-----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, Dw9C9cijEropIM9ryQx8mcrW4HA/jnmdiA7KWkjH/YmI9fa4AuNG44fa4Xi2U5ov 2bHBz6TyCOodUvKa7RqsMg== 0000928385-98-001989.txt : 19980928 0000928385-98-001989.hdr.sgml : 19980928 ACCESSION NUMBER: 0000928385-98-001989 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FOODSERVICE/MD/ CENTRAL INDEX KEY: 0000928395 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 521634568 STATE OF INCORPORATION: DE FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12601 FILM NUMBER: 98715084 BUSINESS ADDRESS: STREET 1: 9830 PATUXENT WOODS DR CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4103127100 MAIL ADDRESS: STREET 1: 9830 PATUXENT WOODS DR CITY: COLUMBIA STATE: MD ZIP: 21046 FORMER COMPANY: FORMER CONFORMED NAME: JP FOODSERVICE INC DATE OF NAME CHANGE: 19940812 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 27, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission file number: 0-24954 U.S. Foodservice (Exact name of registrant as specified in its charter) Delaware 52-1634568 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9755 Patuxent Woods Drive, Columbia, Maryland 21046 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (410) 312-7100 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common Stock New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 amendments to this Form 10-K. [_] The aggregate market value of the registrant's voting stock held by non- affiliates of the registrant at September 18, 1998, based on the closing price of such stock on the New York Stock Exchange on such date, was approximately $1.5 billion. The number of shares of the registrant's Common Stock, $.01 par value, outstanding on September 18, 1998 was 46,889,788. DOCUMENTS INCORPORATED BY REFERENCE Certain information in the Proxy Statement for the 1998 Annual Meeting of Stockholders of the registrant is incorporated by reference into Part III hereof. TABLE OF CONTENTS
Page ---- PART I Item 1. Business........................................... 1 Item 2. Properties......................................... 11 Item 3. Legal Proceedings.................................. 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 12 Item 6. Selected Financial Data............................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ 27 Item 8. Financial Statements and Supplementary Data........ 28 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................ 28 PART III Item 10. Directors and Executive Officers of the Registrant. 29 Item 11. Executive Compensation............................. 29 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 29 Item 13. Certain Relationships and Related Transactions..... 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 30
i FORWARD-LOOKING STATEMENTS This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend" and "plan" as they relate to U.S. Foodservice or its management are intended to identify such forward-looking statements. All statements regarding U.S. Foodservice or U.S. Foodservice's expected future financial position, business strategy, cost savings and operating synergies, projected costs and plans, and objectives of management for future operations are forward-looking statements. Although U.S. Foodservice believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, the factors set forth under the caption "Business--Risk Factors," general economic and business and market conditions, changes in federal laws, increased competitive pressure in the foodservice industry, and costs or difficulties relating to the integration of acquired businesses, including difficulties in achieving expected cost savings and operating synergies. ii PART I Unless the context otherwise requires, references in this report to the Company or U.S. Foodservice are to U.S. Foodservice and its consolidated subsidiaries. ITEM 1. BUSINESS GENERAL U.S. Foodservice (the "Company" or "U.S. Foodservice") is the nation's second largest broadline foodservice distributor based on net sales of approximately $5.5 billion in the year ended June 27, 1998 ("fiscal 1998"). Broadline distributors offer a comprehensive range of food and related products from a single source of supply and provide foodservice establishments with the cost savings associated with large, full-service deliveries. Operating from 37 full-service distribution centers nationwide at June 27, 1998, the Company offers its products and services across a broad geographic area encompassing more than 85% of the U.S. population. The Company markets and distributes more than 40,000 national, private label and signature brand items to over 130,000 foodservice customers, including restaurants, hotels, healthcare facilities, cafeterias and schools. The Company's diverse customer base encompasses both independent (or "street") and multi-unit (or "chain") businesses. The Company also provides restaurant design and engineering services for all types of foodservice operations through its contract and design offices. The Company supplements its internal expansion with an active program of strategic acquisitions to take advantage of growth opportunities from ongoing consolidation in the fragmented foodservice distribution industry. The Company seeks to increase penetration of its existing markets through "fold-in" acquisitions of small, privately owned distributors within its current markets and to expand into new markets through acquisitions of larger-sized distributors. Effective February 27, 1998, the Company changed its corporate name from JP Foodservice, Inc. to U.S. Foodservice. The references in this report to the Company or U.S. Foodservice prior to February 27, 1998 are to JP Foodservice, Inc. The Company was organized in 1989 under the laws of the State of Delaware. The principal executive offices of U.S. Foodservice are located at 9755 Patuxent Woods Drive, Columbia, Maryland 