and to provide additional indemnity to the Trustee, and modify other provisions of this Indenture, the Securities or the Security Documents that relate to such additional Collateral or that will or may be impacted by providing such additional Collateral in a manner not adverse to the Holders, and to enter into agreements, documents or other instruments to effect the foregoing, including, without limitation, pledge and security agreements relating to Liens on such Collateral on a second - priority basis in favor of the Trustee for the benefit of the Trustee and the Holders; (8) to make any change that would provide additional rights or benefits to Holders or that does not adversely affect the rights of any Holder; (9) to confirm to the Banks the subordination of the Liens in the Collateral in favor of the Trustee pursuant to the Security Documents to the Liens in the Collateral in favor of the Banks under or pursuant to the Bank Credit Agreement; or (10) to make any change necessary to comply with the provisions of the Security Documents, including pursuant to amendments of the Security Documents in accordance with their terms. The Company shall also be entitled to releases of Collateral as described in Section 5.03 of the Security Pledge and Intercreditor Agreement. SECTION 8.02. With Consent of Holders. Subject to Sections 5.04 and 5.07 of this Indenture and without prior notice to the Holders, the Company, when authorized by its Board of Directors (as evidenced by a Board Resolution), and the Trustee may amend this Indenture, the Securities and the Security Documents with the written consent of the Holders of a majority in principal amount of the Securities then outstanding, and the Holders of a majority in principal amount of the Securities then outstanding by written notice to the Trustee may waive future compliance by the Company with any provision of this Indenture, the Securities or the Security Documents. Notwithstanding the provisions of this Section 8.02, without the consent of each Holder affected, an amendment or waiver, including a waiver pursuant to Section 5.04, may not: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon, or adversely affect any right of repayment at the option of any Holder of any Security, or change any place of payment where, or the currency in which, any Security or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (ii) reduce the percentage in principal amount of the outstanding Securities required for any such supplemental indenture, for any waiver of compliance with certain provisions of this Indenture or certain defaults and their consequences provided for in this Indenture; (iii) waive a default in the payment of principal of or interest on, any Security; or (iv) modify any of the provisions of this Section 8.02, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Security affected thereby. It shall not be necessary for the consent of the Holders under this Section 8.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 8.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. The Company will mail supplemental indentures and Security Documents to Holders upon their written request. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. SECTION 8.03. Revocation and Effect of Consent. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the Security of the consenting Holder, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to its Security or portion of its Security. Such revocation shall be effective only if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver shall become effective on receipt by the Trustee of written consents from the Holders of the requisite percentage in principal amount of the outstanding Securities. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then, notwithstanding the last two sentences of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies) and only those persons shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. After an amendment, supplement or waiver becomes effective as set forth in Sections 8.01 and 8.02, it shall bind every Holder and every subsequent Holder of a Security in the manner set forth herein. SECTION 8.04. Notation on or Exchange of Securities. If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder and the Trustee may place an appropriate notation on any Security thereafter authenticated. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. SECTION 8.05. Trustee to Sign Amendments, Etc. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Eight is authorized or permitted by this Indenture. Subject to the preceding sentence, the Trustee shall sign such amendment, supplement or waiver if the same does not adversely affect the rights, duties, liabilities or immunities of the Trustee (as determined by the Trustee in the exercise of its reasonable discretion). The Trustee in its discretion may, but shall not be obligated to, execute any such amendment, supplement or waiver that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 8.06. Conformity with Trust Indenture Act. Every amendment and supplemental indenture executed pursuant to this Article Eight shall conform to the requirements of the TIA as then in effect. ARTICLE NINE MISCELLANEOUS SECTION 9.01. Trust Indenture Act of 1939. Upon the issuance of the Global Securities, this Indenture will be subject to the provisions of the TIA that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 9.02. Notices Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: if to the Company: Nutritional Sourcing Corporation 1300 N.W. 22nd Street Pompano Beach, Florida 33069 Attention: Chief Financial Officer if to the Trustee: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, DE 19890 Attention: Corporate Trust Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed to him at his address as it appears on the Security Register by first class mail and shall be sufficiently given to him if so mailed within the time prescribed. Copies of any such communication or notice to a Holder shall also be mailed to the Trustee and each Agent at the same time. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. Except for a notice to the Trustee, which is deemed given only when received, and except as otherwise provided in this Indenture, if a notice or communication is mailed in the manner provided above, it is duly given, whether or nor the addressee receives it. SECTION 9.03. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture or the Security Documents, the Company shall furnish to the Trustee: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture or the Security Documents relating to the proposed action have been complied with; and (ii) an Opinion of Counsel stating that, in the opinion of such Counsel, all such conditions precedent have been complied with. SECTION 9.04. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture or the Security Documents shall include: (i) a statement that the person making such certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (iii) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with, and such other opinions as the Trustee may reasonably request; provided that, with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 9.05. Rules by Trustee, Paying Agent or Registrar. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 9.06. Payment Date Other Than a Business Day. If an Interest Payment Date, Redemption Date, Stated Maturity or date of maturity of any Security shall not be a Business Day at any place of payment, then payment of principal of or interest on such Security, as the case may be, need not be made on such date, but may be made on the next succeeding Business Day at such place of payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity or date of maturity of such Security; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or date of maturity, as the case may be. SECTION 9.07. Governing Law. The laws of the State of New York shall govern this Indenture and the Securities. The Trustee, the Company and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising our of or relating to this Indenture, the Securities or the Security Documents. SECTION 9.08. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any Subsidiary of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 9.09. No Recourse Against Others. No recourse for the payment of the principal of, premium, if any, or interest on any of the Securities, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company contained in this Indenture, or in any of the Securities, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator or against any past, present or future shareholder, officer, director, employee or controlling person, as such, of the Company or of any successor Person, either directly or through the Company or any successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. SECTION 9.10. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 9.11. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 9.12. Separability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 9.13. Table of Contents, Headings, Etc. The Table of Contents and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. ARTICLE TEN REDEMPTION SECTION 10.01. Right of Redemption. The Securities may be redeemed at the election of the Company, in whole or in part, at any time on or after the Issue Date and prior to maturity, at the Redemption Prices specified in the form of Securities annexed hereto as Exhibit A, plus accrued interest to the Redemption Date. SECTION 10.02. Notices to Trustee. If the Company elects to redeem Securities pursuant to Section 10.01 of the Indenture and paragraph 5 of the Securities, it shall notify the Trustee in writing of the Redemption Date, the Redemption Price and the principal amount of Securities to be redeemed. The Company shall give each notice provided for in this Section 10.02 in an Officers' Certificate at least 45 days before the Redemption Date but not later than the date of any notice delivered pursuant to Section 10.04 hereof (unless a shorter period shall be satisfactory to the Trustee). SECTION 10.03. Selection of Securities to Be Redeemed. If less than all of the Securities are to be redeemed at any time, the Trustee shall select the Securities to be redeemed in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed or, if the Securities are not listed on a national securities exchange, on a pro rata basis, by lot or by such method as the Trustee in its sole discretion shall deem fair and appropriate; provided that no Securities of $500 in principal amount or less shall be redeemed in part. The Trustee shall make the selection from the Securities outstanding and not previously called for redemption. Securities in denominations of $500 in principal amount may only be redeemed in whole. The Trustee may select for redemption portions (equal to $500 in principal amount or any multiple of $1 in excess thereof) of the principal of Securities that have denominations larger than $500 in principal amount. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company and the Registrar promptly in writing of the Securities or portions of Securities to be called for redemption. SECTION 10.04. Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first class mail to each Holder whose Securities are to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the name and address of the Paying Agent; (iv) that Securities called for redemption must be surrendered to the Paying Agent in order to collect the Redemption Price; (v) that the redemption does not violate any agreement binding upon the Company; (vi) that, unless the Company defaults in making the redemption payment, interest on Securities called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued interest to the Redemption Date upon surrender of the Securities to the Paying Agent; (vii) that, if any Security is being redeemed in part, the portion of the principal amount (equal to $500 in principal amount or any multiple of $1 in excess thereof) of such Security to be redeemed and that, on and after the Redemption Date, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be reissued; and (viii) that, if any Security contains a CUSIP number as provided in Section 2.13 of this Indenture, no representation is being made as to the correctness of the CUSIP number either as printed on the Securities or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the name and at the expense of the Company; provided, however, that the Company shall have delivered to the Trustee at least 45 (or a lesser number of days acceptable to the Trustee) days prior to the Redemption Date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information in such notice required by the preceding paragraph. Concurrently with the giving of such notice by the Company to the Holders, the Company shall deliver to the Trustee an Officers' Certificate stating that such notice has been given. SECTION 10.05. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender of any Securities to the Paying Agent, such Securities shall be paid at the Redemption Price, plus accrued interest to the Redemption Date. Notice of redemption shall be deemed to be given when mailed, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of the Securities. SECTION 10.06. Deposit of Redemption Price. On or prior to 10:00 a.m. New York City time on any Redemption Date, the Company shall deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, shall segregate and hold in trust as provided in Section 2.05 of this Indenture) money sufficient to pay the Redemption Price of and accrued interest on all Securities to be redeemed on that date other than Securities or portions thereof called for redemption on that date that have been delivered by the Company to the Trustee for cancellation. SECTION 10.07. Payment of Securities Called for Redemption. If notice of redemption has been given in the manner provided above, the Securities or portion of Securities specified in such notice to be redeemed shall become due and payable on the Redemption Date at the Redemption Price stated therein, together with accrued interest to such Redemption Date, and on and after such date (unless the Company shall default in the payment of such Securities at the Redemption Price and accrued interest to the Redemption Date, in which case the principal, until paid, shall bear interest from the Redemption Date at the rate prescribed in the Securities), such Securities shall cease to accrue interest. Upon surrender of any Security for redemption in accordance with a notice of redemption, such Security shall be paid and redeemed by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders registered as such at the close of business on the relevant Regular Record Date. SECTION 10.08. Securities Redeemed in Part. Upon surrender of any Security that is redeemed in part, the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unredeemed portion of such surrendered Security. ARTICLE ELEVEN COLLATERAL AND SECURITY SECTION 11.01. Security Pledge and Intercreditor Agreement. (a) In order to secure the due and punctual payment of principal of and interest and premium (if any) on the Securities when and as the same shall become due and payable, whether on an Interest Payment Date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of and interest and premium (to the extent permitted by law), if any, on the Securities and performance of all other obligations of the Company to the Holders or the Trustee under this Indenture and the Securities, the Company and the Trustee are simultaneously with the execution of this Indenture entering into the Security Pledge and Intercreditor Agreement, pursuant to which the Company has granted to the Trustee a security interest in all of its right, title and interest in, to and under the Collateral referred to therein for the equal and ratable benefit and security of the Holders of the Securities, without preference, priority or distinction of any thereof over any other by reason or difference in time, of issuance, sale or otherwise, and for the Trustee or any other agent for such Holders to the extent provided in this Indenture and in the Security Documents. At the time this Indenture and the Security Pledge and Intercreditor Agreement are executed, the Company will have full right, power and lawful authority to grant, convey, hypothecate, assign, mortgage and pledge the property constituting the Collateral, in the manner and form done, or intended to be done, in this Indenture and the Security Pledge and Intercreditor Agreement, free and clear of all Liens whatsoever, except the Liens created pursuant to the Bank Credit Agreement, this Indenture and the Security Pledge and Intercreditor Agreement, and except to the extent otherwise provided therein and herein, and (a) will forever warrant and defend the title to the same against the claims of all Persons whatsoever, (b) will execute, acknowledge and deliver to the Trustee such further assignments, transfers, assurances or other instruments as the Trustee may reasonably require or request, and (c) will do or cause to be done all such acts and things as may be necessary or proper, or as may be reasonably required by the Trustee, to assure and confirm to the Trustee the perfection and priority of the security interests in the Collateral contemplated by the Security Pledge and Intercreditor Agreement, or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Securities, according to the intent and purposes herein expressed. (b) Each Holder, by accepting a Security, consents and agrees to all of the terms and provisions of the Security Documents, as the same may be in effect from time to time or may be amended from time to time in accordance with the provisions of thereof and of this Indenture, and authorizes and directs the Trustee to act as the secured party under the Security Documents; provided, however, that if any provisions of the Security Documents limit, qualify or conflict with the duties imposed by the TIA, when applicable, the TIA shall control, subject to Section 9.01. (c) As set forth in and governed by the Security Documents, as among the Holders, the Collateral as now or hereafter constituted shall be held for the equal and ratable benefit of the Holders without preference, priority or distinction of any thereof over any other by reason of difference in time of issuance, sale or otherwise, as security for the Securities. SECTION 11.02. Recording and Opinions. (a) The Company will, at its own expense, register, record and file or rerecord, refile and renew the Security Documents, this Indenture and all amendments or supplements thereto in such manner and in such place or places, if any, as may be required by law in order fully to preserve and protect the Liens of the Indenture and the Security Documents on all parts of the Collateral and to effectuate and preserve the perfection and priority of the security of the Holders and all rights of the Trustee. (b) The Company will furnish to the Trustee on May 15 in each year beginning with May 15, 2004, an Opinion of Counsel dated as of such date, either: (i) (A) stating that, in the opinion of such counsel, all action has been taken with respect to the recording, registering, filing, re - recording, re-registering and re-filing of all supplemental indentures, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain and perfect the Lien of the Security Documents and reciting with respect to the security interests in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given, and (B) stating that, in the opinion of such counsel, based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of such date and during the succeeding 12 months fully to preserve, perfect and protect, to the extent such protection and preservation are possible by filing, the rights of the Holders and the Trustee hereunder and under the Security Documents with respect to the security interests in the Collateral; or (ii) stating that, in the opinion of such counsel, no such action is necessary to maintain and perfect such Lien, and maintain the priority of such Lien in the Collateral and assignment. (c) The Company will otherwise comply with the provisions of TIA Section 314(b). SECTION 11.03. Actions to Protect Collateral. In addition to Section 5.09 and subject to the provisions of the Security Documents, the Trustee, acting at the written direction of the Holders of the Securities, shall have power to institute and maintain such suits and proceedings as the Trustee reasonably may deem expedient to prevent any impairment of the Collateral or the perfection, status or priority of the Trustee's Lien in the Collateral by any acts that the Trustee reasonably has cause to believe are unlawful or in violation of the terms of the Security Documents or this Indenture, and such suits and proceedings as the Trustee reasonably may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security for the Securities or be prejudicial to the Holders or the Trustee in their respective capacities as such); provided that nothing contained in this Section 11.03 shall be deemed to be a waiver of any right which the Company would otherwise have with respect to the defense of any such suit or proceeding. If an advance of funds shall at any time be required for the preservation or maintenance of any Collateral, then, upon three Business Days' notice to the Company, the Trustee shall be entitled to make such advance (it being understood that the Trustee shall not be obligated to make such advance). Each such advance shall be reimbursed, with interest from the date such advance was made (at the rate then borne by the Securities), by the Company, upon demand of the Trustee, and if the Company fails to comply with such demand, out of trust moneys. Any funds advanced by the Trustee pursuant to this paragraph for the preservation and maintenance of Collateral shall be secured obligations hereunder, secured by the security interest in the Collateral pursuant to the Security Pledge and Intercreditor Agreement. SECTION 11.04. Receipt of Funds Under Security Documents. The Trustee is authorized to receive any funds for the benefit of the Holders distributed under the Security Documents, and to make further distributions of such funds to the Holders according to the provisions of this Indenture. SECTION 11.05. Certificates of Fair Value. To the extent applicable, the Company shall cause TIA Section 314(d) to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by any Officer of the Company, provided that, to the extent required by TIA Section 314(d), any such certificate or opinion shall be made by an "independent appraiser" or other "expert" (as such terms are set forth in TIA Section 314(d)). SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. NUTRITIONAL SOURCING CORPORATION, as Issuer By: /S/_________________________________________ Name: Title: WILMINGTON TRUST COMPANY, as Trustee By: ____________________________________________ Name: Title: EXHIBIT A (FACE NOTE) NUTRITIONAL SOURCING CORPORATION 10.125% Senior Secured Note Due 2009 No. [CUSIP] ______ $ The following information is supplied for purposes of Sections 1273 and 1275 of the Internal Revenue Code: NUTRITIONAL SOURCING CORPORATION, a Delaware corporation (the "Company"), which term includes any successor corporation under the Indenture hereinafter referred to), for value received, promises to pay to ____________________, or registered assigns, the principal sum of __________________ Dollars, on August 1, 2009. Interest Payment Dates: February 1 and August 1, commencing February 1, 2004. Regular Record Dates: January 15 and July 15. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. Date:_______________ NUTRITIONAL SOURCING CORPORATION By: _______________________________________ Title: By:________________________________________ Title: (Form of Trustee's Certificate of Authentication) This is one of the 10.125% Senior Secured Notes Due 2009 described in the within - mentioned Indenture. WILMINGTON TRUST COMPANY, as Trustee By:___________________________ Authorized Signature (REVERSE SIDE OF NOTE) NUTRITIONAL SOURCING CORPORATION 10.125% Senior Secured Note Due 2009 1. Principal and Interest. The Company will pay the principal of this Security on August 1, 2009. The Company promises to pay interest on the principal amount of this Security on each Interest Payment Date, as set forth below, at the rate of 10.125% per annum. Interest will be payable semiannually (to the holders of record of the Securities at the close of business on January 15 or July 15 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing February 1, 2004. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Issue Date; provided that, if there is no existing default in the payment of interest and if this Security is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360 - day year of twelve 30 - day months. The Company shall pay interest on overdue principal and interest on overdue installments of interest, to the extent lawful, at the rate of 10.125% per annum. 2. Method of Payment. The Company will pay interest (except defaulted interest) on the principal amount of the Securities on each February 1 and August 1 to the persons who are Holders (as reflected in the Security Register at the close of business on such January 15 and July 15 immediately preceding the Interest Payment Date), in each case, even if the Security is cancelled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Security to a Paying Agent on or after August 1, 2009. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by its check payable in such money; provided, that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium, if any and interest on Global Securities and all other Securities the Holders of which shall have provided written transfer instructions to the Company or any Paying Agent. It may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. Initially, the Trustee will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company, any Subsidiary of the Company, or any Affiliate of any of them may act as Paying Agent, Registrar or co - registrar. 4. Indenture; Limitations. The Company issued the Securities under an Indenture dated as of June 5, 2003 (the "Indenture"), between the Company and Wilmington Trust Company, as trustee (the "Trustee"). Capitalized terms used but not defined herein are used as defined in the Indenture unless otherwise indicated. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the TIA. The Securities are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Security and the terms of the Indenture, the terms of the Indenture shall control. The Securities are general obligations of the Company. The Indenture limits the original aggregate principal amount of the Securities to up to $90,000,000. The Securities are secured by the Lien created pursuant to the Indenture and the Security Documents, which Lien is second in priority to the Lien created pursuant to the Bank Credit Agreement. 5. Optional Redemption. The Company may redeem all of the Securities at any time or any portion of the Securities from time to time, on or after the Issue Date, at a redemption price equal to the applicable percentage of the then outstanding principal amount thereof set forth below, plus accrued interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), if redeemed during the periods set forth below: Year Redemption Price Issue Date to and 102.000% including the First Anniversary of Issue Date After the First 101.000% Anniversary of Issue Date to and including the Second Anniversary of Issue Date and after the second anniversary of the Issue Date, at 100% of the principal amount, plus accrued interest to the Redemption Date. 6. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder to be redeemed at his last address as it appears in the Security Register. Securities in denominations larger than $500 may be redeemed in part. On and after the Redemption Date, interest ceases to accrue on Securities or portions of Securities called for redemption, unless the Company defaults in the payment of the Redemption Price. 7. Denominations; Transfer; Exchange. The Securities are in registered form without coupons in denominations of $500 in principal amount and multiples of $1 in excess thereof. A Holder may register the transfer or exchange of Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. 8. Persons Deemed Owners. A Holder may be treated as the owner of a Security for all purposes, subject to the provisions of the Indenture relating to record dates for payment. 9. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 10. Discharge Prior to Maturity. If the Company deposits with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of the Securities and interest thereon (a) to redemption or maturity, the Company will be discharged from the Indenture and the Securities, except, in certain circumstances, for certain sections thereof, and (b) to the Stated Maturity of such principal and interest, the Company will be discharged from certain covenants set forth in the Indenture. 11. Amendment; Supplement; Waiver. Subject to certain exceptions set forth in the Indenture, the Indenture, the Securities and the Security Documents may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Securities then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of a majority in principal amount of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, provide for uncertificated Securities in addition to or in place of certificated Securities and make any change that would provide any additional rights or benefits to Holders or that does not adversely affect the rights of any Holder. 12. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries, among other things, to pay dividends, create liens, sell assets, engage in transactions with Affiliates or incur Indebtedness. At the end of each fiscal quarter, the Company must report to the Trustee on compliance with such limitations. 13. Successor Corporations. When a successor person or other entity assumes all the obligations of its predecessor under the Securities, the Indenture and the Security Documents, the predecessor person will be released from those obligations. 14. Defaults and Remedies. An Event of Default is any event defined as an Event of Default in the Indenture. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable as provided in the Indenture. If a bankruptcy or insolvency default with respect to the Company occurs and is continuing, the Securities automatically become due and payable. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of at least a majority in principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. 15. Trustee Dealings with Company. The Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. 16. No Recourse Against Others. No stockholder, director, officer, employee or incorporator as such, past, present or future, of the Company or any successor corporation shall have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 17. Authentication. This Security shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Security. 18. Obligation of Company Only. The Holder of this Security acknowledges, by acceptance hereof, that this Security is solely an obligation of the Company and that the Indebtedness under the Bank Credit Agreement constitutes obligations of one or more of the Company's subsidiaries. 19. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to Nutritional Sourcing Corporation, 1300 N.W. 22nd Street, Pompano Beach, Florida 33069, Attention: Chief Financial Officer. ASSIGNMENT I or we assign and transfer this Security to: Please insert social security or other identifying number of assignee ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ Print or type name, address and zip code of assignee and irrevocably appoint _______________________________, as agent, to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated:_____________ Signed:____________________________________________________ (Sign exactly as name appears on the other side of the Security) Date:______________ _________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within - mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee*: Dated: NOTICE: To be executed by an executive officer _______________________________ * Signature must be guaranteed by an "eligible guarantor institution" within the meaning of Rule 17Ad - 15 under the Securities Exchange Act of 1934, as amended, if this Security is to be delivered other than to, and in the name of, the registered holder. OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 3.09 or 3.11 of the Indenture, check the Box: [ ]. If you wish to have a portion of this Security purchased by the Company pursuant to Section 3.09 or 3.11 of the Indenture, state the amount (in principal amount) which must be an integral multiple of $500 or a multiple of $1 in excess thereof: $_______________________________ Date: ____________ Your Signature:_________________ (Sign exactly as your name appears on the other side of this Security) *Signature Guarantee:______________________________________ _______________________________ * Signature must be guaranteed by an "eligible guarantor institution" within the meaning of Rule 17Ad - 15 under the Securities Exchange Act of 1934, as amended, if this Security is to be delivered other than to, and in the name of, the registered holder. EX-4 4 a10kex47.txt EXHIBIT 4.7 EXECUTION COPY **************************************************************************** NUTRITIONAL SOURCING CORPORATION, as Issuer and WILMINGTON TRUST COMPANY, as Trustee __________________ Security Pledge and Intercreditor Agreement Dated as of June 5, 2003 __________________ 10.125% Senior Secured Notes due 2009 **************************************************************************** TABLE OF CONTENTS Page Section 1. Definitions . . . . . . . . . . . . . . .. . . . . . . . . 1 Section 2. Representations and Warranties . . . . . . . . . . . . . . . 3 Section 3. Security Interest. . . . . . . . . . . . . . . . . . . . . . 4 3.01 Grant of Security Interest.. . . . . . . . . . . . . . . . . . 4 3.02 Dividends on Collateral Consisting of Capital Stock. . . . . . 5 Section 4. Subordination of Lien.. . . . . . . . . . . . . . . . . . . . 5 4.01 Subordination Generally.. . . . . . . . . . . . . . . . . . . . 5 4.02 Certain Enforcement Actions.. . . . . . . . . . . . . . . . . . 6 4.03. Certain Matters Pertaining to Insolvency Proceedings.. . . . . 6 4.04 Certain Actions With Respect to Lien Priorities.. . . . . . . . 7 4.05 Perfection of Security Interests. . . . . . . . . . . . . . . . 9 4.06 Control of Dispositions of Collateral.. . . . . . . . . . . . . 9 Section 5. Declaration of Trust; Other Provisions Concerning the Collateral.10 5.01 Declaration and Acceptance of Trust. . . . . . . . . . . . . . . 10 5.02 Right to Make Advances.. . . . . . . . . . . . . . . . . . . . . 10 5.03 Release of Collateral . .. . . . . . . . . . . . . . . . . . . . 10 5.04 Purchaser Protected . .. . . . . . . . . . . . . . . . . . . . . 12 5.05 Powers Exercisable by Receiver or Trustee . .. . . . . . . . . . 12 5.06 Determinations Relating to Collateral . . . . . . . . . . . . . 12 Section 6. Further Assurances, Etc . . . . . . . . . . . . . . . . . . . . 12 6.01 Delivery and Other Perfection . . . . . . . . . . . . . . . . . 12 6.02 Certain Provisions Relating to Collateral . . . . . . . . . . . 13 Section 7. Trust Moneys . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.01. Trust Moneys . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.02 Withdrawal of Certain Trust Moneys . . . . . . . . . . . . . . . 15 7.03 Application of Trust Moneys upon Event of Default . . . . . . . 15 Section 8. Remedies, Etc . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.01 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . 15 8.02 Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8.03 Removals, Etc . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.04 Private Sale . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.05 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 9. Bank Credit Agreement Reliance, Modifications, Etc . . . . . . . 17 9.01. Notice of Acceptance, Etc . . . . . . . . . . . . . . . . . . . 17 9.02. Modifications to Documents . . . . . . . . . . . . . . . . . . 17 9.03. Liability of Banks . . . . . . . . . . . . . . . . . . . . . . 18 9.04. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 18 Section 10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 18 10.01 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 10.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 10.03 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 10.04 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 19 10.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 19 10.06 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.07 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.08 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.09 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.10 Information as to Bank Credit Agreement . . . . . . . . . . . . 20 10.11 No Limitation Upon Indenture . . . . . . . . . . . . . . . . . . 20 SECURITY PLEDGE AND INTERCREDITOR AGREEMENT SECURITY PLEDGE AND INTERCREDITOR AGREEMENT dated as of June 5, 2003, between NUTRITIONAL SOURCING CORPORATION, a Delaware corporation (including any successor thereto, the "Company,"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Trustee (the "Trustee"). Pursuant to an Indenture dated as of the date hereof (as the same may be modified and supplemented and in effect from time to time, the "Indenture") between the Company and the Trustee, the Company has authorized the issuance of up to $90,000,000 principal amount of its 10.125% Senior Secured Notes due 2009 issuable as provided in the Indenture on the date hereof (such 10.125% Senior Secured Notes being herein collectively called the "Securities"). To induce the holders of the Securities to accept the Securities upon their issuance under the Indenture, the Company has agreed to pledge and grant a security interest in the Collateral (as hereinafter defined) as security for the Secured Obligations (as so defined), which pledge and grant shall be junior in priority to any pledge and security interest in the Collateral granted by the Company as collateral security for its obligations under the "Bank Credit Agreement" referred to in the Indenture. Accordingly, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. Terms used but not defined herein have the respective meanings assigned to such terms in the Indenture. As provided in Section 1.03(viii) of the Indenture, the word "include", "includes" and "including" shall mean "include, without limitation", "includes, without limitation" and "including, without limitation", respectively. In addition, as used herein: "Bank Credit Agreement Obligations" means all obligations of the Company and its Subsidiaries to the Banks (including any agent or representative acting on their behalf) under the Bank Credit Agreement, whether for payment of principal, interest, fees, expenses, indemnification or any other obligation at any time payable by the Company or any of its Subsidiaries thereunder. "Bank Credit Agreement Payment Date" means the date on which (a) all of the Bank Credit Agreement Obligations shall have been finally and indefeasibly paid in full, all commitments to extend credit thereunder shall have been terminated and all letters of credit or similar instruments issued thereunder shall have expired or been terminated (or cash collateralized as provided in clause (b) below), and (b) the Company and its Subsidiaries shall have furnished the Banks (or an agent or representative on their behalf) with cash as collateral security in such amounts as the Banks shall have determined are reasonably necessary to secure the Banks from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Bank Credit Agreement Obligations, including issued and outstanding letters of credit and checks or other payments provisionally credited to the Bank Credit Agreement Obligations and as to which the Banks have not yet received final and indefeasible payment. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as amended from time to time or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect and all rules and regulations promulgated thereunder. "Collateral" shall have the meaning ascribed thereto in Section 3.01 hereof. "Equity Collateral" shall have the meaning ascribed thereto in Section 3.01(c) hereof. "Insolvency Proceeding" means any proceeding for the purposes of dissolution, winding up, liquidation, arrangement or reorganization of any Person, whether in bankruptcy, insolvency, arrangement, reorganization or receivership proceedings, or upon an assignment for the benefit of creditors or any other marshaling of the assets and liabilities of such Person. "Intercompany Notes" means the promissory notes payable by Subsidiaries of the Company to the Company referred to in Annex 1 hereto and any replacement notes or other similar notes payable by Subsidiaries of the Company to the Company from time to time, which promissory notes are subordinated, inter alia, to the Bank Credit Agreement Obligations and the claims of such Subsidiaries to trade creditors. "Issuers" means any Subsidiaries of the Company from time to time in which the Company shall hold any capital stock or other ownership interest, including the respective corporations and limited liability companies identified on Annex 1 hereto under the caption "Issuer". "Pledged Equity" shall have the meaning ascribed thereto in Section 3.01(a) hereof. "Possessory Collateral" means the Intercompany Notes and the certificates evidencing the Pledged Equity, and any other Collateral in which a Lien may be perfected through physical possession by the secured party or any agent therefor of an instrument or other document evidencing such Collateral. The term "Possessory Collateral" shall include the Mortgage Notes referred to on Annex 1 hereto pledged as collateral security for the obligations of Pueblo in respect of the Subordinated Intercompany Real Estate Note referred to in said Annex 1. "Secured Obligations" means, collectively, (i) all present and future obligations of the Company under the Indenture relating to the Securities, including in respect of the principal of, and interest (including interest accruing after the occurrence of any Default set forth in the Indenture, whether or not a claim for post-filing or post-petition interest is allowed or allowable under applicable law following the institution of a proceeding under bankruptcy, insolvency or similar laws) and premium, if any, on the Securities, fees, reimbursement and indemnification obligations (including fees and expenses of the Trustee payable under the Indenture and under the Security Documents) and all other amounts outstanding under the Indenture or the Securities (including all such amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code or the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code), and (ii) all present and future obligations of the Company under this Agreement or the other Security Documents, in each case as the same may be modified and supplemented and in effect from time to time (including fees and expenses of the Trustee payable under the Indenture and under the Security Documents). "Trust Moneys" means all cash or cash equivalents received by the Trustee in respect of the Collateral (a) in exchange for the release of Collateral from the Lien of this Agreement, (b) as proceeds of any sale or other disposition of all or any part of the Collateral by or on behalf of the Trustee or any collection, recovery, receipt, appropriation or other realization of or from all or any part of the Collateral pursuant to this Agreement or otherwise or (c) otherwise as security for the Secured Obligations. Section 2. Representations and Warranties. The Company represents and warrants to the Trustee that: (a) Organization, Etc. The Company is validly organized and existing and in good standing under the laws of the State of Delaware, is duly qualified to do business and is in good standing as a foreign entity in each jurisdiction where the nature of its business requires such qualification, and has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its obligations under this Agreement and to conduct business substantially as currently conducted by it. (b) Due Authorization, Non - Contravention, Etc. The execution, delivery and performance by the Company of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action and do not contravene any (i) contractual restriction binding on or affecting the Company, (ii) court decree or order binding on or affecting the Company or (iii) law or governmental regulation binding on or affecting the Company. (c) Governmental Approval, Regulation, Etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or other person (other than filings and recordings in respect of the Liens created hereunder and other than those that have been, or on the date of this Agreement will be, duly obtained or made and which are, or on the date of this Agreement will be, in full force and effect) is required for (i) the grant by the Company of the security interest granted hereby and the pledge by the Company of any Collateral pursuant hereto, or (ii) the due execution, delivery or performance by the Company of this Agreement. (d) Validity, Etc. This Agreement constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its terms, except in any case as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by principles of equity. (e) Ownership. The Company is the sole beneficial owner of the Collateral in which it purports to grant a security interest pursuant to Section 3.01 hereof and no lien exists or will exist upon such Collateral at any time (and no right or option to acquire the same exists in favor of any other Person), except for Permitted Liens under the Indenture and except for the pledge and security interest in favor of the Trustee created or provided for herein. (f) Pledged Equity. The Pledged Equity identified in Annex 1 hereto constitutes all of the issued and outstanding shares of capital stock or other ownership interest of any class or character of the Issuers beneficially owned by the Company on the date hereof and Annex 1 hereto correctly identifies, as at the date hereof, the respective Issuers of such Pledged Equity and (in the case of any corporate Issuer) the respective class and par value of the shares comprising such Pledged Equity, the percentage of the outstanding equity interests of such Issuer represented by the Pledged Equity and the respective number of shares represented by each such certificate. (g) Intercompany Notes. The Intercompany Notes identified in Annex 1 hereto constitute all intercompany promissory notes payable by any of the Subsidiaries of the Company to the Company. Section 3. Security Interest. 3.01 Grant of Security Interest. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations, the Company hereby pledges and grants to the Trustee, for the benefit of the Holders, as hereinafter provided, a security interest in all of the Company's right, title and interest in the following property, whether now owned by the Company or hereafter acquired and whether now existing or hereafter coming into existence (all being collectively referred to herein as the "Collateral"): (a) all shares of capital stock or other ownership interests held by the Company from time to time in any Subsidiary of the Company now or hereafter existing, including the Issuers identified in Annex 1, in each case together with the certificates (if any) evidencing the same, and all present and future rights of the Company to receive payment of money or other distribution of payments arising out of or in connection with such shares or ownership interests, now or hereafter owned by the Company (collectively, the "Pledged Equity"); (b) all shares, securities, moneys or property representing a dividend on any of the Pledged Equity, or representing a distribution or return of capital upon or in respect of the Pledged Equity, or resulting from a split-up, revision, reclassification or other like change of the Pledged Equity or otherwise received in exchange therefor, and any subscription warrants, rights or options issued to the holders of, or otherwise in respect of, the Pledged Equity; (c) without limiting the general applicability of Section 3.01(a), in the event of any consolidation or merger in which any Issuer of any Pledged Equity is not the surviving entity, all ownership interests held by the Company of any class or character in the successor entity formed by or resulting from such consolidation or merger (the Pledged Equity, together with all other certificates, shares, securities, properties or moneys as may from time to time be pledged hereunder pursuant to clause (a) or (b) above and this clause (c) being herein collectively called the "Equity Collateral"); (d) the Intercompany Notes, and all instruments, files, records, and documents covering or relating to the Intercompany Notes, and all payments of principal of or interest thereon; and (e) all proceeds of and to any of the property described in the preceding clauses of this Section 3 (including all Trust Moneys) and, to the extent related to any property described in said clauses or such proceeds, all books and other papers in the possession or under the control of the Company, IT BEING UNDERSTOOD, that the Liens granted by the Company in favor of the Trustee provided for above shall, in the manner and to the extent provided in Section 4 hereof, be junior and subordinate to the Liens granted or to be granted by the Company in favor of the Banks (or an agent or representative on their behalf) pursuant to the Bank Credit Agreement. 3.02 Dividends on Collateral Consisting of Capital Stock. In the event that a Default under the Indenture has occurred and is then continuing, any dividend or distribution with respect to the Collateral consisting of Capital Stock pledged hereunder shall, except as and to the extent paid to the holders of the Bank Credit Agreement Obligations for application to the Bank Credit Agreement Obligations, be paid directly to the Trustee to be held by the Trustee in accordance with and subject to the provisions of Section 4 of this Agreement. Section 4. Subordination of Lien. 4.01 Subordination Generally. Notwithstanding anything else in this Agreement or in the Indenture to the contrary, the Trustee, on behalf of itself and the Holders, hereby agrees that, regardless of the relative times of attachment or perfection thereof or the order of filing of financing statements or other documents or any provision of the Uniform Commercial Code or any other applicable law to the contrary, (a) the Liens granted in favor of the Trustee pursuant to this Agreement shall in all respects be junior and subordinate to the Liens granted or to be granted to the Banks (or an agent or representative on their behalf) as security for the Bank Credit Agreement Obligations (without regard to whether there shall be a Lien on any such assets securing Bank Credit Agreement Obligations or whether any Lien shall be perfected or avoidable) and (b) except as provided in clause (y) or (z) to the proviso to Section 4.02(a), all of the rights and remedies of the Trustee hereunder are hereby expressly made, and at all times will be, subject and subordinate in all respects to any Liens now existing or that may in the future be created as security for the Bank Credit Agreement Obligations. The Trustee further agrees, on behalf of itself and the Holders, that it shall not (and hereby waives any right to) take any action to contest or challenge the validity, priority, enforceability or perfection of the Liens of the Banks (or of any agent or representative acting on their behalf) on the Collateral. 4.02 Certain Enforcement Actions. Prior to the Bank Credit Agreement Payment Date, the Trustee will not, without the prior written consent of the Banks (or of an agent or representative on their behalf), (a) commence any action, whether judicial or otherwise, for the enforcement of the Trustee's rights or remedies as a secured creditor with respect to the Collateral or any Liens on the Collateral, including (i) commencement of any execution, levy, receivership or foreclosure proceedings against, or any other sale of, collection on, or disposition of, any Collateral or in respect of any Liens on the Collateral or any proceeds thereof, or any other exercise of rights or remedies with respect to the Collateral or in respect of any Liens on the Collateral (including any collection proceedings with respect to any of the Collateral), (ii) notifying any obligor on any of the Intercompany Notes, or any other third-party account debtors of the Company, to make payment directly to the Trustee or to any of its agents or other Persons acting on its behalf, and (iii) following the commencement of an Insolvency Proceeding against the Company, exercising any rights afforded to secured creditors in a case under the Bankruptcy Code with respect to the Collateral or any Liens on the Collateral or taking any other action under the Bankruptcy Code that directly relates to or directly affects the Collateral or any Liens on the Collateral, provided that (x) following the occurrence and during the continuance of an Insolvency Proceeding, nothing herein shall be deemed to prevent the taking of any action by the Trustee to the extent that the same relates to or affects all or substantially all of the property of the bankruptcy estate of the Company, (y) the Trustee and the Holders may make such demands and file such claims as may be necessary to prevent the waiver or bar under applicable statutes of limitations or other statutes, court orders or rules of procedure of any claims held by them and (z) the foregoing shall not prevent the Trustee or the Holders from declaring an Event of Default or exercising their rights to accelerate the Indebtedness pursuant to Article V of the Indenture, or (b) seek to exercise any other rights or remedies of any type or nature with respect to any of the Collateral or any Lien on the Collateral. After the Bank Credit Agreement Payment Date, the Trustee shall not be restricted by the provisions of this Agreement from exercising any and all rights it may have as a creditor under applicable law, including the rights to exercise all rights and remedies in foreclosure or otherwise with respect to any of the Collateral. 4.03. Certain Matters Pertaining to Insolvency Proceedings. In addition to, and without limiting the generality of Section 4.02 hereof, the Trustee, on behalf of itself and the Holders agrees that in the event of an Insolvency Proceeding involving the Company that occurs prior to the Bank Credit Agreement Payment Date: (a) the Trustee and the Holders will not (i) pursue any remedies with respect to the Collateral or any Liens on the Collateral in an Insolvency Proceeding, including seeking a relief from stay that is not supported by the Banks (or an agent or representative on their behalf) or (ii) oppose, hinder or interfere with any sale under Section 363 of the Bankruptcy Code of all or any portion of the Collateral which has the support of the Banks (or any such agent or representative), provided that nothing in this Section 4.03(a) will (x) affect the exercise by the Trustee and the Holders of their right to vote on a reorganization plan or to determine how they are to vote or (y) prevent the Trustee or the Holders from exercising any rights to which they are entitled by virtue of the TIA; (b) neither the Trustee nor any Holder will cause the Company or a bankruptcy trustee therefor to seek to surcharge the Collateral of the Banks, or to finance any surcharge action (other than in respect of fees and expenses of the Trustee on a subordinated basis in accordance with this Agreement including this Section 4); (c) the Trustee, on behalf of itself and the Holders, waives any actions, claims or rights against the Banks (or an agent or representative on their behalf) arising out of the election of the Banks (or any such agent or representative) of the application of Section 1111(b)(2) of the Bankruptcy Code, or which might arise from any matter approved by the Bankruptcy Court, including the use of cash collateral, debtor-in-possession financing arrangements, granting security interests, or receipt and application of payments from the debtor's estate; and (d) neither the Trustee nor any Holder will support any motion for an order approving debtor-in-possession financing or the use of cash collateral if the order would include provisions that would (i) convert prepetition unsecured debt into secured debt or an administrative expense or (ii) elevate a prepetition lien that is equal to or junior to the Liens of the Banks to a position which would be senior to the Liens of the Banks; neither the Trustee nor any Holder shall object to the provision by the Banks (or an agent or representative on their behalf) of debtor-in-possession financing on the grounds that their interests are not adequately protected under the terms of the debtor-in-possession financing arrangement, provided that, nothing in this sentence shall preclude the Trustee or any Holder from objecting to such debtor-in-possession financing on any ground on which an unsecured creditor could object. 