21046, and U.S. Foodservice's telephone number at that address is (410) 312-7100. ACQUISITION OF RYKOFF-SEXTON, INC. Effective December 23, 1997, the Company acquired by merger (the "Acquisition") Rykoff-Sexton, Inc. ("Rykoff-Sexton"), the nation's third largest broadline foodservice distributor based on net sales. In the transaction, Rykoff-Sexton merged with and into a wholly-owned subsidiary of the Company. The Company's subsidiary was the surviving corporation in the merger, was renamed Rykoff-Sexton, Inc. as of the effective time of the merger and will continue to be a wholly-owned subsidiary of the Company. Effective April 2, 1998, the corporate name of the subsidiary was changed from Rykoff-Sexton, Inc. to U.S. Foodservice, Inc. At the effective time of the merger, each issued and outstanding share of common stock of Rykoff-Sexton was converted into the right to receive 0.775 of a share of common stock of the Company (the "Common Stock"). In connection with the Acquisition, holders of Rykoff-Sexton common stock immediately before the merger received Common Stock representing approximately 50% of the Common Stock outstanding giving effect to the merger. -1- The Company has accounted for the Acquisition as a pooling of interests in accordance with generally accepted accounting principles. FOODSERVICE DISTRIBUTION INDUSTRY Companies in the foodservice distribution industry purchase, store, market and transport food products, paper products and other supplies and food-related items to establishments that prepare and serve meals to be eaten away from home. Foodservice distribution companies generally are classified as "broadline," "specialty" or "system" distributors. Broadline distributors offer a comprehensive range of food and related products from a single source of supply and provide foodservice establishments with the cost savings associated with large full-service deliveries. Specialty distributors generally are small, family-owned enterprises that supply only one or two product categories. System distributors typically supply a narrow range of products to a limited number of multi-unit businesses operating in a broad geographical area. PRODUCTS In fiscal 1998, U.S. Foodservice offered to the foodservice industry a single source of supply for more than 40,000 national, private label and signature brand items that were distributed to over 130,000 foodservice customers. Food Products. The Company's food products include canned fruits and vegetables, tomatoes and tomato products, juices, syrups, dressings and salad oils, baking supplies, spices, condiments, sauces, jellies and preserves, coffee, tea and fountain goods, prepared convenience entrees, dairy and other refrigerated products, fresh produce, fresh meats, seafood, poultry, desserts, dietary foods, imported and domestic cheeses and specialty and gourmet imported items. Frozen foods include soups, prepared convenience entrees, bakery products, fruits and vegetables, desserts, meat, poultry, seafood and other frozen products customarily distributed to the foodservice industry. Many of the Company's product offerings feature "center of the plate" and entree selections. Janitorial and Paper Products. The Company's non-food products include janitorial supplies such as detergents and cleaning compounds; plastic products such as refuse container liners, cutlery, straws and sandwich bags; and paper products such as disposable napkins, cups, hats, placemats and coasters. Equipment and Supplies. The Company distributes light restaurant equipment and supply items, including cookware, glassware, dinnerware and other commercial kitchen equipment. The following table sets forth the product categories of the items sold by the Company and the percentage of the Company's net sales generated by product category and by contract and design services during fiscal 1998: -2-
PERCENTAGE OF NET SALES Canned and dry products................ 30% Meats.................................. 16 Other frozen foods..................... 14 Dairy products......................... 9 Paper products......................... 8 Poultry................................ 7 Seafood................................ 6 Perishable food products............... 3 Equipment and supplies................. 3 Janitorial supplies.................... 2 Contract and design services........... 2 ---- Total net sales 100% ====
National Brands. U.S. Foodservice supplies more than 32,000 national brand items, which represented approximately 73% of net sales in fiscal 1998. Management believes that national brands are attractive to chain accounts and other customers seeking consistent product quality throughout their operations. The Company's national brand strategy has promoted closer relationships with many national suppliers, who provide important sales and marketing support to the Company. Private Brands. U.S. Foodservice offers its customers an expanding line of products under its various private brands. The Company currently offers over 8,000 private brand products, including frozen and canned goods, fruits, vegetables and meats, under the following private labels: Rykoff-Sexton Connoisseur(TM) (highest quality), U.S. Foodservice Blue(TM), U.S. Foodservice Red(TM), Chef's Variety(R), Harvest Value(R), U.S. Foodservice Cattleman's Choice(TM), U.S. Foodservice Cattleman's Selection(TM), Magnifry(R) and Magnifries(TM). U.S. Foodservice also markets diet-modified products under the brand name Health.Diet.Life(R) and a sugar substitute and artificial sweetner under the brand names Allowance(R) and Allowance II(TM). Restaurant equipment and supplies are marketed under the Serco Restaurant brand and cleaning products under the Clean Pride(R) brand. The Company has developed the multi-tier quality system to meet the specific requirements of different market segments. Signature Brands. U.S. Foodservice offers its customers an exclusive and expanding line of signature products which are comparable in quality to national brand items and priced competitively with such items. The Company markets these products under the names Roseli(R) (Italian-style products), Hilltop Hearth(R) (bread and bakery products), Cross Valley Farms(TM) (processed fruits and vegetables), Patuxent Farms(R) (processed meats), el Pasado Authentic Mexican Cuisine with a Touch of the Past(R) (Mexican-style products), Rituals(R) (gourmet coffee), Pacific-Jade(R) (Oriental-style products), and Harbor Banks(R) (seafood products). At June 27, 1998, the Company offered more than 3,000 signature brand items. Private and signature brand items enable the Company to offer its customers product alternatives to comparable national brands across a wide range of prices. The Company historically has sold a significantly lower proportion of proprietary private and signature brand products than its primary competitors, whose proprietary brand sales have accounted for 30% to over 60% of their sales volume. Sales of the Company's proprietary brands represented approximately 27% of net sales in fiscal 1998. The Company is currently consolidating the proprietary brands marketed by JP Foodservice and Rykoff-Sexton prior to the Acquisition, a process which it expects will be substantially completed in the fiscal year ending July 3, 1999 ("fiscal 1999"). Although it intends to continue to emphasize sales of national brand products, the Company plans to expand sales of its private and signature brand product lines through national and local advertising, representation at -3- national food shows and at food shows sponsored by the Company at its branches, and training of its sales force regarding the attributes of these products. MANUFACTURING OPERATIONS In the first quarter of fiscal 1999, U.S. Foodservice outsourced its manufacturing capacity by selling the assets of the Rykoff-Sexton Manufacturing Division to a third party. As part of this transaction, U.S. Foodservice entered into a six-year supply agreement with the new company. The Company is obligated in the first year of the agreement to purchase food and non-food products with a minimum total purchase price of approximately $115 million. The purchase commitment will increase by 6% each succeeding year of the contract term. SERVICES To strengthen its customer relationships and increase account penetration, U.S. Foodservice offers the following types of value-added services: Management Support and Assistance. The Company's sales force assists customers in managing their foodservice operations more efficiently and profitably by providing advice and assistance on product selection, menu planning and recipes, nutritional information, inventory analysis and product costing and marketing strategies. The Company also provides in-service training of customer personnel. Specialized Market Services. The Company offers services and programs tailored to specialized markets. For example, through an integrated service program, the Company provides healthcare service providers with special nutritional plans, customized software packages (directAdvantage(TM)), a variety of marketing services and in-service training of institutional personnel. In order to be eligible to participate in this program, healthcare institutions must maintain a specified minimum volume of purchases from the Company. Publications. The Company promotes active customer use of its other products and services through the distribution of professionally printed publications, including its quarterly magazines, Quintessential(TM) and Healthnext(TM). The Company's publications highlight selected products, including proprietary private and signature brand items, present menu suggestions, provide nutritional information and include recipes using the Company's products. Customers also may participate, at no cost, in the Company's recipe program in which the Company furnishes participants every two weeks with recipe cards that describe new menu concepts. CUSTOMERS The Company's customer base of over 130,000 accounts encompasses a wide variety of foodservice establishments. The following table sets forth the segments of the Company's customer base by type of customer for fiscal 1998:
PERCENTAGE TYPE OF CUSTOMER OF NET SALES Restaurants (limited and full menu)... 63% Hotels and casinos.................... 9 Healthcare institutions............... 9 Schools and colleges.................. 8 Other................................. 11 ---- 100% ====
-4- Street Customers. The Company's street customers are independent restaurants, hotels, schools and other foodservice businesses. Street customers are serviced directly by commission sales personnel who personally call on customers, place orders, coordinate product delivery and provide the services offered to these customers. Street accounts represented approximately 61% of the Company's net sales in fiscal 1998. The Company pursues a long-term strategy of increasing street account sales as a percentage of net sales by attempting to expand sales to street customers at a faster rate than sales to chain customers. Chain Customers. The majority of the Company's chain customers consist of franchises or corporate-owned units of national or regional family dining and other restaurant "concepts" and, to a lesser extent, hotels and other regional institutional operators. The Company has developed strong working relationships with its chain accounts, which have enabled these accounts, in conjunction with the Company, to develop distribution programs tailored to precise delivery and product specifications. These distribution programs have created operating and cost efficiencies for both the chain customers and the Company. Chain customers generally are serviced by salaried sales and service representatives who coordinate the procurement and delivery of all products