4.04 Certain Actions With Respect to Lien Priorities. (a) Turnover by Trustee of Collateral. All payments or distributions of or with respect to the Collateral that are received by the Trustee hereunder at any time prior to the Bank Credit Agreement Payment Date shall be segregated from other funds and property held by the Trustee in trust for the benefit of the Banks, and the Trustee shall forthwith pay over to the Banks (or an agent or representative on their behalf) such proceeds in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) or held as Collateral (in the case of non - cash property or securities) in accordance with the provisions hereof and of the Bank Credit Agreement. The Trustee, on behalf of itself and the Holders, hereby irrevocably and unconditionally waives and relinquishes all statutory, contractual, common law, equitable and all other claims against the Company and any Collateral for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid or payable to the Banks by the Trustee hereunder and further irrevocably and unconditionally waives and relinquishes any and all other benefits which the Trustee might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by or collected upon or realized from the Collateral, prior to the Bank Credit Agreement Payment Date. (b) Turnover by Banks upon Payment in Full. Effective upon the first day after the Bank Credit Agreement Payment Date, except under the circumstances described in Section 4.04(c), the Company will cause the Banks (or an agent or representative on their behalf) to promptly execute and deliver all such instruments and documents, and take all such actions as shall be necessary or that the Trustee may reasonably request, to evidence or confirm the termination of the subordination of the Lien created under this Agreement as provided in this Section 4 and, in that connection, to cause the Banks (or an agent or representative on their behalf) to deliver to the Trustee without recourse and without representation or warranty of any kind, all Collateral, all proceeds thereof and all certificates, instruments or other documents evidencing or representing any of the Collateral, and any moneys constituting any of the Collateral, at the time held by the Banks (or any such agent or representative) pursuant to the Bank Credit Agreement; provided that, the Banks shall not be required to deliver or pay over any of the foregoing, execute any instruments or documents or take any other action referred to in this Section 4.04(b) to the extent that such action would contravene any law, order or other legal requirement, and in the event of a controversy or dispute, the Banks (or any such agent or representative) may interplead any moneys or other property in any court of competent jurisdiction. (c) Reinstatement. If, after receipt of any payment of, or receipt of any proceeds of Collateral applied to the payment of, any of the Bank Credit Agreement Obligations (including upon the insolvency, bankruptcy or reorganization of the Company), the Banks are required to surrender or return such payment or proceeds to any Person for any reason (including upon any such insolvency, bankruptcy or reorganization), then the Bank Credit Agreement Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by the Banks. In any such event, the Trustee shall upon demand therefor by the Banks (or an agent or representative on their behalf) deliver to the Banks (or such agent or representative) without recourse and without representation or warranty of any kind, all Collateral, all proceeds thereof and all certificates, instruments or other documents evidencing or representing any of the Collateral and all monies constituting any of the Collateral then in the possession, custody or control of the Trustee, together with all endorsements and instruments of transfer reasonably requested by the Banks (or any such agent or representative), provided that, the Trustee shall not be required to deliver or pay over any of the foregoing, execute any instruments or documents or take any other action referred to in this Section 4.04(c) to the extent that such action would contravene any law, order or other legal requirement, and in the event of a controversy or dispute, the Trustee (or any such agent or representative) may interplead any moneys or other property in any court of competent jurisdiction. This Section 4.04(c) shall remain effective notwithstanding any contrary action which may be taken by the Banks (or an agent or representative on their behalf) in reliance upon such payment or proceeds and shall survive the termination of this Agreement. 4.05 Perfection of Security Interests. For the limited purpose of perfecting the security interests of the Trustee in the Possessory Collateral and Trust Moneys, the Company will (a) in the case of Possessory Collateral, cause the Banks (or an agent or representative on their behalf) to acknowledge to the Trustee in writing that, subject to the provisions of Sections 4.01 through 4.06, and 9.01 through 9.03, of this Agreement, the Banks (or such agent or representative) hold possession of such Possessory Collateral for the benefit of the Trustee and the Holders, and (b) in the case of Trust Moneys, cause the Banks (or an agent or representative on their behalf) to enter into such agreements as shall enable the Trustee to have "control" over such Trust Moneys (within the meaning of the applicable provisions of the Uniform Commercial Code), but with such control being subject and subordinate to the control and rights of the Banks (or such agent or representative) in such Trust Moneys under the Bank Credit Agreement. In that connection, it is understood and agreed that (i) none of the Banks (nor any agent or representative on their behalf) makes any representation as to the value of the Collateral or any part thereof, or as to the security afforded by this Agreement or as to the validity, execution, enforceability, legality or sufficiency of this Agreement or of the Secured Obligations, and none of the Banks (nor any agent or representative on their behalf) shall incur any liability or responsibility in respect of any such matters and (ii) none of the Banks (nor any agent or representative on their behalf) shall be required to ascertain or inquire as to the performance by the Company of any of the covenants or agreements contained herein or in the Indenture. 4.06 Control of Dispositions of Collateral. (a) Dispositions Free of Liens. The Trustee, on behalf of itself and the Holders, hereby agrees that any collection, sale or other disposition of Collateral (whether under the applicable Uniform Commercial Code or otherwise) by the Banks (or an agent or representative on their behalf) shall be free and clear of any Liens of the Trustee in such Collateral (even if the Banks shall become the owner of such Collateral); provided that, the Trustee shall retain a Lien (having the same priority as the Lien it previously had on the item of Collateral that was collected, sold or otherwise disposed of) on the proceeds of such collection, sale or other disposition (except (i) to the extent such proceeds are applied to the Bank Credit Agreement Obligations or (ii) the Banks shall apply Bank Credit Agreement Obligations to the purchase of such Collateral, whether through offset, bidding in the same in an auction or otherwise). (b) Release by Trustee to Facilitate Disposition. To the extent requested by the Banks (or an agent or representative on their behalf), the Trustee will promptly execute and deliver and otherwise cooperate in providing any necessary or appropriate releases to permit a collection, sale or other disposition of Collateral, as provided in Section 4.06(a), by the Banks (or any such agent or representative) therein free and clear of the Liens of the Trustee hereunder. (c) Waiver of Marshalling. The Trustee, on behalf of itself and the Holders, hereby waives any right to require the Banks (or an agent or representative on their behalf) to marshal assets in its favor or to proceed against any Collateral provided by the Company, or any other property, assets or collateral provided by the Company or any other Person as security for the Bank Credit Agreement Obligations, and agrees that the Banks (or such agent or representative) may proceed against the Company, any Collateral or any such other property, assets or other collateral provided by the Company or by any other Person, in such order and at such times as the Banks (or any such agent or representative) shall determine in their sole and absolute discretion. The Trustee, on behalf of itself and the Holders, hereby waives any claim that any of them may have against the Banks (or an agent or representative on their behalf) that any sale or other disposition of any Collateral was not conducted in a commercially reasonable manner in accordance with applicable law. Section 5. Declaration of Trust; Other Provisions Concerning the Collateral. 5.01 Declaration and Acceptance of Trust. The Trustee hereby declares, and the Company agrees, that the Trustee holds a Lien on the Collateral as secured party in trust under this Agreement for the benefit of the Holders, with no preference, priority or distinction of any Holder over any other Holder by reason of difference in time of issuance, sale or otherwise. The Company, by executing and delivering this Agreement, and each Holder, by acceptance of its Securities and the benefits of this Agreement, (i) grants to the Trustee all rights and powers necessary for the Trustee to perform its obligations hereunder and under applicable law, (ii) confirms that the Trustee shall have the authority, subject to the terms of this Agreement and under applicable law, to enforce any remedies under or with respect to this Agreement, to give or withhold any consent or approval relating to any Collateral, the Liens thereon or this Agreement or any obligations with respect thereto, and otherwise to take any action on behalf of the Holders contemplated in this Agreement or under applicable law (including receiving opinions and exercising remedies) and (iii) agrees that, except as provided in this Agreement, such Holder shall not take any action to enforce any of such remedies or give any such consents or approvals relating to any Collateral, the Liens thereon, this Agreement or under applicable law. 5.02 Right to Make Advances. If an advance of funds shall at any time be required for the preservation or maintenance of any Collateral, then, upon three Business Days' notice to the Company, the Trustee shall be entitled to make such advance (it being understood that the Trustee shall not be obligated to make any such advance). Each such advance shall be reimbursed, with interest from the date such advance was made (at the rate then borne by the Securities), by the Company, upon demand by the Trustee, and if the Company fails to comply with any such demand, out of Trust Moneys. Any funds advanced by the Trustee pursuant to this Section 5.02 for the preservation and maintenance of Collateral shall be Secured Obligations hereunder. 5.03 Release of Collateral. (a) Limitations upon Releases by Trustee. Except as otherwise permitted or required by Section 4 hereof, the Trustee shall not release Collateral from the Lien of this Agreement unless such release is in accordance with the provisions of this Section 5.03. To the extent applicable (following qualification of the Indenture under the TIA), the Company shall cause 314(d) of the TIA relating to the release of property or Liens to be complied with. (b) Full Release of Collateral. The Company shall be entitled to obtain a full release of all of the Collateral (except for Collateral consisting of funds deposited or segregated in satisfaction of the requirements of Section 2.05 and Article VII of the Indenture as to which Collateral the Trustee may continue to possess and shall retain its Lien for such duration and as required by the Indenture) from the Lien of this Agreement upon compliance with all of the conditions precedent set forth in (i) Section 7.01 or 7.02 of the Indenture for complete satisfaction and discharge of all of the Company's obligations under the Indenture and (ii) Section 7.03 of the Indenture for creation of a defeasance trust with respect to the Company's obligations under the Indenture. Upon delivery by the Company to the Trustee of an Officers' Certificate and an Opinion of Counsel, each to the effect that all of the applicable conditions precedent and other requirements described above have been complied with, the Trustee shall take all necessary action, at the request and expense of the Company, to release and reconvey to the Company all of the Collateral (except for Collateral consisting of funds deposited or segregated in satisfaction of the requirements of Section 2.05 and Article VII of the Indenture as to which Collateral the Trustee may continue to possess and shall retain its Lien for such duration and as required by the Indenture), and the Trustee shall deliver any such Collateral in its possession (except for Collateral consisting of funds deposited or segregated in satisfaction of the requirements of Section 2.05 and Article VII of the Indenture as to which Collateral the Trustee may continue to possess and shall retain its Lien for such duration and as required by the Indenture) to the Company (and, if such conditions are satisfied prior to the Bank Credit Agreement Payment Date, shall confirm to the Banks, or an agent or representative on their behalf, such release and reconveyance). (c) Release Upon Asset Sale. So long as no Default or Event of Default has occurred and is continuing, upon any Asset Sale in compliance with the provisions of the Indenture (including the provisions of Section 3.09 thereof), Collateral which is the subject of such a sale or other disposition shall be released from the Lien created by this Agreement in accordance with the provisions of the Indenture, this Agreement and the TIA. In that connection, the Trustee shall execute, deliver or acknowledge any necessary or proper instruments of termination, satisfaction or release (prepared by the Company) reasonably required to effect the release of such Collateral upon (i) delivery by the Company to the Trustee of an Officers' Certificate certifying that all conditions precedent under the Indenture to such Asset Sale have been met and setting forth the aggregate amount of the Net Cash Proceeds to be received upon such Asset Sale, (ii) receipt by the Trustee of such Net Cash Proceeds to be held as Trust Moneys hereunder (or, if such Asset Sale shall occur prior to the Bank Credit Agreement Payment Date, receipt of the same by the Banks or an agent or representative on their behalf) and (iii) the delivery by the Company to the Trustee of an Officers' Certificate and Opinion of Counsel stating that all action has been effected as shall be necessary to create, perfect and make enforceable a Lien under this Agreement on any other consideration received in connection with such Asset Sale. The Trustee shall have no duty or obligation to verify the facts or statements set forth in any Officers' Certificate to be provided to the Trustee in accordance with this Section 5.03(c). To the extent applicable, the Company shall cause Section 314(d) of the TIA relating to the release of Collateral from the Lien of this Agreement to be complied with. Any certificate or opinion required by Section 314(d) of the TIA may be made by any Officer of the Company, provided that, to the extent required by Section 314(d) of the TIA, any such certificate or opinion shall be made by an "independent appraiser" or other "expert" (as such terms are used in Section 314(d) of the Trust Indenture Act). 5.04 Purchaser Protected. In no event shall any purchaser in good faith of any Collateral purported to be released from the Lien created hereby be bound to ascertain the authority of the Trustee to execute the release or to inquire as to the satisfaction of any conditions required by the provisions hereof for the exercise of such authority or to see to the application of any consideration given by such purchaser or other transferee; nor shall any purchaser or other transferee of any Collateral permitted by this Section 5 to be sold be under any obligation to ascertain or inquire into the authority of the Company to make any such sale or other transfer. 5.05 Powers Exercisable by Receiver or Trustee. If the Collateral shall be in the possession of a receiver or trustee, lawfully appointed, the powers conferred in this Section 5 upon the Company with respect to the release, sale or other disposition of Collateral may be exercised by such receiver or trustee, and an instrument signed by such receiver or trustee shall be deemed the equivalent of any similar instrument of the Company or of any officer or officers thereof required by the provisions of this Section 5. 5.06 Determinations Relating to Collateral. In the event (i) the Trustee shall receive any written request from the Company under this Agreement for consent or approval with respect to any matter or thing relating to the Collateral or the Company's obligations with respect thereto, (ii) there shall be due to or from the Trustee under the provisions of this Agreement any performance or the delivery of any instrument or (iii) the Trustee shall become aware of any nonperformance by the Company of any covenant or any breach of any representation or warranty of the Company set forth in this Agreement, then, in each such event, the Trustee shall be entitled, at the expense of the Company, to hire experts, consultants, agents and attorneys on a reasonable basis to advise the Trustee on the manner in which the Trustee should respond to such request or render any requested performance or response to such nonperformance or breach. The Trustee shall be fully protected against any and all liability in the taking of any action recommended or approved in writing by any such expert, consultant, agent or attorney. Section 6. Further Assurances, Etc. In furtherance of the grant of the pledge and security interest pursuant to Section 3 hereof, the Company hereby agrees with the Trustee as follows: 6.01 Delivery and Other Perfection. The Company shall at its own expense: (a) prior to or concurrently with the execution and delivery of this Agreement, (i) file such financing statements and other documents in such offices as shall be necessary or desirable (or as the Trustee may reasonably request) to perfect any security interests granted or purported to be granted by this Agreement, (ii) deliver to the Trustee all certificates identified in Annex 1 hereto evidencing the Pledged Equity, accompanied by undated stock or other powers duly executed in blank, and all Intercompany Notes and (iii) deliver to the Trustee an Officers' Certificate and Opinion of Counsel to the effect that all actions necessary to perfect the Lien of the Trustee in the Collateral in existence on the date of execution and delivery of this Agreement have been duly effected in accordance with the provisions of the Uniform Commercial Code and applicable law; (b) if any other shares, securities, moneys or property pledged by the Company under Section 3 hereof are received by the Company, forthwith either (x) transfer and deliver to the Trustee such shares or securities so received by the Company (together with the certificates for any such shares and securities duly endorsed in blank or accompanied by undated stock or other powers duly executed in blank), all of which thereafter shall be held by the Trustee, pursuant to the terms of this Agreement, as part of the Collateral or (y) take such other action as shall be necessary or appropriate to duly perfect the Lien created hereunder in such shares, securities, moneys or property; (c) promptly give, execute, deliver, file and/or record any financing statement, notice, instrument, document, agreement or other papers that shall be necessary or desirable to create, preserve, perfect and validate the pledge and security interest granted pursuant hereto and to enable the Trustee to exercise and enforce its rights hereunder with respect to such pledge and security interest; and (d) keep full and accurate books and records relating to the Collateral, and stamp or otherwise mark such books and records in such manner as shall be necessary or appropriate in order to reflect the security interests granted by this Agreement and furnish to the Trustee, from time to time at the Trustee's request copies of such books and records, provided that, notwithstanding the foregoing, at all times prior to the Bank Credit Agreement Payment Date, the Company may comply with the requirements of the foregoing clauses (a)(ii), (b), (c) (insofar as relating to the delivery of any certificates, instruments or other documents evidencing or representing any of the Collateral, and any moneys constituting any of the Collateral) and (d) with respect to delivery of any certificates, shares, securities, moneys or property specified above, to the extent that the Company shall have caused the Banks (or an agent or representative on their behalf) to comply with the requirements of Section 4.05 hereof with respect to such certificates, shares, securities, moneys and property. 6.02 Certain Provisions Relating to Collateral. (a) Maintenance of Full Pledge. The Company will cause the Pledged Equity to constitute at all times 100% of the total number of shares of each class of capital stock, or other ownership interests, of the Subsidiaries of the Company then beneficially owned by the Company. The Company shall deliver the opinions required by Section 314(b) of the TIA as and when provided for thereunder. (b) Voting and Other Rights. So long as no Event of Default shall have occurred and be continuing, the Company shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement, the Indenture or the Securities, and the Trustee shall execute and deliver to the Company or cause to be executed and delivered to the Company all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Company may reasonably request for the purpose of enabling the Company to exercise the rights and powers that it is entitled to exercise pursuant to this Section 6.02(b). (c) Rights to Dividends, Etc.. Notwithstanding any provision of this Agreement or the Indenture to the contrary, unless and until an Event of Default has occurred and is continuing, the Company shall be entitled to receive and retain for its use any interest, dividends and other payments or distributions on the Collateral paid in cash (free and clear of any Lien created hereunder). Section 7. Trust Moneys. 7.01. Trust Moneys. The Trustee is authorized to establish the Collateral Account referred to in the Indenture. Trust Moneys shall be subject to a Lien in favor of the Trustee and shall be held by the Trustee for the benefit of the Holders as a part of the Collateral, provided that, notwithstanding the foregoing, at all times prior to the Bank Credit Agreement Payment Date, the Trustee shall not be entitled or required to hold such Trust Moneys so long as the Company shall have caused the Banks (or an agent or representative on their behalf) to comply with the requirements of Section 4.05 hereof with respect to such Trust Moneys. Prior to the Bank Credit Agreement Payment Date, the Trustee shall have no right to require any particular application, or to direct the application, of any Trust Moneys (except that, to the extent Trust Moneys constitute Net Cash Proceeds of an Asset Sale, the Company agrees that such Trust Moneys shall be applied as required under Section 3.09 of the Indenture). After the Bank Credit Agreement Payment Date, the Trustee shall apply Trust Moneys as follows: FIRST: to the payment of any amounts owing to the Trustee hereunder or under the Indenture that are sixty or more days past due, and to reimburse the Trustee and any Holder the amount of any advance made pursuant to Section 5.02 hereof (with interest thereon at the rate then borne by the Securities); and SECOND: so long as no Event of Default shall have occurred and be continuing, any remaining Trust Moneys (except for Trust Moneys consisting of funds deposited or segregated in satisfaction of the requirements of Section 2.05 and Article VII of the Indenture, as to which the Trustee may continue to possess and shall retain its Lien for such duration and as required by the Indenture) may be withdrawn by the Company and released from the Lien of this Agreement and shall be paid by the Trustee to the Company, provided that, to the extent such Trust Moneys constitute Net Cash Proceeds of an Asset Sale, such Trust Moneys may be withdrawn by the Company only against delivery of an Officers' Certificate to the Trustee to the effect that such Trust Moneys, upon withdrawal, are to be applied in accordance with the requirements of Section 3.09 of the Indenture. The provisions of Sections 7.03 shall govern the application of any Trust Moneys upon the occurrence of an Event of Default. 7.02 Withdrawal of Certain Trust Moneys. To the extent that any Trust Moneys consist of moneys received by the Trustee that result in the requirement pursuant to Section 3.09 of the Indenture to make an Asset Sale Offer and the Company has made such Asset Sale Offer in accordance with the Indenture which is not fully subscribed to by the Holders, the Trust Moneys remaining after completion of such Asset Sale Offer may be withdrawn by the Company and released from the Lien of this Agreement and shall be paid by the Trustee to the Company upon receipt by the Trustee of (i) an Officers' Certificate certifying that all conditions precedent and covenants provided for herein and in the Indenture relating to such release have been complied with and (ii) such other documentation, if any, as shall be required under 314(d) of the TIA. 7.03 Application of Trust Moneys upon Event of Default. Subject to Section 4 hereof, after the Bank Credit Agreement Payment Date, if an Event of Default under the Indenture has occurred and is continuing, and any of the Secured Obligations has been accelerated, then the Trustee shall, as soon as practicable, apply the Trust Moneys and other amounts or proceeds from the sale or other disposition of or realization upon any Lien on, the Collateral as follows: FIRST: to the payment of the costs and expenses of such sale, disposition or other realization, including reasonable out-of-pocket costs and expenses of the Trustee and the fees and expenses of its agents and counsel, and all expenses incurred and advances made by the Trustee or any Holder in connection therewith; SECOND: to the payment in full of the Secured Obligations, in each case equally and ratably in accordance with the respective amounts thereof then due and owing; and THIRD: after payment in full of the Secured Obligations, to the payment to the Company, or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 7.03, "proceeds" of the Collateral means cash, securities and other property realized in respect of, and distributions in kind of, the Collateral, including any thereof received under any reorganization, liquidation or adjustment of debt of the Company or any issuer of or obligor on any of the Collateral. Section 8. Remedies, Etc. 8.01 Event of Default. During the period during which an Event of Default shall have occurred and be continuing, but subject in all events to the provisions of Section 4 hereof: (a) the Trustee shall have, and shall be entitled to exercise, all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not the Uniform Commercial Code is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted, including the right, to the maximum extent permitted by law, to exercise all voting, consensual and other incidental powers of ownership pertaining to any Pledged Equity or other capital stock, ownership interests, securities, notes or other obligations constituting Collateral as if the Trustee were the sole and absolute owner thereof, including, pursuant to an irrevocable proxy granted to the Trustee, exercisable upon the Trustee's notification to the Company of its intention to exercise its voting power under this Section 8.01, to vote the Pledged Equity and such other Collateral (and the Company agrees to take all such action as may be appropriate to give effect to such right); (b) the Trustee in its discretion may, in its name or in the name of the Company or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; (c) the Trustee may, upon ten Business Days' (or such longer period as may be required under applicable law) prior written notice to the Company of the time and place, with respect to the Collateral or any part thereof that shall then be or shall thereafter come into the possession, custody or control of the Trustee or any of its agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Trustee deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required above or by applicable statute, including the Uniform Commercial Code, and cannot be waived), and the Trustee or any Holder or anyone else may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Company, any such demand, notice and right or equity being hereby expressly waived and released to the maximum extent permitted by applicable law. The Trustee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned; and (d) the Trustee may, without being required to give prior notice, withdraw or cause the withdrawal of any and all cash constituting Trust Moneys. The proceeds of each collection, sale or other disposition and any cash constituting Trust Moneys withdrawn under this Section 8.01 shall be applied in accordance with Section 7.03 hereof. 8.02 Deficiency. If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 8.01 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Company shall remain liable for any deficiency. 8.03 Removals, Etc. Without at least 10 days' prior written notice to the Trustee, the Company shall not (i) maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any place, other than at the address for notices specified in the Indenture, (ii) change its name, or the name under which it does business, from the name shown on the signature pages hereto or (iii) change its jurisdiction of organization. 8.04 Private Sale. Neither the Trustee or any Holder shall incur any liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to Section 8.01 hereof conducted in a commercially reasonable manner under the Uniform Commercial Code. 8.05 Termination. Upon the final and indefeasible payment in full of the principal of and interest and premium, if any, on the Securities, this Agreement shall terminate, and the Trustee shall forthwith cause to be assigned, transferred and delivered, against written receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Company. The Trustee shall also execute and deliver to the Company upon such termination or release of Collateral such Uniform Commercial Code termination statements and such other documentation and take such other actions as shall be reasonably requested by, and at the expense of, the Company to effect the termination and release of the Liens on the Collateral. Section 9. Bank Credit Agreement Reliance, Modifications, Etc. 9.01. Notice of Acceptance, Etc. All Bank Credit Agreement Obligations at any time made or incurred by any of the Banks under the Bank Credit Agreement shall be deemed to have been made or incurred in reliance upon this Agreement, and the Trustee, on behalf of itself and the Holders, hereby waives (i) notice of acceptance by the Banks of this Agreement, (ii) notice of the existence or creation or non- payment of all or any part of the Bank Credit Agreement Obligations and (iii) protest, demand for payment and notice of default. Nothing herein shall be deemed to supersede any obligation of the Company to provide any notice to the Trustee or the Holders under the Indenture. Nothing in this Agreement shall be construed to override any provision of the Bank Credit Agreement restricting or requiring any action on the part of the Company. 9.02. Modifications to Documents. The Trustee, on behalf of itself and the Holders, hereby agrees that, without affecting the obligations of the Company, the Trustee and the Holders hereunder, the Banks (or an agent or representative on their behalf) may, at any time and from time to time, in their sole discretion without the consent of or notice to the Trustee or any Holder, and without incurring any liability to the Trustee or any Holder or impairing or releasing the subordination provided for herein, amend, restate, supplement, terminate (in whole or in part) or otherwise modify the Bank Credit Agreement (including any guaranties and security documents thereunder) in any manner whatsoever, including to: (a) rescind in whole or in part any demand for payment of any Bank Credit Agreement Obligations made by the Banks (or an agent or representative on their behalf), or to continue any Bank Credit Agreement Obligations, (b) change the manner, place or terms of payment or extend the time of payment of or renew or alter, all or any of the Bank Credit Agreement Obligations or otherwise amend, restate, supplement, compromise or otherwise modify in any manner, or grant any waiver or release with respect to, all or any part of the Bank Credit Agreement Obligations or the Bank Credit Agreement, (c) retain or obtain a Lien on any property to secure any of the Bank Credit Agreement Obligations, and in that connection to enter into any additional agreements with the Company or any of its Subsidiaries, (d) to amend, or grant any waiver, compromise or release with respect to, or consent to any departure from, any guaranty or other obligations of any Person obligated in any manner under or in respect of the Bank Credit Agreement Obligations, (e) release its Lien on any property of the Company or any of its Subsidiaries, or sell, exchange, or surrender any such property at any time held as collateral security, (f) exercise or refrain from exercising any rights against the Company or any other Person, including to declare any of the Bank Credit Agreement Obligations to be due and payable, (g) retain or obtain the primary or secondary obligation of any other Person with respect to any of the Bank Credit Agreement Obligations, and (h) otherwise manage and supervise the Bank Credit Agreement Obligations as the Banks (or an agent or representative on their behalf) shall deem appropriate. 9.03. Liability of Banks. The Trustee, on behalf of itself and the Holders, agrees that no Bank (nor any agent or representative on their behalf) shall have any liability for any action taken or omitted to be taken by any of them with respect to any Collateral or any Lien thereon or any matter arising out of or in connection with this Agreement, except for their own gross negligence or willful misconduct. 9.04. Further Assurances. The Trustee agrees to execute and deliver such further documents and to do such other lawful acts and things as the Banks (or an agent or representative on their behalf) may reasonably request in order fully to effect the subordination provisions set forth in Section 4. Section 10. Miscellaneous. 10.01 No Waiver. No failure on the part of the Trustee to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Trustee of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 10.02 Notices. All notices, requests, demands and other communications provided for or permitted hereunder shall be in writing (including telex and telecopy communications) and shall be sent to the addresses and in the manner provided in Section 9.02 of the Indenture. 10.03 Expenses. Without limitation of any of the provisions of the Indenture, the Company agrees to reimburse the Trustee for all reasonable costs and expenses of the Trustee (including the reasonable fees and expenses of legal counsel) in connection with (i) any Event of Default and any enforcement or collection proceeding resulting therefrom, including all manner of participation in or other involvement with (w) any performance by the Trustee of any obligations of the Company in respect of the Collateral that the Company has failed or refused to perform, (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, and any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Trustee in respect thereof, by litigation or otherwise, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 10.03, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 3.01 hereof. In addition to the foregoing, the Company shall pay or reimburse the Trustee for all stamp, filing and transfer fees, taxes (other than income taxes in respect of the compensation received by the Trustee under the Indenture), and other similar imposts which may be payable or determined to be payable in respect of the execution, delivery, performance and enforcement of this Agreement or any Secured Obligation. Any amounts due by the Company under this Section 10.03 shall be in addition to (and not in limitation of) any amounts due to the Trustee or any Holders under the Indenture and the Securities. 10.04 Amendments, Etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Company and the Trustee (with the consent of the Holders to the extent required under Article VIII of the Indenture). 10.05 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Company, the Trustee and the Holders (provided, however, that the Company shall not assign or transfer its rights or obligations hereunder, except pursuant to a transaction permitted under Article IV of the Indenture, without the prior written consent of the Trustee). The subordination provisions contained in Section 4, and the provisions of Section 9, are for the benefit of the Banks (and any agent or representative on their behalf) and their respective successors and assigns, and may not be rescinded or cancelled or modified in any way, nor may any such provision be waived or changed without the express prior written consent thereto of the Banks. All subordination provisions contained herein may be enforced directly by the Banks against the Trustee, the Holders and the Company. The Trustee agrees, upon request of the Company, to execute and deliver in favor of the Banks a written confirmation that the Banks are entitled to the benefits of such provisions of this Agreement. Notwithstanding anything herein to the contrary, resignation or removal of the Trustee under the Indenture shall be effective to cause the resignation or removal of the Trustee (as applicable) for all purposes under and in connection with the Security Documents. 10.06 Captions. The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 10.07 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties hereto may execute this Agreement by signing any such counterpart. 10.08 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. 10.09 Severability. If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Trustee, the Holders and the Banks in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. 10.10 Information as to Bank Credit Agreement. The Company shall deliver or cause to be delivered to the Trustee from time to time upon the request of the Trustee, a list setting forth, for the Bank Credit Agreement, the aggregate principal amount outstanding thereunder and to the extent known to the Company, the names of the Banks (and any agent or representative acting on their behalf). The Company shall furnish to the Trustee within thirty (30) days after the date hereof a list setting forth the name and address of each party to whom notices must be sent under the Bank Credit Agreement, and the Company shall furnish promptly to the Trustee any changes or additions to such list. 10.11 No Limitation Upon Indenture. Nothing in this Agreement shall be deemed to alter, impair or limit the obligations of the Company, or the rights of the Trustee and the Holders, under the Indenture. Without limiting the generality of the foregoing or any other provision of this Agreement or the Indenture, the provisions of Section 6.01 of the Indenture shall be equally applicable to the rights and obligations of the Trustee under this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Security Pledge and Intercreditor Agreement to be duly executed and delivered as of the day and year first above written. NUTRITIONAL SOURCING CORPORATION By _____________________________________ Name: Title: WILMINGTON TRUST COMPANY, as Trustee By _____________________________________ Name: Title: ANNEX 1 PLEDGED EQUITY Percentage of Registered Certificate Class of Par Number Outstanding Owner Issuer Nos. Stock Value of Shares Equity Nutritional Pueblo 2 common $1.00 1,000 100% Sourcing Entertainment, Corporation Inc. a Delaware Corporation Nutritiona1 Pueblo 1 member - n.a. 100 100% Sourcing International ship Corporation LLC, a Delaware units Limited Liability Company Nutritiona1 Xtra Merger 1 common $10.00 100 100% Sourcing Corporation, Corporation a Delaware Corporation INTERCOMPANY NOTES 1. 10.125% Restated Subordinated Intercompany Real Estate Note, in the principal amount of $70,0000,000, issued by Pueblo International, LLC, to Nutritional Sourcing Corporation, dated June 5, 2003 and due on August 1, 2009. 2. 10.125% Subordinated Intercompany Note, in the principal amount of $20,0000,000, issued by Pueblo Entertainment, Inc. to Nutritional Sourcing Corporation, dated June 5, 2003 and due August 1, 2009. MORTGAGE NOTES 1. Mortgage Note for $593,120.00, secured by Deed No. 23 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Manati, Puerto Rico, Registry Property No. 13,793, and corresponding Mortgage. 2. Mortgage Note for $1,300,468.00 secured by Deed No. 24 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Vega Baja, Puerto Rico, Registry Property No. 23,872, and corresponding Mortgage. 3. Mortgage Note for $1,212,300.00, secured by Deed No. 25 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Juana Diaz, Puerto Rico, Registry Property No. 12,506, and corresponding Mortgage. 4. Mortgage Note for $378,000.00, secured by Deed No. 26 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Guayama, Puerto Rico, Registry Property No. 11,983, and corresponding Mortgage. 5. Mortgage Note for $108,000.00, secured by Deed No. 27 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Calle Cruz, Old San Juan, Puerto Rico, Registry Property No. 420, and corresponding Mortgage. 6. Mortgage Note for $747,633.00, secured by Deed No. 28 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Fajardo, Puerto Rico, Registry Property No. 838, and corresponding Mortgage. 7. Mortgage Note for $528,277.00, secured by Deed No. 29 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at Hatillo, Puerto Rico, Registry Property No. 18,462, and corresponding Mortgage. 8. Mortgage Note for $361,067.00, secured by Deed No. 30 of First Leasehold Mortgage, executed before Notary Douglas Sanchez Cortes, encumbering property located at San German, Puerto Rico, Registry Property No. 14,095, and corresponding Mortgage. 9. Mortgage Note for $8,000,000.00 secured by Deed of Leasehold Mortgage Deed number 263 of Notary Ronald L. Rosenbaum executed June 5, 2003 (Plaza Las Americas). 10. Mortgage Note for $3,500,000.00 secured by Deed of Leasehold Mortgage Deed number 262 of Notary Ronald L. Rosenbaum executed June 5, 2003 (Plaza Caribe). 11. Mortgage Note for $800,000.00, secured by Deed No. 35 of First Leasehold Mortgage, executed before Notary Mercedes Barreras Soler, encumbering property located at Caguas Centro, Puerto Rico, Registry Property No. 43,851 of Caguas, and corresponding Mortgage. 12. Mortgage Note for $2,750,000.00, increased to $4,630,000, secured by Deed No. 24 of Extension and Modification of Mortgage, executed before Notary Juan Agustin Rivero of June 2, 1988, and by Deed No. 155 of Notary Pedro Morell Losada, executed the 28th day of July, 1993 encumbering Campo Rico Property and the corresponding Mortgages. 13. Mortgage Note for $13,134,000.00 increased to $17,000,000.00, secured by Mortgage constituted by Deed No. 23 of Notary Juan Agustin Rivero, executed on June 2, 1998, increased by Deed No. 156 of Notary Pedro Morell Losada, executed on July 28, 1993 encumbering Campo Rico Property, and the corresponding Mortgages. 14. Mortgage Note for $3,817,000.00, increased to $7,200,000.00, secured by Mortgage constituted by Deed No. 21 of Notary Juan Agustin Rivero, executed on June 2, 1988, increased by Deed No. 148 of Notary Pedro Morell Losada, executed on July 28, 1993 encumbering De Diego Property, and the corresponding Mortgages. The security interest and pledge in all notes includes all substitutions, modifications, and extensions thereof as well as all interest, income and other proceeds thereof. EX-10 5 a10kex1047.txt EXHIBIT 10.47 RETENTION AGREEMENT ("Agreement"), dated as of March 15, 2003, by and between Pueblo International, LLC, a Delaware limited liability company and Pueblo Entertainment, Inc., a Delaware corporation (the "Companies"), which are wholly owned subsidiaries of Nutritional Sourcing Corporation, a Delaware corporation ("NSC") and William T. Keon, III (the"Executive"). WHEREAS, the Companies acknowledge the existence of various risks and uncertainties in connection with the competitive marketplace in Puerto Rico and the U.S. Virgin Islands and with matters involving NSC and its current Chapter 11 proceedings; WHEREAS, the Companies believe it is in the best interests of the Companies to take appropriate actions to insure continuity of key management and desire to induce Executive to remain in the employ of the Companies, notwithstanding such risks and uncertainties; WHEREAS, the Companies have requested Executive to remain in the employ of the Companies, on the terms and conditions hereafter set forth and Executive is willing to accept such terms; and WHEREAS, considering the foregoing, the Executive and the Companies agree to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Companies and the Executive (the"Parties") hereby agree as follows: 1. Employment, Duties, Acceptance and Term 1.1 The Companies hereby employ the Executive as President and Chief Executive Officer ("CEO"), and the Executive agrees to be so employed. The Executive shall report directly to the board of directors of the Companies, respectively, or their designee ("Board of Directors"). During the Employment Period (as defined in Section 1.3 hereof), the Executive will be responsible for managing the business and affairs of the Companies and the day-to-day operations of the Companies, and such other responsibilities as shall be determined from time to time by the Board of Directors consistent with Executive's titles and position. All staff in the Companies' Florida and Puerto Rico offices are expected to report to Executive through their managers. In addition, the Board of Directors acknowledges and approves that Executive serves as of the date hereof and will continue to serve as an officer and/or director of certain other parent, subsidiary and affiliated companies of the Companies (each such related entity referred to individually as a"Group Affiliate"). Consistent with Executive's titles and position the Executive shall take all such actions as may be required to fulfill his duties as President and CEO or which are within the scope of the business activities of the Companies or which may be necessary to carry out any additional responsibilities as may be given to the Executive by the Board of Directors, including responsibilities with Group Affiliates. The Executive shall not be paid or accept any salary for such duties, obligations or responsibilities except for the amounts as expressly set forth in this Agreement. 1.2 The Executive shall devote his full business time and attention to the business of the Companies, including such additional duties and responsibilities to which he is assigned under this Agreement, during the period of his employment hereunder; provided, however, that the Executive may continue to serve on the boards of directors and/or be a designated officer of Group Affiliates to the extent that such activities do not materially interfere with the execution of the Executive's duties hereunder. 1.3 The Executive's employment under this Agreement shall commence as of March 15, 2003 (the "Commencement Date") and end on the third anniversary of the Commencement Date, subject to the provisions of Section 3 of this Agreement (the"Employment Period"). The Employment Period shall be automatically extended for an additional two year term, subject to the provisions of Section 3 of this Agreement ("Renewal Period") unless either the Companies or Executive shall give the other party not less than 180 days written notice prior to the termination of the Employment Period of the intention to not extend this Agreement (a"Non-Renewal Notice"). 2. Compensation and Benefits 2.1 Base Salary. During the Employment Period, the Companies will pay to Executive a Base Salary at the annual rate of Five Hundred Fifty Thousand U.S. Dollars ($550,000.00), to be paid in substantially equal installments on a weekly basis, subject to applicable payroll withholdings and deductions. The Board of Directors shall review the Base Salary on an annual basis and, at the Board of Director's discretion, may increase the Base Salary. All compensation and benefits payable to Executive pursuant to this Agreement will be paid by or on behalf of Pueblo International, LLC directly to the Executive but shall be the joint and several liability of the Companies. 2.2 Annual Incentive Compensation. If the Executive meets the annual performance criteria established by the Board of Directors under the Companies' Key Management Incentive Opportunity Program (KMIO), the Companies shall pay to the Executive, within ninety (90) days of the close of each fiscal year end or portion of such year during the Employment Period, a KMIO bonus ("KMIO Incentive Compensation") in such amount as determined by the KMIO formulas; however with a minimum guarantee of 50% of annual Base Salary regardless of achieving minimum KMIO performance targets, and may pay in excess of 50% as determined by actual results achieved. The Board of Directors shall review the KMIO Incentive Compensation Program on an annual basis and, at their discretion will approve the performance targets for each fiscal year. 2.3 Special Inducement. As a special inducement to convince Executive to enter into this Agreement and in acknowledgement of prior agreements and understandings initially made to induce Executive to accept employment by the Companies, the Companies agree (a) to pay Executive the Supplemental Retirement Benefit accrued through January 31, 2003, as determined consistent with the formulas prepared by Mercer Human Resource A Consulting or as otherwise agreed by the parties, and (b) to make such payment at the time the parties enter into a Supplemental Retirement Benefit Agreement as agreed by the parties. The Companies and Executive commit to reach a mutually satisfactory resolution of the matters set forth in (a) and (b) above within 90 days of the Effective Date. 2.4 Special Incentive Compensation. The Executive is also a participant in the Special Incentive Program (SIP) covered under a separate agreement, which will terminate on August 1, 2003 unless mutually extended. 2.5 The Companies shall pay or reimburse the Executive for all reasonable business and travel expenses actually incurred or paid by the Executive during the period of employment hereunder in the performance of services under this Agreement, upon timely presentation of expense statements or vouchers or such other supporting information as Companies may require. 2.6 The Companies shall provide Executive with an automobile allowance of $237.50 per week. 2.7 The Companies shall provide to the Executive medical and disability benefits and insurances and coverage under applicable employee benefit plans currently provided generally to senior executives of the Companies pursuant to the terms, conditions and limitations of the Companies' plans and its regulations in effect and as they may be modified from time to time. However, because the Executive's employment is covered by this Agreement, the Executive is not eligible to participate in or seek coverage under any Companies' separation or severance plan, policy or benefit or similar program, other than as provided in this Agreement. 2.8 The Executive shall be entitled to cumulative paid vacation in the amount of four weeks of paid vacation per calendar year. All cumulative vacation time accrued to date and not used will continue to accumulate in addition to any future unused vacation time and carry forward indefinitely. The Executive is to report quarterly on the status of Executive's vacation accruals and time taken. The Executive shall not be entitled to receive a payment for any accrued but unused vacation until time of separation. The Executive will schedule Executive's vacation with the approval of the Board of Directors and subject to the operating needs of the Companies. The Executive has an accrued and unused vacation time balance of 128 days as of December 31, 2002. 2.9 The Executive's principal work location is in Coral Gables, Florida and secondary work location is in San Juan, Puerto Rico. Executive's work locations may not be changed nor can Executive's business travel obligations be materially increased without the prior written consent of Executive. 2.10 The Executive is deemed to have been an employee of a common controlled group since January 31, 1983 and Executive's benefit levels (including retirement benefits) are to reflect employment from that date. 3. Termination of Employment Relationship 3.1 The Companies may at any time, by written notice to Executive, terminate Executive's employment hereunder and this Agreement for"Cause" as of the date of such notice. For purposes of this Agreement,"Cause" shall be defined as any of the following: (i) the commission by the Executive, in connection with the performance of Executive's duties or obligations hereunder, of acts of dishonesty, gross negligence or willful misconduct; which act (or failure to act) the Board of Directors, in the exercise of their discretion, determines materially affects adversely, the value, reliability or performance of the Executive in regard to Executive's employment by the Companies; or (ii) the conviction of the Executive of (or pleading nolo contendere or similar plea by the Executive to) any felony or serious violation of law which the Board of Directors, in the exercise of their discretion, determines materially affects adversely, the value, reliability or performance of the Executive in regard to Executive's employment by the Companies; or (iii) the Executive's refusal or neglect to comply with the reasonable and prudent directions and/or instructions of the Board of Directors consistent with the terms of this Agreement, and the Executive's failure to cure such alleged material default, refusal or failure within ten (10) calendar days from date of receipt of the written notice from the Board of Directors to Executive of such default, refusal or failure; or (iv) the Executive's material breach of any of the Executive's obligations (including the obligation to comply with all of the Companies' material policies and procedures) to the Companies and the Executive's failure to cure such alleged material breach with ten (10) calendar days from the date of receipt of the written notice from the Board of Directors to Executive of such alleged material breach; or (v) Executive's willful and continued failure to substantially perform Executive's duties with the Companies, or any subsidiary of the Companies, as such duties may reasonably be defined from time to time by the Board of Directors (other than failure resulting from Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive by the Board of Directors, which demand specifically identifies the manner in which the Board of Directors believes that Executive has not substantially performed Executive's duties; or (vi) a material and documented breach of the Executive's covenants under Section 4 of this Agreement. For purposes of this Agreement, no act or failure to act, on the part of the Executive, shall be considered"willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon directions of the Board of Directors or the authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for the Companies shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for"Cause" unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 75% of the entire membership of the Board of Directors (excluding the Executive if he is a member of the Board of Directors) at a meeting of the Board of Directors called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. In the event of termination for"Cause" pursuant to this Section 3.1, the Companies shall be liable and shall pay to the Executive only that portion of the Base Salary pursuant to Section 2.1 which has been fully earned and unpaid as of the date of the Executive's receipt of such written notice from the Board of Directors. The Executive shall not be entitled to KMIO Incentive Compensation on account of the year in which the Executive is terminated if for"Cause." The Executive will be entitled to all accumulated and unused vacation pay regardless of the reason for termination, in addition to a fair estimate of all benefits accrued but not yet paid under the SIP arrangement. 3.2 The Companies may, at any time during the term of this Agreement, by written notice to the Executive, terminate the Executive's employment hereunder"Without Cause" (which shall include termination due to death or disability of the Executive or pursuant to a Non-Renewal Notice by the Companies) as of the date of such notice to Executive by the Board of Directors. In the event of such termination"Without Cause" pursuant to this Section 3.2, the Companies shall pay the Executive, within ten (10) days of the date of notice of termination the following amounts: (a) an amount equal to three times Executive's annual Base Salary then in effect, if such termination occurs during the Employment Period and an amount equal to one and one-half the annual Base Salary then in effect if such termination occurs during the Renewal Period; (b) a pro-rated portion of the current year's KMIO Incentive Compensation, to be determined based upon the actual sales and EBITDA results year to date as of the most recently completed four week fiscal period compared with the KMIO annual targets prorated for the short period multiplied by the amount of base compensation received as of the effective termination date, however in no situation is this amount to be less than 50% of Base Salary as outlined in Section 2.2; (c) advance the estimated amount to be paid under SIP arrangement based upon reasonable and available projections resulting in a SIP award and this advanced amount is to be increased or partially repaid based upon the eventual actual and final SIP calculations; and (d) an amount equal to continuation of automobile allowance, medical and other insurance benefits for three years if such termination occurs during the Employment Period and an amount equal to one and one-half year's continuation of such benefits if such termination occurs during the Renewal Period. This Section 3.2 also applies in the event of a deemed termination "Without Cause" which shall occur if, upon a"change of control" of the Companies and/or NSC, the Executive is not guaranteed in the Executive's good faith judgment the same position, title and responsibilities with a new financially responsible owner, under terms and conditions at least as favorable to the Executive in all material respects as those contained in this Agreement. "Change of control" includes a change in the majority of the ultimate equity ownership or control for whatever reason, whether involving consideration or not. 3.3 If payments are due Executive pursuant to this Section 3, then the Companies shall pay to Executive an amount which, on an after-tax basis (including federal income and excise taxes and state and local income taxes), equals the excise tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the"Code"), upon Executive by reason of"parachute payments" (as defined in Section 280G(b)(2) of the Code) made by the Companies. 4. Protection of Confidential Information, Non-Competition 4.1 Executive and Companies acknowledge that the services Executive provides to the Companies are unique (for purposes of this Section 4 the term "Companies" shall include the entity owning the Companies as well as all entities owned by the Companies). Executive and Companies further acknowledge that the business knowledge and relationships of the Executive acquired during Executive's employment with the Companies is a critical asset of the Companies. In addition, the Executive's work for the Companies will bring the Executive into close contact with many confidential affairs of the Companies that are not readily available to the public and plans for future developments of the Companies. Accordingly, the Executive hereby agrees that, as a material and essential condition of Executive's employment by the Companies and in consideration of this Agreement and the compensation and other benefits provided for herein, the Executive is subject to and encumbered by the restrictive covenants set forth in this Section 4 and that the Companies shall have the right to enforce these restrictive covenants. 4.1.1 The Executive hereby covenants, warrants and agrees that the Executive will not, during the period of Executive's employment hereunder or at any time thereafter, directly or indirectly divulge, use, furnish, disclose or make available to anyone any Confidential Information, except as may be necessary for Executive to communicate on a"need to know" basis in the ordinary course of performing Executive's duties as an employee of the Companies. 4.1.2 For purposes of this Agreement,"Confidential Information" shall mean any and all information, data and knowledge that (i) has been created, discovered, developed or otherwise become known to the Companies (including, without limitation, information, data and knowledge created, discovered, developed, or made known by the Executive during the period of or arising out of Executive's employment by the Companies) or in which property rights have been assigned or otherwise conveyed to the Companies, which information, data or knowledge has commercial value in the business in which the Companies is engaged, except such information, data or knowledge as is or becomes known to the public without violation of the terms of this Agreement, or (ii) arises out of or relates to the business affairs of the Companies (including without limitation, any information which the Companies considers to be privileged). By way of illustration, but not limitation, Confidential Information includes financial information, supply and service information, marketing information, personnel information, customer information, trade secrets, business and customer links and relations, customer lists, contact lists or information, processes, know-how, improvements, discoveries, developments, designs, inventions, training methods, sales techniques, marketing plans, strategies, forecasts, new products, unpublished financial statements or parts thereof, budgets, projections, licenses, prices, costs, and employee, customer and supplier lists or parts thereof, terms of supply or service contracts, terms of agreements between customers and the Companies and any information relating to the business affairs of the Companies, in whatever form maintained. The Executive further acknowledges that such Confidential Information would inevitably be disclosed were he to become employed by, engaged by or otherwise provide competitive services to a competitor of the Companies. 4.1.3 All ideas, creations, improvements and other works of authorship created, developed, written or conceived by Executive at any time during Executive's employment by the Companies and relating to the Companies' business are works for hire within the scope of Executive's employment and shall be the property of the Companies free of any claim whatsoever by Executive and any person claiming any rights or interests through the Executive. 4.1.4 The Executive hereby covenants, warrants and agrees that he shall not, directly or indirectly, make or retain a copy of, nor make or cause to be made any notes of, nor remove or cause to be removed from the premises of the Companies, any document, notation or recording, whether mechanically or electronically or physically or mentally or otherwise maintained or copied, incorporating any trade secret or other Confidential Information belonging to or relating to the Companies unless such copying or making of notes is necessary for the proper and efficient discharge of Executive's duties on behalf of the Companies, provided, however, the Executive shall return such document, papers, copies or notes to the Companies forthwith after the authorized purpose has ceased or has been completed or on the demand of the Companies. 4.1.5 In the event of the termination of employment of the Executive, whether by the Companies or by the Executive and for whatever reason, the Executive hereby covenants, warrants and agrees that the Executive will immediately deliver to the Companies, within three (3) days of such termination or as directed by the Board of Directors: (i) all Confidential Information in whatever form it is maintained or it exists; (ii) all other documents, reports, notes, customer lists, customer data, business plans, specifications, programs, computer printouts and data and all other materials of any nature, whether originals or reproductions and in whatever form maintained or they exist, pertaining to the Companies, the business affairs of the Companies or the Executive's work with the Companies, and the Executive will not, directly or indirectly, take or possess, or deliver to any other person or entity, any of the foregoing or any reproduction or variation of any of the foregoing; and (iii) any and all other property or equipment which is properly the property of the Companies. 4.2 During the period of the Executive's employment and for a period of six (6) months following the voluntary or involuntary termination of Executive's employment hereunder for"Cause," the Executive hereby covenants, warrants and agrees that the Executive will NOT, as an individual, agent, partner, investor, officer or employee of a corporation or any other entity or in any other capacity, directly or indirectly (i) solicit or induce, or in any manner attempt to solicit or induce, any person employed by or acting as an agent of the Companies to leave his or her employment with or engagement by the Companies to join another enterprise or companies which is engaged in a similar business and competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands as an employee or agent; or (ii) hire, contract with or otherwise employ or engage any former or current employee, agent or consultant of the Companies to join another common enterprise or entity which is engaged in a similar business and competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands in any of their business areas or interests. In the event the Companies breaches its obligations under Section 2 or 3.2 of this Agreement, this Section 4.2 shall be null and void. 4.3 During the period of Executive's employment and for a period of six (6) months following the voluntary or involuntary termination of Executive's employment hereunder for"Cause," the Executive shall NOT, as an individual, agent, partner, investor, officer or employee of a corporation or any other entity or in any other capacity, directly or indirectly (i) induce or attempt to induce any customer or supplier of the Companies to cease being a customer or supplier of the Companies; or (ii) induce or attempt to induce any customer or supplier of the Companies to become a customer or supplier of any person, firm or corporation which in any way competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands in any of their business areas or interests; or (iii) enter the employ of, or render any services to, any person, firm or corporation which is in any way competes with the Companies in any of their business areas or interests in Puerto Rico and/or the U.S. Virgin Islands, (iv) interfere with the business relationships or prospective business relationships of the Companies; or (v) otherwise compete with the Companies in Puerto Rico and/or the U.S. Virgin Islands. In the event the Companies breaches its obligations under Section 2 or 3.2 of this Agreement, this Section 4.2 shall be null and void. 4.4 If the Executive commits a material breach of any of the provisions of Section 4.1, 4.2 or 4.3 hereof, the Companies shall have the right and remedy to have the provisions of this Agreement specifically enforced by way of a temporary restraining order and/or a preliminary and/or permanent injunction by any court having jurisdiction, without the posting of any bond or security by the Companies, it being acknowledged and agreed by the Executive and the Companies that any such breach will cause irreparable injury to the Companies and that money damages will not provide an adequate remedy to the Companies. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Companies under law or in equity. Further, should the Companies commence an action for injunctive relief, the Companies shall have the right in the same proceeding and court to seek and obtain money damages caused by such breach. 4.5 If any of the covenants or other provisions contained in Section 4.1, 4.2 or 4.3, or any part thereof, is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remainder of the covenant, covenants or provisions which shall be given the maximum effect possible without regard to the invalid portions and the remainder shall then be fully enforceable. 4.6 If any of the covenants or other provisions contained in Section 4.1, 4.2 or 4.3, or any part thereof, is held to be unenforceable because of the duration of such provision or the geographical or product/business area covered thereby, the parties agree that such provisions shall be reformed and construed to reduce the duration and/or area of such provision to the extent necessary for enforceability and, in its reduced form, said provision shall then be fully enforceable. 4.7 The Parties hereto intend to and hereby irrevocably confer exclusive jurisdiction to enforce the covenants and other provisions contained in Sections 4.1, 4.2 and 4.3, upon the courts in the State of Florida (and the federal courts resident in such State), with venue being set in Miami-Dade County and further expressly agree not to assert that any action brought in such courts has been brought in an inconvenient forum. The Parties further agree that, to the fullest extent permitted by law, valid service of process may be undertaken by certified mail to the addresses in Section 5. 4.8 The covenants and other provisions of this Section 4 shall survive the termination of this Agreement or the voluntary or involuntary termination of the Executive's employment regardless of the circumstances of such termination. 5. Notices All notices or other communications given pursuant hereto by one party to another shall be in writing and deemed given when (a) delivered by hand, (b) sent by fax/telecopier (with receipt confirmed), provided that a copy is mailed the same day by registered or certified mail, postage prepaid, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case to the appropriate addresses and fax/telecopier numbers for the Companies and the Executive set forth below (or to such other address and/or fax/telecopier number as any party may designate by notice to the others from time to time). If to the Companies: Pueblo International, LLC Pueblo Entertainment, Inc. c/o Finser Corporation 550 Biltmore Way, Suite 900 Coral Gables, Florida 33134 Telephone No. (305) 442-3407 Fax. No. (305) 447-1389 Attention: General Counsel If to the Executive at: William T. Keon, III 60 Edgewater Dr., Apt 11A Coral Gables, FL 33133 Telephone No.: 305-666-4148 Fax No.: __________________ 6. General 6.1 Except as otherwise provided in Section 4, any dispute or controversy arising out of or related to this Agreement, the Executive's employment with the Companies or the termination of that employment shall be resolved exclusively by arbitration, conducted before a panel of three (3) arbitrators in Miami, Florida, in accordance with the applicable rules for arbitration of employment disputes of the American Arbitration Association ("AAA"), the CPR Institute for Dispute Resolution ("CPR") or JAMS/Endispute then in effect. The choice of the AAA, CPR or JAMS/Endispute arbitration rules shall be made by the party initiating arbitration. The Companies shall pay the administrative costs of the AAA and the arbitrators' reasonable costs and fees. The Executive is responsible for Executive's own attorneys' fees and other fees and expenses, if any, with respect to the Executive's conduct of the arbitration. The arbitrator is expressly empowered to award reasonable attorneys' fees and expenses to the prevailing party as well as all other remedies to which the party would be entitled if the dispute were resolved in court. The arbitrator shall not have the authority to alter or amend any lawful policy, procedure or practice of the Companies or agreement to which the Companies are a party or the substantive rights or defenses of either party under any statute, contract, constitution or common law. The decision and award of the arbitrators is final and binding. The arbitrators shall promptly issue a written decision in support of their award. Judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. The Federal Arbitration Act or any applicable state law shall govern the application and enforcement provision of this Section. 6.2 The article headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 6.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. 6.4 This Agreement may not be amended, modified, superseded or waived, except by a written instrument executed by both parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof, or any similar provision or policy applicable to any other individual, shall in no manner affect the right of either party at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 6.5 This Agreement shall be subject to and governed by the laws of the State of Florida. 6.6 This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. 6.7 A telecopy signature on this Agreement shall have the same force and effect as an original signature. 7. Severability If any provision of this Agreement is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remaining provisions of this Agreement, without regard to the invalid portion, and any such invalid provisions shall be reformed and construed to the extent necessary to permit their enforceability so as to reflect the intent of the parties hereto. 8. Representation The Companies and the Executive represent and warrant that each is fully authorized and empowered to enter into this Agreement and the performance of each of their respective obligations under this Agreement will not violate any agreement between each of them and any other person, firm or organization. 9. Survivorship The respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment or this Agreement to the extent necessary to the intended preservation of such rights and obligations. 10. Successors and Assigns The respective rights and obligations of the Companies under this Agreement shall inure to the benefit of and shall be binding upon the respective successors and assigns of the Companies. This Agreement is assignable by the Companies to any corporate entity which acquires directly or indirectly by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Companies. Upon such assignment, the Companies shall not be released from liability hereunder. This Agreement shall not be assignable by the Executive, but may become part of the Executive's estate in case of death. 11. Effective Date This Agreement shall become effective and enforceable on the execution of this Agreement by all Parties (the"Effective Date"). [Signatures on next page] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PUEBLO INTERNATIONAL, LLC By /s/ Steven I. Bandel Name: Steven I. Bandel Title:___________________________________ PUEBLO ENTERTAINMENT, INC. By /s/Daniel J. O'Leary Name: Daniel J. O'Leary Title: Chief Financial Officer /s/ William T. Keon, III William T. Keon, III 2 WTK - AGREEMENT TEST EX-10 6 a10kex1048.txt EXHIBIT 10.48 RETENTION AGREEMENT ("Agreement"), dated as of March 15, 2003, by and between Pueblo International, LLC, a Delaware limited liability company and Pueblo Entertainment, Inc., a Delaware corporation (the "Companies"), which are wholly owned subsidiaries of Nutritional Sourcing Corporation, a Delaware corporation ("NSC") and Daniel O'Leary (the "Executive"). WHEREAS, the Companies acknowledge the existence of various risks and uncertainties in connection with the competitive marketplace in Puerto Rico and the U.S. Virgin Islands and with matters involving NSC and its current Chapter 11 proceedings; WHEREAS, the Companies believe it is in the best interests of the Companies to take appropriate actions to insure continuity of key management and desire to induce Executive to remain in the employ of the Companies, notwithstanding such risks and uncertainties; WHEREAS, the Companies have requested Executive to remain in the employ of the Companies, on the terms and conditions hereafter set forth and Executive is willing to accept such terms; and WHEREAS, considering the foregoing, the Executive and the Companies agree to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Companies and the Executive (the "Parties") hereby agree as follows: 1. Employment, Duties, Acceptance and Term 1.1 The Companies hereby employ the Executive as Chief Financial Officer and the Executive agrees to be so employed. The Executive shall report directly to the Chief Executive Officer of the Companies or such person's designee ("Executive Supervisor"). During the Employment Period (as defined in Section 1.3 hereof), the Executive will be responsible for the management of the financial activities of the Companies, and such other responsibilities as shall be determined from time to time by the Executive Supervisor consistent with Executive's titles and position. Consistent with Executive's titles and position the Executive shall take all such actions as may be required to fulfill Executive's duties as Chief Financial Officer or which are within the scope of the business activities of the Companies or which may be necessary to carry out any additional responsibilities as may be given to the Executive by the Executive Supervisor. 1.2 The Executive shall devote Executive's full business time and attention to the business of the Companies, including such additional duties and responsibilities to which Executive is assigned pursuant to this Agreement, during the period of employment hereunder. 1.3 The Executive's employment under this Agreement shall commence as of March 15, 2003 (the "Commencement Date") and end on the third anniversary of the Commencement Date, subject to the provisions of Section 3 of this Agreement (the "Employment Period"). The Employment Period shall be automatically extended for an additional two year term, subject to the provisions of Section 3 of this Agreement ("Renewal Period") unless either the Companies or Executive shall give the other party not less than 180 days written notice prior to the termination of the Employment Period of the intention to not extend this Agreement (a "Non-Renewal Notice"). 2. Compensation and Benefits 2.1 Base Salary. During the Employment Period, the Companies will pay to Executive a Base Salary at the annual rate of Three Hundred Thousand U.S. Dollars ($300,000.00), to be paid in substantially equal installments on a weekly basis, subject to applicable payroll withholdings and deductions. The Executive Supervisor shall review the Base Salary on an annual basis and, at the Executive Supervisor's discretion, may increase the Base Salary. All compensation and benefits payable to Executive pursuant to this Agreement will be paid by or on behalf of Pueblo International, LLC directly to the Executive but shall be the joint and several liability of the Companies. 2.2 Annual Incentive Compensation. If the Executive meets the annual performance criteria established by the Board of Directors of the Companies under the Companies' Key Management Incentive Opportunity Program (KMIO), the Companies shall pay to the Executive, within ninety (90) days of the close of each fiscal year end or portion of such year during the Employment Period, a KMIO bonus ("KMIO Incentive Compensation") in such amount as determined by the KMIO formulas. The Board of Directors of the Companies shall review the KMIO Incentive Compensation Program on an annual basis and, at their discretion will approve the performance targets for each fiscal year. 2.3 Special Incentive Compensation. The Executive is also a participant in the Special Incentive Program (SIP) covered under a separate agreement, which will terminate on August 1, 2003 unless mutually extended. 2.4 The Companies shall pay or reimburse the Executive for all reasonable business and travel expenses actually incurred or paid by the Executive during the period of employment hereunder in the performance of services under this Agreement, upon timely presentation of expense statements or vouchers or such other supporting information as Companies may require. 2.5 The Companies shall provide Executive with an automobile allowance of $200.00 per week. 2.6 The Companies shall provide to the Executive medical and disability benefits and insurances and coverage under applicable employee benefit plans currently provided generally to senior executives of the Companies pursuant to the terms, conditions and limitations of the Companies' plans and its regulations in effect and as they may be modified from time to time. However, because the Executive's employment is covered by this Agreement, the Executive is not eligible to participate in or seek coverage under any separation or severance plan, policy or benefit or similar program, other than as provided in this Agreement. 2.7 The Executive shall be entitled to cumulative paid vacation in the amount of three weeks of paid vacation per calendar year. All cumulative vacation time accrued to date and not used will continue to accumulate in addition to any future unused vacation time and carry forward indefinitely. The Executive is to report quarterly on the status of Executive's vacation accruals and time taken. The Executive shall not be entitled to receive a payment for any accrued but unused vacation until time of separation. The Executive will schedule Executive's vacation with the approval of the Executive Supervisor and subject to the operating needs of the Companies. The Executive's accrued and unused vacation time will be determined within thirty (30) days of the Effective Date of this Agreement. 2.8 The Executive's principal work location is in Pompano Beach, Florida and secondary work location is in San Juan, Puerto Rico. Executive's work locations may not be changed nor can Executive's business travel obligations be materially increased without the prior written consent of Executive. 3. Termination of Employment Relationship 3.1 The Companies may at any time, by written notice to Executive, terminate Executive's employment hereunder and this Agreement for "Cause" as of the date of such notice. For purposes of this Agreement, "Cause" shall be defined as any of the following: (i) the commission by the Executive, in connection with the performance of Executive's duties or obligations hereunder, of acts of dishonesty, gross negligence or willful misconduct; which act (or failure to act) the Board of Directors of the Companies, in the exercise of their discretion, determines materially affects adversely, the value, reliability or performance of the Executive in regard to Executive's employment by the Companies; or (ii) the conviction of the Executive of (or pleading nolo contendere or similar plea by the Executive to) any felony or serious violation of law which the Board of Directors of the Companies, in the exercise of their discretion, determines materially affects adversely, the value, reliability or performance of the Executive in regard to Executive's employment by the Companies; or (iii) the Executive's refusal or neglect to comply with the reasonable and prudent directions and/or instructions of the Executive Supervisor consistent with the terms of this Agreement, and the Executive's failure to cure such alleged material default, refusal or failure within ten (10) calendar days from date of receipt of the written notice from the Board of Directors of the Companies to Executive of such default, refusal or failure; or (iv) the Executive's material breach of any of the Executive's obligations (including the obligation to comply with all of the Companies' material policies and procedures) to the Companies and the Executive's failure to cure such alleged material breach with ten (10) calendar days from the date of receipt of the written notice from the Board of Directors of the Companies to Executive of such alleged material breach; or (v) Executive's willful and continued failure to substantially perform Executive's duties with the Companies, or any subsidiary of the Companies, as such duties may reasonably be defined from time to time by the Board of Directors of the Companies (other than failure resulting from Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive by the Board of Directors of the Companies, which demand specifically identifies the manner in which the Board of Directors of the Companies believes that Executive has not substantially performed Executive's duties; or (vi) a material and documented breach of the Executive's covenants under Section 4 of this Agreement. For purposes of this Agreement, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon directions of the Executive Supervisor, authority given pursuant to a resolution duly adopted by the Board of Directors of the Companies or based upon the advice of counsel for the Companies shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for "Cause" unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 75% of the entire membership of the Board of Directors of the Companies (excluding the Executive if he is a member of the Board of Directors of the Companies) at a meeting of the Board of Directors of the Companies called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity to be heard before the Board of Directors of the Companies), finding that, in the good faith opinion of the Board of Directors of the Companies, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. In the event of termination for "Cause" pursuant to this Section 3.1, the Companies shall be liable and shall pay to the Executive only that portion of the Base Salary pursuant to Section 2.1 which has been fully earned and unpaid as of the date of the Executive's receipt of such written notice from the Board of Directors of the Companies. The Executive shall not be entitled to KMIO Incentive Compensation on account of the year in which the Executive is terminated if for "Cause." The Executive will be entitled to all accumulated and unused vacation pay regardless of the reason for termination, in addition to a fair estimate of all benefits accrued but not yet paid under the SIP arrangement. 3.2 The Companies may, at any time during the term of this Agreement, by written notice to the Executive, terminate the Executive's employment hereunder "Without Cause" (which shall include termination due to death or disability of the Executive or pursuant to a Non-Renewal Notice by the Companies) as of the date of such notice to Executive by the Board of Directors of the Companies. In the event of such termination "Without Cause" pursuant to this Section 3.2, the Companies shall pay the Executive, within ten (10) days of the date of notice of termination the following amounts: (a) an amount equal to two times Executive's annual Base Salary then in effect, if such termination occurs during the Employment Period and an amount equal to the annual Base Salary then in effect if such termination occurs during the Renewal Period; (b) a pro-rated portion of the current year's KMIO Incentive Compensation, to be determined based upon the actual sales and EBITDA results year to date as of the most recently completed four week fiscal period compared with the KMIO annual targets prorated for the short period multiplied by the amount of base compensation received as of the effective termination date; (c) advance the estimated amount to be paid under SIP arrangement based upon reasonable and available projections resulting in a SIP award and this advanced amount is to be increased or partially repaid based upon the eventual actual and final SIP calculations; and (d) an amount equal to continuation of automobile allowance, medical and other insurance benefits for two years if such Termination occurs during the Employment Period and an amount equal to one year's continuation of such benefits if such termination occurs during the Renewal Period. This Section 3.2 also applies in the event of a deemed termination "Without Cause" which shall occur if, upon a "change of control" of the Companies and/or NSC, the Executive is not guaranteed in the Executive's good faith judgment the same position, title and responsibilities with a new financially responsible owner, under terms and conditions at least as favorable to the Executive in all material respects as those contained in this Agreement. "Change of control" includes a change in the majority of the ultimate equity ownership or control for whatever reason, whether involving consideration or not. 3.3 If payments are due Executive pursuant to this Section 3, then the Companies shall pay to Executive an amount which, on an after-tax basis (including federal income and excise taxes and state and local income taxes), equals the excise tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), upon Executive by reason of "parachute payments" (as defined in Section 280G(b)(2) of the Code) made by the Companies. 4. Protection of Confidential Information, Non-Competition 4.1 Executive and Companies acknowledge that the services Executive provides to the Companies are unique (for purposes of this Section 4 the term "Companies" shall include the entity owning the Companies as well as all entities owned by the Companies). Executive and Companies further acknowledge that the business knowledge and relationships of the Executive acquired during Executive's employment with the Companies is a critical asset of the Companies. In addition, the Executive's work for the Companies will bring the Executive into close contact with many confidential affairs of the Companies that are not readily available to the public and plans for future developments of the Companies. Accordingly, the Executive hereby agrees that, as a material and essential condition of Executive's employment by the Companies and in consideration of this Agreement and the compensation and other benefits provided for herein, the Executive is subject to and encumbered by the restrictive covenants set forth in this Section 4 and that the Companies shall have the right to enforce these restrictive covenants. 4.1.1 The Executive hereby covenants, warrants and agrees that the Executive will not, during the period of Executive's employment hereunder or at any time thereafter, directly or indirectly divulge, use, furnish, disclose or make available to anyone any Confidential Information, except as may be necessary for Executive to communicate on a "need to know" basis in the ordinary course of performing Executive's duties as an employee of the Companies. 4.1.2 For purposes of this Agreement, "Confidential Information" shall mean any and all information, data and knowledge that (i) has been created, discovered, developed or otherwise become known to the Companies (including, without limitation, information, data and knowledge created, discovered, developed, or made known by the Executive during the period of or arising out of Executive's employment by the Companies) or in which property rights have been assigned or otherwise conveyed to the Companies, which information, data or knowledge has commercial value in the business in which the Companies is engaged, except such information, data or knowledge as is or becomes known to the public without violation of the terms of this Agreement, or (ii) arises out of or relates to the business affairs of the Companies (including without limitation, any information which the Companies considers to be privileged). By way of illustration, but not limitation, Confidential Information includes financial information, supply and service information, marketing information, personnel information, customer information, trade secrets, business and customer links and relations, customer lists, contact lists or information, processes, know-how, improvements, discoveries, developments, designs, inventions, training methods, sales techniques, marketing plans, strategies, forecasts, new products, unpublished financial statements or parts thereof, budgets, projections, licenses, prices, costs, and employee, customer and supplier lists or parts thereof, terms of supply or service contracts, terms of agreements between customers and the Companies and any information relating to the business affairs of the Companies, in whatever form maintained. The Executive further acknowledges that such Confidential Information would inevitably be disclosed were he to become employed by, engaged by or otherwise provide competitive services to a competitor of the Companies. 4.1.3 All ideas, creations, improvements and other works of authorship created, developed, written or conceived by Executive at any time during Executive's employment by the Companies and relating to the Companies' business are works for hire within the scope of Executive's employment and shall be the property of the Companies free of any claim whatsoever by Executive and any person claiming any rights or interests through the Executive. 4.1.4 The Executive hereby covenants, warrants and agrees that he shall not, directly or indirectly, make or retain a copy of, nor make or cause to be made any notes of, nor remove or cause to be removed from the premises of the Companies, any document, notation or recording, whether mechanically or electronically or physically or mentally or otherwise maintained or copied, incorporating any trade secret or other Confidential Information belonging to or relating to the Companies unless such copying or making of notes is necessary for the proper and efficient discharge of Executive's duties on behalf of the Companies, provided, however, the Executive shall return such document, papers, copies or notes to the Companies forthwith after the authorized purpose has ceased or has been completed or on the demand of the Companies. 4.1.5 In the event of the termination of employment of the Executive, whether by the Companies or by the Executive and for whatever reason, the Executive hereby covenants, warrants and agrees that the Executive will immediately deliver to the Companies, within three (3) days of such termination or as directed by the Board of Directors of the Companies: (i) all Confidential Information in whatever form it is maintained or it exists; (ii) all other documents, reports, notes, customer lists, customer data, business plans, specifications, programs, computer printouts and data and all other materials of any nature, whether originals or reproductions and in whatever form maintained or they exist, pertaining to the Companies, the business affairs of the Companies or the Executive's work with the Companies, and the Executive will not, directly or indirectly, take or possess, or deliver to any other person or entity, any of the foregoing or any reproduction or variation of any of the foregoing; and (iii) any and all other property or equipment which is properly the property of the Companies. 4.2 During the period of the Executive's employment and for a period of six (6) months following the voluntary or involuntary termination of Executive's employment hereunder for "Cause," the Executive hereby covenants, warrants and agrees that the Executive will NOT, as an individual, agent, partner, investor, officer or employee of a corporation or any other entity or in any other capacity, directly or indirectly (i) solicit or induce, or in any manner attempt to solicit or induce, any person employed by or acting as an agent of the Companies to leave his or her employment with or engagement by the Companies to join another enterprise or companies which is engaged in a similar business and competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands as an employee or agent; or (ii) hire, contract with or otherwise employ or engage any former or current employee, agent or consultant of the Companies to join another common enterprise or entity which is engaged in a similar business and competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands in any of their business areas or interests. In the event the Companies breaches its obligations under Section 2 or 3.2 of this Agreement, this Section 4.2 shall be null and void. 4.3 During the period of Executive's employment and for a period of six (6) months following the voluntary or involuntary termination of Executive's employment hereunder for "Cause," the Executive shall NOT, as an individual, agent, partner, investor, officer or employee of a corporation or any other entity or in any other capacity, directly or indirectly (i) induce or attempt to induce any customer or supplier of the Companies to cease being a customer or supplier of the Companies; or (ii) induce or attempt to induce any customer or supplier of the Companies to become a customer or supplier of any person, firm or corporation which in any way competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands in any of their business areas or interests; or (iii) enter the employ of, or render any services to, any person, firm or corporation which is in any way competes with the Companies in any of their business areas or interests in Puerto Rico and/or the U.S. Virgin Islands, (iv) interfere with the business relationships or prospective business relationships of the Companies; or (v) otherwise compete with the Companies in Puerto Rico and/or the U.S. Virgin Islands. In the event the Companies breaches its obligations under Section 2 or 3.2 of this Agreement, this Section 4.2 shall be null and void. 4.4 If the Executive commits a material breach of any of the provisions of Section 4.1, 4.2 or 4.3 hereof, the Companies shall have the right and remedy to have the provisions of this Agreement specifically enforced by way of a temporary restraining order and/or a preliminary and/or permanent injunction by any court having jurisdiction, without the posting of any bond or security by the Companies, it being acknowledged and agreed by the Executive and the Companies that any such breach will cause irreparable injury to the Companies and that money damages will not provide an adequate remedy to the Companies. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Companies under law or in equity. Further, should the Companies commence an action for injunctive relief, the Companies shall have the right in the same proceeding and court to seek and obtain money damages caused by such breach. 4.5 If any of the covenants or other provisions contained in Section 4.1, 4.2 or 4.3, or any part thereof, is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remainder of the covenant, covenants or provisions which shall be given the maximum effect possible without regard to the invalid portions and the remainder shall then be fully enforceable. 4.6 If any of the covenants or other provisions contained in Section 4.1, 4.2 or 4.3, or any part thereof, is held to be unenforceable because of the duration of such provision or the geographical or product/business area covered thereby, the parties agree that such provisions shall be reformed and construed to reduce the duration and/or area of such provision to the extent necessary for enforceability and, in its reduced form, said provision shall then be fully enforceable. 4.7 The Parties hereto intend to and hereby irrevocably confer exclusive jurisdiction to enforce the covenants and other provisions contained in Sections 4.1, 4.2 and 4.3, upon the courts in the State of Florida (and the federal courts resident in such State), with venue being set in Miami-Dade County and further expressly agree not to assert that any action brought in such courts has been brought in an inconvenient forum. The Parties further agree that, to the fullest extent permitted by law, valid service of process may be undertaken by certified mail to the addresses in Section 5. 4.8 The covenants and other provisions of this Section 4 shall survive the termination of this Agreement or the voluntary or involuntary termination of the Executive's employment regardless of the circumstances of such termination. 5. Notices All notices or other communications given pursuant hereto by one party to another shall be in writing and deemed given when (a) delivered by hand, (b) sent by fax/telecopier (with receipt confirmed), provided that a copy is mailed the same day by registered or certified mail, postage prepaid, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case to the appropriate addresses and fax/telecopier numbers for the Companies and the Executive set forth below (or to such other address and/or fax/telecopier number as any party may designate by notice to the others from time to time). If to the Companies: Pueblo International, LLC Pueblo Entertainment, Inc. c/o Finser Corporation 550 Biltmore Way, Suite 900 Coral Gables, Florida 33134 Telephone No. (305) 442-3407 Fax. No. (305) 447-1389 Attention: General Counsel If to the Executive at: 5600 Pacific Blvd Apt 604 Boca Raton, Florida 33433 Telephone No.: 561-901-7660 Fax No.: 561-391-0026 6. General 6.1 Except as otherwise provided in Section 4, any dispute or controversy arising out of or related to this Agreement, the Executive's employment with the Companies or the termination of that employment shall be resolved exclusively by arbitration, conducted before a panel of three (3) arbitrators in Miami, Florida, in accordance with the applicable rules for arbitration of employment disputes of the American Arbitration Association ("AAA"), the CPR Institute for Dispute Resolution ("CPR") or JAMS/Endispute then in effect. The choice of the AAA, CPR or JAMS/Endispute arbitration rules shall be made by the party initiating arbitration. The Companies shall pay the administrative costs of the AAA and the arbitrators' reasonable costs and fees. The Executive is responsible for Executive's own attorneys' fees and other fees and expenses, if any, with respect to the Executive's conduct of the arbitration. The arbitrator is expressly empowered to award reasonable attorneys' fees and expenses to the prevailing party as well as all other remedies to which the party would be entitled if the dispute were resolved in court. The arbitrator shall not have the authority to alter or amend any lawful policy, procedure or practice of the Companies or agreement to which the Companies are a party or the substantive rights or defenses of either party under any statute, contract, constitution or common law. The decision and award of the arbitrators is final and binding. The arbitrators shall promptly issue a written decision in support of their award. Judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. The Federal Arbitration Act or any applicable state law shall govern the application and enforcement provision of this Section. 6.2 The article headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 6.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. 6.4 This Agreement may not be amended, modified, superseded or waived, except by a written instrument executed by both parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof, or any similar provision or policy applicable to any other individual, shall in no manner affect the right of either party at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 6.5 This Agreement shall be subject to and governed by the laws of the State of Florida. 6.6 This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. 6.7 A telecopy signature on this Agreement shall have the same force and effect as an original signature. 7. Severability If any provision of this Agreement is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remaining provisions of this Agreement, without regard to the invalid portion, and any such invalid provisions shall be reformed and construed to the extent necessary to permit their enforceability so as to reflect the intent of the parties hereto. 8. Representation The Companies and the Executive represent and warrant that each is fully authorized and empowered to enter into this Agreement and the performance of each of their respective obligations under this Agreement will not violate any agreement between each of them and any other person, firm or organization. 9. Survivorship The respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment or this Agreement to the extent necessary to the intended preservation of such rights and obligations. 10. Successors and Assigns The respective rights and obligations of the Companies under this Agreement shall inure to the benefit of and shall be binding upon the respective successors and assigns of the Companies. This Agreement is assignable by the Companies to any corporate entity which acquires directly or indirectly by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Companies. Upon such assignment, the Companies shall not be released from liability hereunder. This Agreement shall not be assignable by the Executive, but may become part of the Executive's estate in case of death. 11. Effective Date This Agreement shall become effective and enforceable on the execution of this Agreement by all Parties (the "Effective Date"). [Signatures on next page] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PUEBLO INTERNATIONAL, LLC By /s/ William T. Keon, III Name: William T. Keon, III Title: President and Chief Executive Officer PUEBLO ENTERTAINMENT, INC. By /s/ William T. Keon, III Name: William T. Keon, III Title: President and Chief Executive Officer /s/ Daniel O'Leary Daniel O'Leary 2 DJO - AGREEMENT TEST EX-10 7 a10kex1049.txt EXHIBIT 10.49 RETENTION AGREEMENT ("Agreement"), dated as of March 15, 2003, by and between Pueblo International, LLC, a Delaware limited liability company and Pueblo Entertainment, Inc., a Delaware corporation (the "Companies"), which are wholly owned subsidiaries of Nutritional Sourcing Corporation, a Delaware corporation ("NSC") and Fernando J. Bonilla (the "Executive"). WHEREAS, the Companies acknowledge the existence of various risks and uncertainties in connection with the competitive marketplace in Puerto Rico and the U.S. Virgin Islands and with matters involving NSC and its current Chapter 11 proceedings; WHEREAS, the Companies believe it is in the best interests of the Companies to take appropriate actions to insure continuity of key management and desire to induce Executive to remain in the employ of the Companies, notwithstanding such risks and uncertainties; WHEREAS, the Companies have requested Executive to remain in the employ of the Companies, on the terms and conditions hereafter set forth and Executive is willing to accept such terms; and WHEREAS, considering the foregoing, the Executive and the Companies agree to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Companies and the Executive (the "Parties") hereby agree as follows: 1. Employment, Duties, Acceptance and Term 1.1 The Companies hereby employ the Executive and the Executive agrees to be so employed pursuant to the terms hereof. The Executive shall report directly to the Chief Executive Officer of the Companies or such person's designee ("Executive Supervisor"). 1.2 The Executive shall devote Executive's full business time and attention to the business of the Companies, including such duties and responsibilities to which Executive is assigned pursuant to this Agreement, during the period of employment hereunder. Notwithstanding, with prior approval of Executive Supervisor, Executive may serve as an officer or director of community-related, professional, or industry related organizations, so long as such activity does not interfere with Executive's responsibilities hereunder. 1.3 The Executive's employment under this Agreement shall commence as of March 15, 2003 (the "Commencement Date") and end on the third anniversary of the Commencement Date, subject to the provisions of Section 3 of this Agreement (the "Employment Period"). 2. Compensation and Benefits 2.1 Base Salary. During the Employment Period, the Companies will pay to Executive a Base Salary at the annual rate of One Hundred Fifty Thousand U.S. Dollars ($150,000.00), to be paid in substantially equal installments on a weekly basis, subject to applicable payroll withholdings and deductions. The Executive Supervisor shall review the Base Salary on an annual basis and, at the Executive Supervisor's discretion, may increase the Base Salary. All compensation and benefits payable to Executive pursuant to this Agreement will be paid by or on behalf of Pueblo International, LLC directly to the Executive but shall be the joint and several liability of the Companies. 2.2 Annual Incentive Compensation. If the Executive meets the annual performance criteria established by the Board of Managers and/or Board of Directors (hereafter, collectively, "Board of Directors") of the Companies under the Companies' Key Management Incentive Opportunity Program (KMIO), the Companies shall pay to the Executive, within ninety (90) days of the close of each fiscal year end or portion of such year during the Employment Period, a KMIO bonus ("KMIO Incentive Compensation") in such amount as determined by the KMIO formulas. The Board of Directors of the Companies shall review the KMIO Incentive Compensation Program on an annual basis and, at their discretion will approve the performance targets for each fiscal year. 2.3 Special Incentive Compensation. The Executive is also a participant in the Special Incentive Program (SIP) covered under a separate agreement, which will terminate on August 1, 2003 unless mutually extended. 2.4 The Companies shall pay or reimburse the Executive for all reasonable business and travel expenses actually incurred or paid by the Executive during the period of employment hereunder in the performance of services under this Agreement, upon timely presentation of expense statements or vouchers or such other supporting information as Companies may require. 2.5 The Companies shall provide Executive with an automobile allowance of $175.00 per week. 2.6 The Companies shall provide to the Executive medical and disability benefits and insurances and coverage under applicable employee benefit plans currently provided generally to senior executives of the Companies pursuant to the terms, conditions and limitations of the Companies' plans and its regulations in effect and as they may be modified from time to time. However, because the Executive's employment is covered by this Agreement, the Executive is not eligible to participate in or seek coverage under any separation or severance plan, policy or benefit or similar program, other than as provided in this Agreement. 2.7 The Executive shall be entitled to paid vacation per calendar year in accordance with the policies of the Companies in effect from time to time. 2.8 The Executive's principal work location is in San Juan, Puerto Rico. Executive's principal work location may not be changed from San Juan, Puerto Rico nor can Executive's business travel obligations be materially increased without the prior written consent of Executive. 