throughout the system from a central location. Gross profit margins generally are lower for chain customers than for street customers. However, because there are typically no commission sales costs related to chain account sales and because chain customers usually have larger deliveries to individual locations, sales and delivery costs generally are lower for chain accounts than for street accounts. Chain accounts represented approximately 39% of the Company's net sales in fiscal 1998. The Company's business strategy emphasizes supporting the growth of its existing chain accounts. Many of the Company's current chain customers, primarily restaurants, are experiencing more rapid sales growth than other types of foodservice businesses. The Company also targets new chain customers which it believes represent attractive growth opportunities. No single customer accounted for more than 3% of the Company's net sales in fiscal 1998. Consistent with industry practice, the Company generally does not enter into long-term contracts with its customers that may not be canceled by either party at its option. SALES AND MARKETING U.S. Foodservice's principal marketing activities at June 27, 1998 were conducted by approximately 2,000 street sales, 250 chain sales and 430 customer service representatives. The Company's sales and service representatives are responsible for soliciting and processing orders, servicing customers by telephone, reviewing account balances and assisting with new product information. In addition, the Company's sales representatives advise customers on menu selection, methods of preparing and serving food and other operating issues. The Company provides an in-house training program for its entry-level sales and service representatives, which includes seminars, on-the-job training and direct one-on-one supervision by experienced sales personnel. The Company's commission program is designed to reward account profitability and promote sales growth. The Company's strategy is to measure the profitability of each account and product segment and to modify its incentive program accordingly. The Company maintains sales offices at each of its 37 full-service distribution centers and at 26 additional locations in 13 states. The Company employs sales and marketing staff at both the corporate and branch levels to solicit and manage relationships with multi-unit chain accounts. -5- The Company supplements its market presence with advertising campaigns in national and regional trade publications, which typically focus on the Company's services and its ability to service targeted industry segments. The Company supports this effort with a variety of promotional services and programs, including its quarterly magazines and its recipe program. DISTRIBUTION The Company distributes its products out of its 37 full-service distribution centers and extends this geographic coverage through remote distribution locations. The Company's Targeted Specialty Services division warehouses and redistributes, out of three warehouses, to the 37 distribution centers a full line of restaurant equipment and supplies, imported specialty food products and proprietary products. This division allows the Company's distribution centers to offer a more varied product mix while maintaining local inventories at efficient levels. The Company's customers generally are located within 150 miles of one of the Company's distribution centers, although the Company's distribution network and reciprocal arrangements with other distributors enable the Company to serve customers outside of its principal service areas. Services to both street and chain customers are supported by the same distribution facilities and equipment. The 37 full-service distribution centers have a total of approximately 6.5 million square feet of warehouse space. Each distribution center operates from a warehouse complex that contains dry, refrigerated and frozen storage areas as well as office space for sales, marketing, distribution and administration personnel. Products are delivered to the Company's distribution centers by manufacturers, common carriers and the Company's own fleet of trucks. The Company employs management information systems which enable it to lower its inbound transportation costs by making optimal use of its own fleet of trucks or by consolidating deliveries into full truckloads. Orders from multiple suppliers or multiple distribution centers are consolidated into single truckloads for efficient use of available vehicle capacity and return-trip hauls. Orders typically are entered electronically by the commission sales force with the appropriate distribution center through a hand-held computer device or laptop computer. These devices facilitate order entry through the use of pre- coded price lists which automatically price orders, apply pricing controls and allow the sales representative to review the gross profit of each order at the time of sale. Customers also have the option to place orders by telephone to service representatives at each of the branches. Certain large customers place orders through a direct connection to the Company's mainframe computer by means of a computer terminal, personal computer or touch tone telephone, or through Tranzmit(TM), the Company's proprietary direct order entry system. Under all forms of order placement, the salesperson or customer is notified immediately about product availability, which facilitates instant product substitution, if necessary. Products are reserved automatically at the time of order, thereby ensuring complete fulfillment of orders upon delivery. Customers' orders are assembled in the warehouse, sorted and shrink-wrapped to ensure order completeness. The products are staged automatically according to the required delivery sequence. Products are delivered door-to-door, typically on the day following placement of the order. The