3. Termination of Employment Relationship 3.1 The Companies may at any time, by written notice to Executive, terminate Executive's employment hereunder and this Agreement for "Cause" as of the date of such notice. For purposes of this Agreement, "Cause" shall be defined as any of the following: (i) the commission by the Executive, in connection with the performance of Executive's duties or obligations hereunder, of acts of dishonesty, gross negligence or willful misconduct; which act (or failure to act) the Executive Supervisor, in the exercise of Executive Supervisor's discretion, determines materially affects adversely, the value, reliability or performance of the Executive in regard to Executive's employment by the Companies; or (ii) the conviction of the Executive of (or pleading nolo contendere or similar plea by the Executive to) any felony or serious violation of law which the Executive Supervisor, in the exercise of Executive Supervisor's discretion, determines materially affects adversely, the value, reliability or performance of the Executive in regard to Executive's employment by the Companies; or (iii) the Executive's refusal or neglect to comply with the reasonable and prudent directions and/or instructions of the Executive Supervisor consistent with the terms of this Agreement, and the Executive's failure to cure such alleged material default, refusal or failure within ten (10) calendar days from date of receipt of the written notice from the Executive Supervisor to Executive of such default, refusal or failure; or (iv) the Executive's material breach of any of the Executive's obligations (including the obligation to comply with all of the Companies' material policies and procedures) to the Companies and the Executive's failure to cure such alleged material breach with ten (10) calendar days from the date of receipt of the written notice from the Executive Supervisor to Executive of such alleged material breach; or (v) Executive's willful and continued failure to substantially perform Executive's duties with the Companies, or any subsidiary of the Companies, as such duties may reasonably be defined from time to time by the Executive Supervisor or the Board of Directors of the Companies (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive by the Board of Directors of the Companies, which demand specifically identifies the manner in which the Board of Directors of the Companies believes that Executive has not substantially performed Executive's duties; or (vi) a material and documented breach of the Executive's covenants under Section 4 of this Agreement. For purposes of this Agreement, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon directions of the Executive Supervisor, authority given pursuant to a resolution duly adopted by the Board of Directors of the Companies or based upon the advice of counsel for the Companies shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for "Cause" unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 75% of the entire membership of the Board of Directors of the Companies (excluding the Executive if he is a member of the Board of Directors of the Companies) at a meeting of the Board of Directors of the Companies called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity to be heard before the Board of Directors of the Companies), finding that, in the good faith opinion of the Board of Directors of the Companies, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. In the event of termination for "Cause" pursuant to this Section 3.1, the Companies shall be liable and shall pay to the Executive only that portion of the Base Salary pursuant to Section 2.1 which has been fully earned and unpaid as of the date of the Executive's receipt of such written notice from the Board of Directors of the Companies. The Executive shall not be entitled to KMIO Incentive Compensation on account of the year in which the Executive is terminated if for "Cause." The Executive will be entitled to all accumulated and unused vacation pay regardless of the reason for termination, in addition to a fair estimate of all benefits accrued but not yet paid under the SIP arrangement and any pending medial or business expenses up to such date. 3.2 The Companies may, at any time during the term of this Agreement, by written notice to the Executive, terminate the Executive's employment hereunder "Without Cause" (which shall include termination due to death or disability of the Executive) as of the date of such notice to Executive by the Board of Directors of the Companies. In the event of such termination "Without Cause" pursuant to this Section 3.2, the Companies shall pay the Executive, within ten (10) days of the date of notice of termination the following amounts: (a) an amount equal to Executive's annual Base Salary then in effect; (b) a pro-rated portion of the current year's KMIO Incentive Compensation, to be determined based upon the actual sales and EBITDA results year to date as of the most recently completed four week fiscal period compared with the KMIO annual targets prorated for the short period multiplied by the amount of base compensation received as of the effective termination date; (c) advance the estimated amount to be paid under SIP arrangement based upon reasonable and available projections resulting in a SIP award and this advanced amount is to be increased or partially repaid based upon the eventual actual and final SIP calculations; and (d) an amount equal to continuation of automobile allowance, medical and other insurance benefits for one year. This Section 3.2 also applies in the event of a deemed termination "Without Cause" which shall occur if, upon a "change of control" of the Companies and/or NSC, the Executive is not guaranteed in the Executive's good faith judgment the same position, title and responsibilities with a new financially responsible owner, under terms and conditions at least as favorable to the Executive in all material respects as those contained in this Agreement. "Change of control" includes a change in the majority of the ultimate equity ownership or control for whatever reason, whether involving consideration or not. 3.3 If payments are due Executive pursuant to this Section 3, then the Companies shall pay to Executive an amount which, on an after-tax basis (including federal income and excise taxes and state and local income taxes), equals the excise tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), upon Executive by reason of "parachute payments" (as defined in Section 280G(b)(2) of the Code) made by the Companies. 4. Protection of Confidential Information, Non-Competition 4.1 Executive and Companies acknowledge that the services Executive provides to the Companies are unique (for purposes of this Section 4 the term "Companies" shall include the entity owning the Companies as well as all entities owned by the Companies). Executive and Companies further acknowledge that the business knowledge and relationships of the Executive acquired during Executive's employment with the Companies is a critical asset of the Companies. In addition, the Executive's work for the Companies will bring the Executive into close contact with many confidential affairs of the Companies that are not readily available to the public and plans for future developments of the Companies. Accordingly, the Executive hereby agrees that, as a material and essential condition of Executive's employment by the Companies and in consideration of this Agreement and the compensation and other benefits provided for herein, the Executive is subject to and encumbered by the restrictive covenants set forth in this Section 4 and that the Companies shall have the right to enforce these restrictive covenants. 4.1.1 The Executive hereby covenants, warrants and agrees that the Executive will not, during the period of Executive's employment hereunder or at any time thereafter, directly or indirectly divulge, use, furnish, disclose or make available to anyone any Confidential Information, except as may be necessary for Executive to communicate on a "need to know" basis in the ordinary course of performing Executive's duties as an employee of the Companies. 4.1.2 For purposes of this Agreement, "Confidential Information" shall mean any and all information, data and knowledge that (i) has been created, discovered, developed or otherwise become known to the Companies (including, without limitation, information, data and knowledge created, discovered, developed, or made known by the Executive during the period of or arising out of Executive's employment by the Companies) or in which property rights have been assigned or otherwise conveyed to the Companies, which information, data or knowledge has commercial value in the business in which the Companies is engaged, except such information, data or knowledge as is or becomes known to the public without violation of the terms of this Agreement, or (ii) arises out of or relates to the business affairs of the Companies (including without limitation, any information which the Companies considers to be privileged). By way of illustration, but not limitation, Confidential Information includes financial information, supply and service information, marketing information, personnel information, customer information, trade secrets, business and customer links and relations, customer lists, contact lists or information, processes, know-how, improvements, discoveries, developments, designs, inventions, training methods, sales techniques, marketing plans, strategies, forecasts, new products, unpublished financial statements or parts thereof, budgets, projections, licenses, prices, costs, and employee, customer and supplier lists or parts thereof, terms of supply or service contracts, terms of agreements between customers and the Companies and any information relating to the business affairs of the Companies, in whatever form maintained. The Executive further acknowledges that such Confidential Information would inevitably be disclosed were he to become employed by, engaged by or otherwise provide competitive services to a competitor of the Companies. 4.1.3 All ideas, creations, improvements and other works of authorship created, developed, written or conceived by Executive at any time during Executive's employment by the Companies and relating to the Companies' business are works for hire within the scope of Executive's employment and shall be the property of the Companies free of any claim whatsoever by Executive and any person claiming any rights or interests through the Executive. 4.1.4 The Executive hereby covenants, warrants and agrees that he shall not, directly or indirectly, make or retain a copy of, nor make or cause to be made any notes of, nor remove or cause to be removed from the premises of the Companies, any document, notation or recording, whether mechanically or electronically or physically or mentally or otherwise maintained or copied, incorporating any trade secret or other Confidential Information belonging to or relating to the Companies unless such copying or making of notes is necessary for the proper and efficient discharge of Executive's duties on behalf of the Companies, provided, however, the Executive shall return such document, papers, copies or notes to the Companies forthwith after the authorized purpose has ceased or has been completed or on the demand of the Companies. 4.1.5 In the event of the termination of employment of the Executive, whether by the Companies or by the Executive and for whatever reason, the Executive hereby covenants, warrants and agrees that the Executive will immediately deliver to the Companies, within three (3) days of such termination or as directed by the Board of Directors of the Companies: (i) all Confidential Information in whatever form it is maintained or it exists; (ii) all other documents, reports, notes, customer lists, customer data, business plans, specifications, programs, computer printouts and data and all other materials of any nature, whether originals or reproductions and in whatever form maintained or they exist, pertaining to the Companies, the business affairs of the Companies or the Executive's work with the Companies, and the Executive will not, directly or indirectly, take or possess, or deliver to any other person or entity, any of the foregoing or any reproduction or variation of any of the foregoing; and (iii) any and all other property or equipment which is properly the property of the Companies. 4.2 During the period of the Executive's employment and for a period of three (3) months following the voluntary or involuntary termination of Executive's employment hereunder for "Cause," the Executive hereby covenants, warrants and agrees that the Executive will NOT, as an individual, agent, partner, investor, officer or employee of a corporation or any other entity or in any other capacity, directly or indirectly (i) solicit or induce, or in any manner attempt to solicit or induce, any person employed by or acting as an agent of the Companies to leave his or her employment with or engagement by the Companies to join another enterprise or companies which is engaged in a similar business and competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands as an employee or agent; or (ii) hire, contract with or otherwise employ or engage any former or current employee, agent or consultant of the Companies to join another common enterprise or entity which is engaged in a similar business and competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands in any of their business areas or interests. In the event the Companies breaches its obligations under Section 2 or 3.2 of this Agreement, this Section 4.2 shall be null and void. 4.3 During the period of Executive's employment and for a period of three (3) months following the voluntary or involuntary termination of Executive's employment hereunder for "Cause," the Executive shall NOT, as an individual, agent, partner, investor, officer or employee of a corporation or any other entity or in any other capacity, directly or indirectly (i) induce or attempt to induce any customer or supplier of the Companies to cease being a customer or supplier of the Companies; or (ii) induce or attempt to induce any customer or supplier of the Companies to become a customer or supplier of any person, firm or corporation which in any way competes with the Companies in Puerto Rico and/or the U.S. Virgin Islands in any of their business areas or interests; or (iii) enter the employ of, or render any services to, any person, firm or corporation which in any way competes with the Companies in any of their business areas or interests in Puerto Rico and/or the U.S. Virgin Islands, (iv) interfere with the business relationships or prospective business relationships of the Companies; or (v) otherwise compete with the Companies in Puerto Rico and/or the U.S. Virgin Islands. In the event the Companies breaches its obligations under Section 2 or 3.2 of this Agreement, this Section 4.2 shall be null and void. 4.4 If the Executive commits a material breach of any of the provisions of Section 4.1, 4.2 or 4.3 hereof, the Companies shall have the right and remedy to have the provisions of this Agreement specifically enforced by way of a temporary restraining order and/or a preliminary and/or permanent injunction by any court having jurisdiction, without the posting of any bond or security by the Companies, it being acknowledged and agreed by the Executive and the Companies that any such breach will cause irreparable injury to the Companies and that money damages will not provide an adequate remedy to the Companies. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Companies under law or in equity. Further, should the Companies commence an action for injunctive relief, the Companies shall have the right in the same proceeding and court to seek and obtain money damages caused by such breach. 4.5 If any of the covenants or other provisions contained in Section 4.1, 4.2, or 4.3, or any part thereof, is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remainder of the covenant, covenants or provisions which shall be given the maximum effect possible without regard to the invalid portions and the remainder shall then be fully enforceable. 4.6 If any of the covenants or other provisions contained in Section 4.1, 4.2, or 4.3, or any part thereof, is held to be unenforceable because of the duration of such provision or the geographical or product/business area covered thereby, the parties agree that such provisions shall be reformed and construed to reduce the duration and/or area of such provision to the extent necessary for enforceability and, in its reduced form, said provision shall then be fully enforceable. 4.7 The Parties hereto intend to and hereby irrevocably confer exclusive jurisdiction to enforce the covenants and other provisions contained in Sections 4.1, 4.2 and 4.3, upon the courts in the Commonwealth of Puerto Rico and further expressly agree not to assert that any action brought in such courts has been brought in an inconvenient forum. The Parties further agree that, to the fullest extent permitted by law, valid service of process may be undertaken by certified mail to the addresses in Section 5. 4.8 The covenants and other provisions of this Section 4 shall survive the termination of this Agreement or the voluntary or involuntary termination of the Executive's employment regardless of the circumstances of such termination. 5. Notices All notices or other communications given pursuant hereto by one party to another shall be in writing and deemed given when (a) delivered by hand, (b) sent by fax/telecopier (with receipt confirmed), provided that a copy is mailed the same day by registered or certified mail, postage prepaid, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case to the appropriate addresses and fax/telecopier numbers for the Companies and the Executive set forth below (or to such other address and/or fax/telecopier number as any party may designate by notice to the others from time to time). If to the Companies: Pueblo International, LLC Pueblo Entertainment, Inc. c/o Finser Corporation 550 Biltmore Way, Suite 900 Coral Gables, Florida 33134 Telephone No. (305) 442-3407 Fax. No. (305) 447-1389 Attention: General Counse If to the Executive at: 307 La Sorbona Street University Gardens San Juan, PR 00927 Telephone No. (787) 717-4563 Fax No. (787-764-4563 E-mail: fjbonillapr@aol.com 6. General 6.1 Except as otherwise provided in Section 4, any dispute or controversy arising out of or related to this Agreement, the Executive's employment with the Companies or the termination of that employment shall be resolved exclusively by arbitration, conducted before a panel of three (3) arbitrators in San Juan, Puerto Rico, in accordance with the applicable rules for arbitration of employment disputes of the American Arbitration Association ("AAA"), the CPR Institute for Dispute Resolution ("CPR") or JAMS/Endispute then in effect. The choice of the AAA, CPR or JAMS/Endispute arbitration rules shall be made by the party initiating arbitration. The Companies shall pay the administrative costs of the AAA and the arbitrators' reasonable costs and fees. The Executive is responsible for Executive's own attorneys' fees and other fees and expenses, if any, with respect to the Executive's conduct of the arbitration. The arbitrator is expressly empowered to award reasonable attorneys' fees and expenses to the prevailing party as well as all other remedies to which the party would be entitled if the dispute were resolved in court. The arbitrator shall not have the authority to alter or amend any lawful policy, procedure or practice of the Companies or agreement to which the Companies are a party or the substantive rights or defenses of either party under any statute, contract, constitution or common law. The decision and award of the arbitrators is final and binding. The arbitrators shall promptly issue a written decision in support of their award. Judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. The Federal Arbitration Act or any applicable Commonwealth of Puerto Rico law shall govern the application and enforcement provision of this Section. 6.2 The article headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 6.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. 6.4 This Agreement may not be amended, modified, superseded or waived, except by a written instrument executed by both parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof, or any similar provision or policy applicable to any other individual, shall in no manner affect the right of either party at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 6.5 This Agreement shall be subject to and governed by the laws of the Commonwealth of Puerto Rico. 6.6 This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. 6.7 A telecopy signature on this Agreement shall have the same force and effect as an original signature. 7. Severability If any provision of this Agreement is hereafter construed to be invalid or unenforceable in any respect, the same shall not affect the remaining provisions of this Agreement, without regard to the invalid portion, and any such invalid provisions shall be reformed and construed to the extent necessary to permit their enforceability so as to reflect the intent of the parties hereto. 8. Representation The Companies and the Executive represent and warrant that each is fully authorized and empowered to enter into this Agreement and the performance of each of their respective obligations under this Agreement will not violate any agreement between each of them and any other person, firm or organization. 9. Survivorship The respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment or this Agreement to the extent necessary to the intended preservation of such rights and obligations. 10. Successors and Assigns The respective rights and obligations of the Companies under this Employment Agreement shall inure to the benefit of and shall be binding upon the respective successors and assigns of the Companies. This Employment Agreement is assignable by the Companies to any corporate entity which acquires directly or indirectly by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Companies. Upon such assignment, the Companies shall not be released from liability hereunder. This Employment Agreement shall not be assignable by the Executive, but may become part of the Executive's estate in case of death. 11. Effective Date This Agreement shall become effective and enforceable on the execution of this Agreement by all Parties (the "Effective Date"). [Signatures on next page] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PUEBLO INTERNATIONAL, LLC By /s/ William T. Keon, III Name: William T. Keon, III Title: President and Chief Executive Officer PUEBLO ENTERTAINMENT, INC. By /s/ William T. Keon, III Name: William T. Keon, III Title: President and Chief Executive Officer /s/ Fernando J. Bonilla Fernando J. Bonilla EX-10 8 a10kex1050.txt EXHIBIT 10.50 AMENDED AND RESTATED GUARANTOR GENERAL SECURITY AGREEMENT This General Security Agreement ("Agreement"), dated May 23, 2003 is by Nutritional Sourcing Corporation ("NSC") (f/k/a "Pueblo Xtra International, Inc.), a Delaware Corporation, ("Guarantor") in favor of Westernbank Puerto Rico ("Lender"), a Puerto Rico banking corporation. W I T N E S S E T H WHEREAS, Lender has entered into certain financing arrangements, and is about to enter into additional financing arrangements, with Pueblo International, LLC, a Delaware limited liability company, Xtra Super Food Centers, Inc., Pueblo Entertainment, Inc., Xtra Merger Corporation, All Trucks, Inc., and Caribad, Inc., (singly a "Borrower" and collectively the "Borrowers"), all Delaware corporations except Caribad, Inc., which is a Puerto Rico corporation, pursuant to which Lender may make loans and provide other financial accommodations to Borrower; WHEREAS, Guarantor has executed and delivered to Lender guarantees in favor of Lender, and is about to execute and deliver to Lender a guarantee in favor of Lender, pursuant to which Guarantor has absolutely and unconditionally guaranteed, and will absolutely and unconditionally guarantee to Lender, the payment and performance of all now existing and hereafter arising obligations, liabilities and indebtedness of Borrowers to Lender; WHEREAS, Borrowers and Guarantor have executed and delivered to Lender an Extension And Modification And Security Agreement, dated as of January 30, 2003 (the "Extension Agreement") and Guarantor has executed and delivered to Lender a Guarantor General Security Agreement, dated January 30, 2003 (the "Guarantor Security Agreement"); and WHEREAS, Borrowers, Guarantor and Lender are entering into a Loan And Security Agreement, dated as of the date hereof and Guarantor and Lender wish to amend and restate the Guarantor Security Agreement, in connection therewith; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION I. DEFINITIONS All terms used herein which are defined in the Puerto Rico Commercial Transactions Act shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires. All references to Guarantor, Borrowers and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. The word "including" when used in this Agreement shall mean "including, without limitation". An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 7.3 or is cured in a manner satisfactory to Lender, if such Event of Default is capable of being cured as determined by Lender. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean, as to Guarantor, all present and future rights of Guarantor to payment of a monetary obligation whether or not earned by performance, which is not evidenced by chattel paper or an instrument, (a) for property which has been sold , leased, licensed, assigned or otherwise disposed of, (b) for services rendered or to be rendered, (c) for a secondary obligation incurred or to be incurred, or (d) arising out of the use of a credit or charge card or information contained on or for use with such card, and shall include all present and future rights of Guarantor to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper. 1.2 "Adjusted Net Worth" shall mean as to any Person, at any time, in accordance with GAAP (except as otherwise specifically set forth below), on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, calculating the book value of inventory for this purpose on a first-in-first-out basis, after deducting from such book values all appropriate reserves in accordance with GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including tax and other proper accruals) plus (b) indebtedness of such Person and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions acceptable to Lender and as to Guarantor the amount of the Senior Secured Notes from time to time issued and outstanding . 1.3 "Affiliate" shall mean (a) any person, company or business entity controlling, controlled by or under common control with a Borrower, whether such control be direct or indirect. All officers, shareholders, directors, subsidiary corporations, joint venturers, and partners of a Borrower, any person, which directly or indirectly, beneficially owns or holds five percent (5%) or more of any class of voting stock of a Borrower or five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by a Borrower, shall be deemed to be an affiliate for purposes of this Agreement. For purposes of this definition, "control" of a person shall mean the power, directly or indirectly, to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise. 1.4 "Cash Equivalents" shall mean, at any time, (a) any evidence of indebtedness with a maturity date of one hundred eighty (180) days or less issued or directly and fully guaranteed or insured by the United States of America of any agency or instrumentality thereof; provided that, the full faith and credit of the United States of America is pledged in support thereof; (b) certificates of deposit or bankers' acceptances with a maturity of one hundred eighty (180) days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $250,000,000; (c) commercial paper (including variable rate demand notes) with a maturity of one hundred eighty (180) days or less issued by a corporation (except an Affiliate of a Borrower) organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by Standard & Poor's Ratings Service, a division of The McGraw - Hill Companies, Inc. or at least P - 1 by Moody's Investors Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days for underlying security of the types described in clause (a) above entered into with any financial institution having combined capital and surplus and undivided profits of not less than $250,000,000; (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within one hundred eighty (180) days or less from the date of acquisition; provided, that, the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money market funds and mutual funds which invest substantially all of their assets in securities of the types described in clauses (a) through (e) above. 1.5 "Credit Card Acknowledgments" shall mean the agreements among Credit Card Issuers or Credit Card Processors who are parties to Credit Card Agreements, Guarantor and Lender, pursuant to which the Credit Card Issuers or Credit Card Processors acknowledge Lender's first priority security interest in the monies due and to become due to Guarantor (including credits and reserves) under the Credit Card Agreements, and agree to transfer all such amounts to the Blocked Accounts, or such other account of Guarantor set forth in the agreement, or any other account that Lender may direct, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.6 "Credit Card Agreement" shall mean all agreements now or hereafter entered into by Guarantor with any Credit Card Issuer or Credit Card Processor, as same may now exist or may hereafter be amended, modified, supplemented, extended, renewed or replaced. 1.7 "Credit Card Issuer" shall mean any person who issues credit cards or debit cards used by customers of Guarantor to purchase goods, including without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards, and American Express, Discover, Diners Club Carte Blanche and other non-bank credit or debit cards. 1.8 "Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who services, processes or manages the credit, authorization, billing, transfer and/or payment with respect to any sales transactions of Guarantor involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer. 1.9 "Credit Card Receivables" shall mean all accounts consisting of the present and future rights of Guarantor to payment by Credit Card Issuers or Credit Card Processors for merchandise sold and delivered to customers of Guarantor who have purchased such goods using a credit card or debit card issued by a Credit Card Issuer. 1.10 "Equipment" shall mean all of Guarantor's now owned and hereafter acquired equipment, wherever located, including machinery, data processing and computer equipment, computers and computer hardware and software (whether owned or licensed and including embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.11 "Event of Default" shall have the meaning set forth in Section 6.1 hereof. 1.12 "Financing Agreements" shall mean, collectively, the Extension Agreement, the Loan Agreement, this Agreement and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by any Borrower, any Guarantor or any Obligor in connection with the Extension Agreement or the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.13 "Franchise Agreements" shall mean all agreements between any Borrower and any other person, pursuant to which a Borrower is granted the right to sell, rent or lease any property or provide any service by another Person with or without the use of any of such Person's Intellectual Property. 1.14 "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Sections 5.14 and 5.15 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. 1.15 "Information Certificate" shall mean the Information Certificate of Guarantor constituting part of Exhibit A to the Extension Agreement and as revised by Guarantor and delivered to Lender in connection with this Agreement, containing material information with respect to Guarantor, its business and assets provided by or on behalf of Guarantor to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.16 "Intellectual Property" shall mean, as to Guarantor such Guarantor's now owned and hereafter arising or acquired: patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright registrations, trademarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing; all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing; all rights to sue for past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; goodwill (including any goodwill associated with any trademark or the license of any trademark); customer and other lists in whatever form maintained; trade secret rights, copyright rights, rights in works of authorship, domain names and domain name registration; software and contract rights relating to computer software programs, in whatever form created maintained. 1.17 "Inventory" shall mean, as to Guarantor all of Guarantor's now owned and hereafter existing or acquired inventory or goods, wherever located, which (a) are leased by Guarantor as lessor; (b) are held by Guarantor for sale or lease or to be furnished under a contract of service; (c) are furnished by Guarantor under a contract of service; (d) consist of raw materials, work in process, furnished goods or materials used or consumed in its business; or (e) are all other inventory of whatsoever kind or nature. 1.18 "Loan Agreement" shall mean the Loan And Security Agreement, dated the date hereof, by and between Borrowers and Guarantor and Lender, as the same now exists and may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.19 "NSC Notes" shall mean the 10.125% Restated Subordinated Intercompany Notes issued by Pueblo and 10.125% Subordinated Intercompany Note issued by Pueblo Entertainment, Inc. to NSC to be dated on or about June 2, 2003 in the principal amounts of $70,000,000 and $20,000,000 respectively. 1.20 "Obligations" shall mean any and all obligations, liabilities and indebtedness of every kind, nature and description owing by Guarantor to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Extension Agreement or Loan Agreement or after the commencement of any case with respect to any Borrower or Guarantor under the United States Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.21 "Obligor" shall mean any other guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrower. 1.22 "PACA" shall mean the "Packers and Stockyards Act", 7 USC Section 181, etc. seq. 1.23 "PASA" shall mean the "Perishable Agricultural Commodities Act", 7 USC Section 499a, et.seq. 1.24 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects Subchapter S status under the Internal Revenue Code of 1986, as amended or Subchapter N status under the Puerto Rico Internal Revenue Code of 1994, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.25 "Pledged Cash" shall mean the cash collateral delivered by Borrowers to Lender pursuant to a "Cash Collateral Pledge And Security Agreement" dated as of January 30, 2003 and which will continue to be held by Lender subject to the provisions thereof, as amended (the "Cash Collateral Agreement") and the Loan Agreement. 1.26 "Real Estate Security" shall include (a) those leasehold mortgages requested by Lender to be granted by Guarantor; (b) the mortgage liens on the Real Property and interests of Guarantor and Borrowers described in Schedule 1.25 hereto (the "Mortgages"), (c) the mortgage notes described on Schedule 1.25 hereto to be pledged to Lender and (d) liens and security interests in favor of Lender on all other Real Property of Guarantor, all on the terms and subject to the provisions contained herein and in the other applicable Financing Agreements. 1.27 "Real Property" shall mean all now owned and hereafter acquired real property of Guarantor, including leasehold interests, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located. 1.28 "Receivables" shall mean all of the following now owned or hereafter arising or acquired property of Guarantor: (a) all Accounts; (b) all interests, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (c) all payment intangibles of Guarantor; (d) all letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable to Guarantor or otherwise in favor of or delivered to Guarantor in connection with any Accounts; or (e) all other accounts, contract rights, chattel paper, instruments, notes, general intangibles and other forms of obligations owing to Guarantor, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by Guarantor or to or for the benefit of any third person (including loans or advances to any Affiliates or Subsidiaries of Guarantor) or otherwise associated with any Accounts, Inventory or general intangibles of Guarantor (including, without limitation, choses in action, causes of action, tax refunds, tax refund claims, any funds which may become payable to Guarantor in connection with the termination of any employee benefit plan and any other amounts payable to Guarantor from any employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any proceeds thereof and proceeds of insurance covering the lives of employees on which Guarantor is a beneficiary). 1.29 "Records" shall mean all of Guarantor's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Guarantor with respect to the foregoing maintained with or by any other person). 1.30 "Restricted Junior Payment" shall mean (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Guarantor now or hereafter outstanding or any payment on account of a return of capital (or the setting aside or otherwise depositing or investing of any sums for such purpose) or (b) any redemption, retirement, purchase, defeasance or other acquisition, direct of indirect, of any shares of any class of stock of Guarantor or any Affiliate of Guarantor now or hereafter outstanding (or the setting aside or otherwise depositing or investing of any sums for such purpose) or (c) any payment, direct or indirect, of any interest, principal of or premium, if any, on any redemption, retirement, purchase or other acquisition, direct or indirect, of any Subordinated Debt (or the setting aside or otherwise depositing or investing of any sums for such purpose or (d) any payment of money or transfer of any interest in any asset to any Affiliate of Guarantor. 1.31 "Security Pledge" shall mean the "Security Pledge And Intercreditor Agreement between NSC and Wilmington Trust Company, to be dated on or about June 2, 2003. 1.32 "Senior Secured Notes" shall mean NSC's 10.125% Senior Secured Notes due August 1, 2009, to be issued by NSC pursuant to and as part of the Reorganization Plan. 1.33 "Uniform Commercial Code" shall include the Puerto Rico Commercial Transactions Act and "UCC" shall mean the Uniform Commercial Code.. 1.34 "Working Capital" shall mean as to any Person, at any time, in accordance with GAAP, on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to the difference between: (a) the aggregate net book value of all current assets of such person and its subsidiaries (as determined in accordance with GAAP), calculating the book value of inventory for this purpose on a first - in - first - out basis, and (b) all current liabilities of such Person and its subsidiaries (as determined in accordance with GAAP); provided that, for purposes of Section 5.13(i) the liabilities of Borrowers to Lender under the Loan Agreement and (ii) the current amount of Borrowers' reserves for self insurance liabilities, shall not be considered current liabilities (whether or not classified as current liabilities in accordance with GAAP). SECTION 2. GRANT OF SECURITY INTEREST 2.1 Grant of Security Interest. To secure payment and performance of all Obligations, Guarantor hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of Guarantor, whether now owned or hereafter acquired or existing, and wherever located (together with all other collateral security for the Obligations at any time granted to or held or acquired by Lender collectively the "Collateral"): (a) all Accounts; (b) all present and future general intangibles, including all Intellectual Property and Franchise Agreements; (c) all Inventory; (d) All Equipment; (e) all Real Property and fixtures and all Real Estate Security; (f) all chattel paper, including all tangible and electronic chattel paper; (g) all instruments, including all promissory notes; (h) all documents; (i) all deposit accounts; (j) all letters of credit, banker's acceptances and similar instruments and including all letter of credit rights; (k) all supporting obligations and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Receivables and other Collateral, including (i) rights and remedies under or relating to guaranties, contracts of surety ship, letters of credit and credit and other insurance related to the Collateral, (ii) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (iii) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Receivables or other collateral, including returned, repossessed and reclaimed goods, and (iv) deposits by and property of account debtors or other persons securing the obligations of account debtors; (l) all (i) investment property (including securities, whether certificated or uncertificated, securities accounts, security entitlements, commodity contracts or commodity accounts) and (ii) monies, credit balances, deposits and other property of any Guarantor, now or hereafter held or received by or in transit to Lender or at any other depository or other institution from or for the account of a Guarantor whether for safekeeping, pledge, custody, transmission, collection or otherwise; (m) all commercial tort claims, including, without limitation, those identified in the Information Certificate; (n) to the extent not otherwise described above, all Receivables and all goods; (o) all Records; (p) the Pledged Cash; (q) all motor vehicles; (r) all membership and other ownership interests in Pueblo International, LLC, whether certificated or uncertificated; (s) the NSC Notes; and (t) all products and proceeds of the foregoing in any form, including insurance proceeds and all claims against third parties for loss or damage to or destruction of or other involuntary conversion of any kind or nature of any or all of the other collateral. 2.2 Perfection of Security Interest. (a) Guarantor irrevocably and unconditionally authorizes Lender (or its agent) to file at any time and from time to time such financing statements with respect to the Collateral naming Lender or its designee as the secured party and such Guarantor as debtor, as Lender may require, and including any other information with respect to Guarantor or otherwise required by Article 9 of the Uniform Commercial Code of such jurisdiction as Lender may determine, together with any amendments and continuations with respect thereto, which authorization shall apply to all financing statements filed on, prior to or after the date hereof. Guarantor ratifies and approves all financing statements naming Lender or its designees as secured party and Guarantor, as the case may be, as debtor with respect to the Collateral (and any amendments with respect to such financing statements) filed by or on behalf of Lender (or the Banks) prior to the date hereof and ratifies and confirms the authorization or such Person to file such financing statements (and amendments, if any). Guarantor hereby authorizes Lender to adopt on behalf of Guarantor any symbol required for authenticating any electronic filing. In the event that the description of the collateral in any financing statement naming Lender or its designee as the secured party and Guarantor as debtor includes assets and properties of such Guarantor that do not at any time constitute Collateral, whether hereunder, under any of the other Financing Agreements, or otherwise, the filing of such financing statement shall nonetheless be deemed authorized by Guarantor to the extent of the Collateral included in such description and it shall not render the financing statement ineffective as to any of the Collateral or otherwise affect the financing statement as it applies to any of the Collateral. In no event shall Guarantor at any time, file or permit or cause to be filed, any correction statement or termination statement with respect to any financing statement(or any amendment or continuation with respect thereto) naming Lender or any Person from whom Lender acquired any of the Obligations or its designee as secured party and Guarantor as debtor. (b) Guarantor does not have any chattel paper (whether tangible or electronic) or instruments as of the date hereof. In the event that Guarantor shall be entitled to or shall receive any chattel paper or instrument after the date hereof, Guarantors shall promptly notify Lender thereof in writing. Promptly upon the receipt thereof by or on behalf of any Guarantor (including by any agent or representative), Guarantor shall deliver, or cause to be delivered to Lender, all tangible chattel paper and instruments that Guarantor has or may at any time acquire, accompanied by such instruments of transfer or assignment duly executed in blank as Lender may from time to time specify in each case except as Lender may otherwise agree. At Lenders option, Guarantor shall, or Lender may at any time on behalf of Guarantor, cause the original of any such instrument or chattel paper to be conspicuously marked in a form and manner acceptable to Lender with the following legend referring to chattel paper or instruments as applicable: "This _______________________ ____________________ is subject to the security interest of Westernbank Puerto Rico and any sale, transfer, assignment or encumbrance of this _________________________ ___________________ violates the rights of such secured party". (c) In the event that Guarantor shall at any time hold or acquire an interest in any electronic chattel paper or any "transferable record" (as such term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction), Guarantor shall promptly notify Lender thereof in writing. Promptly upon Lender's request, Guarantor shall take, or cause to be taken, such actions as Lender may request to give Lender control of such electronic chattel paper under Section 9-105 of the UCC and control of such transferable record under Section 201 of the Federal Electronic Signatures in Global and National Commence Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as in effect in such jurisdiction. (d) Guarantor does not have any deposit accounts as of the date hereof, except as set forth in Schedule 2.2 hereto. Guarantor shall not, directly or indirectly, after the date hereof open, establish or maintain any deposit account unless each of the following conditions is satisfied: (i) Lender shall have received not less than ten (10) Business Days prior written notice of the intention of Guarantor to open or establish such account which notice shall specify in reasonable detail and specificity acceptable to Lender the name of the account, the owner of the account, the name and address of the bank at which such account is to be opened or established, the individual at such bank with whom such Guarantor is dealing and the purpose of the account (ii) the bank where such account is opened or maintained shall be acceptable to Lender and (iii) on or before the opening of such deposit account, Guarantor shall as Lender may specify, either (A) deliver to Lender a Deposit Account Control Agreement with respect to such deposit account duly authorized, executed and delivered by Guarantor and the bank at which such deposit account is opened and maintained or (B) arrange for Lender to become the customer of the bank with respect to the deposit account on terms and conditions acceptable to Lender. The terms of this subsection (d) shall not apply to deposit accounts specifically and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Guarantor's salaried employees. (e) Guarantor does not own or hold, directly or indirectly, beneficially or as record owner or both, any investment property, as of the date hereof, or have any investment account, securities account, commodity account or other similar account with any bank or other financial institution or other securities intermediary or commodity intermediary as of the date hereof, in each case except as set forth in Schedule 2.2 hereto. (i) In the event that Guarantor shall be entitled to or shall at any time after the date hereof hold or acquire any certificated securities, Guarantor shall promptly endorse, assign and deliver the same to Lender, accompanied by such instruments of transfer or assignment duly executed in blank as Lender may from time to time specify. If any securities now owned or hereafter acquired by Guarantor are uncertificated and are issued to Guarantor or its nominee directly by the issuer thereof, Guarantor shall immediately notify Lender thereof and shall as Lender may specify, either (A) cause the issuer to agree to comply with instructions from Lender as to such securities, without further consent of Guarantor or such nominee, or (B) arrange for Lender to become the registered owner of the securities. (ii) Guarantor shall not, directly or indirectly, after the date hereof open, establish or maintain any investment account, securities account, commodity account or any other similar account (other than a deposit account) with any securities intermediary or commodity intermediary unless each of the following conditions is satisfied: (A) Lender shall have received not less then ten (10) Business Days prior written notice of the intention of Guarantor to open or establish such account which notice shall specify in reasonable detail and specificity acceptable to Lender the name of the account, the owner of the account, the name and address of the securities intermediary or commodity intermediary at which such account is to be opened or established, the individual at such intermediary with whom Guarantor is dealing and the purpose of the account, (B) the securities intermediary or commodity intermediary (as the case may be) where such account is opened or maintained shall be acceptable to Lender, and (C) on or before the opening of such investment account, securities account or other similar account with a securities intermediary or commodity intermediary, Guarantor shall as Lender may specify either (1) execute and deliver, and cause to be executed and delivered to Lender, a Pledge Agreement and an Investment Property Control Agreement with respect thereto duly authorized, executed and delivered by such Guarantor and such securities intermediary or commodity intermediary or (2) arrange for Lender to become the entitlement holder with respect so such investment property on terms and conditions acceptable to Lender. (f) Guarantor is not the beneficiary or otherwise entitled to any right to payment under any letter of credit, banker's acceptance or similar instrument as of the date hereof, except as set forth on Schedule 2.2 hereto. In the event that Guarantor shall be entitled to or shall receive any right to payment under any letter of credit, banker's acceptance or any similar instrument, whether as beneficiary thereof or otherwise after the date hereof, Guarantor shall promptly notify Lender thereof in writing. Guarantor shall immediately, as Lender may specify, either (i) deliver, or cause to be delivered to Lender with respect to any such letter of credit, banker's acceptance or similar instrument, the written agreement of the issuer and any other nominated person obligated to make any payment in respect thereof (including any confirming or negotiating bank), in form and substance satisfactory to Lender, consenting to the assignment of the proceeds of the letter of credit to Lender by such Guarantor and agreeing to make all payments thereon directly to Lender or as lender may otherwise direct or (ii) cause Lender to become, at such Guarantor's expense, the transferee beneficiary of the letter of credit, banker's acceptance or similar instrument (as the case may be). (g) Guarantor does not have any commercial tort claims as of the date hereof, except as set forth on Schedule 2.2 hereto. In the event that Guarantor shall at any time after the date hereof have any commercial tort claims, Guarantor shall promptly notify Lender thereof in writing, which notice shall (i) set forth in reasonable detail the basis for and nature of such commercial tort claim and (ii) include the express grant by Guarantor to Lender of a security interest in such commercial tort claim (and the proceeds thereof). In the event that such notice does not include such grant of a security interest, the sending thereof by Guarantor to Lender shall be deemed to constitute such grant to Lender. Upon the sending of such notice, any commercial tort claim described therein shall constitute part of the Collateral and shall be deemed included therein. Without limiting the authorization of Lender provided in Section 2.2(a) hereof or otherwise arising by the execution by such Guarantor of this Agreement or any of the other Financing Agreements, Lender is hereby irrevocably authorized from time to time and at any time to file such financing statements naming Lender or its designee as secured party and Guarantor as debtors, or any amendments to any financing statements, covering any such commercial tort claim as Collateral. In addition, Guarantor shall promptly upon Lender's request, execute and deliver, or cause to be executed and delivered, to Lender such other agreements, documents and instruments as Lender may require in connection with such commercial tort claim. (h) Guarantor does not have any goods, documents of title or other Collateral in the custody, control or possession of a third party as of the date hereof, except as set forth on Schedule 2.2 hereto and except for goods located in the United States in transit to a location of Guarantor permitted herein in the ordinary course of business of Guarantor in the possession of the carrier transporting such goods. In the event that any goods, documents of title or other collateral are at any time after the date hereof in the custody, control or possession of any other person not referred to in Schedule 2.2 hereto or such carriers, Guarantor shall promptly notify Lender thereof in writing. Promptly upon Lender's request, Guarantor shall deliver to Lender a Collateral Access Agreement duly authorized, executed and delivered by such person and the Guarantor. (i) Guarantor shall take any other actions reasonably requested by Lender from time to time to cause the attachment, perfection and first priority of, and the ability of Lender to enforce, the security interest of Lender in any and all of the Collateral, including, without limitation, (i) executing, delivering and, where appropriate, filing, financing statements and amendments relating thereto under the UCC or other applicable law, to the extent, if any, Guarantor's signature thereon is required therefor, (ii) causing Lender's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of Lender to enforce, the security interest of Lender in such Collateral, (iii) complying with any provision of any statute, regulation or treaty of the United State as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of Lender to enforce, the security interest of Lender in such Collateral, (iv) obtaining the consents and approvals of any Governmental Authority or third party, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, and taking all actions required by any earlier versions of the UCC or by other law, as applicable in any relevant jurisdiction. SECTION 3. COLLATERAL COVENANTS 3.1 Accounts Covenants. (a) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Receivable or other Collateral, by mail, telephone, facsimile transmission or otherwise. (b) Guarantor shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Guarantor, all chattel paper and instruments which Guarantor now owns or may at any time acquire immediately upon Guarantor's receipt thereof, except as Lender may otherwise agree. (c) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts or other Receivables have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all accounts debtors to make payment of Accounts on other Receivables directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other Receivables or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or other Receivables or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may in good faith deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts or other Receivables and such other obligations have been assigned to Lender and are payable directly and only to Lender and Guarantor shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts or other Receivables as Lender may require. 3.2 Inventory Covenants. With respect to the Inventory: (a) Guarantor shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Guarantor's cost therefor and daily withdrawals therefrom and additions thereto; (b) Guarantor shall conduct a physical count of the Inventory at least once each year, but at any time or times as Lender may request on or after an Event of Default, and promptly following such physical inventory shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count; (c) Guarantor shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Guarantor's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Lender's request, Guarantor shall, at its expense, no more than four (4) times in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; (e) Guarantor shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Guarantor assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) except in the ordinary course of business and then only on prompt reporting thereof to Lender Guarantor shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate Guarantor to repurchase such Inventory; (h) Guarantor shall keep the Inventory in good and marketable condition, subject to normal deterioration of produce, deli and bakery food products, expired foods, and products with short expiration dates or shelf - life; and (i) except in the ordinary course of business and then only on prompt report thereof to Lender, Guarantor shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval. 3.3 Equipment Covenants. With respect to the Equipment: (a) upon Lender's request, Guarantor shall, at its expense, at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender; (b)Guarantor shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Guarantor shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Guarantor's business and not for personal, family, household or farming use; (e) Guarantor shall not remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Guarantor or to move Equipment directly from one location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Guarantor in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Guarantor shall not permit any of the Equipment to be or become a part of or permanently affixed to real property; and (g) Guarantor assumes all responsibility and liability arising from the use of the Equipment. 3.4 Power of Attorney. Guarantor hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as Guarantor's true and lawful attorney-in-fact, and authorizes Lender, in Guarantor's or Lender's name, to: (a) at any time an Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or other Receivables or other proceeds of Inventory or other Collateral, (ii) enforce payment of Accounts or other Receivables by legal proceedings or otherwise, (iii) exercise all of Guarantor's rights and remedies to collect any Account or other Receivables or other Collateral, (iv) sell or assign any Account or other Receivable upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew an Account or other Receivable (vi) discharge and release any Account or other Receivable , (vii) prepare, file and sign Guarantor's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Guarantor's mail to an address designated by Lender, and open and dispose of all mail addressed to any Guarantor, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Guarantor's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which Guarantor's mail is deposited, (iii) endorse Guarantor's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse Guarantor's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto or any other Collateral, (v) sign Guarantor's name on any verification of Accounts or other Receivables and notices thereof to account debtors and (vi) execute in Guarantor's name and file any UCC financing statements or amendments thereto. Guarantor hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or wilful misconduct as determined pursuant to a final non - appealable order of a court of competent jurisdiction. This power of attorney is coupled with an interest and is irrevocable. 