Company delivers its products through its fleet of over 2,400 tractor-trailer and straight trucks, each of which is equipped with separate temperature-controlled compartments. In dispatching trucks, the Company employs a computerized routing system designed to optimize delivery efficiency and minimize drive time, wait time and excess mileage. The majority of the Company's fleet utilizes on-board computer systems that monitor vehicle speeds, fuel efficiency, idle time and other vital statistical information. The Company collects and analyzes such data in an effort to monitor and improve transportation efficiency and reduce costs. -6- In certain geographic markets, the Company utilizes its remote redistribution facilities to achieve a higher level of customer service. Products are transported in large tractor-trailers or double trailers to the redistribution facility, where the loads are then transferred to smaller equipment for delivery in the normal fashion. SUPPLIERS At June 27, 1998, U.S. Foodservice employed approximately 250 purchasing agents with expertise in specific product lines to purchase products for the Company from approximately 7,000 suppliers located throughout the United States and in other countries. Substantially all types of products distributed by the Company are available from a variety of suppliers, and the Company is not dependent on any single source of supply. The Company manages its purchasing operations and negotiates all major vendor programs from its corporate headquarters in Columbia, Maryland. The Company seeks to concentrate purchases with selected suppliers to ensure access to high-quality products on advantageous terms. The Company cooperates closely with these suppliers to promote new and existing products. The suppliers assist in training the Company's sales force and customers regarding new products, new trends in the industry and new menu ideas, and collaborate with the Company in advertising and promoting these products both through printed advertisements and through annual branch-sponsored food shows and national trade shows. Prior to the Acquisition, the Company transacted a majority of its purchasing activities centrally at its corporate headquarters. At the former Rykoff-Sexton divisions, purchases were primarily transacted locally. The Company believes that centralized purchasing results in lower costs through greater ordering efficiency. As part of its Acquisition restructuring plan, the Company is progressively centralizing at its corporate headquarters the day-to- day purchasing activities currently being performed at the former Rykoff-Sexton divisions. This transition, which is dependent upon completion of centralization of the Company's management information systems, is currently expected to take two to three years to complete. Through its purchasing department, the Company is able to monitor the quality of the products offered by various suppliers and ensure consistency of product quality across its distribution network. The Company maintains a comprehensive quality control and assurance program that at June 27, 1998 actively involved approximately 225 employees in daily quality control activities. The program is managed by employees engaged in purchasing operations, including product group managers who each manage specific segments of the product line and product line managers who purchase products for the branches, and is supported at each branch by the merchandising manager, the branch buyer and an inventory control specialist. The quality control process includes the selection of suppliers and the policing of quality standards through product sampling at both the Company's corporate offices and branch locations and through visits to growing fields, manufacturing facilities and storage operations. The Company requires all of its suppliers and manufacturers to maintain specified levels of product liability insurance and to name the Company as an additional insured on the applicable insurance policies. -7- COMPETITION The foodservice distribution industry is extremely fragmented, with over 3,000 companies in operation in 1998. In recent years, the foodservice distribution industry has been characterized by significant consolidation and the emergence of larger competitors. The Company competes in each of its markets with at least one other large national distribution company, generally SYSCO Corp. or Alliant Foodservice, Inc., as well as with numerous regional and local distributors. U.S. Foodservice believes that, although price is an important consideration, distributors in the foodservice industry compete principally on the basis of service, product quality and customer relations. The Company attributes its ability to compete effectively against smaller regional and local distributors in part to its wider product selection, the cost advantages resulting from its size and centralized purchasing operations and its ability to offer broad and consistent market coverage. The Company competes effectively against other broadline distributors primarily by providing its customers with accurate and timely fulfillment of orders and an array of value-added services. The Company typically competes against other foodservice distribution companies for potential acquisitions. The Company believes that its financial resources and its ability to offer owners of acquisition targets an interest in the combined business through ownership of the Company's common stock provides the Company with an advantage over many of its competitors. GOVERNMENT REGULATION The Company's operations are subject to regulation by state and local health departments, the U.S. Department of Agriculture and the U.S. Food and Drug Administration, which impose standards for product quality and sanitation. The Company's facilities generally are inspected at least annually by state or federal authorities. The Company's