3.5 Right to Cure. Lender may, at its option, (a) cure any default by Guarantor under any agreement with a third party or pay or bond on appeal any judgment entered against Guarantor, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Guarantor's account therefor, such amounts to be repayable by Guarantor on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Guarantor. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 3.6 Access to Premises. From time to time as requested by Lender, at the cost and expense of Guarantor (a) Lender or its designee shall have complete access to all of each premises during normal business hours and after notice to Guarantor, or at any time and without notice to Guarantor if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Guarantor's books and records, including the Records, and (b) Guarantor shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Guarantor's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and other Receivables and realization of other Collateral. 3.7 Inventory Subject to PACA, Etc. (a) Guarantors shall pay, on or before the due date thereof, all accounts payable arising from the purchase by Guarantor of any Inventory which is subject to or covered by, or with respect to which the seller is protected under, PACA or PASA and, shall not permit (i) any circumstances to exist which would subject Lender to any liability and (ii) Lender to become liable, to any supplier or other third party with respect to such Inventory. (b) Guarantor shall furnish to Lender, on each Thursday, during the term of the Loan Agreement, a Certificate which, as of the preceding Saturday, contains the following and such other information or matters as Lender may request: (i) The value and description of all of Guarantor's Inventory subject to PACA or PASA; (ii) The amount and aging of Guarantor's accounts payable arising from Inventory purchased subject to PACA or PASA; (iii) Payments made during the preceding week of accounts payable arising from Inventory purchased subject to PACA or PAS; and (iv) A statement that no account payable of Guarantor arising from the purchase of Inventory subject to PACA or PASA is unpaid after the due date thereof or if any are unpaid past the due date identifying such payables in detail. (c) Lender may, at its option at any time, (i) pay and discharge any accounts payable of Guarantor arising from the purchase of any Inventory subject to PACA or PASA, and discharge any liens, security interests, other encumbrances or trusts at any time levied on or existing with respect to such Inventory or the proceeds thereof and (ii) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the rights of Lender with respect thereto or so that Lender does not become liable to any supplier or other third party with respect thereto. Lender may add any amounts so expended to the Obligations and charge Guarantor's account therefor, such amounts to be repayable by Guarantor on demand. Lender shall be under no obligation to make such payment or effect such discharge and shall not, by doing so, be deemed to have assumed any obligation or liability of Guarantor. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. SECTION 4. REPRESENTATIONS AND WARRANTIES; COVENANTS. Guarantor hereby represents and warrants to, and covenant with, Lender the following (which shall survive the execution and delivery of this Agreement): 4.1 Corporate Existence, Power and Authority; Subsidiaries. Guarantor is a corporation duly organized and in good standing under the laws of Delaware and is duly qualified as a foreign corporation or partnership and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on Guarantor's financial condition, results of operation or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder are all within Guarantor's corporate powers have been duly authorized and are not in contravention of law or the terms of Guarantor's certificate of incorporation, by - laws, or other organizational documentation, or any indenture, agreement or undertaking to which any Guarantor is a party or by which Guarantor or its property are bound. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Guarantor enforceable in accordance with their respective terms. Guarantor has no subsidiaries except as set forth on Schedule 4.1 hereto. 4.2 Financial Statements; No Material Adverse Change. All financial statements relating to Guarantor which have been or may hereafter be delivered by Guarantor to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operation of Guarantor as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Guarantor to Lender prior to the date hereof, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Guarantor, since the date of the most recent audited financial statements furnished by Guarantor to Lender prior to the date hereof. 4.3 Chief Executive Office; Collateral Locations. The chief executive office of Guarantor and Guarantor's Records concerning Accounts are located only at the address set forth below and only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Guarantors to establish new locations in accordance with Section 5.2 below. The Information Certificate correctly identifies any of such locations which are not owned by Guarantor and sets forth the owners and/or operators thereof, and to the best of Guarantor's knowledge, the holders of any mortgages on such locations. 4.4 Priority of Liens; Title to Properties. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral subject only to the liens indicated on Schedule 4.4 hereto and the other liens permitted under Section 5.8 hereof. Guarantor has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Schedule 4.4 hereto or permitted under Section 5.8 hereof. 4.5 Tax Returns. Guarantor has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Guarantor has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Guarantor and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 4.6 Litigation. Except as set forth on the Information Certificate, there is no present investigation by any governmental agency pending, or to the best of Guarantor's knowledge threatened, against or affecting Guarantor, its assets or business and except for the Chapter 11 Case there is no action, suit, proceeding or claim by any Person pending, or to the best of Guarantor's knowledge threatened, against Guarantor or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Guarantor would result in any material adverse change in the assets, business or prospects of Guarantor or which would impair the ability of Guarantor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon any Collateral. 4.7 Compliance with Other Agreements and Applicable Laws. Except as may be set forth in the Extension Agreement or the Schedules thereto, Guarantor is not in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Guarantor is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. 4.8 Bank Accounts. All of the deposit accounts, investment accounts or other accounts in the name of or used by Guarantor maintained at any bank or other financial institution are set forth on Schedule 4.8 hereto. 4.9 Accuracy and Completeness of Information. All information furnished by or on behalf of Guarantor in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business, assets or prospects of Guarantor, which has not been fully and accurately disclosed to Lender in writing. 4.10 Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation under the Extension Agreement and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Guarantor shall now or hereafter give, or cause to be given, to Lender SECTION 5. AFFIRMATIVE AND NEGATIVE COVENANTS 5.1 Maintenance of Existence. Guarantor shall at all times preserve, renew and keep in full, force and effect its corporate or other existence and rights and franchises with respect thereto and Guarantor shall maintain in full force and effect all of its permits, licenses, trademarks, trade names, approvals, authorizations, leases and contracts necessary to carry on its business as presently or proposed to be conducted. Guarantor shall give Lender thirty (30) days prior written notice of any proposed change in its corporate or other name, which notice shall set forth the new name and Guarantor shall deliver to Lender a copy of the amendment to the Certificate of Incorporation of Guarantor or other instrument providing for the name change certified by the Secretary of State or other authenticating official of the jurisdiction of incorporation or constitution of Guarantor as soon as it is available. 5.2 New Collateral Locations. Guarantor may open any new location within Puerto Rico or the U.S. Virgin Islands provided Guarantor (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including UCC financing statements. 5.3 Compliance with Laws, Regulations, Etc. Guarantor shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders of any Federal, State or local governmental authority applicable to it. 5.4 Payment of Taxes and Claims. Guarantor shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Guarantor and with respect to which adequate reserves have been set aside on its books. Guarantor shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Guarantor agrees to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Guarantor such amount shall be added and deemed part of the Loans, provided, that, nothing contained herein shall be construed to require Guarantor to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations, the termination of this Agreement and the termination or non-renewal of the Extension Agreement. 5.5 Insurance. Guarantor shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Guarantor shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Guarantor fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Guarantor. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Guarantor in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Guarantor shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Guarantor shall obtain non - contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by Guarantor or any of its affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations 5.6 Certain Information. (a) Guarantor shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations or which would result in any material adverse change in Guarantor's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (b) Guarantor shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all reports which Guarantor sends to its stockholders generally and copies of all reports and registration statements which Guarantor files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (c) Guarantor shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information respecting the Collateral and the business of Guarantor, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Guarantor to any court or other government agency or to any participant or assignee or prospective participant or assignee. Guarantor hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Guarantor's expense, copies of the financial statements of Guarantor and any reports or management letters prepared by such accountants or auditors on behalf of Guarantor and to disclose to Lender such information as they may have regarding the business of Guarantor. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Guarantor to Lender in writing. 5.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Guarantor shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any stock or indebtedness to any other Person or any of its assets to any other Person (except for (i) sales of Inventory in the ordinary course of business and (ii) the disposition of worn - out or obsolete Equipment or Equipment no longer used in the business of Guarantor so long as (A) if an Event of Default exists or has occurred and is continuing, any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of $500,000 for all such Equipment disposed of in any fiscal year of Guarantor, or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e) agree to do any of the foregoing. 5.8 Encumbrances. Guarantor shall not create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including the Collateral, except: (a) liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Guarantor and with respect to which adequate reserves have been set aside on its books; (c) non - consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of such Guarantor's business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to such Guarantor, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of real property which do not interfere in any material respect with the use of such real property or ordinary conduct of the business of such Guarantor as presently conducted thereon or materially impair the value of the real property which may be subject thereto; (e) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on real estate not to exceed $250,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of any Guarantor other than the Equipment or real estate so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; (f) the security interests and liens set forth on Schedule 4.4 hereto; and (g) the security interests pursuant to the Security Pledge. 5.9 Indebtedness. Guarantor shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligations or indebtedness, except (a) the Obligations; (b) trade accounts payable not unpaid more than the greater of (i) sixty (60) days past the invoice date or (ii) the due date thereof unless Lender has established Availability Reserves with respect thereto, and other trade obligations and normal accruals in the ordinary course of business not yet due and payable, or with respect to which the Guarantor is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Guarantor, and with respect to which adequate reserves have been set aside on its books; (c) purchase money indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; (d) unsecured indebtedness of Guarantor for borrowed money incurred after the date hereof, owing to any Person other than any shareholder, officer, director, agent, employee or Affiliate of Guarantor on commercially reasonable rates and terms pursuant to an arm's length transaction; provided, that, (i) Lender shall have received not less than five (5) business days prior written notice of the intention to incur such indebtedness, which notice shall set forth in reasonable detail satisfactory to Lender, the amount of such indebtedness, the person to whom such indebtedness will be owed, the interest rate, the schedule of repayments and maturity date with respect thereto and such other information as Lender may reasonably request with respect thereto, (ii) Lender shall have received true, correct and complete copies of all agreements, documents and instruments evidencing or otherwise related to such indebtedness, (iii) the aggregate amount of such indebtedness of Guarantor and its Subsidiaries on a consolidated basis,at any time outstanding, shall not exceed $250,000, (iv) on and before the date of incurring such indebtedness and after giving effect thereto, no Event of Default, or event which with the giving notice or the passage of time or both would constitute an Event of Default, shall exist or have occurred and be continuing, (v) Guarantor may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date of the execution thereof, and (vi) Guarantor shall not, directly or indirectly, (A) make any prepayments or other non-mandatory payments in respect of such indebtedness, or (B) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto, or (C) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (vii) Guarantor shall furnish to Lender all notices, demands or other materials in connection with such indebtedness either received by guarantor or on its behalf, promptly after the receipt thereof, or sent by Guarantor or on its behalf, concurrently with the sending thereof, as the case may be; and (e) indebtedness of Guarantor described on Schedule 5.9(e) hereto; provided, that: (i) the individual principal amounts of such indebtedness and aggregate principal amounts of all such indebtedness shall not exceed the amounts shown on such Schedule 5.9 hereto less the aggregate amount of all repayments, repurchases or redemptions, whether optional or mandatory in respect thereof, plus interest thereon at the rate provided for in such agreement or instrument as in effect on the date hereof, (ii) Guarantor may only make (A) regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness and (B) a one time payment on the Closing Date, as contemplated by the Reorganization Plan and (iii) Guartantor shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iv) Guarantor shall furnish to Lender all notices or demands in connection with such indebtedness either received by any Guarantor or on its behalf, promptly after the receipt thereof, or sent by Guarantor or on its behalf, concurrently with the sending thereof, as the case may be; and (f) indebtedness to Borrowers not in excess of the amount of $250,000 incurred in any fiscal year, the proceeds of which are to be used by Guarantor to pay it's ordinary and necessary expenses. 5.10 Loans, Investments, Guarantees, Etc. Guarantor shall not, directly or indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, except: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in cash or Cash Equivalents; provided, that, as to any of the foregoing, unless waived in writing by Lender, such Guarantor shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments, (c) the loans, advances and guarantees set forth on Schedule 5.10 hereto; provided, that, as to such loans, advances and guarantees, (i) Guarantor shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such loans, advances or guarantees or any agreement, document or instrument relating thereto, or (B) as to such guarantees, redeem, retire, defease, purchase or otherwise acquire the obligations arising pursuant to such guarantees, or set aside or otherwise deposit or invest any sums for such purpose, and (ii) Guarantor shall furnish to Lender all notices or demands in connection with such loans, advances or guarantees or other indebtedness subject to such guarantees either received by Guarantor or on its behalf, promptly after the receipt thereof, or sent by Guarantor or on its behalf, concurrently with the sending thereof, as the case may be, and (d) loans and advances not in excess of the amount of $500,000 (together with all such loans and advances made by Borrowers permitted by Section 9.10(d) of the Loan Agreement) for all such loans and advances during the term of this Agreement; provided that, no such loan or advance shall be made to any Affiliate of Guarantor or any Person described on Schedule 9.22 of the Loan Agreement. 5.11 Dividends and Redemptions. Guarantor shall not, directly or indirectly, declare or pay any dividends on account of any shares of any class of capital stock of Guarantor now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or except as may be permitted by Section 5.12 hereof, make any other Restricted Junior Payment, or agree to do any of the foregoing. 5.12 Transactions with Affiliates. Guarantor shall not, directly or otherwise , (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any officer, director, agent or other person affiliated with Guarantor, except in the ordinary course of and pursuant to the reasonable requirements of Guarantor's business and upon fair and reasonable terms no less favorable to Guarantor than Guarantor would obtain in a comparable arm's length transaction with an unaffiliated person or (b) make any payments of management, consulting or other fees for management or similar services, or of any indebtedness owing to any officer, employee, shareholder, director or other person affiliated with Guarantor except reasonable compensation to officers, employees and directors for services rendered to Guarantor in the ordinary course of business. 5.13 Working Capital. Guarantor shall, at all times, maintain consolidated Working Capital of not less than $5,000,000. 5.14 Adjusted Net Worth. Guarantor shall, at all times, maintain a consolidated Adjusted Net Worth of not less than $25,000,000. 5.15 Costs and Expenses. Guarantor shall pay to Lender on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) insurance premiums, appraisal fees and search fees; (c) costs and expenses of preserving and protecting the Collateral; (d) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including preparations for and consultations concerning any such matters); and (e) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. 5.16 Further Assurances. At the request of Lender at any time and from time to time, Guarantor shall, at its expense, at any time or times duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the liens and the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Where permitted by law, Guarantor hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. SECTION 6. EVENTS OF DEFAULT AND REMEDIES 6.1 Events of Default. The occurrence or existence of any Event of Default under the Loan Agreement, is referred to herein individually as an "Event of Default", and collectively as "Events of Default". 6.2 Remedies. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Guarantor or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Guarantor of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against Guarantor or any Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender; provided, that, upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h) of the Loan Agreement, all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Guarantor, at Guarantor's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Guarantor, which right or equity of redemption is hereby expressly waived and released by Guarantor. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Guarantor designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Guarantor waive any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Guarantors waive the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Guarantor shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for in the Loan Agreement and all costs and expenses of collection or enforcement, including attorneys' fees and legal expenses. (d) For purposes of enabling Lender to exercise rights and remedies hereunder, Guarantor hereby grants to Lender, to the extent assignable, an irrevocable non-exclusive license (exercisable without payment of any royalty or other compensation to Guarantor) to use, assign or sublicense any of the trademarks, service-marks, trade names, business names, trade styles, designs, logos, and source of business identifiers and other Intellectual Property now owned or hereafter acquired by Guarantor, wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. SECTION 7. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 7.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the Commonwealth of Puerto Rico (without giving effect to principles of conflicts of law). (b) Guarantor irrevocably consents and submits to the non - exclusive jurisdiction of the United States District Court for the District of Puerto Rico and the Court of First Instance of the Commonwealth of Puerto Rico(Superior Court) for San Juan and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected or related or incidental to the dealings of Guarantors and Lender in respect of this Agreement or the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agrees that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Guarantor or any of its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Guarantor or its property). (c) Guarantor hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Guarantor in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Guarantor shall appear in answer to such process, failing which Guarantors shall be deemed in default and judgment may be entered by Lender against Guarantor for the amount of the claim and other relief requested. (d) GUARANTOR AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANYWAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. GUARANTOR AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT GUARANTOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Guarantor (whether in tort, contract, equity or otherwise) for losses suffered by Guarantor in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non - appealable judgment or court order binding on Lender that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement and the other Financing Agreements. 7.2 Waiver of Notices. Guarantor hereby expressly waive demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on Guarantor which Lender may elect to give shall entitle Guarantor to any other or further notice or demand in the same, similar or other circumstances. 7.3 Amendments and Waivers. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender, and as to amendments, as also signed by an authorized officer of Guarantor. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 7.4 Waiver of Counterclaims. Guarantor waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 7.5 Indemnification. Guarantor shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including amounts paid in settlement, court costs, and the fees and expenses of counsel. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Guarantor shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. The foregoing indemnity shall survive the payment of the Obligations, the termination of this Agreement and the termination or non-renewal of the Loan Agreement. SECTION 8. MISCELLANEOUS 8.1 Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at 268 Munoz Rivera Ave., Westernbank World Plaza Building, Suite 600, 6th Floor, , Hato Rey, P.R., 00919 and to Guarantor at its chief executive offices set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 8.2 Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 8.3 Successors. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon Guarantor and its successors and assigns and inure to the benefit of and be enforceable by Lender and its successors and assigns, except that Guarantor may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. 8.4 Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern. 8.5 Interpretative Provisions. (a) Unless otherwise expressly provided herein, (i) references herein to any agreement, document or instrument shall be deemed to include all subsequent amendments, modifications, supplements, extensions, renewals, restatements or replacements with respect thereto, but only to the extent the same are not prohibited by the terms hereof or of any other Financing Agreement, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, recodifying, supplementing or interpreting the statute or regulation. (b) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (c) This Agreement and other Financing Agreements may use several difference limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (d) This Agreement and the other Financing Agreements are the result of negotiations among and have been reviewed by counsel to Guarantor and Lender and the other parties, and are the products of all parties. Accordingly, this Agreement and the other Financing Agreements shall not be construed against Lender merely because of Lender's involvement in their preparation. (e) Capitalized terms used herein, not otherwise defined herein, that are defined in the Loan Agreement, shall have the respective meanings prescribed therein. (f) Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP as consistently applied . 8.6 Counterparts. This Agreement may be executed in any number of counterparts, but all of such counterparts shall together constitute but only and the same agreement. In making proof of this Agreement, it shall not be necessary to produce or account for more than one counterpart hereof signed by each of the parties hereto. This Agreement may be executed and delivered by telecopier with the same force and effect as if it were a manually executed and delivered counterpart. IN WITNESS WHEREOF, Lender and Guarantor have caused these presents to be duly executed as of the day and year first above written, by officers thereof duly authorized. LENDER Westernbank Puerto Rico By: /S/ Miguel Vazquez Miguel Vazquez President, Business Credit Division GUARANTOR Nutritional Sourcing Corporation (f/k/a Pueblo Extra International, Inc.) Attest: By: /S/ Daniel J. O'Leary /S/_________________ Daniel J. O'Leary Secretary Executive Vice President and (Seal) Chief Financial Officer Chief Executive Office: 550 Biltmore Way Suite 900 Coral Gables, FL 33134 CODE: PUEBLO -3 GUARANTOR-GENERAL SECURITY AGREEMENT-NEW-3 EX-10 9 a10kex1051.txt EXHIBIT 10.51 LOAN AND SECURITY AGREEMENT by and between WESTERNBANK PUERTO RICO (BUSINESS CREDIT DIVISION) as Lender and PUEBLO INTERNATIONAL, LLC. XTRA SUPERFOOD CENTERS, INC. PUEBLO ENTERTAINMENT, INC. XTRA MERGER CORPORATION CARIBAD, INC. ALL TRUCK, INC. as Borrowers and NUTRITIONAL SOURCING CORPORATION Dated: May 23, 2003 LOAN AND SECURITY AGREEMENT This Loan and Security Agreement, dated as of May 23, 2003 is entered into by and between Westernbank Puerto Rico, a Puerto Rico Banking corporation ("Lender") and Pueblo International, LLC ("Pueblo"), a Delaware limited liability company, FLBN Corporation (f/k/a Xtra Super Food Centers, Inc.), a Delaware corporation, Pueblo Entertainment, Inc., a Delaware corporation, Xtra Merger Corporation, a Delaware corporation, Caribad, Inc., a Puerto Rico corporation and All Truck, Inc., a Delaware corporation (hereinafter referred to individually as a "Borrower" and collectively as "Borrowers") and Nutritional Sourcing Corporation, a Delaware corporation ("NSC"). WITNESSETH WHEREAS, pursuant to an Extension And Modification Agreement between Lender, Borrowers and NSC, dated as of January 30, 2003 (the "Extension Agreement"), Lender has (a) purchased "Loans" and other "Obligations" pursuant to the "Credit Agreement" (as such terms are used in the Extension Agreement) and (b) made Loans and granted other financial accommodations to Borrower as a bridge facility; WHEREAS, the Extension Agreement contemplates that under certain circumstances Lender and Borrowers and NSC will substitute the Extension Agreement with a "Definitive Loan Agreement" and other "Definitive Financing Agreements" (as defined in the Extension Agreement) and make additional loans to Borrowers; WHEREAS, this Agreement is the Definitive Loan Agreement referred to in the Extension Agreement; WHEREAS, Borrowers and NSC have requested that Lender enter into certain financing arrangements with Borrowers pursuant to which Lender may make loans and provide other financial accommodations to Borrowers and as contemplated by the Extension Agreement; WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires. All references to Borrowers and Lender or pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. The word "including" when used in this Agreement shall mean "including, without limitation". An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3 or is cured in a manner satisfactory to Lender, if such Event of Default is capable of being cured as determined by Lender. Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean all present and future rights of each Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance, including Credit Card Receivables. 1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if necessary, to the next one sixteenth (1/16) of one (1%) percent) determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a decimal, prescribed by any United States or foreign banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of the Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. 1.3 "Adjusted Net Worth" shall mean as to any Person, at any time, in accordance with GAAP (except as otherwise specifically set forth below), on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to the sum of: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, calculating the book value of inventory for this purpose on a first - in - first - out basis, after deducting from such book values all appropriate reserves in accordance with GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including tax and other proper accruals) plus (b) indebtedness of such Person and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions acceptable to Lender and as to NSC the amount of the Senior Secured Notes from time to time issued and outstanding. 1.4 "Affiliate" shall mean, with respect to a specified Person, any other Person which directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes (a) any Person which beneficially owns or holds ten percent (10%) or more of any class of voting stock of such Person or other equity interests in such Person, (b) any Person of which such Person or a Subsidiary of such Person beneficially owns or holds ten percent (10%) or more of any class of voting stock or in which such Person beneficially owns or holds ten percent (10%) or more of the equity interests and (c) any director or executive officer of such Person. For the purposes of this definition, the term "control" (including with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the 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 stock, by agreement or otherwise. 1.5 "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans and Letter of Credit Accommodations which would otherwise be available to Borrowers under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of any Borrower, NSC or any other Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrowers, NSC or any other Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect outstanding Letter of Credit Accommodations as provided in Section 2.2 hereof or (d) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. 1.6 "Bankruptcy Code" shall mean the United States Code, being title 11 of the United States Code as enacted in 1978, as the same may have heretofore been or may hereafter be amended, recodified, modified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.7 "Bankruptcy Court" shall mean the United States Bankruptcy Court for the district of Delaware. 1.8 "Blocked Accounts" shall have the meaning set forth in section 6.3 hereof. 1.9 "Borrowers Agent" shall mean Pueblo, in its capacity as agent for Borrowers hereunder and any successor or replacement agent for Borrowers appointed and approved by Lender in writing, and its successors and assigns. 1.10 "Business Day" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York and a day on which the Reference Bank and Lender are open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market. 1.11 "Capital Lease" shall mean, as applied to any Person, any lease of (or any agreement conveying the right to use) any property (whether real, personal or mixed) by such Person as lessee which in accordance with GAAP, is required to be reflected as a liability on the balance sheet of such Person. 1.12 "Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock, partnership interests or limited liability company interests at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock or other interests (but excluding any debt security that is exchangeable for or convertible into such capital stock). 1.13 "Cash Equivalents" shall mean, at any time, (a) any evidence of indebtedness with a maturity date of one hundred eighty (180) days or less issued or directly and fully guaranteed or insured by the United States of America of any agency or instrumentality thereof; provided that, the full faith and credit of the United States of America is pledged in support thereof; (b) certificates of deposit or bankers' acceptances with a maturity of one hundred eighty (180) days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $250,000,000; (c) commercial paper (including variable rate demand notes) with a maturity of one hundred eighty (180) days or less issued by a corporation (except an Affiliate of a Borrower) organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days for underlying security of the types described in clause (a) above entered into with any financial institution having combined capital and surplus and undivided profits of not less than $250,000,000; (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within one hundred eighty (180) days or less from the date of acquisition; provided, that, the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money market funds and mutual funds which invest substantially all of their assets in securities of the types described in clauses (a) through (e) above. 1.14 "Change of Control" shall mean (a) the transfer (in one transaction or a series of transactions) of all or substantially all of the assets of a Borrower or NSC to any Person or group (as such term is used in Section 13(d)(3) of the Securities And Exchange Act of 1934[the "Exchange Act"]); (b) the liquidation or dissolution of a Borrower or NSC or the adoption of a plan by the stockholders of a Borrower or NSC relating to the dissolution or liquidation of any Borrower or NSC; (c) the acquisition by any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act), of beneficial ownership directly or indirectly, of a majority of the voting power of the total outstanding voting stock of any Borrower or NSC, or (d) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of any Borrower or NSC cease for any reason to constitute a majority of the Board of Directors of such Borrower or NSC, then still in office; (e) the failure of the present beneficial holders of voting stock of NSC to own and control, directly or indirectly, one hundred (100%) percent of the voting power of the total outstanding voting stock of each Borrower or NSC or (f) the failure of NSC to be the sole member or sole holder of the membership interests of Pueblo. As used in this Section 1.14 the term "Board of Directors" includes the Board of Managers or other governing body of Pueblo and the term "voting stock" includes the membership interests of Pueblo. 1.15 "Chapter 11 Case" shall mean the Chapter 11 Case of NSC under the Bankruptcy Code known as In re Nutritional Sourcing Corporation, in the Bankruptcy Court, designated Case No. 02-12550 (PJW). 1.16 "Closing Date" shall mean the date of making the initial Loans hereunder, to be fixed by Lender, on or before June 30, 2003, at such place at such time as shall be specified by Lender. 1.17 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.18 "Collateral" shall have the meaning set forth in Section 5 hereof. 1.19 "Collateral Access Agreement" shall mean an agreement in writing, in form and substance satisfactory to Lender, from any lessor of premises to any Borrower or NSC or any other Person to whom any Collateral(including Inventory, Equipment, bills of lading or other documents of title)is consigned or who has custody, control or possession of any such Collateral or is otherwise the owner or operator of any premises on which any of such Collateral is located, pursuant to which such lessor, consignee or other Person, inter alia, acknowledges, in form and substance satisfactory to Lender, Lender's first priority lien and security interest in such Collateral, and agrees to waive any and all claims such lessor, consignee or other Person may at any time have against such Collateral and agrees to permit Lender access to, and the right to remain on the premises of such lessor, consignee or other Person, so as to exercise Lender's rights and remedies and otherwise deal with such Collateral and in the case of any Person who at any time has custody, control or possession of any bills of lading or other documents of title, agrees to hold such bills of lading or other documents as bailee for Lender and to follow all instructions of Lender with respect thereto. 1.20 "Credit Card Acknowledgments" shall mean the agreements among Credit Card Issuers or Credit Card Processors who are parties to Credit Card Agreements, Borrowers and Lender, pursuant to which the Credit Card Issuers or Credit Card Processors acknowledge Lender's first priority security interest in the monies due and to become due to Borrowers (including credits and reserves) under the Credit Card Agreements, and agree to transfer all such amounts to the Blocked Accounts, or such other account of Borrowers' Agent set forth in the agreement, or any other account that Lender may direct, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.21 "Credit Card Agreement" shall mean all agreements now or hereafter entered into by any Borrower with any Credit Card Issuer or Credit Card Processor, as same may now exist or may hereafter be amended, modified, supplemented, extended, renewed or replaced. 1.22 "Credit Card Issuer" shall mean any person who issues credit cards or debit cards used by customers of a Borrower to purchase goods, including without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards, and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards. 1.23 "Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who services, processes or manages the credit, authorization, billing, transfer and/or payment with respect to any sales transactions of any Borrower involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer. 1.24 "Credit Card Receivables" shall mean all accounts consisting of the present and future rights of any Borrower to payment by Credit Card Issuers or Credit Card Processors for merchandise sold and delivered to customers of Borrowers who have purchased such goods using a credit card or debit card issued by a Credit Card Issuer. 1.25 "Debt" shall include, as to any Person, at any time (without duplication) (a) any liability, whether or not contingent, of such Person in respect of borrowed money, (b) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except (i) trade accounts payable not unpaid more than the greater of (A) sixty (60) days past the invoice date or (B) the due date thereof and (ii) other accounts payable and current accrued expenses payable of such Person arising in the ordinary course of business which are not past due by more than ninety (90) days, (d)all obligations of such Person under a Capital Lease, (e) all indebtedness or other obligations of others guaranteed by such Person, (f) all obligations secured by a lien or security interest existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non recourse to the credit of such Person, (g) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers acceptances, surety or other bonds or similar instruments and (h) all obligations of such Person with respect to redeemable stock or repurchase or redemption obligations with respect to any Capital Stock or other equity securities issued by such Person. 1.26 "Dilution" shall mean, for any period, the ratio of (a) the aggregate amount of reductions in Accounts other than as a result of payments in cash, for such period to (b) the aggregate amount of total sales, for such period. 1.27 "Due Date" shall mean June 1, 2008. 1.28 "EBITDA" shall mean, as to any Person, with respect to any period, an amount equal to: (a) the Net Income After Tax of such Person for such period, plus (b) depreciation and amortization of such Person for such period (to the extent deducted in the computation of Net Income After Tax of such Person for such period), plus (c) interest expense of such Person for such period (to the extent deducted in the computation of Net Income After Tax), plus (d) income taxes of such Person for such period (to the extent deducted in the computation of Net Income After Tax) all in accordance with GAAP. 1.29 "Effective Date" shall mean the date of execution of this Agreement by Lender. 1.30 "Eligible Accounts" shall mean Accounts (other than Credit Card Receivables) created by a Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and bona fide sale and delivery by a Borrower or rendition of services by a Borrower in the ordinary course of its business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; (b) such Accounts are not unpaid (i) more than ninety (90) days after the date of the original invoice for them and (ii) more than sixty (60) days past the due date thereof. (c) such Accounts comply with the terms and conditions contained in Section 7.2(c) of this Agreement; (d) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (e) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America or the Commonwealth of Puerto Rico or at Lender's option: if either (i) the account debtor has delivered to Borrower an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender and payable only in the United States of America and in U.S. dollars sufficient to cover such Account in form and substance satisfactory to Lender and if required by Lender the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender or (iii) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determined). (f) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except as to bill and hold invoices if Lender shall have received an agreement in writing from the account debtor in form and substance satisfactory to Lender confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice. (g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts); (h) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts or reduce the amount payable or delay payment thereunder; (i) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; (j) neither the account debtor nor any officer or employee of the accountdebtor with respect to such Accounts is an officer, employee or agent of or affiliated with any Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise; (k) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, upon Lender's request, the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, has been complied with in a manner satisfactory to Lender; (l) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (m) such Accounts of a single account debtor or its affiliates do not constitute more than forty percent (40%) of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts); (n) such Accounts are not owed by an account debtor who has Accounts unpaid more than sixty (60) days after the date of the original invoice for them which constitute more than Fifty Percent (50%) percent of the total Accounts of such account debtor; (o) such Accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the credit limit with respect to such account debtors as determined by Lender from time to time (but the portion of the Accounts not in excess of such credit limit may be deemed Eligible Accounts); and (p) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender. General criteria for Eligible Accounts may be established and revised from time to time by Lender in good faith. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. 1.31 "Eligible Inventory" shall mean Inventory of Borrowers consisting of finished goods held for resale in the ordinary course of the business of Borrowers which are acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) raw materials or work-in-process; (b) components which are not part of finished goods; (c) spare parts for equipment and fixtures; (d) packaging and shipping materials; (e) supplies used or consumed in Borrowers' business; (f) Inventory at premises other than those owned and controlled by Borrower, except if Lender shall have received a Collateral Access Agreement with respect to such premises; (g) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (h) bill and hold goods; (i) unserviceable, obsolete or slow moving Inventory; (j) Inventory which is not subject to the first priority, valid and perfected security interest of Lender; (k) returned, damaged and/or defective Inventory; (l) Inventory purchased or sold on consignment; (m) Inventory in transit other than Inventory for which Lender has arranged a Letter of Credit Accommodation described in Section 2.2(c)(i) hereof; (o) Inventory which consists of produce, deli and bakery food products, expired foods, and products with short expiration dates or shelf-life; and (p) Inventory which is subject to PACA or PASA and for which the supplier has not been paid in full. General criteria for Eligible Inventory may be established and revised from time to time by Lender in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.32 "Environmental Laws" shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between any Borrower and any other Credit Party and any governmental authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to record keeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term "Environmental Laws" includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials. 1.33 "Equipment" shall mean all of each Borrowers' now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, racks, shelves, freezers, coolers, material handling equipment, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements wherever located. 1.34 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof. 1.35 "Eurodollar Rate" shall mean with respect to the Interest Period for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic average of the rates of interest per annum (rounded upwards, if necessary, to the next one - sixteenth (1/16) of one (1%) percent) at which the Reference Bank is offered deposits of United States dollars in the London interbank market (or other Eurodollar Rate market selected by Borrowers' Agent and approved by Lender) on or about (9:00a.m. (New York time) two (2) Business Days prior to the commencement of such Interest Period in amounts substantially equal to the principal amount of the Eurodollar Rate Loans requested by and available to Borrowers in accordance with this Agreement, with a maturity of comparable duration to the Interest Period selected by Borrowers' Agent. 1.36 "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof. 1.37 "Excess Availability" shall mean the amount, as determined by Lender, calculated at any time, equal to: (a) the lesser of: (i) the amount of the Revolving Loans available to Borrowers as of such time based on (A) the applicable lending formulas multiplied by (B) the Net Amount of Eligible Accounts and the lesser of (1) the Value of Eligible Inventory and(2) the Net Recovery Percentage of Eligible Inventory, as determined by Lender, and the amount of the Pledged Cash and subject to the sublimits and Availability Reserves from time to time established by Lender hereunder, and (ii) the Maximum Credit minus (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations plus (ii) the aggregate amount of all then outstanding and unpaid trade payables of Borrowers which remain unpaid more than the greater of (A) sixty (60) days past the invoice date or (B) the due date thereof, as of such time, plus (iii) the amount of checks issued by Borrowers to pay trade payables, but not yet sent and the book overdraft of Borrowers. 1.38 "Extension Agreement Financing Agreements" shall mean, collectively, the Extension Agreement and all notes, guarantees, security agreement documents and instruments executed and/or delivered by Borrowers, NSC or any other Obligor in connection with the Extension Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.39 "Financing Agreements" shall mean, collectively, this Agreement and all notes, guarantees, security agreement documents and instruments now or at any time hereafter executed and/or delivered by Borrowers, NSC or any other Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.40 "Fixed Charge Coverage Ratio" shall mean as to any Person with respect to any period, the ratio of (a) such Person's EBITDA for such period divided by (b) the sum of (i) the interest expense plus (ii) the current maturities of all Debt, except the Revolving Loans, plus (iii) all taxes (not including taxes deducted from or charged to earnings in computing EBITDA), of such Person for such period. 1.41 "Franchise Agreements" shall mean all agreements between any Borrower and any other person, pursuant to which a Borrower is granted the right to sell, rent or lease any property or provide any service by another Person with or without the use of any of such Person's Intellectual Property. 1.42 "Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including any that are or become classified as hazardous or toxic under any Environmental Law). 1.43 "Information Certificate" shall mean the Information Certificates of Borrowers and NSC constituting Exhibit A to the Extension Agreement and as revised by Borrowers and delivered to Lender in connection with this Agreement, containing material information with respect to Borrowers and NSC and their respective business and assets, provided by or on behalf of Borrowers to Lender in connection with the preparation of the Agreement and the other Financing Agreements and the financing arrangements provided for therein. 1.44 "Intellectual Property" shall mean as to NSC and its Subsidiaries such now owned and hereafter arising or acquired patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright registrations, trademarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing; all extensions, renewals, reissues, divisions, continuations, and continuations in part of any of the foregoing; all rights to sue for past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; goodwill (including any goodwill associated with any trademark or the license of any trademark); customer and other lists in whatever form maintained; trade secret rights, copyright rights, rights in works of authorship, domain names and domain name registration; software and contract rights relating to computer software programs, in whatever form created or maintained. 1.45 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of approximately one (1), two (2), or three (3) months duration as Borrowers' Agent may elect, the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided that, Borrowers' Agent may not elect an Interest Period which will end after the last day of the then - current term of this Agreement. 1.46 "Interest Rate" shall mean as to(a) Prime Rate Loans,(i)which are Revolving Loans, a rate of one and one half percent (1.5%) per annum in excess of the Prime Rate and (ii) which are Term Loans, a rate of two percent (2%) per annum in excess of the Prime Rate and (b) as to Eurodollar Rate Loans, (i) which are Revolving Loans, a rate of three and one half percent (3.5%) per annum in excess of the Adjusted Eurodollar Rate and (ii) which are Term Loans, a rate of four percent (4%) per annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable for the Interest Period selected by Borrowers' Agent as in effect three (3) Business Days after the date of receipt by Lender of the request of Borrower for such Eurodollar Rate Loans in accordance with the term thereof, whether such rate is higher or lower than any rate previously quoted to Borrowers); provided that, the Interest Rate shall mean(x) the rate of three and one half percent (3.5%) per annum in excess of the Prime Rate as to Prime Rate Loans which are Revolving Loans and the rate of four percent (4%) per annum in excess of the Prime Rate as to Prime Rate Loans which are Term Loans and (y) the rate of five and one half percent (5.5%) per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans which are Revolving Loans and the rate of six percent (6%) per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans which are Term Loans, at Lender's option, without notice, (a) for the period (i) from and after the date of termination or non-renewal hereof until Lender has received full and final payment of all Obligations (notwithstanding entry of a judgment against Borrowers) and (ii) from and after the date of the occurrence of an Event of Default for so long as such Event of Default is continuing as determined by Lender, and (b) on the Revolving Loans at any time outstanding in excess of the amounts available to Borrower under Section 2 (whether or not such excess(es), arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default); provided that, at no time shall the Interest Rate be lower than a rate of six percent (6%) per annum as to Prime Rate Loans and seven percent (7%) per annum as to Eurodollar Rate Loans. 1.47 "Inventory" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. 1.48 "Letter of Credit Accommodations" shall mean the letters of credit, merchandise purchase or other guaranties which are from time to time either (a) issued or opened by Lender for the account of any Borrower, NSC or any other Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by any Borrower of its obligations to such issuer. 1.49 "Loans" shall mean the Revolving Loans and the Term Loans. 1.50 "Material Adverse Effect" shall mean a material adverse effect on (a) the financial condition, business, performance or operation of Borrowers, (b) the legality, validity or enforceability of this Agreement or any of the other Financing Agreements; (c) the legality, validity, enforceability, perfection or priority of the security interests and liens of Lender upon the Collateral or any other property which is security for the Obligations; (d) the Collateral of Borrowers (taken as a whole) or the value of the Collateral; (e) the ability of Borrowers to repay the Obligations or of Borrowers to perform their obligations under this Agreement or any of the other Financing Agreements; or (f) the ability of Lender to enforce the Obligations or realize upon the Collateral or otherwise with respect to the rights and remedies of Lender under this Agreement or any of the other Financing Agreements. 1.51 "Material Contract" shall mean (a) any contract or other agreement (other than the Financing Agreements), written or oral, of a Borrower involving monetary liability of or to any Person in an amount in excess of $1,000,000 in any fiscal year, (c) any Franchise Agreement and (c) any other contract or other agreement (other than the Financing Agreements), whether written or oral, to which a Borrower is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto would have a material adverse effect on the business, assets, condition (financial or otherwise) or results of operations or prospects of Borrowers or the validity or enforceability of this Agreement, any of the other Financing Agreements, or any of the rights and remedies of Lender hereunder or thereunder. 1.52 "Maximum Credit" shall mean the amount of $80,000,000. 1.53 "Net Amount of Eligible Accounts" shall mean the gross amount of Eligible Accounts less (a) sales, excise or similar taxes included in the amount thereof and (b) returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto. 1.54 "Net Income After Tax" shall mean, with respect to any Person for any period, the aggregate of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such period (excluding to the extent included therein any extraordinary or non - recurring gains and extraordinary non-cash charges to property, plant and equipment or goodwill) after deducting all charges (including income taxes) which should be deducted before arriving at the net income (loss) for such period, all as determined in accordance with GAAP; provided that, (a) the net income of any Person that is not a Subsidiary of NSC or a Borrower or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions actually received by NSC or a Borrower or a wholly - owned Subsidiary of NSC or a Borrower; (b) the net income of any Person that is not a wholly owned Subsidiary shall be included only after deducting portions of income properly attributable to minority interests and (c) the effect of any change in accounting principles adopted by such Person or its Subsidiaries after the date hereof shall be excluded. For the purposes of this definition, net income excludes any gain and non - cash loss (but not any cash loss) realized upon the sale or other disposition of any assets that are not sold in the ordinary course of business (including, without limitation, dispositions pursuant to sale and leaseback transactions) or of any capital stock of such Person or a Subsidiary of such Person and any net income realized as a result of changes in accounting principles or the application thereof to such Person. 1.55 "Net Recovery Percentage" shall mean the fraction, expressed as a percentage (a) the numerator of which is the amount equal to the recovery on the aggregate amount of the Inventory at such time on an orderly liquidation basis as set forth in appraisals of Inventory received by Lender in accordance with Section 7.3, net of estimated operating expenses, liquidation expenses and commissions and (b) the denominator of which is the original cost of the aggregate amount of the Inventory subject to appraisal. 1.56 "Net Revenues" shall mean, gross revenues less returns, credits, discounts and allowances. 1.57 "Noteholders Liens" shall mean the security interests in favor of the holders of NSC's 10.125% Senior Secured Notes due August 1, 2009, in the collateral described in the Security Pledge, as in effect on the Closing Date, which shall be junior and subordinate to the liens and security interests of Lender therein to the extent provided in the Security Pledge as in effect on the date hereof. 1.58 "NSC Notes" shall mean the 10.125% Restated Subordinated Intercompany Note issued by Pueblo and 10.125% Subordinated Intercompany Note issued by Pueblo Entertainment, Inc. to NSC, to be dated on or about June 2, 2003 in the principal amounts of $70,000,000 and $20,000,000, respectively. 1.59 "Obligations" shall mean any and all Revolving Loans, Term Loans, Letter of Credit Accommodations, and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrowers or NSC to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to any Borrower under the Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.60 "Obligor" shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrowers. 1.61 "Payment Account" shall have the meaning set forth in Section 6.3 hereof. 1.62 "PACA" shall mean the "Packers and Stockyards Act", 7 USC Section 181, et.seq. 1.63 "PASA" shall mean the "Perishable Agricultural Commodities Act", 7 USC Section 499a, et. seq. 1.64 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects Subchapter S status under the Internal Revenue Code of 1986, as amended or N corporation status under the Puerto Rico Internal Revenue Code of 1994, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.65 "Pledged Cash" shall mean the cash collateral delivered by Borrowers to Lender pursuant to a "Cash Collateral Pledge And Security Agreement" dated as of January 30, 2003 and which will continue to be held by Lender subject to the provisions thereof, as amended (the "Cash Collateral Agreement") and this Agreement. 1.66 "Prime Rate" shall mean the rate from time to time advised by Westernbank Puerto Rico, or its successors, to its clients as its "prime rate", whether or not such advised rate is the best rate available at such bank. 1.67 "Prime Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms thereof. 1.68 "Real Estate Security" shall include (a) those leasehold mortgages requested by Lender to be granted by Borrowers; (b) the mortgage liens on the Real Property and interests of Borrowers described in Schedule 5.1(e) hereto (the "Mortgages"), (c) the mortgage notes described on Schedule 5.1(e) hereto to be pledged to Lender and (d) liens and security interests in favor of Lender on all other Real Property of Borrowers or NSC, all on the terms and subject to the provisions contained herein and in the other applicable Financing Agreements. 1.69 "Real Property" shall mean all now owned and hereafter acquired real property of any Borrower or NSC, including leasehold interests and those real properties described on Schedule 5.1(e) hereto, together with all buildings, structures and other improvements located thereon and all licenses, easements and appurtenances relating thereto, whenever located. 1.70 "Receivables" shall mean all of the following now owned or hereafter arising or acquired property of Borrowers: (a) all Accounts; (b) all interest, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (c) all payment intangibles of each Borrower; (d) all letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable to a Borrower or otherwise in favor of or delivered to any Borrower in connection with any Account; or (e) all other accounts, contract rights, chattel paper, instrument, notes, general intangibles and other forms of obligations owing to any Borrower, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by any Borrower or to or for the benefit of any third person, including loans or advances to any Affiliates or Subsidiaries of NSC or otherwise associated with any Accounts, Inventory or general intangibles of any Borrower (including without limitation, choses in action, causes of action, tax refunds, tax refund claims, any funds which may become payable to a Borrower in connection with the termination of any employee benefit plan and any other amounts payable to a Borrower from any employee benefit plan) and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any process thereof and proceeds of insurance covering the lives of employees on which a Borrower is a beneficiary. 1.71 "Records" shall mean all of Borrowers' present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of a Borrower with respect to the foregoing maintained with or by any other person). 1.72 "Reference Bank" shall mean Westernbank Puerto Rico or such other bank as Lender may from time to time designate. 1.73 "Reorganization Plan" shall mean NSC Plan of Reorganization in the Chapter 11 Case as approved by Lender; but shall exclude the "Alternative Plan" described therein. 1.74 "Restricted Junior Payment" shall mean (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of Capital Stock of any Borrower now or hereafter outstanding or any payment on account of a return of capital (or the setting aside or otherwise depositing or investing of any sums for such purpose) or (b) any redemption, retirement, purchase, defeasance or other acquisition, direct of indirect, of any shares of any class of Capital Stock of any Borrower or any Affiliate of a Borrower now or hereafter outstanding (or the setting aside or otherwise depositing or investing of any sums for such purpose) or (c) any payment, direct or indirect, of any interest, principal of or premium, if any, on any redemption, retirement, purchase or other acquisition, direct or indirect, of any Subordinated Debt (or the setting aside or otherwise depositing or investing of any sums for such purpose) or (d) any payment of money or transfer of any interest in any asset to any Affiliate of a Borrower. 1.75 "Retail Store" shall mean the retail stores which are now existing or hereafter operated by any Borrower and which sell Inventory. 1.76 "Revolving Loans" shall mean the loans now or hereafter made by Lender to or for the benefit of Borrower on a revolving basis (involving advances, repayments and readvances) as set forth in Section 2.1 hereof. 1.77 "Security Pledge" shall mean the "Security Pledge And Intercreditor Agreement between NSC and Wilmington Trust Company, to be dated on or about June 2, 2003. 1.78 "Senior Secured Notes" shall mean NSC's 10.125% Senior Secured Notes due August 1, 2009, to be issued by NSC pursuant to and as part of the Reorganization Plan. 1.79 "Solvent" shall mean, at any time with respect to any Person, that at such time such Person (a) is able to pay its debts as they mature and has (and has a reasonable basis to believe it will continue to have) sufficient capital (and not unreasonably small capital) to carry on its business consistent with its practices as of the date thereof, and (b) the assets and properties of such Person at a fair valuation (and including as assets for this purpose at a fair valuation all rights of subrogation, contribution or indemnification arising pursuant to any guarantees given by such Person) are greater than the indebtedness of such Person, and including subordinated and contingent liabilities computed at the amount which, such person has a reasonable basis to believe, represents an amount which can reasonably be expected to become an actual or matured liability (and including as to contingent liabilities arising pursuant to any guarantee the face amount of such liability as reduced to reflect the probability of it becoming a matured liability). 1.80 "Subordinated Debt" shall mean all liabilities, indebtedness and obligations of any Borrower, NSC or any other Obligor to any person the payment of which is restricted by this Agreement, any of the other Financing Agreements or the Security Pledge. 1.81 "Subsidiary" or "subsidiary" shall mean, with respect to any Person, any corporation, association, limited liability company, limited liability partnership, or other limited or general partnership, trust, association or other business entity, of which an aggregate of at least a majority of the outstanding Capital Stock or other interests entitled to vote in the election of the Board of Directors of such corporation, managers, trustees or other controlling persons (whether or not the right so to vote exists or has been suspended by reason of the happening of a contingency), or an equivalent controlling interest therein, of such Person is, at the time directly or indirectly, owned by such Person and/or one or more subsidiaries of such Person. 1.82 "Suppressed Availability" shall mean the amount, as determined by Lender, calculated at any time, which Borrowers shall otherwise be entitled to borrow under applicable lending formulas but which shall not be available to, and which shall be withheld from, Borrowers. 1.83 "Term Loans" shall mean the term loans made by Lender to Borrowers as provided for in Section 2.3 hereof. 1.84 "Uniform Commercial Code" or "UCC" shall include the Puerto Rico "Commercial Transactions Act" and "UCC" shall mean the Uniform Commercial Code. 1.85 "Value" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) cost computed on a first - in - first - out basis in accordance with GAAP or (b) market value. 1.86 "Voting Stock" or "voting stock" shall mean with respect to any Person, (a) one(1) or more classes of Capital Stock of such Person having general voting powers to elect at least a majority of the Board of Directors, managers, trustees or other persons performing similar functions, even if at the time any other class or classes of Capital Stock have, or might have, voting power by reason of the happening of any contingency or (b) any Capital Stock of such Person convertible or exchangeable without restriction at the option of the holder thereof into Capital Stock of such Person described in clause (a) of this definition. 1.87 "Working Capital" shall mean as to any Person, at any time, in accordance with GAAP, on a consolidated basis for such Person and its subsidiaries (if any), the amount equal to the difference between: (a) the aggregate net book value of all current assets of such Person and its subsidiaries (as determined in accordance with GAAP), calculating the book value of inventory for this purpose on a first - in - first - out basis, and (b) all current liabilities of such Person and its subsidiaries (as determined in accordance with GAAP), provided, that, as to Borrowers, for purposes of Section 9.14, (i) the liabilities of Borrowers to Lender under this Agreement and (ii) the current amount of Borrowers' reserves for self insurance liabilities, shall not be considered current liabilities (whether or not classified as current liabilities in accordance with GAAP). Section 2. Credit Facilities. 2.1 Revolving Loans. (a) Subject to and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrowers from time to time in amounts requested by Borrowers' Agent up to the amount equal to: (i) Up to ninety percent (90%) of the Net Amount of Eligible Accounts, plus (ii) Up to the lesser of: (A) sixty five percent (65%) of the Value of Eligible Inventory or (B) eighty percent (80%) of the "Net Recovery Percentage" for Eligible Inventory, plus (iii) Up to One Hundred Percent (100%)of the Pledged Cash, less (iv) any Availability Reserves; provided that, except in Lender's discretion, the aggregate amount of Revolving Loans at any time outstanding pursuant to Section 2.1(a)(i)(ii)and (iii) hereof shall in no event exceed Thirty Five Million Dollars ($ 35,000,000). (b) Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrowers' Agent, (i) reduce the lending formula with respect to Eligible Accounts and Eligible Inventory to the extent that Lender determines in good faith that: (A) the Dilution with respect to the Accounts for any period has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (B) the general creditworthiness of account debtors has declined or (C) the Dilution as of the close of any month is greater than five percent (5%) for such month or (ii) reduce the lending formula(s) with respect to Eligible Inventory to the extent that Lender determines that: (A) the number of days of the turnover of the Inventory for any period has changed in any material respect or (B) the liquidation value of the Eligible Inventory, or any category thereof, has decreased, or (C) the nature and quality of the Inventory has deteriorated. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Availability Reserves. Lender anticipates that any reduction on account of a determination by Lender under Section 2.1(b)(i) (C) hereof will be at a rate which is not less than twice the percentage determined thereunder. (C) Except in Lender's discretion, the aggregate amount of the Loans and the Letter of Credit Accommodations outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Loans, or the aggregate amount of the outstanding Loans and Letter of Credit Accommodations exceed the amounts available under the lending formulas, the sublimits for Letter of Credit Accommodations set forth in Section 2.2(d) or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrowers shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. (d) Lender may treat the then undrawn amounts of outstanding Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory as Revolving Loans to the extent Lender is in effect basing the issuance of the Letter of Credit Accommodations on the Value of the Eligible Inventory being purchased with such Letter of Credit Accommodations. In determining the actual amounts of such Letter of Credit Accommodations to be so treated for purposes of the sublimit, the outstanding Revolving Loans and Availability Reserves shall be attributed first to any components of the lending formulas in Section 2.1(a) that are not subject to such sublimit, before being attributed to the components of the lending formulas subject to such sublimit. 2.2 Letter of Credit Accommodations. (a) Subject to and upon the terms and conditions contained herein, at the request of Borrowers' Agent, Lender agrees to provide or arrange for Letter of Credit Accommodations for the account of Borrowers containing terms and conditions acceptable to Lender and the issuer thereof. Any payments made by Lender to any issuer thereof and/or related parties in connection with the Letter of Credit Accommodations shall constitute additional Revolving Loans to Borrower pursuant to this Section 2.2. (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations Borrowers shall pay to Lender a letter of credit fee at a rate equal to two and one - half percent (2.5%) per annum on the daily outstanding balance of the Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month, except that Borrowers shall pay to Lender such letter of credit fee, at Lender's option, without notice, at a rate equal to four and one - half percent (4.5%) per annum on such daily outstanding balance for: (i) the period from and after the date of termination or non - renewal hereof until Lender has received full and final payment of all Obligations (notwithstanding entry of a judgment against any Borrower) and (ii) the period from and after the date of the occurrence of an Event of Default for so long as such Event of Default is continuing as determined by Lender. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrowers to pay such fee shall survive the termination or non - renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available unless on the date of the proposed issuance of any Letter of Credit Accommodations the Revolving Loans available to Borrower (subject to the Maximum Credit and any Availability Reserves) are equal to or greater than: (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the sum of (A) thirty five percent (35%) of the Value of such Eligible Inventory, plus (B) freight, taxes, duty and other amounts which Lender estimates must be paid in connection with such Inventory upon arrival and for delivery to one of Borrower's locations for Eligible Inventory within the United States of America, Puerto Rico or the Virgin Islands and (ii) if the proposed Letter of Credit Accommodation is for any other purpose an amount equal to one hundred percent(100%) of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. Effective on the issuance of each Letter of Credit Accommodation an Availability Reserve shall be established in the applicable amount set forth in Section 2.2"(i) or Section 2.2"(ii). (d) Except in Lender's discretion, the amount of all outstanding Letter of Credit Accommodations and all other commitments and obligations made or incurred by Lender in connection therewith shall not at any time exceed Ten Million Dollars ($10,000,000) in the aggregate, included within the overall Revolving Loans. At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrowers will either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations and in either case, the Revolving Loans otherwise available to Borrower shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. (e) Borrowers shall jointly and severally indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto, including any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent or any other person with respect to any Letter of Credit Accommodation. Borrowers assume all risks with respect to the acts or omissions of the drawer under or beneficiary of, or any other person with respect to, any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed Borrowers' agent. Borrowers assume all risks for, and agree to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit Accommodations and any documents, drafts or acceptances thereunder. Borrowers hereby release and hold Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrowers, by any issuer or correspondent or otherwise with respect to or relating to any Letter of Credit Accommodation. The provisions of this Section 2.2(e) shall survive the payment of Obligations and the termination or non - renewal of this Extension Agreement. (f) Nothing contained herein shall be deemed or construed to grant Borrowers any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Borrowers shall be bound by any interpretation made in good faith by Lender, or any other issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Borrowers. Lender shall have the sole and exclusive right and authority to, and Borrowers shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non - compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in Borrowers' names. (g) Any rights, remedies, duties or obligations granted or undertaken by Borrowers to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by Borrowers to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been undertaken by Borrowers to Lender and to apply in all respects to Borrowers. 2.3 Term Loans. Lender is or will be making three (3) Term Loans to Borrowers as follows: (a)(i) Lender intends to make a capital expenditures Term Loan to Borrowers for the purpose of remodeling retail stores, relocating retail stores, opening new retail stores and purchasing new Equipment for remodeled, relocated or new retail stores, all as approved by Lender, in the original principal amount of up to the lesser of (A) $4,000,000 or (B) the sum of (1) 70% of the "Eligible Construction Project Costs" (as hereafter defined) of remodeling, relocating or opening new retail stores plus (2) 70% of the lower of (x) the "Original Supplier Landed Cost"(as hereafter defined) of "Eligible New Equipment" (as hereafter defined) and (y) the "Net Fair Market Value" (as hereafter defined), of Eligible New Equipment. This Term Loan ("Term Loan A") will be (A) evidenced by Term Loan A Promissory Notes each in the original principal amount of each partial disbursement of Term Loan A, duly executed and delivered by Borrowers to Lender concurrently with each disbursement, (B) repaid, together with interest and other amounts, in accordance with this Agreement, the Term Loan A Promissory Notes and the other Financing Agreements and (C) secured by all of the Collateral. Term Loan A shall in no event exceed $4,000,000, in the aggregate, during the term of this Agreement. Borrowers may not request disbursements of Term Loan A in amounts of less than $250,000. All amounts drawn under Term Loan A and all Term Loan A Promissory Notes shall be payable calculated on the basis of 60 equal monthly payments of principal with a final payment of the then remaining principal balance, interest and other amounts, as provided herein and in the Term Loan A Promissory Notes, on the Due Date. Borrowers shall execute and deliver to Lender a Term Loan A Promissory Note at the time of each partial disbursement of this Term Loan A in the principal amount of such disbursement. Borrowers may request partial disbursements, from time to time, at any time prior to January 30, 2006 of amounts available under Term Loan A, in minimum amounts of $250,000. Any amounts under Term Loan A not disbursed at or prior to January 30, 2006 will no longer be available after such date. (ii) In order to draw amounts under Term Loan A for Eligible New Equipment, in addition to having met and continuing to meet the conditions elsewhere specified herein: (A) The Eligible New Equipment for which disbursement is being requested shall have been delivered to Borrowers in Puerto Rico or the United States Virgin Islands; (B) The Eligible New Equipment for which disbursement is requested shall be free and clear of all liens, charges, claims of third parties and security interests whatsoever; (C) Borrowers' Agent shall deliver to Lender such documents with respect to such Eligible New Equipment as Lender may request, including supplier invoices, evidence of payment of excise tax thereon, a payback analysis, a letter requesting Lender to make payment directly to the vendor and a Certificate of Borrowers' Agent's President and Chief Financial Officer as to such matters as Lender may request; (D) Borrowers shall have executed and delivered to Lender a Term Loan A Promissory Note in form and substance satisfactory to Lender; (E) Lender shall be satisfied that neither the disbursement nor repayment of such portion of Term Loan A will have a Material Adverse Effect on Borrowers described in Section 1.50(a) or (e) hereof; and (F) The conditions precedent specified Section 4.3 hereof shall be satisfied at and as of the time of each disbursement of Term Loan A; provided that, with respect to Pueblo's store in Isla Verde, in order to draw amounts for Eligible New Equipment under Term Loan A only on the Closing Date, (x) Borrowers' Agent may furnish an appraisal acceptable to Lender in lieu of the items to be delivered pursuant to Section 2.3(a)(ii) (C) hereof,(y) disbursement will be made to Borrowers and (z) the provisions of Section 2.3(a)(ii)(E) shall not be applicable. (iii) In order to draw amounts under Term Loan A for Eligible Construction Project Costs, in addition to having met and continuing to meet the conditions elsewhere specified herein: (A) Borrowers shall have incurred the Eligible Construction Project Costs for which disbursement is being requested and shall certify to Lender, in form and substance satisfactory to Lender that the proceeds of Term Loan A to be disbursed by Lender hereunder shall be used by Borrowers to cover amounts which shall at the time have been expended and/or be justly due and owing by Borrowers on account of the Eligible Construction Project Costs of remodeling, relocating or opening retail stores of any Borrower; (B) Borrowers' Agent shall deliver to Lender such documents with respect to such Eligible Construction Project Costs as Lender may request, including but not limited to supplier invoices, evidence of payment of excise tax thereon, a payback analysis, a letter requesting Lender to make payment directly to the vendor and a Certificate of Borrowers' Agent's President and Chief financial Officer as to such matters as Lender may request; (C) Borrowers shall have executed and delivered to Lender a Term Loan A Promissory Note in form and substance satisfactory to Lender; (D) Lender shall be satisfied that neither the disbursement nor repayment of such portion of Term Loan A will have a Material Adverse Effect on Borrowers described in Section 1.50(a) or (e) hereof . (E) The conditions precedent specified Section 4.3 hereof shall be satisfied at and as of the time of each disbursement of Term Loan A; (H) Each request for a disbursement hereunder of Term Loan A for remodeling, relocating or opening a retail store shall be accompanied by a certification of the work in place, satisfactorily completed, of Eligible Construction Project Costs, submitted by Borrowers' Agent and an independent engineer satisfactory to Lender; (I) Lender shall have previously approved, in writing (1) such remodeling relocation or opening of such retail store and (2) a detailed budget submitted by Borrowers' Agent for such remodeling, relocation or opening; and (J) The disbursement requested shall be in accordance with such budget; provided that, with respect to Pueblo's store in Isla Verde, in order to draw amounts for Eligible Construction Project Costs under Term Loan A only on the Closing Date the provisions of Section 2.3(a)(iii) shall not be applicable. (iv) As used in this Section 2.3(a): (A) "Eligible Construction Project Costs" means the costs of materials used in the remodeling, relocating or opening of a new retail store; but does not include labor; (B) "Net Fair Market Value", with respect to Eligible New Equipment, means the market value of such Equipment, as determined by Lender and excludes installation costs; (C) "Eligible New Equipment" means (1) new Equipment purchased from the manufacturer or its duly authorized dealer, (2) which has not been used and which is not more than one (1) year old, (3) which is not fixtures, (4) which is not subject to a lien or security interest of any other person, (5) which is not leased and (6), which is not worn - out or obsolete; and (D) "Original Supplier Landed Cost" means supplier invoice price less all excise or other taxes, less freight to San Juan, Puerto Rico, or the United States Virgin Islands, as applicable, less all duty. (b) (i) Lender intends to make a Term Loan to Borrowers for the purpose of partially refinancing existing indebtedness of Pueblo to NSC and to be used for working capital, in the principal amount of the lesser of (A) $36,000,000 or (B) seventy five percent (75%) of the "Net Fair Market Value" (as hereafter defined) of the "Eligible Real Property"(as hereafter defined) owned by Borrowers. In order to draw amounts under this Term Loan not disbursed at closing, in addition to having met and continuing to meet the conditions elsewhere specified herein Borrowers must, within 30 days after the Closing Date, satisfy all those conditions specified in Section 4.3 hereof. This Term Loan ("Term Loan B") is and will be (A) evidenced by one or more Term Loan B Promissory Notes in the original principal amounts disbursed duly executed and delivered by Borrowers to Lender concurrently herewith and at the time of any additional disbursement thereof, (B) repaid together with interest and other amounts, in accordance with this Agreement, the Term Loan B Promissory Notes, and the other Financing Agreements, calculated on the basis of 180 consecutive monthly installments payable on the 1st day of each month, commencing the 1st day of the month after disbursement thereof, of which all installments except the last installment, shall each be in the principal amount of (1) the amount disbursed divided by (2) 180 and the last installment and final payment shall be the amount of the entire unpaid balance of such Term Loan and Term Loan B Promissory Notes and due on the Due Date, together with interest and other amounts as provided herein and in the Term Loan B Promissory Notes and (C) secured by all of the Collateral. (ii) As used in this Section 2.3(b): (A) "Eligible Real Property" means those real properties owned by Borrowers, described in Schedule 2.3(b) hereto, not subject to any lien or encumbrance other than those which are acceptable to Lender, and which real properties are acceptable to Lender; and (B)" Net Fair Market Value" with respect to Eligible Real Property, means the fair market value of such Eligible Real Property, net of all liens, claims, charges and encumbrances, as determined by appraisals acceptable to Lender. (C) (i) Lender intends to make a Term Loan to Borrowers to be used for working capital, in the principal amount of the lesser of (A) $ 5,000,000 and (B) fifty percent (50%) of the "Net Value" of "Eligible Leaseholds" (as hereafter defined). In order to draw amounts under this Term Loan not disbursed at closing, in addition to having met and continuing to meet the conditions elsewhere specified herein Borrowers must, within 30 days after the Closing Date satisfy all those conditions specified in Section 4.3 hereof. This Term Loan ("Term Loan C") is and will be (A) evidenced by one or more Term Loan C Promissory Notes in the original principal amounts disbursed duly executed and delivered by Borrowers to Lender concurrently therewith and at the time of any additional disbursement thereof, (B) repaid together with interest and other amounts, in accordance with this Agreement, the Term Loan C Promissory Notes, and the other Financing Agreements, calculated on the basis of 60 consecutive monthly installments payable on the 1st day of each month, commencing the 1st day of the month after each disbursement thereof, of which all installments, except the last installment, shall each be in the principal amount of (1) the amount disbursed divided by (2) 60, and the last installment and final payment shall be the amount of the entire unpaid balance of such Term Loan and Term Loan C Promissory Note and due on the Due Date, together with interest and other amounts provided herein and in the Term Loan C Promissory Note and (C) secured by all of the Collateral. (ii) As used in this Section 2.3(c) (A) "Eligible Leaseholds" means those leasehold interests of Borrowers described on Schedule 2.3(c) hereto, not subject to any lien or encumbrance and which leasehold interests are acceptable to Lender; and (B) "Net Value", with respect to an Eligible Leasehold, means the fair market value of such leaseholds as determined by appraisals acceptable to Lender. (d) Notwithstanding any other provision of this Agreement or the Term Notes all Term Loans shall become immediately due and payable upon the termination or non - renewal of this Agreement, or in Lender's discretion upon the occurrence of an Event of Default under this Agreement or any of the other Financing Agreements. 2.4 Availability Reserves. All Revolving Loans otherwise available to Borrowers pursuant to the lending formulas and subject to the Maximum Credit and other applicable limits hereunder shall be subject to Lender's continuing right to establish and revise Availability Reserves. 2.5 Maximum Credit. Except in Lender's discretion, the aggregate amount of all of the Loans at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Loans, or the aggregate amount of the outstanding Loans, exceed the amounts available under the lending formulas, or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrowers shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. The Maximum Credit shall have the following sublimits: (a) Revolving Loans - $35,000,000; (b) Term Loan A - $ 4,000,000; (c) Term Loan B - $36,000,000; and (d) Term Loan C - $ 5,000,000. 2.6 Release of Pledged Cash. Lender shall, on the Closing Date release from the lien of its pledge and deliver to Borrowers any Pledged Cash in excess of that required (a) for the amount of the Revolving Loans and Letter of Credit Accommodations to be within the "formulas" herein provided and (b) so that no Event of Default or event or condition which with the giving of notice or passage of time or both would become an Event of Default shall exist. 2.7 Repayment of Existing Loans. Borrowers shall, on the Closing Date, repay to Lender all indebtedness and other amounts owing to Lender by Borrowers under the Extension Agreement. Section 3. Interest And Fees. 3.1 Interest. (a) Borrowers shall pay to Lender interest on the outstanding principal amount of the non - contingent Obligations at the Interest Rate. Notwithstanding any other provision hereof(except Section 3.1(d)(i)), in no event shall the interest payable hereunder be less than six percent (6%) per annum on the Revolving Loans and seven percent(7%) per annum on the Term Loans. All interest accruing hereunder on and after the date of any Event of Default or termination or non - renewal hereof shall be payable on demand. (b) Borrowers' Agent may from time to time request that Prime Rate Loans be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans continue for an additional Interest Period. Such request from Borrowers' Agent shall specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such Eurodollar Rate Loans. Subject to the terms and conditions contained herein, three (3) Business Days after receipt by Lender of such request from Borrowers' Agent, such Prime Rate Loans shall be converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be, provided that, (i) no Event of Default, or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing, (ii) no party hereto shall have sent any notice of termination or non - renewal of this Agreement, (iii) Borrowers shall have complied with such customary procedures as are established by Lender and specified by Lender to Borrowers' Agent from time to time for requests by Borrowers' Agent for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans must be in an amount not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of the Eurodollar Rate Loans for Revolving Loans and Term Loans at any time requested by Borrowers' Agent shall not exceed the amount equal to eighty (80%) percent of the lowest principal amount of the Revolving Loans and Term Loans which it is anticipated will be outstanding during the applicable Interest Period, in each case as determined by Lender (but with no obligation of Lender to make such Loans) and (vii) Lender shall have determined that the Interest Period or Adjusted Eurodollar Rate is available to Lender through the Reference Bank and can be readily determined as of the date of the request for such Eurodollar Rate Loan by Borrowers' Agent. Any request by Borrowers' Agent to convert Prime Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Lender and Reference Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Lender and Reference Bank had purchased such deposits to fund the Eurodollar Rate Loans. Interest periods for different Loans (i.e. Revolving Credit, Term A, Term B or Term C Loans) that commence on the same date and have the same duration shall be treated as a single Interest Period for purposes of the minimum dollar amount of Eurodollar Loans, and maximum number of Interest Periods, hereunder. (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Lender has received and approved a request to continue such Eurodollar Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by Lender to Borrowers' Agent, convert to Prime Rate Loans in the event that (i) an Event of Default or event which, with the notice or passage of time, or both, would constitute an Event of Default, shall exist, (ii) this Agreement shall terminate or not be renewed, or (iii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to Eurodollar Rate Loans or existing Eurodollar Rate Loans continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period Exceed either (A) the aggregate principal amount of the Loans then outstanding, or (B) the Revolving Loans then available to Borrower under Section 2.1 hereof. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing. (d) Interest shall be payable by Borrowers to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on non - contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is advised based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall (i) charges constituting interest payable by Borrower to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation and if any part of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto and (ii) except as may be required by the preceding subclause (i) the Interest Rate ever be less than(A) six percent (6%) per annum on the Revolving Loans and (B) seven percent(7%) per annum on the Term Loans. 3.2 Servicing Fee. Borrowers shall pay to Lender monthly a servicing fee in an amount equal to $5,000 in respect of Lender's services for each month (or part thereof) while this Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be fully earned as of and payable in advance on the date hereof and on the first day of each month hereafter. 3.3 Unused Line Fee. Borrowers shall pay to Lender monthly, an unused line fee at a rate equal to one half of one percent (0.5%) percent per annum calculated upon the amount by which $30,000,000 exceeds the average daily principal balance of the outstanding Revolving Loans and Letter of Credit Accommodations during the immediately preceding month (or part thereof), while this Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on the first day of each month in arrears. 3.4 Letter of Credit Fees. Borrower shall pay Lender fees for Letter of Credit Accommodations as stated in Section 2.2(b) hereof. 3.5 Early Termination Fee. If for any reason (a) this Agreement is terminated prior to the end of then current term or any renewal term of this Agreement or (b)this Agreement fails to close (i) prior to the end of the current term of the Extension Agreement or any renewal or extension thereof, or (ii) on or prior to September 30, 2003, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrowers agree to pay to Lender, on demand an early termination fee in the amount set forth below if such termination or failure is effective in the period indicated: Amount Period (a) $4,000,000 From the date hereof to and including August 31, 2003; (b) $1,050,000 plus 3% of the then From September 1, 2003 to and outstanding balance of the Term Loans including June 22, 2005; at and as of the date of such failure or termination (c) $700,000 plus 2% of the then From June 23, 2005 to and including outstanding balance of the June 22, 2006; and Term Loans as of the date of such termination. (d) $ 350,000 plus 1% of the then From June 23, 2006 to and outstanding balance of the Term including June 21, 2008 or if Loans as of the date of such this Agreement is extended for Termination an additional period as provided herein, to and including the end of the then current term Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and Borrowers agree that it is reasonable under the circumstances currently existing. In addition, Lender shall be entitled to such early termination fee upon the occurrence of any Event of Default described in Sections 10.1(g) or 10.1(h) hereof except if (a) Lender does not exercise its right to terminate this Agreement, (b) Lender elects, at its option, to provide financing to Borrowers or permit the use of cash collateral under the Bankruptcy Code and (c) such financing or use is approved on terms acceptable to Lender; provided that, such termination fee shall remain payable as otherwise provided herein. The early termination fee provided for in this Section 3.5 shall be deemed included in the Obligations. Borrowers waive any claim for reduction of fees whether or not such fees are treated as a penalty. 3.6 Changes in Laws and Increased Costs of Loans. (a) Notwithstanding anything to the contrary contained herein, all Eurodollar Rate Loans shall, upon notice by Lender to Borrowers' Agent, convert to Prime Rate Loans in the event that (i) any change in applicable law or regulation (or the interpretation or administration thereof) shall either (A) make it unlawful for Lender, the Reference Bank or any participant to make or maintain Eurodollar Rate Loans or to comply with the terms hereof in connection with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs to Lender, the Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans by an amount deemed by Lender to be material or (C) reduce the amounts received or receivable by Lender in respect thereof, by an amount deemed by Lender to be material or (ii) the cost to Lender, the Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to be material. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person as a result of the foregoing, including, without limitation, any such loss, cost or expense incurred by reason of the liquidation or re - employment of deposits or other funds acquired by such person to make or maintain the Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting forth the basis for the determination of such amount necessary to compensate Lender as aforesaid shall be delivered to Borrowers and shall be conclusive, absent manifest error. (b) If any payments or prepayments in respect of the Eurodollar Rate Loans are received by Lender other than on the last day of the applicable Interest Period (whether pursuant to acceleration, upon maturity or otherwise), including any payments pursuant to the application of collections or any other payments made with the proceeds of Collateral, Borrowers shall pay to Lender upon demand by Lender (or Lender may, at its option, charge any loan account of Borrower) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any additional loss (including loss of anticipated profits), cost or expense incurred by such person as a result of such prepayment or payment, including without limitation, any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by such person to make or maintain such Eurodollar Rate Loans or any portion thereof. 3.7 Extension Fee. Borrowers ratify and confirm that the extension fee payable pursuant to Section 4.2 of the Extension Agreement has been fully earned. Section 4. Conditions Precedent. 4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations. Each of the following is a condition precedent to Lender making the initial Loans, and providing the initial Letter of Credit Accommodations hereunder: (a) All of the representations and warranties of Borrowers and NSC contained in the Extension Agreement Financing Agreements shall be true and correct on and as of the Closing Date, except when made as of a specified date and as to such representations and warranties same shall have been true and correct as of the date specified and Lender shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of Borrowers and NSC to such effect. (b) Borrowers and NSC shall have complied with all conditions and performed all covenants to be performed by any of them at a prior to the Closing Date and Lender shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of Borrower and NSC to such effect. (c) No court of competent jurisdiction shall have issued any injunction or restraining order or other order with respect to the Reorganization Plan which prohibits the consummation of the transactions contemplated therein or modifies such transactions and no action or other proceeding shall have been commenced which seeks any of the foregoing or to restrain or modify any of the transactions described in the Financing Agreements. (d) Lender shall have received, in form and substance satisfactory to Lender, (i) evidence that Lender has valid, perfected and first priority security interests in and liens upon the Collateral and any other property which is intended to be security for the Obligations, including the Real Estate Security, subject only to the security interests and liens permitted by Section 9.8 hereof or in the other Financing Agreements; and (ii) all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination by others (except with respect Capital Lease obligations of Borrowers not in excess of $12,300,000, in the aggregate) who have provided financial accommodations to Borrowers of their respective financing arrangements with Borrowers and the termination and release by it or them, as the case may be, of any interest in and to any assets and properties of any Borrower and NSC, duly authorized, executed and delivered by it or each of them, including, but not limited to, (A) UCC termination statements for all UCC financing statements previously filed by it or any of them or their predecessors, as secured party and any Borrower or NSC, as debtor and (B) satisfactions and discharges of any mortgages, deeds of trust or deeds to secure debt by any Borrower in favor of others or NSC in form acceptable for recording in the appropriate government office. (e) All requisite corporate and other actions and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including records of requisite corporate and other actions and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities. (f) No material adverse change shall have occurred in the assets, business or prospects of Borrowers or NSC since the date of Lender's latest field examination and no change or event shall have occurred which would impair the ability of any Borrower or NSC to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral. (g) Lender shall have completed a field review of the Records and such other information with respect to the Collateral as Lender may require to determine the amount of Revolving Loans and Term Loans available to Borrowers, the results of which shall be satisfactory to Lender, not more than three (3) business days prior to the Closing Date. (h) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including acknowledgments by lessors, mortgagees and warehousemen of Lender's liens and security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and agreements permitting Lender access to, and the right to remain on, the premises to exercise its rights and remedies and otherwise deal with the Collateral. (i) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrowers and NSC with respect to the Financing Agreements, and the security interests and liens of Lender in the Collateral and such other matters as Lender may request. (j) The other Financing Agreements requested or submitted by Lender from or to Borrowers and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender. (k) Lender shall have received, in form and substance satisfactory to Lender all agreements with respect to (i) the Blocked Accounts and (ii)all investment property and all other deposit accounts of Borrowers or NSC as Lender may require, duly authorized, executed and delivered by Borrowers, NSC and the appropriate depository, financial or other applicable institution. (l) Lender shall have received the Credit Card Acknowledgments, in each case duly authorized, executed and delivered by the Credit Card Issuers and Credit Card Processors. (m) Lender shall have received in form and substance satisfactory to Lender copies of all of Borrowers' agreements with financial institutions regarding the collection of receipts from purchases made by customers on credit and debit cards. (n) Each of the depository banks used by a Borrower for the deposit of receipts from the sale of merchandise and each other depository bank used by Borrower for the deposit of other proceeds of Collateral and other property, which is collateral security for the Obligations shall have been notified of Lender's security interest therein and shall have been irrevocably authorized and directed to send all funds on deposit with such banks only to the Blocked Account designated by Lender or as Lender otherwise directs. (o) Lender shall have received, and NSC shall have obtained, in form and substance satisfactory to Lender, a final and unappealable order of the Bankruptcy Court in the Chapter 11 Case to which no objection or opposition shall have been filed or made: (i) Approving the execution, delivery and performance of this Agreement and the other Financing Agreements to which it is a party, by NSC and the consummation of the transactions contemplated hereby and thereby; (ii) Confirming the Reorganization Plan; and (iii) As to such other matters as Lender may request. (p) The Reorganization Plan shall concurrently with the making of the Initial Loans, have been consummated and Lender shall have received evidence satisfactory to it that all payments required to be made in connection therewith have been, or concurrently with the making of the Initial Loans will be, made. (q) The amount payable by Borrowers to NSC and by NSC in connection with the consummation of the Reorganization Plan shall not exceed $51,000,000. (r) Excess Availability, as of the Closing Date, shall not be less than $5,000,000, after giving effect to the Loans to be made and the Letter of Credit Accommodations to be provided in connection with the initial transactions hereunder. (s) All indebtedness owing (i) by any Borrower to NSC and (ii) by the Borrowers among themselves shall have been fully subordinated to the Obligations, to Lenders satisfaction. (t) Lender shall have received, in form and substance satisfactory to Lender, (i) a pro forma and market value consolidated and consolidating and combined and combining, as applicable, balance sheet of Borrowers, reflecting the initial transactions contemplated hereunder, including, but not limited to, (A) the Loans to be provided by Lender to Borrowers (B) the use of the proceeds of the initial Loans as provided herein and (C) the consummation of the Reorganization Plan and (ii) a projection and forecast of Borrowers' cash flow for their current and five(5) succeeding fiscal years all accompanied by a certificate, dated as of the Closing Date, of the chief executive officer and chief financial officer of Borrowers, stating that such pro - forma balance sheet, market value balance sheet and projection of cash flow, represents the reasonable, good faith opinion of such officers as to the subject matter thereof as of the date of such certificate and as to such other matters as Lender may request. (u) The market value balance sheet of Borrower, the certificate and the projection referred to in Section 4.1 (t) hereof shall reflect to Lender's satisfaction that Borrowers, taken as a whole, are Solvent. (v) The Reorganization Plan, as consummated, shall be acceptable to Lender. (w) Borrowers shall not have granted any liens or security interests in any of their assets to any Person except (i) the security interest and liens permitted by Section 9.8 hereof, (ii) the liens and security interests granted to Lender and (iii) the Noteholders Liens, which shall in all respects be junior and subordinate to the liens and security interests of Lender, to Lender's satisfaction. (x) Lender shall have received, in form and substance satisfactory to Lender, (i) a guarantee of payment by each Borrower of the Obligations owed by each of the other Borrowers and (ii) a guarantee of payment of the Obligations by NSC secured by a first and only security interest (except for the Noteholders Liens) in NSC's assets in favor of Lender granted by NSC. (y) All Collateral owned by any Borrower to be furnished to Lender pursuant hereto or pursuant to any of the other Financing Agreements shall be furnished by the owner thereof directly to Lender and none of such Collateral shall be furnished through NSC and Borrowers and NSC shall have terminated any liens and security interests of NSC therein. (z) The "Alternative Plan" (as defined in the Reorganization Plan) shall not have become effective and no event or circumstances shall exist which with or without the issuance of the "Direction Letter" (as defined in the Reorganization Plan) would allow the Alternative Plan to become effective. (aa) Lender shall have received all such subordination agreements, non- disturbance agreements, assignments of leases, landlord's consents and other agreements and consents from landlords, subtenants, mortgagees and others with respect to the Real Estate Security as Lender shall request. (bb) Lender shall have received evidence, satisfactory to it, that $15,000,000 has been contributed to the capital of NSC by PX & M Holdings, Inc., in cash. (cc) Lender shall have received estoppel certificates from substantially all of Borrowers' landlords showing that no defaults thereunder by any Borrower exists or that any alleged default does not have a Material Adverse Effect. (dd) Borrowers shall have furnished evidence to Lender that all property taxes on the Real Estate then due have been paid. (ee) Borrowers shall have executed and delivered to Lender all Real Estate Security to Lender and Lender shall have received mortgagee title policies with respect thereto in such amounts and from such insurers and with such affirmative coverages as Lender may request, all in form and substance satisfactory to Lender. (ff) Lender shall have received recent surveys of the Real Estate owned by Borrowers prepared by a licensed engineer, satisfactory to Lender, conforming to the descriptions and showing no encroachments and certified to Lender. (gg) Lender shall have received appraisals for the Real Estate from appraisers acceptable to Lender, addressed to Lender, all in form and substance and showing such values therefor, as shall be acceptable to Lender. (hh) Lender shall have received evidence of zoning of the Real Estate disclosing no violation of applicable regulations, satisfactory to Lender and flood zone certificates for the Real Estate, satisfactory to Lender. (ii) Lender shall have received a certified copy of the Security Pledge as in effect on the Closing Date and same shall be satisfactory to Lender, in form and substance.Lender may permit Borrowers periods of up to ninety (90) days from the Closing Date to comply with and satisfy one or more of the conditions specified in Section 4.1 hereof and may defer funding of, or not fund at all, such amounts of the initial and future Loans as Lender shall determine, unless and until such conditions have been satisfied, all in Lender's sole discretion. Lender shall have no liability to Borrowers whatsoever for not funding any of the Loans if any such condition is not satisfied within such 90 day period. 4.2 Conditions Precedent to All Loans And Letter of Credit Accommodations. Each of the following is an additional condition precedent to Lender making Loans and providing Letter of Credit Accommodations to or for Borrowers, including the initial and any future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Loan and after giving effect thereto; (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan, or providing each such Letter of Credit Accommodation and after giving effect thereto; and (c) No law, regulation, order, judgment or decree of any governmental authority shall exist, and no action, suit, investigation, litigation or proceeding shall be pending or threatened in any court or before any arbitrator or Governmental Authority, which (i) purports to enjoin, prohibit, restrain or otherwise affect (A) the making of the Loans or providing the Letter of Credit Accommodations, or (B) the consummation of the transactions contemplated pursuant to the terms hereof or the other Financing Agreements or (ii) has or could reasonably be expected to have a Material Adverse Effect. 4.3 Additional Conditions Precedent to Term Loans. Each of the following is an additional condition precedent to Lender making disbursements of Term Loan A, Term Loan B and Term Loan C to Borrowers of amounts thereof not disbursed at closing as part of the initial Loans: (a) Any condition precedent specified in Section 4.1 hereof or elsewhere herein to the making of the initial Loans not satisfied at the time of making of the initial Loans the satisfaction of which had been deferred by Lender shall have been fulfilled to Lender's satisfaction; (b) All such conditions shall have been satisfied within the time prescribed, to Lenders satisfaction; (c) No material adverse change shall have occurred in the assets, business or prospects of Borrower since the Closing Date and no change or event shall have occurred which would impair the ability of Borrowers or any Obligor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; (d) Lender shall have given all approvals to be given by it and Borrowers and NSC shall have complied with all conditions and performed all covenants to be performed by any of them in connection with such Term Loan at or prior to the date of disbursement thereof; (e) Lender shall have received such appraisals as it may have requested; and (f) All conditions specified in Section 4.2 hereof must continue to be satisfied at and as of the date of each disbursement. Section 5. Grant of Security Interest. 5.1 Grant of Security Interest. To secure payment and performance of all Obligations, each Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of such Borrower, whether now owned or hereafter acquired or existing, and wherever located (together with all other collateral security for the Obligations at any time granted to or held or acquired by Lender collectively the "Collateral"). (a) all Accounts; (b) all present and future general intangibles, including all Intellectual Property and Franchise Agreements; (c) all Inventory; (d) All Equipment; (e) all Real Property and fixtures and all Real Estate Security; (f) all chattel paper, including all tangible and electronic chattel paper; (g) all instruments, including all promissory notes; (h) all documents; (i) all deposit accounts; (j) all letters of credit, banker's acceptances and similar instruments and including all letter of credit rights; (k) all supporting obligations and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Receivables and other Collateral, including (i) rights and remedies under or relating to guaranties, contracts of surety ship, letters of credit and credit and other insurance related to the Collateral, (ii) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (iii) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Receivables or other collateral, including returned, repossessed and reclaimed goods, and (iv) deposits by and property of account debtors or other persons securing the obligations of account debtors; (l) all (i) investment property (including securities, whether certificated or uncertificated, securities accounts, security entitlements, commodity contracts or commodity accounts) and (ii) monies, credit balances, deposits and other property of any Borrower, now or hereafter held or received by or in transit to Lender or at any other depository or other institution from or for the account of a Borrower whether for safekeeping, pledge, custody, transmission, collection or otherwise; (m) all commercial tort claims, including, without limitation, those identified in the Information Certificate; (n) to the extent not otherwise described above, all Receivables and all goods; (o) all Records; (p) the Pledged Cash; (q) all motor vehicles; and (r) all products and proceeds of the foregoing in any form, including insurance proceeds and all claims against third parties for loss or damage to or destruction of or other involuntary conversion of any kind or nature of any or all of the other collateral. 5.2 Perfection of Security Interest. Borrowers irrevocably and unconditionally authorizes Lender (or its agent) to file at any time and from time to time such financing statements with respect to the Collateral naming Lender or its designee as the secured party and any Borrower as debtor, as Lender may require, and including any other information with respect to Borrowers or otherwise required by Article 9 of the Uniform Commercial Code of such jurisdiction as Lender may determine, together with any amendments and continuations with respect thereto, which authorization shall apply to all financing statements filed on, prior to or after the date hereof. Borrowers hereby ratify and approve all financing statements naming Lender or its designee as secured party and any Borrower as debtor with respect to the Collateral (and any amendments with respect to such financing statements) filed by or on behalf of Lender prior to the date hereof and ratify and confirm the authorization of Lender to file such financing statements (and amendments, if any). Borrowers hereby authorize Lender to adopt on behalf of each Borrower any symbol required for authenticating any electronic filing. In the event that the description of the Collateral in any financing statement naming Lender or its designee as the secured party and a Borrower as debtor includes assets and properties of a Borrower that do not at any time constitute Collateral, whether hereunder, under any of the other Financing Agreements, or otherwise, the filing of such financing statement shall nonetheless be deemed authorized by Borrowers to the extent of the Collateral included in such description and it shall not render the financing statements ineffective as to any of the Collateral or otherwise affect the financing statement as it applies to any of the Collateral. In no event shall Borrowers at any time file, or permit or cause to be filed, any correction statement or termination statement with respect to any financing statement (or amendment or continuation with respect thereto) naming Lender or its designee as secured party and any Borrower as debtor. Section 6. Collection And Administration 6.1 Borrower's Loan Account. Lender shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans, Letter of Credit Accommodations and other Obligations and the Collateral, (b) all payments made by or on behalf of Borrowers and (c) all other appropriate debits and credits as provided in this Agreement, including fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2 Statements. Lender shall render to Borrowers each month a statement setting forth the balance in the Borrowers' loan account(s) maintained by Lender for Borrowers pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrowers and conclusively binding upon Borrowers as an account stated except to the extent that Lender receives a written notice from Borrowers' Agent of any specific exceptions of Borrowers thereto within thirty (30) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrowers a written statement as provided above, the balance in Borrowers' loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrowers. 6.3 Collection of Accounts. (a) Borrowers shall establish and maintain, at their expense, blocked accounts or lock boxes and related blocked accounts (in either case, "Blocked Accounts"), as Lender may specify, with such banks as are acceptable to Lender into which Borrowers shall promptly deposit and direct their account debtors, credit card issuers and credit card processors to directly remit all payments on Receivables, including Accounts and all payments constituting proceeds of Inventory, Equipment or other Collateral in the identical form in which such payments are made, whether by cash, check or other manner. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to Lender, providing that all items received or deposited in the Blocked Accounts are the property of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all funds received or deposited into the Blocked Accounts to such bank account of Lender as Lender may from time to time designate for such purpose ("Payment Account"). Borrowers agree that all payments made to such Blocked Accounts or other funds received and collected by Lender, whether on the Accounts or as proceeds of Inventory, Equipment or other Collateral or otherwise shall be the property of Lender. (b) For purposes of calculating the amount of the Loans available to Borrowers, such payments will be applied (conditional upon final collection) to the Obligations on the business day of receipt by Lender of immediately available funds in the Payment Account provided such payments and notice thereof are received in accordance with Lender's usual and customary practices as in effect from time to time and within sufficient time to credit Borrower's loan account on such day, and if not, then on the next business day. For the purposes of calculating interest on the Obligations, payments or other funds received will be applied (conditional upon final collection) to the Obligations three (3) business day(s) following the date of receipt of immediately available funds by Lender in the Payment Account provided such payments or other funds and notice thereof are received in accordance with Lender's usual and customary practices as in effect from time to time and within sufficient time to credit Borrower's loan account on such day, and if not, then on the next business day. (c) Borrowers and all of their respective Subsidiaries and other Affiliates, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender. In no event shall the same be commingled with any Borrower's own funds. Borrowers agree to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person. The obligation of Borrowers to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non - renewal of this Agreement. (d) In addition to the account referred to in Section 6.3(a) hereof, Borrowers may establish and maintain, at their expense, deposit account arrangements and merchant payment arrangements with the banks set forth on Schedule 8.8 hereto, and after compliance with the provisions of Section 7.11 hereof, such other banks as Borrower may hereafter select as are acceptable to Lender. The banks set forth on Schedule 8.8 hereto constitute all of the banks with whom Borrowers have deposit account arrangements and merchant payment arrangements as of the date hereof and identifies each of the deposit accounts at such banks and describes the nature of the use of such deposit account by Borrowers. Borrowers shall deposit all proceeds from sales of Inventory in every form (including, without limitation, cash, checks, credit card sales drafts, credit card sales or charge slips or receipts and other forms of daily store receipts and the collections and proceeds thereof in whatever form) from each store location of a Borrower and all proceeds of Collateral, on each business day into the deposit accounts of Borrowers used solely for such purpose and identified to each retail store and location as set forth on Schedule 8.8 hereto. Borrowers shall irrevocably authorize and direct in writing, in form and substance satisfactory to Lender, each of the banks into which proceeds from sales of Inventory from each store location of Borrowers and any and all other proceeds of Collateral are at any time deposited as provided above to send by wire transfer on a daily basis, to an account or accounts designated by Lender, all funds deposited in such account, and shall irrevocably authorize and direct in writing its account debtors, Credit Card Issuers and Credit Card Processors to directly remit payments on its Accounts, Credit Card Receivables and all other payments constituting proceeds of Inventory and collections to the Blocked Accounts described in Section 6.3(a) above. 6.4 Payments. All Obligations shall be payable to the Payment Account as provided in Section 6.3 or such other place as Lender may designate from time to time. Lender may apply payments received or collected from Borrowers or for the account of Borrowers (including the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines; provided that, unless an Event of Default or event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing Lender shall not apply payments collected from the proceeds of Accounts to Term Loans not then due(but the forgoing proviso shall not prevent Lender at any time and from time to time from applying payments collected from the proceeds of Accounts to any portion of the Term Loans then due). At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrowers. Borrowers shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrowers shall be liable to pay to Lender, and do hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non - renewal of this Agreement. 6.5 Authorization to Make Loans. Lender is authorized to make the Loans and provide Letter of Credit Accommodations based upon telephonic or other instructions received from anyone purporting to be the Chief Executive Officer or Chief Financial Officer of a Borrower or Borrowers' Agent or other authorized person or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations. All requests for Loans, hereunder shall specify the date on which the requested advance is to be made or established (which day shall be a Business Day) and the amount of the requested Loan and Letter of Credit Accommodation. Requests received before 11:00 a.m. Atlantic Standard Time on a Business Day shall be processed on that day. Requests received after 11:00 a.m. Atlantic Standard time on any day shall be deemed to have been made as of the opening of business on the immediately following business day. All Loans and Letter of Credit Accommodations under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrowers when deposited to the credit of Borrowers or otherwise disbursed or established in accordance with the instructions of Borrowers' Agent or in accordance with the terms and conditions of this Agreement. 6.6 Use of Proceeds. Borrowers shall use the initial proceeds of the Loans provided by Lender to Borrowers hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrowers' Agent to Lender on or about the date hereof, (b) payments to NSC, in reduction of indebtedness of Borrowers to NSC, not exceeding the amount of $47,000,000 and (c) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans and Letter of Credit Accommodations made by Lender to Borrowers pursuant to the provisions hereof shall be used by Borrower only for general operating, working capital and other proper corporate purposes of Borrowers not otherwise prohibited by the terms hereof. NSC shall use the proceeds of the Loans paid to it by Borrowers only for purposes of paying a portion of the amounts payable pursuant to the Reorganization Plan. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. Section 7. Collateral Reporting And Covenants. 7.1 Collateral Reporting. Borrowers shall provide Lender with the following documents in a form satisfactory to Lender: (a) on a regular basis as required by Lender, a schedule of Accounts, sales made, credits issued and cash received; (b) on a monthly basis or more frequently as Lender may request, (i) perpetual inventory reports, (ii) inventory reports by category, (iii) aging of accounts payable, (iv) a report of any Inventory shrinkage or Equipment which has been stolen, and (v) a report of any Equipment which has been sold, exchanged or otherwise transferred or disposed of, (c) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrowers; (d) aging of accounts receivable on a weekly basis or more frequently as Lender may request; and (e) such other reports as to the Collateral as Lender shall request from time to time. If any of Borrower's records or reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrowers hereby irrevocably authorize such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 Accounts Covenants. (a) Borrower shall notify Lender promptly of: (i) any material delay in Borrowers' performance of any of its obligations to any account debtor or the assertion of any claims, offsets, defenses or counterclaims by any account debtor, or any disputes with account debtors, or any settlement, adjustment or compromise thereof, (ii) all material adverse information relating to the financial condition of any account debtor and (iii) any event or circumstance which, to Borrowers' knowledge would cause Lender to consider any then existing Accounts as no longer constituting Eligible Accounts. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor without Lender's consent, except in the ordinary course of Borrowers' business in accordance with practices and policies previously disclosed in writing to Lender. So long as no Event of Default exists or has occurred and is continuing, Borrower shall have the right to settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors or grant any credits, discounts or allowances. (b) Without limiting the obligation of Borrowers to deliver any other information to Lender, Borrowers shall promptly report to Lender any return of Inventory by any one account debtor if the inventory so returned in such case has a value in excess of $10,000. At any time that Inventory is returned, reclaimed or repossessed, the Account (or portion thereof) which arose from the sale of such returned, reclaimed or repossessed Inventory shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrowers shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments immediately delivered to Lender pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of Borrowers' business in accordance with practices and policies previously disclosed to Lender, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement and (v) none of the transactions giving rise thereto will violate any applicable Commonwealth, State or Federal laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms. (d) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise. (e) Borrowers shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrowers, all chattel paper and instruments which a Borrower now owns or may at any time acquire immediately upon a Borrower's receipt thereof, except as Lender may otherwise agree. (f) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors or other obligors in respect thereof that the Receivables, including the Accounts have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all accounts debtors and other obligors to make payment of thereof directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Receivables including the Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Receivables, including the Accounts or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrowers shall deliver to Lender such originals of documents evidencing the sale and delivery or lease of goods or the performance of services giving rise to any Accounts as Lender may require. 7.3 Inventory Covenants. With respect to the Inventory: (a) Borrowers shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, each Borrower's cost therefor and daily or weekly withdrawals therefrom and additions thereto; (b) Borrowers shall conduct (i) a physical count of the Inventory at least once each year, but at any time or times as Lender may request on or after an Event of Default, and (ii) test counts of inventory at any time or times as Lender may request utilizing a third party service therefore designated by Lender, and promptly following such physical inventory and test counts of inventory shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count and test counts; (c) Borrowers shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of a Borrower's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Lender's request, Borrowers shall, at their expense, no more than four times in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; (e) Borrowers shall produce, use, store and maintain the Inventory with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Borrowers assume all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) except in the ordinary course of business, and then only on prompt reporting thereof to Lender, Borrowers shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate a Borrower to repurchase such Inventory; (h) Borrowers shall keep the Inventory in good and marketable condition, subject to normal deterioration of produce, deli and bakery food products, expired foods, and products with short expiration dates or shelf - life; and (i) except in the ordinary course of business and then only on prompt reporting thereof to Lender, Borrowers shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval. 7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender's request, Borrower shall, at their expense, at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender; (b) Borrowers shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrowers shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Borrowers' business and not for personal, family, household or farming use; (e) Borrower shall not remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of a Borrower or to move Equipment directly from one location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Borrowers in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrowers shall not permit any of the Equipment to be or become a part of or permanently affixed to real property; and (g) Borrowers assume all responsibility and liability arising from the use of the Equipment. 7.5 Tradename Covenants. With respect to their trade names and trademarks (a) Borrowers shall at all times maintain their registered trade names and trademarks, except for trade names and trademarks no longer used or useful in Borrowers' business; (b) Borrowers shall not at any time, grant any person, other than another Borrower a license except for trade names and trademarks no longer used or useful in Borrowers' business; to use any trade name or trademarks; (c) upon Lender's request, Borrowers shall, at their expense, no more than twice in any twelve (12) months period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to their trade names and trademarks in form, scope and methodology acceptable to Lender and by an appraisers acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; and (d) Borrowers shall not use their trade names or trademarks to sell any assets or property other than assets and property similar in nature to the types currently being sold by Borrowers. 7.6 Power of Attorney. Borrowers hereby irrevocably designate and appoint Lender (and all persons designated by Lender) as Borrowers' true and lawful attorney-in-fact, and authorizes Lender, in Borrowers' or Lender's name, to: (a) at any time an Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or chattel paper or other proceeds of Inventory or other Collateral, (ii) enforce payment of Receivables including Accounts by legal proceedings or otherwise, (iii) enforce and exercise all of Borrowers' rights and remedies to collect any Receivables including Accounts or other Collateral, (iv) sell or assign any Receivable, including any Accounts upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew any Receivable, including any Account or any Chattel Paper (vi) discharge and release any Receivable, including any Account, (vii) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrowers' obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which any Borrower's mail is deposited, (iii) endorse any Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse any Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Receivables including Account or any goods pertaining thereto or any other Collateral, (v) sign any Borrower's name on any verification of Accounts and notices thereof to account debtors and (vi) execute in any Borrower's name and file any UCC financing statements or amendments thereto. Borrowers hereby release Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or willful misconduct as determined pursuant to a final non - appealable order of a court of competent jurisdiction. 7.7 Right to Cure. Lender may, at its option, (a) cure any default by a Borrower under any agreement with a third party, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral, (c) when an Event of Default or event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing, pay or bond on appeal any judgement entered against a Borrower and (d) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrowers' account therefor, such amounts to be repayable by Borrowers on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of a Borrower. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.8 Access to Premises. From time to time as requested by Lender, at the cost and expense of Borrowers (a) Lender or its designee shall have complete access to all of Borrowers' and NSC's premises during normal business hours and after notice to Borrowers Agent or at any time and without notice to Borrowers' Agent if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrowers' and NSC's books and records, including the Records, and (b) Borrowers and NSC shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. 7.9 Inventory Subject to PACA, Etc. (a) Borrowers shall pay, on or before the due date thereof, all accounts payable arising from the purchase by a Borrower of any Inventory which is subject to or covered by, or with respect to which the seller is protected under, PACA or PASA and, shall not permit (i) any circumstances to exist which would subject Lender to any liability and (ii) Lender to become liable, to any supplier or other third party with respect to such Inventory. (b) Borrowers shall furnish to Lender, on each Thursday, during the term of this Agreement, a Certificate which, as of the proceeding Saturday, contains the following and such other information or matters as Lender may request: (i) The value and description of all of Borrowers' Inventory subject to PACA or PASA; (ii) The amount and aging of accounts payable arising from Inventory purchased subject to PACA or PASA; (iii) Payments made during the preceding week of accounts payable arising from Inventory purchased subject to PACA or PASA; (iv) A statement that no account payable of Borrowers arising from the purchase of Inventory subject to PACA or PASA is unpaid after the due date thereof or if any are unpaid past the due date, identifying such payables in detail; and (v) A statement that no Borrower has received any notice from any Person of intent to preserve any trust established under PACA or PASA or if any such notice has been received describing in detail the transaction involved, accompanied by a copy of such notice. (c) Lender may, at its option at any time, (a) pay and discharge any accounts payable of Borrowers arising from the purchase of any Inventory subject to PACA or PASA, and discharge any liens, security interests other encumbrances or trusts at any time levied on or existing with respect to such Inventory or the proceeds thereof and (b) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the rights of Lender with respect thereto or so that Lender does not become liable to any supplier or other third party with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrowers' account therefor, such amounts to be repayable by Borrowers on demand. Lender shall be under no obligation to make such payment or effect such discharge and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrowers. Any payment made or other action taken by Lender under this Section 7.9 shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. (d) Lender may, in its discretion, add to the amount of Availability Reserves, amounts which it deems appropriate to reserve for liability under PACA or PASA. 7.10 Chattel Paper Covenants. (a) Borrowers represent and warrant to Lender that Borrowers do not have any chattel paper (whether tangible or electronic) or instruments as of the date hereof, except as set forth in Schedule 7.10 hereto. In the event that Borrowers shall at any time, be entitled to or shall receive chattel paper or instruments after the date hereof having a face amount of, or with respect to which payment thereunder will be in the amount of, $100,000 or more as to all such chattel paper and instruments, Borrowers shall promptly notify Lender thereof in writing. Promptly upon the receipt thereof by or on behalf of any Borrower (including by any agent or representative), Borrowers shall deliver, or cause to be delivered to Lender, all such tangible chattel paper and instruments that a Borrower has or may at any time acquire, accompanied by such instruments of transfer or assignment duly executed in blank as Lender may from time to time specify in each case except as Lender may otherwise agree. At Lender's option, Borrowers shall, and Lender may at any time on behalf of Borrowers, cause the original of any such instrument or chattel paper to be conspicuously marked in a form and manner acceptable to Lender with the following legend referring to chattel paper or instruments as applicable: "This _______________________ ___________________ is subject to the security interest of Westernbank Puerto Rico and any sale, transfer, assignment or encumbrance of this _______________________ ___________________ violates the rights of such secured party". (b) In the event that Borrowers shall at any time hold or acquire an interest in any electronic chattel paper or any "transferable record" (as such term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction), Borrowers shall promptly notify Lender thereof in writing. Promptly upon Lenders request, Borrowers shall take, or cause to be taken, such actions as Lender may request to give Lender control of such electronic chattel paper under Section 9 - 105 of the UCC and control of such transferable record under Section 201 of the Federal Electronic Signatures in Global and National Commence Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as in effect in such jurisdiction. 7.11 Deposit Accounts. Borrowers represent and warrant to Lender that Borrowers do not have any deposit accounts as of the date hereof, except as set forth in Schedule 8.8 hereto. Borrowers shall not, directly or indirectly, after the date hereof open, establish or maintain any deposit account unless each of the following conditions is satisfied: (i) Lender shall have received not less than fifteen (15) Business Days prior written notice of the intention of a Borrower to open or establish such account which notice shall specify in reasonable detail and specificity acceptable to Lender the name of the account, the owner of the account, the name and address of the bank at which such account is to be opened or established, the individual at such bank with whom such Lender is dealing and the purpose of the account and Lender shall have consented thereto in writing, (ii) the bank where such account is opened or maintained shall be reasonably acceptable to Lender and (iii) on or before the opening of such deposit account, Borrowers shall as Lender may specify, either (A) deliver to Lender a Deposit Account Control Agreement in form and substance satisfactory to Lender with respect to such deposit account duly authorized, executed and delivered by such Person and the bank at which such deposit account is opened and maintained or (B) arrange for Lender to become the customer of the bank with respect to the deposit account on terms and conditions acceptable to lender. The terms of this subsection 7.11 shall not apply to deposit accounts specifically and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of a Borrower's salaried employees. 7.12 Investment Property. Borrowers represent and warrant to Lender that Borrowers do not own or hold, directly or indirectly, beneficially or as record owner or both, any investment property, as of the date hereof, or have any investment account, securities account, commodity account or other similar account with any bank or other financial institution or other securities intermediary or commodity intermediary as of the date hereof, in each case except as set forth in Schedule 7.12 hereto. In the event that any Borrower shall be entitled to or shall at any time after the date hereof hold or acquire any certificated securities, Borrower shall promptly endorse, assign and deliver the same to Lender, accompanied by such instruments of transfer or assignment duly executed in blank as Lender may from time to time specify. If any securities now owned or hereafter acquired by Borrowers are uncertificated and are issued to a Borrower or its nominee directly by the issuer thereof, Borrowers shall immediately notify Lender thereof and shall as Lender may specify, either (i) cause the issuer to agree to comply with instructions from Lender as to such securities, without further consent of any of Borrowers or such nominee, or (ii) arrange for Lender to become the registered owner of the securities. Borrowers shall not, directly or indirectly, after the date hereof open, establish or maintain any investment account, securities account, commodity account or any other similar account (other than a deposit account) with any securities intermediary or commodity intermediary unless each of the following conditions is satisfied (i) Lender shall have received not less than fifteen (15) Business Days prior written notice of the intention of Borrowers to open or establish such account which notice shall specify in reasonable detail and specificity acceptable to Lender the name of the account, the owner of the account, the name and address of the securities intermediary or commodity intermediary at which such account is to be opened or established, the individual at such intermediary with whom Borrowers are dealing and the purpose of the account and Lender shall have consented thereto in writing, (ii) the securities intermediary or commodity intermediary (as the case may be) where such account is opened or maintained shall be acceptable to Lender, and (iii) on or before the opening of such investment account, securities account or other similar account with a securities intermediary or commodity intermediary, such person shall as Lender may specify, either (A) execute and deliver, and cause to be executed and delivered to Lender, a Pledge Agreement and an Investment Property Control Agreement in form and substance satisfactory to Lender with respect thereto duly authorized, executed and delivered by Borrower and such securities intermediary or commodity intermediary or (B) arrange for Lender to become the entitlement holder with respect to such investment property on terms and conditions acceptable to Lender. 7.13 Letters of Credit. Borrowers represent and warrant to Lender that no Borrower is the beneficiary or otherwise entitled to any right to payment under any letter of credit, banker's acceptance or similar instrument as of the date hereof. In the event that a Borrower shall be entitled to or shall receive any right to payment under any Letter of Credit banker's acceptance or any similar instrument, whether as beneficiary thereof or otherwise after the date hereof, Borrowers' Agent shall promptly notify Lender thereof in writing. Borrowers shall immediately, as Lender may specify, either (i) deliver, or cause to be delivered to Lender, with respect to any such letter of credit, banker's acceptance or similar instrument, the written agreement of the issuer and any other nominated person obligated to make any payment in respect thereof (including any confirming or negotiating bank), in form and substance satisfactory to Lender consenting to the assignment of the proceeds of the letter of credit to Lender by such Borrower and agreeing to make all payment thereon directly to Lender or as Lender may otherwise direct or (ii) cause Lender to become, at such person's expense, the transferee beneficiary of the letter of credit, banker's acceptance or similar instrument (as the case may be). 7.14 Tort Claims. Borrowers represent and warrant to Lender that no Borrower has any commercial tort claims as of the date hereof, except as set forth on Schedule 7.14 hereto. In the event that a Borrower shall at any time after the date hereof have any commercial tort claims such Borrower shall promptly notify Lender thereof in writing, which notice shall (i) set forth in reasonable detail the basis for and nature of such commercial tort claim and (ii) include the express grant by such Borrower to Lender of a security interest in such commercial tort claim (and the proceeds thereof). In the event that such notice does not include such grant of a security interest, the sending thereof by such Borrower to Lender shall be deemed to constitute such grant to Lender. Upon the sending of such notice, any commercial tort claim described therein shall constitute part of the Collateral and shall be deemed included therein. Without limiting the authorization of Lender provided herein or otherwise arising by the execution by Borrowers of this Agreement or any of the other Financing Agreements, Lender is hereby irrevocably authorized from time to time and at any time to file such financing statements naming Lender or its designee as secured party and such Borrower as debtor, or any amendments to any financing statements, covering any such commercial tort claim as Collateral. In addition, each Borrower shall promptly upon request by Lender, execute and deliver, or cause to be executed and delivered, to Lender such other agreements, documents and instruments as Lender may require in connection with such commercial tort claim. 7.15 Third Party Possession. Borrowers represent and warrant to Lender that they do not have any goods, documents of title or other collateral in the custody, control or possession of a third party as of the date hereof, except for goods located in the United States in transit to a location of a Borrower permitted herein in the ordinary course of business of such Borrower in the possession of the carrier transporting such goods. In the event that any goods, documents of title or other collateral are at any time after the date hereof in the custody, control or possession of any other person or such carriers, Borrowers shall promptly notify Lender thereof in writing; provided that, as to such carriers, Borrowers need only notify Lender on an aggregate basis. Promptly upon Lender's request, Borrowers shall deliver a Collateral Access Agreement in form and substance satisfactory to Lender, duly authorized, executed and delivered by any such person and Borrower. 7.16 Franchise Agreements. (a) To the extent, and only to extent, that any Franchise Agreement is not fully lawfully or contractually assignable to or collectable by Lender, either for purposes of obtaining a security interest therein or foreclosing on, collecting or otherwise realizing on any such Franchise Agreement, Lender shall nevertheless retain a security interest and right of collection and all other rights provided for under this Agreement: (i) To the extent permitted under applicable laws, regulations and third party contractual terms governing such Franchise Agreements; (ii) In the proceeds of such Franchise Agreements; and (iii) After the occurrence and during the continuance of an Event of Default the right to require Borrowers to do all things and take all actions, including making demands and filing suit (or authorizing Lender to make demand or file suit) in any Borrower's name to collect or otherwise realize upon such Franchise Agreements for Lender's benefit. (b) Borrowers agree that, on request from Lender, after the occurrence and during the continuance of an Event of Default, each Borrower will give any consents or notices required or permitted under any of the Franchise Agreements. 7.17 Additional Actions. Borrowers shall take any other actions reasonably requested by Lender from time to time to cause the attachment, perfection and first priority of, and the ability of Lender to enforce, the security interest of Lender in any and all of the Collateral, including, without limitation, (i) executing, delivering and, where appropriate, filing, financing statements and amendments relating thereto under the UCC or other applicable law, to the extent, if any, a Borrower's signature thereon is required therefor, (ii) causing Lender's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of Lender to enforce, the security interest of Lender in such Collateral, (iii) complying with any provision of any statute, regulation or treaty of the United State, Puerto Rico and the United States Virgin Islands as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of Lender to enforce, the security interest of Lender in such Collateral, (iv) obtaining the consents and approvals of any governmental authority or third party, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, and taking all actions required by any earlier versions of the UCC or by other law, as applicable in any relevant jurisdiction and (v) transferring any and all deposit accounts and investment property to a financial institution or account specified by Lender. Section 8. Representations And Warranties. Borrowers and NSC hereby, jointly and severally, represent and warrant to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans and providing Letter of Credit Accommodations by Lender to Borrowers: 8.1 Corporate Existence, power and authority; Subsidiaries. Except for Pueblo, each Borrower and NSC is a corporation duly organized and in good standing under the laws of its state of incorporation and Pueblo is a limited liability company, duly organized and in good standing under the laws of the state of its organization, and each is duly qualified as a foreign corporation or limited liability company and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on a Borrower's or NSC's financial condition, results of operations or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder (a) are all within each Borrower's and NSC's corporate or limited liability company powers, (b) have been duly authorized, (c) are not in contravention of law or the terms of any Borrower's or NSC's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which a Borrower or NSC is a party or by which a Borrower or NSC or their respective property are bound and (d) except for those arising pursuant to the Financing Agreements and the Security Pledge will not result in the creation or imposition of, or require or give rise to any obligation to grant, any lien, security interest, charge or other encumbrance upon any property of any Borrower or NSC. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrowers and NSC enforceable in accordance with their respective terms. As of the date hereof no Borrower nor NSC has any Subsidiaries except as set forth on the Information Certificate. 8.2 Financial Statements; No Material Adverse Change. All financial statements relating to Borrowers and NSC which have been or may hereafter be delivered by Borrowers to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operations of Borrower and NSC as of the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrowers to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Borrowers and NSC since the date of the most recent audited financial statements furnished by Borrowers to Lender prior to the date of this Agreement. 8.3 Chief Executive Office; Collateral Locations. The chief executive office of Borrowers and NSC and each such Person's Records concerning Accounts are located only at the address set forth below on the signature page hereto and their respective only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate. The Information Certificate correctly identifies any of such locations which are not owned by Borrowers or NSC and sets forth the owners and/or operators thereof and to the best of Borrowers' knowledge, the holders of any mortgages on such locations. 8.4 Priority of Liens; Title to Properties. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral subject only to those non material liens indicated on Part 1 of Schedule 8.4. Borrower has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Parts 1 and 2 of Schedule 8.4 hereto. 8.5 Tax Returns. Borrowers have filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension, except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrowers have paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by any of them, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers and with respect to which adequate reserves have been set aside on their books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, Commonwealth, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 8.6 Litigation. Except as set forth on the Information Certificate, there is no present investigation by any governmental agency pending, or to the best of Borrowers' knowledge threatened, against or affecting any Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of Borrowers' knowledge threatened, against any Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against a Borrower would result in any material adverse change in the assets, business or prospects of such Borrower or would impair the ability of such Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon any Collateral. 8.7 Compliance with Other Agreements and Applicable Laws. Except in respect of the proceedings identified in items 117, 120 and 130 of the Schedule of Litigation attached to the Information Certificate, no Borrower is in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrowers are in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. 8.8 Bank Accounts. All of the deposit accounts, merchant payment accounts, investment accounts or other accounts in the name of or used by any Borrower maintained at any bank or other financial institution are set forth on Schedule 8.8 hereto. 8.9 Accuracy and Completeness of Information. All information furnished by or on behalf of Borrowers or NSC or in writing to Lender in connection with this Agreement, or any other Financing Agreements or any transaction contemplated hereby or thereby, including all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a Material Adverse Effect which has not been fully and accurately disclosed to Lender in writing. 8.10 Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrowers or NSC shall now or hereafter give, or cause to be given, to Lender. 8.11 Intellectual Property. Borrowers own or license or otherwise have the right to use all Intellectual Property materially necessary for the operations of their business as presently conducted or proposed to be conducted. As of the date hereof, Borrowers do not have any Intellectual Property registered, or subject to pending applications, in the United States Patent and Trademark Office or any similar office or agency in the United States, any State thereof, any political subdivision thereof or in any other country, other than those described in Schedule 8.11 hereto and have not granted any licenses with respect thereto other than as set forth in Schedule 8.11 hereto. To Borrowers' knowledge, after reasonable investigation, no event has occurred which permits or would permit after notice or passage of time or both, the revocation, suspension or termination of such rights. Except as otherwise disclosed by Borrowers to Lender in writing to the best of Borrowers' knowledge, no slogan or other advertising device, product, process, method, substance or other Intellectual Property or goods bearing or using any Intellectual Property presently contemplated to be sold by or employed by a Borrower infringes any patent, trade mark, service mark, trade name, copyright, license or other Intellectual Property owned by any other Person presently and no claim or litigation is pending or threatened against or affecting any Borrower or contesting its rights to sell or use any such Intellectual Property. Schedule 8.11 sets forth all of the agreements or other arrangements of Borrowers pursuant to which any Borrower has a license or other right to use any trademarks, logos, designs, representations or other intellectual Property owned by another person as in effect on the date hereof and the dates of the expiration of such agreements or other arrangements of such Borrower as in effect on the date hereof. No trademark, service mark or other Intellectual Property at any time used by a Borrower which is owned by another person, or owned by a Borrower subject to any security interest, lien, collateral assignment, pledge or other encumbrance in favor of any person other than Lender, is affixed to any Eligible Inventory. 8.12 Capitalization. (a) All of the issued and outstanding shares of Capital Stock of each Borrower and of NSC are directly and beneficially owned and held by those persons specified on Schedule 8.12 hereto, in the amounts specified therein and all of such Capital Stock have been duly issued and are fully paid and non - assessable, free and clear of all claims, liens, pledges and encumbrances of any kind except those in favor of Lender. (b) Except for the Borrowers, NSC has no Subsidiaries and each of Pueblo Markets, Inc, Pueblo Super Videos, Inc., Xtra Drugstores, Inc. and Pueblo Caribbean Videos, Inc. have been dissolved. (c) Borrowers are Solvent and will continue to be Solvent after (i) the creation of Obligations and the security interests of Lender, (ii) the payments to NSC contemplated hereunder and (iii) the consummation of the other transactions contemplated hereunder. 8.13 Environmental Compliance. (a) Except as set forth on Schedule 8.13 hereto, neither (i) Borrowers nor (ii) NSC with respect to any Real Property including any Real Estate Security, has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off their respective premises (whether or not owned by any of them) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of Borrowers and NSC complies in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on Schedule 8.13 hereto, there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor is any pending or to the best of Borrowers' knowledge threatened, with respect to any non - compliance with or violation of the requirements of any Environmental Law by (i) Borrowers or (ii)NSC with respect to any Real Property including any Real Estate Security or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects any Borrower or NSC with respect to any Real Property including any Real Estate Security or any Borrower's or NSC's business, operations or assets or any properties at which a Borrower or NSC has transported, stored or disposed of any Hazardous Materials. (c) Neither (i) Borrowers nor (ii) NSC has any material liability (contingent or otherwise) in connection with a release, spill or charge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Borrowers and NSC have all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of Borrowers or NSC under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. 8.14 Employee Benefits. (a) Except as set forth on Schedule 8.14 hereto, Borrowers have not engaged in any transaction in connection with which Borrowers or any of their ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the code, including any accumulated funding deficiency described in Section 8.14(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.14(d) hereof. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrowers to be incurred with respect to any employee benefit plan of Borrowers or any of their ERISA Affiliates. There has been no reportable event (without the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan of Borrowers or any of their ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which Borrowers or any of their ERISA Affiliates is required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each employee benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee benefit plan, including any penalty or tax described in Section 8.14(a) hereof and any deficiency with respect to vested accrued benefits described in section 8.14(d) hereof. (d) Except as set forth on schedule 8.14 hereto, the current value of all vested accrued benefits under all employee benefit plans maintained by Borrowers that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.14(a) hereof any accumulated funding deficiency described in Section 8.14(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Neither Borrowers nor any of their respective ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.15 Credit Card Agreements. Set forth in Schedule 8.15 hereto is a correct and complete list of (a) all of the Credit Card Agreements and all other agreements, documents and instruments existing as of the date hereof between or among Borrowers, the Credit Card Issuer, the Credit Card Processors and any of their affiliates, (b) the percentage of each sale payable to the Credit Card Issuer or Credit Card Processor under the terms of the Credit Card Agreements,(c) all other fees and charges payable by Borrowers under or in connection with the Credit Card Agreements and (d) the terms of such Credit Card Agreements. The Credit Card Agreements constitute all of such agreements necessary for Borrowers to operate their business as presently conducted with respect to credit cards and debit cards and no Accounts of Borrowers arise from purchases by customers of Inventory with credit cards or debit cards, other than those which are issued by Credit Card Issuers with whom Borrowers have entered into one of the Credit Card Agreements set forth on Schedule 8.15 hereto. Each of the Credit Card Agreements constitute the legal, valid and binding obligations of the Borrower party thereto, and to the best of Borrowers' knowledge, the other parties thereto, are enforceable in accordance with their respective terms and are in full force and effect. No default or event of default, or act, condition or event which after notice or passage of time or both, would constitute a default or an event of default under any of the Credit Card Agreements exists. Borrowers have complied with all of the terms and conditions of the Credit Card Agreements to the extent necessary for Borrowers to be entitled to receive all payments thereunder. Borrowers have delivered, or caused to be delivered to Lender, true, correct and complete copies of all of the Credit Card Agreement. 8.16 Interrelated Business. Borrowers share an identity of interest such that any benefit received by each Borrower benefits the others. Each Borrower renders services to or for the benefit of the other Borrowers, make loans and advances to or for the benefit of the other Borrowers and provides administrative, marketing, payroll and management services to or for the benefit of the other Borrowers. Borrowers have centralized accounting and legal services. Section 9. Affirmative And Negative Covenants. 9.1 Maintenance of Existence. Borrowers and NSC shall at all times preserve, renew and keep in full, force and effect their respective corporate or other existence and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, trade names, approvals, authorizations, leases and contracts necessary to carry on their business as presently or proposed to be conducted. Borrowers and NSC shall give Lender thirty (30) days prior written notice of any proposed change in any of their corporate or other names, which notice shall set forth the new name(s) and Borrowers and NSC shall deliver to Lender a copy of the amendment to the Certificate of Incorporation or other organizational document of a Borrower or NSC providing for the name change certified by the Secretary of State of the jurisdiction of incorporation or organization of such Person as soon as it is available. 9.2 New Collateral Locations. Any Borrower may open any new store location within Puerto Rico or the United States Virgin Island provided Borrowers' Agent (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (b) such Borrower executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including UCC financing statements. 9.3 Compliance with Laws, Regulations, Etc. (a) Borrowers and NSC shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local governmental authority, including the Employee Retirement Security Act of 1974, as amended, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including all of the Environmental Laws. (b) Borrowers and NSC shall establish and maintain, at their expense, a system to assure and monitor their continued compliance with all Environmental Laws in all of their operations, which system shall include annual reviews of such compliance by employees or agents of Borrowers who are familiar with the requirements of the Environmental Laws. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrowers to Lender. Borrowers and NSC shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall regularly report to Lender on such response. (c) Borrowers and NSC shall give both oral and written notice to Lender immediately upon a Borrower's or NSC's receipt of any notice of, or a Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non - compliance with or violation of any Environmental Law by (1) Borrower or (2) any Guarantor with respect to any Real Estate Security or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental, health or safety matter, which affects (1) any Borrower or NSC, or their respective business, operations or assets or any properties at which a Borrower transported, stored or disposed of any Hazardous Materials or (2) any Real Estate Security given by any Guarantor. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of Borrowers or NSC with respect to any Real Estate Security, in order to avoid any material non - compliance, with any Environmental Law, Borrowers shall, at Lender's request and Borrowers' expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests of the site where a Borrower's or NSC's non - compliance or alleged non-compliance with such Environmental Laws has occurred as to such non - compliance and prepare and deliver to Lender a report as to such non - compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or Borrowers' or NSC's response thereto or the estimated costs thereof, shall change in any material respect. (e) Borrowers and NSC shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of any Borrower or NSC or any Real Estate Security given by any of them and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.4 Payment of Taxes and Claims. Borrowers and NSC shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets or any Real Estate Security of any Guarantor, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers and with respect to which adequate reserves have been set aside on their books. Borrowers shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrowers agree to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrowers such amount shall be added and deemed part of the Loans, provided, that, nothing contained herein shall be construed to require Borrowers to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non - renewal of this Agreement. 9.5 Insurance. Borrowers and NSC shall at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrowers' Agent shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Borrowers' Agent fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrowers. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for each Borrower and NSC in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Each Borrower and NSC shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and each Borrower and NSC shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by Borrowers or any of their Affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6 Financial Statements and Other Information. (a) Each Borrower and NSC shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of such Borrower and NSC and their respective Subsidiaries (if any) in accordance with GAAP. Borrowers' Agent shall (i) promptly furnish or cause to be furnished to Lender all such financial and other information as Lender may request relating to the Collateral and the assets, business and operations of each Borrower and NSC and shall notify the independent public accountants acting as auditors to Borrowers and NSC that Lender is authorized to obtain such information directly from such accountants. Without limiting the foregoing Borrowers shall cause to be furnished to Lender: (i) within thirty (30) days after the end of each fiscal month, (A) monthly unaudited consolidated and consolidating financial statements of NSC and Borrowers (including in each case balance sheets, statements of income and loss, statements of cash flow, and statements of shareholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of NSC and Borrowers as of the end of and through such fiscal month and (B) monthly operating statements of each Retail Store, (ii) within forty five (45) days after the end of each fiscal quarter, (A) unaudited consolidated and consolidating financial statements of NSC and Borrowers (including the information specified in Section 9.6(a)(i) (A) hereof),as of the end and through the fiscal quarter then ended and (B) quarterly operating statements of each Retail Store, (iii) within sixty (60) days after the consummation of NSC's Plan of the Reorganization, audited consolidated and consolidating financial statements of NSC and Borrowers (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders" equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of NSC and Borrowers as of the end of and for the immediately preceding fiscal year, together with the unqualified opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrowers and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of NSC and Borrowers as of the end of and for such fiscal year, and (iv) within ninety (90) days after the end of each fiscal year ending after November 2, 2002, audited consolidated financial statements and supporting consolidating financial schedules of NSC and Borrowers (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders equity), and the accompanying notes thereto and the accompanying consolidating and combining schedules and financial statements of NSC and Borrowers, all in reasonable detail, fairly presenting the financial position and the results of the operations of NSC and Borrowers as of the end of and for such fiscal year, together with the unqualified opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrowers and reasonably acceptable to Lender, that such consolidated financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of NSC and Borrowers. The financial statements referred to in Section 9.6(a)(i) and (ii) hereof shall be accompanied by a certificate of the Chief Financial Officer of Borrowers to the effect (i) that such financial statements are correct in all material respects, subject to normal year end audit adjustments and (ii) that Borrowers are in compliance with the covenants set forth in Sections 9.14, 9.15, 9.16 and 9.17 hereof , as of the close of the period to which such financial statements relate, together with a schedule showing the calculations used in determining such compliance and that no Event of Default or event which would with the giving of notice or passage of time, constitute an Event of Default exists and is continuing. (b) Borrowers shall promptly notify Lender in writing of the details of (i) any loss, damages, investigation, action, suit, proceeding or claim which has or could result in a Material Adverse Effect, (ii) any Material Contract of a Borrower being terminated or amended or any new Material Contract entered into (in which event Borrowers' Agent shall provide Lender with a copy of such Material Contract), (iii) any order, judgment or decree in excess of $1,000,000 which has been entered against a Borrower or NSC or any of their properties or assets, (iv) any notification from a Governmental Authority of violation of laws or regulations received by a Borrower or NSC, (v) any ERISA Event and (vi) the occurrence of any Event of Default or act, condition or event which with the giving of notice or the passage of time or both, would constitute an Event of Default. (c) NSC shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all reports which any of them sends to their stockholders generally and copies of all reports and registration statements which any of them files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrower and NSC shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information respecting the Collateral and the business of Borrowers as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of a Borrower or NSC to any court or other government agency upon request therefor or to any participant or assignee or prospective participant or assignee. Borrowers and NSC hereby irrevocably authorize and direct all accountants or auditors to deliver to Lender, at Borrowers' expense, copies of the financial statements of NSC and each of its Subsidiaries and any reports or management letters prepared by such accountants or auditors on behalf of NSC and its Subsidiaries and to disclose to Lender such information as they may have regarding the business of NSC and its Subsidiaries. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrowers to Lender in writing. (e) Borrowers shall deliver, or cause to be delivered, to Lender, within sixty (60) days after the Closing Date, opening consolidated and consolidating balance sheets of NSC and Borrowers after giving effect to the transactions contemplated by this Agreement, together with the certification of the Chief Executive Officer and Chief Financial Officer of each Borrower and NSC to the effect that such opening balance sheets have been prepared in accordance with GAAP and present fairly the financial condition of NSC and Borrowers as of such date. 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrowers and NSC shall not directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with any of them or (b) sell, assign, lease, transfer, abandon or otherwise dispose of(i) any Capital Stock or indebtedness to any other Person or (ii) any of their assets to any other Person (except for (i) sales of Inventory in the ordinary course of business and (ii) the disposition of worn - out or obsolete Equipment or Equipment no longer used in the business of Borrowers so long as (A) any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of $500,000 for all such Equipment disposed of in any fiscal year of Borrowers) or (c) form or acquire any Subsidiaries, or transfer any assets to any Subsidiary, or (d) wind up, liquidate or dissolve or (e) agree to do any of the foregoing. 9.8 Encumbrances. Borrowers and NSC shall not create, incur, assume or suffer or permit to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of their respective assets or properties, including the Collateral, except: (a) liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers or NSC and with respect to which adequate reserves have been set aside on its books; (c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrowers' or NSC's business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers or NSC, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on their books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of Real Property which do not interfere in any material respect with the use of such Real Property or ordinary conduct of the business of Borrowers or NSC as presently conducted thereon or materially impair the value of the Real Property which may be subject thereto; (e) purchase money security interests in Equipment (including Capital Leases entered into after the date hereof) and purchase money mortgages on Real Property, not to exceed $250,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of a Borrower or NSC other than the Equipment or Real Property so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or Real Property so acquired, as the case may be; (f) the security interests and liens set forth on Schedule 8.4 hereto; and (g) the security interests pursuant to the Security Pledge. 9.9 Indebtedness. No Borrower nor NSC shall incur, create, assume, become or be liable in any manner with respect to, or suffer or permit to exist, any obligations or indebtedness, except: (a) the Obligations; (b) trade accounts payable not unpaid more than the greater of (i) sixty (60) days past the invoice date or (ii) the due date thereof, unless Lender has established Availability Reserves with respect thereto, and other trade obligations and normal accruals in the ordinary course of business not yet due and payable, or with respect to which a Borrower or NSC is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to such Borrower or NSC and with respect to which adequate reserves have been set aside on their books; (c) purchase money indebtedness (including Capital Leases) to the extent not incurred or secured by liens (including Capital Leases) in violation of any other provision of this Agreement; (d) unsecured indebtedness of NSC to Borrowers described in Section 9.10(f) hereof and unsecured indebtedness of a Borrower or NSC for borrowed money incurred after the date hereof, owing to any Person, other than any shareholder, officer, director, agent, employee or Affiliate of a Borrower, on commercially reasonable rates and terms pursuant to an arm's length transaction; provided, that, (i) Lender shall have received not less than five (5) business days prior written notice of the intention to incur such indebtedness, which notice shall set forth in reasonable detail satisfactory to Lender, the amount of such indebtedness, the person to whom such indebtedness will be owed, the interest rate, the schedule of repayments and maturity date with respect thereto and such other information as Lender may reasonably request with respect thereto, (ii) Lender shall have received true, correct and complete copies of all agreements, documents and instruments evidencing or otherwise related to such indebtedness, (iii) the aggregate amount of such indebtedness at any time outstanding shall not exceed $250,000, (iv) on and before the date of incurring such indebtedness and after giving effect thereto, no Event of Default, or event which with the giving notice or the passage of time or both would constitute an Event of Default, shall exist or have occurred and be continuing, (v) Borrowers or NSC may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date of the execution thereof, and (vi) Borrowers or NSC shall not, directly or indirectly, (A) make any prepayments or other non - mandatory payments in respect of such indebtedness, or (B) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto, or (C) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (vii) Borrowers or NSC shall furnish to Lender all notices, demands or other materials in connection with such indebtedness either received by Borrower or NSC or on its behalf, promptly after the receipt thereof, or sent by a Borrower, NSC or on its behalf, concurrently with the sending thereof, as the case may be; (e) indebtedness of Borrowers and NSC described on Schedule 9.9(e) hereto; provided, that: (i) the individual principal amounts of such indebtedness and aggregate principal amounts of all such indebtedness shall not exceed the amounts shown on such Schedule 9.9 hereto less the aggregate amount of all repayments, repurchases or redemptions, whether optional or mandatory in respect thereof, plus interest thereon at the rate provided for in such agreement or instrument as in effect on the date hereof, (ii) Borrowers and NSC may only make (A) regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness and (B) with respect to NSC a one time payment on the Closing Date, as contemplated by the Reorganization Plan, (iii)Borrowers and NSC shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iv) Borrowers and NSC shall furnish to Lender all notices or demands in connection with such indebtedness either received by any Borrower or NSC or on its behalf, promptly after the receipt thereof, or sent by a Borrower or NSC or on their behalf, concurrently with the sending thereof, as the case may be; and (f) unsecured obligations and indebtedness owed by any Borrower to any of the other Borrowers. 9.10 Loans, Investments, Guarantees, Etc. Borrowers and NSC shall not directly or indirectly, make or permit to exist any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the Capital Stock or indebtedness or all or a substantial part of the assets or property of any person, or form or acquire any Subsidiaries or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, except: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in cash or Cash Equivalents; provided that, as to any of the foregoing, unless waived in writing by Lender, Borrowers and NSC shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments; (c) the loans, advances and guarantees set forth on Schedule 9.10 hereto; provided, that, as to such loans, advances and guarantees, (i) Borrower and NSC shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such loans, advances or guarantees or any agreement, document or instrument related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase or otherwise acquire the obligations arising pursuant to such guarantees, or set aside or otherwise deposit or invest any sums for such purpose, and (ii) Borrowers and NSC shall furnish to Lender all notices or demands in connection with such loans, advances or guarantees or other indebtedness subject to such guarantees either received by a Borrower or NSC or on its behalf, promptly after the receipt thereof, or sent by a Borrower or NSC or on its behalf, concurrently with the sending thereof, as the case may be; (d) loans and advances not in excess of the amount of $500,000 outstanding in the aggregate for all such loans and advances during the term of this Agreement; provided that, no such loan or advance shall be made to any Affiliate of a Borrower or any Person described on Schedule 9.22 hereto; (e) loans or advances by any Borrower to any of the other Borrowers and (f) loans and advances by Borrowers to NSC not in excess of the amount of $250,000 incurred in any fiscal year to be used by NSC for the payment of its ordinary and necessary expenses. 9.11 Transactions with Affiliates. Borrowers shall not, directly or indirectly, (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any officer, director, agent or Person Affiliated with a Borrower or NSC which is not also a Borrower, except in the ordinary course of and pursuant to the reasonable requirements of such Borrower's business and upon fair and reasonable terms no less favorable to such Borrower than such Person would obtain in a comparable arm's length transaction with an unaffiliated person (but in no event may a Borrower sell, transfer or lease any property to any Subsidiary) or (b) make any payments (i) of any indebtedness owing to any officer, employee, shareholder, director or other person Affiliated with any Borrower or NSC, which is not also a Borrower or (ii) of any compensation to any employee, except reasonable compensation to employees for services rendered to in the ordinary course of business, not in violation of Section 9.22 hereof; provided that, Borrowers may make the transfers and payments permitted by Section 9.19(b) and (c) hereof. 9.12 Additional Bank Accounts. Borrowers shall not, directly or indirectly, open, establish or maintain any deposit account, investment account or any other account with any bank or other financial institution, other than the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except:(a) as to any new or additional Blocked Accounts and (b) as permitted by Sections 7.11 and 7.12 hereof. 9.13 Compliance with ERISA. (a) Borrowers and NSC shall not, with respect to any "employee benefit plans" maintained by a Borrower or any of its ERISA Affiliates: (i) terminate any of such employee benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee benefit plans or any trust created thereunder which would subject any Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA, (iii) fail to pay to any such employee benefit plan any contribution which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee benefit plan, (v) allow or suffer to exist any occurrence of a reportable event(other than those as to which the Pension Benefit Guaranty Corporation has waived notice pursuant to Regulation) or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee benefit plan that is a single employer plan, that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation, (vi) incur any withdrawal liability with respect to any multi employer pension plan; and (vii) fail to maintain each employee benefit plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal State and Commonwealth Law. (b) As used in this Section 9.13 and Section 8.14 the terms (i) "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA, (ii) "ERISA Affiliate" shall mean any Person required to be aggregated with a Borrower or any of its Subsidiaries under Sections 414(b), 414 (c) , 414(m) or 414(o) of the Code and "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974 . 9.14 Working Capital. Borrowers and NSC shall, at all times, maintain consolidated Working Capital of not less than $5,000,000. 9.15 Adjusted Net Worth. Borrowers and NSC shall at all times, maintain a consolidated Adjusted Net Worth of not less than $ 25,000,000. 9.16 Suppressed Availability. (a) Borrowers shall, maintain with Lender, at all times after the date hereof, Suppressed Availability of not less than $1,800,000. Lender may, but shall not be required to and in addition to its other rights, in its discretion, use the amount of Suppressed Availability (i) to pay costs and expenses incurred by Borrowers or chargeable to Borrowers under this Agreement, (ii) to cure defaults of Borrowers or NSC under this Agreement, or by Borrower or NSC or any other Obligor under any of the other Financing Agreements or any other agreement of any Borrower or NSC with any third party, (iii) to pay taxes of Borrowers or NSC and (iv) for, any other purpose permitted by, or to make any other payment which Lender is authorized to make, under this Agreement. (b) If the amount of Suppressed Availability shall at any time be less than $1,800,000 Borrowers shall, at all times, on notice by Lender, immediately take such actions as are required by Lender, including delivery to Lender of additional Pledged Cash, so that the amount of Suppressed Availability shall not be less than $1,800,000. 9.17 Additional Financial Covenants. (a) Borrowers and NSC shall, as of the close of their fiscal year ending November 2, 2002, and for the 52 - 53 week period then ending, and as of the close of each of their fiscal years thereafter and for the respective 52 - 53 week periods then ending have a consolidated Fixed Charge Coverage Ratio equal to or greater than 1.5 to 1; provided that, in determining such Ratio there shall be excluded as current maturities of Debt the amount of the Loans and the amount of the NSC Notes, as such of each such date. (b) Borrowers and NSC shall, as of the close of their fiscal year ending November 2, 2002, and for the 52 - 53 week period then ending and as of the close of each of their fiscal years thereafter and for the respective 52 - 53 week periods then ending, derive (i)consolidated EBITDA of not less than $25,000,000 and (ii) consolidated Net Revenue of not less than $525,000,000. (c) Borrowers and NSC shall not permit , as of the close of their fiscal year ending November 2, 2002, and for the 52 - 53 week period then ending and as of the close of each of their fiscal years thereafter and for the respective 52 - 53 week periods then ending, the ratio of their consolidated Debt to consolidated EBITDA to be greater than 10 to 1. 9.18 Changes in Equity. Borrowers and NSC shall not (a) cease to have their respective Capital Stock or other equity interests owned by the Persons now owning such Capital Stock or other equity interests in the same percentages of ownership now held by such Persons or (b) issue, sell or deliver any shares of their respective Capital Stock or other equity interests or rights, options, warrants or calls to purchase any shares of their respective Capital Stock other equity interests or securities convertible into shares of their respective Capital Stock or other equity interests. 9.19 Restricted Junior Payments. Borrowers shall not, directly or indirectly, make, or agree to make, any Restricted Junior Payments, except: (a) As may be permitted by Sections 9.11 (a) and 9.10(f) hereof; (b) Issuance and delivery to NSC of the NSC Notes; (c) Payment by Pueblo to NSC of the amount of $51,000,000 to be used by NSC for consummation of its Reorganization Plan; provided that, each of the following conditions are satisfied: (i) such payment shall be made with funds legally available therefor, (ii) such payment shall not violate any law or regulation or the terms of any indenture, agreement or undertaking to which any Borrower is a party or by which any Borrower or its properties are bound, (iii) as of the date of such payment (A) no Event of Default or act, condition or event which with the giving of notice or passage of time or both would constitute an Event of Default shall exist or have occurred and be continuing and (B) the making of such payment would not cause the occurrence of an Event of Default, including a failure to comply with any of the provisions of Sections 9.14, 9.15, 9.16 or 9.17 hereof; and (iv) as of the date of such payment and after giving effect thereto, Borrowers, taken as whole, shall be Solvent; and (d) Payments to NSC of regularly scheduled interest payments on the NSC Notes to be used by NSC for the purposes of paying regularly scheduled payments of interest on the Senior Secured Notes; provided that, each of the following conditions are satisfied: (i) such payment shall be made with funds legally available therefor, (ii) such payment shall not violate any law or regulation or the terms of any indenture, agreement or undertaking to which any Borrower is a party or by which any Borrower or its properties are bound, (iii) as of the date of such payment (A) no Event of Default or act, condition or event which with the giving of notice or passage of time or both would constitute an Event of Default shall exist or have occurred and be continuing and(B) the making of such payment would not cause the occurrence of an Event of Default, including a failure to comply with any of the provisions of Sections 9.14, 9.15, 9.16 or 9.17 hereof; (iv) as of the date of such payment and after giving effect thereto, Borrowers, taken as whole, shall be Solvent; (v) The making of such payment does not and will not result in, as determined by Lender, Revolving Loans in excess of those permitted under Section 2.1(a) hereof; and (e) A Borrower may declare and pay dividends to another Borrower. 9.20 Costs and Expenses. Borrowers shall pay to Lender on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all costs and expenses and fees for insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; (c) costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations; (e) costs and expenses of preserving and protecting the Collateral; (f) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including preparations for and consultations concerning any such matters);(g) all out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrower's operations including the costs of field testing by third party providers retained by Lender, plus a per diem charge at the rate of $1,000.00 per person per day plus travel, hotel and all other out of pocket expenses for Lender's examiners in the field and office; and (h) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. 9.21 Environmental Audits. Within ninety (90) days from the date of a request by Lender, from time to time, Borrowers shall deliver to Lender, at their expense updated environmental audits of the Real Property and the Real Estate Security conducted by an environmental firm acceptable to Lender and in form, scope and methodology satisfactory to Lender confirming that (a) Borrowers and NSC are in compliance with all Environmental Laws, in all material respects and (b) there is no material potential or actual liability of any Borrower or NSC for any remedial action with respect to any environmental condition or any other significant environmental problems; provided that, if such audits cannot confirm such compliance or that there is no such liability, Borrowers shall forthwith at their expense, diligently take all remedial action necessary to cure such condition, effect such compliance and discharge such liability, to such firm's satisfaction. 9.22 Management Compensation. Borrowers and NSC will not pay compensation or management, consulting or other fees for management or similar services directly or indirectly, to or for the benefit of (a) as to those Persons listed on Schedule 9.22 hereto in per annum amounts in the aggregate in excess of that set forth and determined as described on Schedule 9.22 hereto, including performance and incentive bonuses, for each such person, (b) as to any Affiliate or direct or indirect or beneficial stockholder an additional per annum amount in excess of $120,000 and (c) as to all other officers, directors or consultants amounts in excess of that which is reasonable, ordinary and necessary. 9.23 Business Names. Borrowers and NSC shall not use any trade names in the conduct of their business and operations other than (a)those listed on Schedule 8.11 hereto and (b)those trade names which a Borrower may hereafter use after (i) having given Lender at least 15 Business Days notice after the filing for registration of such name and (ii) taking all such actions and executing and delivering all such agreements, instruments, notices and documents as Lender shall request to(A) grant to Lender a valid and perfected first and prior security interest and lien therein and (B) protect and preserve Landers's security interests and liens in the other Collateral. 9.24 Franchise Agreements. (a) Each Borrowers shall (i) observe and perform and perform all of the material terms, covenants, conditions and provisions of the Franchise Agreements to be observed and performed by any of them at the times set forth therein, if any, (ii) not do, permit, suffer or refrain from doing anything which could reasonably be expected to result in a material default under or material breach of any of the terms of any Franchise Agreement, (iii) not cancel, surrender, modify, amend, waive or release any Franchise Agreement in any material respect or any term, provision or right of a Borrower thereunder in any material respect, or consent to or permit to occur any of the foregoing; except that, subject to Section 9.24(b) below, a Borrower may cancel, surrender or release any Franchise Agreement in the ordinary course of the business of such Borrower; provided that, Borrowers shall give Lender not less than ten (10) days prior written notice of the intention to so cancel, surrender and release any such Franchise Agreement, (iv) give Lender prompt written notice of any Franchise Agreement entered into by any Borrower after the date hereof, together with a true, correct and complete copy thereof and such other information with respect thereto as lender may reasonably request, (v) give Lender prompt written notice of any material breach of any obligation, or any default, by any party under any Franchise Agreement, and deliver to Lender (promptly upon the receipt thereof by a Borrower in the case of a notice to a Borrower, and concurrently with the sending thereof in the case of a notice from a Borrower) a copy of each notice of default received or delivered by a Borrower in connection with any Franchise Agreement, and (vi) furnish to Lender, promptly upon the request of Lender, such information and evidence as Lender may reasonable require from time to time concerning the observance, performance and compliance by any Borrower or the other party or parties thereto with the terms, covenants or provisions of any Franchise Agreement. (b) Each Borrower will either exercise any option to renew or extend the term of each Franchise Agreement in such manner as will cause the term of such Franchise Agreement to be effectively renewed or extended in accordance with, and subject to, the terms thereof, for the period provided by such option and give prompt written notice thereof to Lender or give Lender prior written notice that such Borrower does not intend to renew or extend the term of any such Franchise Agreement or that the term thereof shall otherwise be expiring, not less than ten (10) days prior to the date of any such non - renewal or expiration. In the event of the failure of a Borrower to extend or renew any Franchise Agreement, Lender shall have, and is hereby granted, the irrevocable right and authority, at its option in accordance with, and subject to, the terms thereof to renew or extend the term of such Franchise Agreement, whether in its own name and behalf, or in the name and behalf of a designee or nominee of Lender or in the name of or on behalf of any Borrower, as Lender shall determine, at any time that an Event of Default shall exist or have occurred and be continuing. Any sums so paid by Lender shall constitute part of the Obligations. 9.25 Additional Covenants. (a) Borrowers shall deliver to Lender, within 10 days of the close of each fiscal month a report of essential payments made and expenses incurred, by Borrowers during such month in such detail as Lender may request. (b) Borrowers shall deliver to Lender, within 10 days of the close of each fiscal quarter a progress report with respect to Borrowers' store remodeling, relocation and opening plans. (c) Borrowers shall deliver to Lender, within 10 days of the close of each fiscal month, a comparison of its actual "availability" for such month with its budgeted "availability" for such month. (d) Borrowers shall furnish to Lender, within 10 days of the close of each fiscal quarter, a status report on its leased properties, in form and detail and covering those matters requested by Lender. 9.26 Loan Amount Certificate. Borrowers and NSC shall, promptly upon the request of Lender, but not more often the 4 times in any fiscal year and in any event together with the audited Financial Statements referred to in Section 9.6 hereof furnish to Lender a certificate, signed by their President and Chief Financial Officer, stating as of the date thereof (a) the then outstanding balance of the Loans, (b) that no defense, offset or counterclaim exists with respect to Borrowers obligation to pay such Loans or if any such defense, offset or counterclaim does exist, specifying in detail the nature and amount thereof and the facts upon which based and (c) they have reviewed this Agreement and the other Financing Agreements to which any Borrower is a party and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of the Borrowers and that, based on such review, the Borrowers have observed or performed all of their covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Financing Agreements to be observed, performed or satisfied by the Borrowers and that such review has not disclosed the existence, and that such officers do not have knowledge of the existence as at the date of the certificate, of any Event of Default or event or condition which, with the giving of notice or the lapse of time or both, would constitute an Event of Default or if such officer has any knowledge of any such Event of Default or other event or condition, specifying same and what action the Borrowers are taking or proposes to take with respect thereto. 9.27 Further Assurances. At the request of Lender at any time and from time to time, Borrowers and NSC shall at their expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests of Lender, and the priority thereof, in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of Borrowers' Agent representing that all conditions precedent to the making of Loans and providing Letter of Credit Accommodations contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans and providing Letter of Credit Accommodations until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, each Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. 9.28 Closing The Chapter 11 Case. NSC shall use its reasonable best efforts to close its Chapter 11 Case on or before September 30, 2003 and shall not file a motion to reopen the case without the Bank's prior written consent. 9.29 Security Pledge. NSC shall (a) deliver to lender, on or prior to the Closing Date, a certified copy of the Security Pledge as in effect on such date and (b) shall not thereafter amend or agree to amend the Security Pledge, without the prior written consent of Lender. Section 10. Events of Default And Remedies. 10.1 Events of Default. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default" and collectively as "Events of Default": (a) Borrowers (i) fail to pay when due any of the Obligations or (ii) Borrowers or NSC fail to perform any of the terms, covenants, conditions or provisions contained in this Agreement or any of the other Financing Agreements except those described in Section 10(a)(i) above and such failure shall continue for ten (10) days; except that, such ten (10) day cure period shall not be applicable in the case of (A) any failure which cannot be cured at all or within such ten (10) day period, (B) an intentional breach by a Borrower or NSC or (C) a failure which has been the subject of a prior failure within the preceding six (6) months; (b) any representation, warranty or statement of fact made by Borrowers or NSC to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect; (c) NSC or any other Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender or any representation, warranty or statements of fact made by any such Person in any such document shall when made or deemed made be false or misleading in any material respect; (d) any judgment for the payment of money is rendered against any Borrower or NSC or any other Obligor in excess of $250,000 in any one case, or in excess of $500,000 in the aggregate and shall remain undischarged or unvacated for a period in excess of sixty (60) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against any Borrower or NSC or any other Obligor or any of their assets; (e) any Borrower, NSC or any other Obligor which is a partnership, limited liability company, limited liability partnership or a corporation, dissolves or suspends or discontinues doing business; (f) Borrowers shall not be Solvent or any Borrower or NSC makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (g) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against any Borrower or NSC(except the Chapter 11 Case) or any other Obligor or all or any part of their respective properties and such petition or application is not dismissed within thirty(30) days after the date of its filing or any Borrower or NSC or any other Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of any such action or proceeding or the relief requested is granted sooner. (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by any Borrower or NSC(except the Chapter 11 Case) or any other Obligor or for all or any part of its property; (i) any default by a Borrower or NSC or any other Obligor under any agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or under any Capital Lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in any case in an amount in excess of $200,000, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by any Borrower or NSC or any other Obligor under any Material Contract, lease, license, or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; (j) there shall be a Change of Control or change in the present senior management of Borrowers or NSC; (k) the indictment, or as Lender may reasonably and good faith determine, threatened indictment of a Borrower or NSC or any other Obligor under any criminal statute, or commencement or threatened commencement of any criminal or civil proceedings against any Borrower or NSC or any other Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of any Borrower or NSC or any other Obligor; (l) there shall be a material adverse change in the business, assets or prospects of Borrower or NSC or any other Obligor after the date hereof; (m) there shall be an event of default under any of the other Financing Agreements; (n) the Reorganization Plan shall not be consummated on or prior to September 30, 2003 or shall not be complied with in any material respect; (o) the Chapter 11 Case shall (i) be converted to a case under Chapter 7 of the Bankruptcy Code, (ii) be dismissed or (iii) have a trustee appointed therein; (p) the Chapter 11 Case shall be reopened at any time after closing thereof; (q) the security interests granted to the Trustee, pursuant to the Security Pledge do not continue to be to Lender's satisfaction, validly and effectively junior and subordinate to the liens of and security interests of Lender; or (r) NSC shall have failed to file objections to proofs of claim filed on or before the date hereof in the Chapter 11 Case that it deems necessary to object to, on or before the thirtieth (30th) day after the Closing Date. 10.2 Remedies. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrowers or NSC or any other Obligor except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by a Borrower or NSC of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against any Borrower or NSC or any other Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (provided, that, upon the occurrence of any Event of Default described in Sections 10.1(g), or 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrowers at Borrowers' expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of a Borrower, which right or equity of redemption is hereby expressly waived and released by Borrowers and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Borrowers' Agent designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrowers waive any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrowers waive the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrowers shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including attorneys" fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of an Event of Default or an event which with notice or passage of time or both would constitute an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or providing Letter of Credit Accommodations or reduce the lending formulas or amounts of Loans and Letter of Credit Accommodations available to Borrowers and/or (ii) terminate any provision of this Agreement providing for any future Loans or Letter of Credit Accommodations to be made or provided by Lender to Borrowers. (e) For the purpose of enabling Lender to exercise the rights and remedies hereunder, each Borrower hereby grants to Lender, effective as of the occurrence of any Event of Default, to the extent assignable, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to Borrowers) to use or assign any of the trademarks, service marks, trade names, business names, trade styles, designs, logos and other source of business identifiers and other Intellectual Property and general intangibles now owned or hereafter acquired by any Borrower, wherever the same maybe located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the complication or printout thereof. 10.3 Special Event of Default. (a) The occurrence or existence of the following event shall be an additional "Event of Default": (i) Any condition precedent specified in Section 4.1 hereof, the satisfaction of which has been deferred by Lender in writing, is not fulfilled and satisfied on or prior to the date to which fulfillment and satisfaction thereof has been deferred (whether or not such condition is capable of being fulfilled or satisfied by Borrowers); and (ii) Lender shall give notice to Borrowers that it is declaring an Event of Default. (b) On the occurrence and during the continuance of an Event of Default specified in this Section 10.3 Lender shall be entitled to all rights and remedies hereunder, including without limitation those set forth in Section 10.2 hereof, under the other Financing Agreements, and at law. Section 11. Jury Trial Waiver; Other Waivers And Consents; Governing Law. 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto with respect thereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the Commonwealth of Puerto Rico (without giving effect to principles of conflicts of law). (b) Borrowers and NSC and Lender irrevocably consent and submit to the non-exclusive jurisdiction of the United States District Court for the District of Puerto Rico and to the Court of First Instance, (Superior Court) of San Juan, Puerto Rico and waive any objection based on venue or forum non conveniences with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against any Borrower or NSC or their respective property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrowers or NSC and their respective property). (c) Each Borrower and NSC hereby waive personal service of any and all process upon each of them and consent that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon a Borrower or NSC in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, the Person so served shall appear in answer to such process, failing which such Person shall be deemed in default and judgment may be entered by Lender against such Person for the amount of the claim and other relief requested. (d) BORROWERS AND NSC AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWERS AND NSC AND LENDER EACH HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWERS AND NSC OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrowers or NSC (whether in tort, contract, equity or otherwise) for losses suffered by any of them in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non - appealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. 11.2 Waiver of Notices. Each Borrower and NSC hereby expressly waive demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on a Borrower or NSC which Lender may elect to give shall entitle any of them to any other or further notice or demand in the same, similar or other circumstances. 11.3 Amendments and Waivers. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender, and as to amendments, as also signed by an authorized officer of Borrowers and NSC. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 11.4 Waiver of Counterclaims. Borrowers and NSC waive all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other than compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5 Indemnification. Each Borrower and NSC shall, jointly and severally, indemnify and hold Lender, and its directors, agents, employees and counsel (collectively "Indemnified Persons"), harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreement, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including amounts paid in settlement, court costs, and the fees and expenses of counsel (the "Indemnified Liabilities"). To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrowers and NSC shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. Section 12. Term of Agreement; Miscellaneous. 12.1 Term. (a) This Agreement and the other Financing Agreements shall become effective as of the Effective Date and shall continue in full force and effect for a term ending on June 22, 2008 (the "Renewal Date") and from year to year thereafter, unless sooner terminated pursuant to the terms hereof. Lender or Borrowers may terminate this Agreement and the other Financing Agreements effective on the Renewal Date or on the anniversary of the Renewal Date in any year by giving the other party at least sixty (60) days prior written notice; provided that, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the effective date of termination or non - renewal of the Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrowers' Agent for such purpose. Interest shall be due until and including the next business day, if the amounts so paid by Borrowers to the bank account designated by Lender are received in such bank account later than 12:00 noon, Atlantic Standard time. (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrowers or NSC or any other Obligor of its respective duties, obligations and covenants under this Agreement, the other Financing Agreements, until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements, and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (c) Upon the written request of Borrowers' Agent, after the effective date of the termination or non - renewal of this Agreement, Lender shall deliver to Borrowers, at Borrowers' cost and expense, UCC - 3 termination statements and a release and reassignment of trademarks, patents, and copyrights, each in form and substance satisfactory to Lender, necessary to evidence the termination of Lender's security interests in and lien upon the Collateral, provided that, each of the following conditions is satisfied: (i) Lender shall have received payment in full in cash and performance of all outstanding and unpaid Obligations and the delivery to Lender of cash collateral in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment, and upon the release of all claims against Lender, (ii) Lender shall have received a written release by Borrowers and NSC and all other Obligors, of Lender and the other Indemnified Parties, in form and substance satisfactory to Lender, duly authorized, executed and delivered by Borrowers and NSC and all other Obligors, and (iii) no suits, actions, proceedings or claims are pending or threatened against any Indemnified Person asserting any damages, losses or liabilities that are Indemnified Liabilities. Accordingly Borrowers and NSC waive any rights which any of them may have under the Uniform Commercial Code to demand the filing of termination statements with respect to the Collateral and Lender shall not be required to send such termination statements to Borrowers or NSC or to file them with any filing office, unless and until this Agreement is terminated in accordance with its terms, the conditions specified in this Section 12.1(c) satisfied and all of the Obligations indefeasibly paid in immediately available funds. 12.2 Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth below and to Borrowers or NSC at Borrowers' Agent's chief executive office set forth below, or to such other address as any party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 12.3 Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12.4 Successors. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrowers and their respective successors and assigns, except that Borrowers and NSC may not assign their rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may, after notice to Borrowers' Agent, assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participation in, all or any part of the Loans, the Letter of Credit Accommodations or any other interest herein to another financial institution or other person, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. 12.5 Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersedes all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern. 12.6 Additional Interpretative Provision. (a) All financial computations hereunder shall be computed unless otherwise specifically provided herein, in accordance with GAAP as consistently applied and using the same method for inventory valuation as used in the preparation of the financial statements of Borrowers most recently received by Lender prior to the date hereof. (b) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including", the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including". (c) Unless otherwise expressly provided herein, (i) references herein to any agreement, document or instrument shall be deemed to include all subsequent amendments, modifications, supplements, extensions, renewals, restatements or replacements with respect thereto, but only to the extent the same are not prohibited by the terms hereof or of any other Financing Agreement, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, recodifying, supplementing or interpreting the statute or regulation. (d) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (e) This Agreement and other Financing Agreements may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (f) This Agreement and the other Financing Agreements are the results of negotiations among and have been reviewed by counsel to Lender and the other parties, and are the products of all parties. Accordingly, this Agreement and the other Financing Agreements shall not be construed against Lender merely because of Lender's involvement in their preparation. 12.7 Counterparts, Etc. This Agreement or any of the other Financing Agreements may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Agreement or any of the other Financing Agreements by telefacsimile shall have the same force and effect as the deliver of an original executed counterpart of this Agreement or any of such other Financing Agreements. Any party delivering an executed counterpart of any such agreement by telefacsimile shall also deliver an original executed counterpart, but the failure to do so shall not affect the validity, enforceability or binding effect of such agreement. 12.8 Appointment of Borrowers' Agent. (a) Each Borrower hereby irrevocably appoints Pueblo as Borrowers' Agent hereunder and Pueblo hereby agrees to act in such capacity as agent for such Borrowers hereunder. Each Borrower further irrevocably authorizes Borrowers' Agent to take such action on such Borrowers' behalf and to exercise such rights and powers hereunder as are delegated to Borrowers' Agent by the terms hereof, together with such rights and powers as are reasonably incident al thereto. (b) Borrowers' Agent is hereby expressly and irrevocably authorized by each Borrower, without hereby limiting any implied or express authority, (i) to give and receive on behalf of such Borrower all notices and other materials delivered or provided to be delivered by Lender to such Borrower or by such Borrower to lender pursuant to the Financing Agreements, (ii) to request Revolving Loans and Letter of Credit Accommodations on behalf of such Borrower, and (iii) to pay, on behalf of such Borrower, all Obligations at any time due Lender for the benefit of Lender pursuant to the terms of this Agreement. 12.9 Multiple Borrowers. References to Borrowers wherever used in this Agreement, shall mean each and all of Borrowers and their respective successors and assigns, individually and collectively, jointly and severally, primarily and unconditionally. The liability of each Borrower hereunder shall be absolute, primary and unconditional, joint and several. 12.10 Effect On Extension Agreement. Upon closing of the transactions contemplated herein and the making of the initial Loans by Lender, effective as of the Closing Date, this Agreement will supercede and replace the Extension Agreement; provided that, if the Closing Date has not occurred on or prior to June 30, 2003 Lender may terminate this Agreement and the Extension Agreement, all other Extension Agreement Financing Agreements and all Collateral (as defined therein) therefore or thereunder will remain in full force and effect. IN WITNESS WHEREOF, Lender and Borrowers and NSC have caused these presents to be duly executed as of the day and year first above written. LENDER: Westernbank Puerto Rico By: /S/ Miguel Vazquez Name: Miguel Vazquez Title: President Business Credit Division Address: 268 Munoz Rivera Avenue Suite 600, 6th Floor Westernbank World Plaza Hato Rey, Puerto Rico 00918 BORROWERS: Attest: Pueblo International, LLC (f/k/a Pueblo International, Inc.) __________________ Secretary By: /S/ Daniel J. O'Leary (Seal) Name: Daniel J. O'Leary Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 1300 N.W. 22nd Street Pompano Beach, FL 33069 FLBN Corporation Attest: (f/k/a Xtra Super Food Centers, Inc.) __________________ By: /S/ Daniel J. O'Leary Secretary Name: Daniel J. O'Leary (Seal) Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 1300 N.W. 22nd Street Pompano Beach, FL 33069 Attest: Pueblo Entertainment, Inc., __________________ By: /S/ Daniel J. O'Leary Secretary Name: Daniel J. O'Leary (Seal) Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 1300 N.W. 22nd Street Pompano Beach, FL 33069 Attest: Xtra Merger Corporation __________________ By: /S/ Daniel J. O'Leary Secretary Name: Daniel J. O'Leary (Seal) Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 1300 N.W. 22nd Street Pompano Beach, FL 33069 Attest: All Truck, Inc. ____________________ By: /S/ Daniel J. O'Leary Secretary Name: Daniel J. O'Leary (Seal) Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 1300 N.W. 22nd Street Pompano Beach, FL 33069 Attest: Caribad, Inc. _________________ By: /S/ Daniel J. O'Leary Secretary Name: Daniel J. O'Leary (Seal) Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 1300 N.W. 22nd Street Pompano Beach, FL 33069 OTHER OBLIGOR: Attest: Nutritional Sourcing Corporation (f/k/a Pueblo Xtra International, Inc.) _______________ By: /S/ Daniel J. O'Leary Secretary Name: Daniel J. O'Leary (Seal) Title: Executive Vice President and Chief Financial Officer Chief Executive Office: 550 Biltmore Way - Suite 900 Coral Gables, FL 33134 EX-99 10 a10kex991.txt EXHIBIT 99.1 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Annual Report of Nutritional Sourcing Corporation (the "Company") on Form 10-K for the fiscal year ended November 2, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William T. Keon III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: July 25, 2003 /s/ William T. Keon III --------------------------- William T. Keon III Chief Executive Officer 2 - - 2 - EX-99 11 a10kex992.txt EXHIBIT 99.2 CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Annual Report of Nutritional Sourcing Corporation (the "Company") on Form 10-K for the fiscal year ended November 2, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel J. O'Leary, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: July 25, 2003 /s/ Daniel J. O'Leary --------------------------- Daniel J. O'Leary Chief Financial Officer 2 - - 2 - -----END PRIVACY-ENHANCED MESSAGE-----