relationship with its fresh food suppliers with respect to the grading and commercial acceptance of produce shipments is governed by the Federal Produce and Agricultural Commodities Act, which specifies standards for sale, shipment, inspection and rejection of agricultural products. The Company also is subject to regulation by state authorities for the accuracy of its weighing and measuring devices. Federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, generally are not directly applicable to the Company. Certain of the Company's distribution facilities have underground and above-ground storage tanks for diesel fuel and other petroleum products, which are subject to laws regulating such storage tanks. Such laws have not had a material adverse effect on the capital expenditures, earnings or competitive position of the Company. INTELLECTUAL PROPERTY The Company has proprietary rights to a number of trademarks used in its business, including trademarks used in connection with the marketing of its private and signature brand products and a variety of customized service programs. A number of these trademarks are registered with the U.S. Patent and Trademark Office, each for an initial period of ten or 20 years, which is renewable for additional ten-year periods for as long as the Company continues to use the trademarks. The Company considers its trademarks to be of material importance to its business plans. -8- EQUIPMENT AND MACHINERY Equipment and machinery owned by the Company and used in its operations consist principally of electronic data processing equipment and product handling equipment. The Company also operates a fleet of over 2,400 vehicles, consisting of tractors, trailers and straight trucks, which are used for long hauls and local deliveries. At June 27, 1998, the Company owned approximately 30% of these vehicles and leased the remainder. See Note 6 to the Company's Consolidated Financial Statements included elsewhere in this report. The Company outsources its data center operations for approximately one third of its divisions. As the Company's business needs warrant, the Company can either increase or decrease the amount of computer capacity it purchases upon short notice to the vendor. Management believes that this arrangement provides the Company with more reliable and flexible service at a lower cost than the Company could achieve by operating its own data center for this segment of its business. The Company regularly evaluates the capacity of its various facilities and equipment and makes capital investments to expand capacity where necessary. In fiscal 1998, the Company spent $95.5 million on capital expenditures, primarily for construction of new distribution centers in Fort Mill, South Carolina and Las Vegas, Nevada, expansion of existing distribution centers at various locations and upgrading of management information systems. The Company will continue to undertake expansion or replacement of its facilities as and when needed to accommodate the Company's growth. EMPLOYEES At the end of fiscal 1998, the Company had approximately 11,000 full-time employees, of whom approximately 240 were employed in corporate management and administration and approximately 4,200 of whom were hourly employees. Approximately 3,000 of the Company's employees were covered by collective bargaining contracts with approximately 40 different local unions associated with the International Brotherhood of Teamsters and other labor organizations. Collective bargaining contracts covering approximately 870 employees will expire during fiscal 1999. The Company believes that its relations with its employees are satisfactory. EXECUTIVE OFFICERS OF THE COMPANY WHO ARE NOT DIRECTORS George T. Megas, age 45, joined the Company in 1991 as Vice President- Finance, with responsibility for the accounting, treasury and finance functions. Mr. Megas, a Certified Public Accountant, previously served as the Corporate Controller for Strategic Planning Associates, Inc., a management consulting firm, from 1979 to 1990, when it was acquired by Mercer Management Consulting, and served as a Controller for certain regions of Mercer Management Consulting until 1991. RISK FACTORS The Company's business is subject to certain risks, including the following: Risks Associated with Future Acquisitions. U.S. Foodservice follows a growth strategy of supplementing internal expansion with acquisitions of other foodservice businesses. A significant portion of the growth of U.S. Foodservice's revenues in recent years has resulted from acquisitions. The Company's acquisition strategy involves a number of risks. U.S. Foodservice cannot provide assurance that it will successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired operations into its existing operations or expand into new markets in the future. Further, particular acquisitions could have an adverse effect on U.S. Foodservice's operating results. The possibility of such an adverse effect often is greatest in periods -9- following the acquisitions, when U.S. Foodservice is seeking to integrate the operations of the acquired businesses into its own operations. Once integrated, acquired operations may not achieve levels of net sales or profitability comparable to those achieved before the acquisition, or otherwise perform as expected. U.S. Foodservice may not be able to increase its revenues or earnings through future acquisitions at the same rates it achieved through the acquisitions it previously completed. The Company may determine that it is necessary or desirable to obtain financing for acquisitions through additional bank borrowings or the issuance of additional debt or equity securities. Debt financing of an acquisition would increase the leverage of U.S. Foodservice and will be subject to restrictions contained in certain of the Company's debt agreements. Equity financing of an acquisition may dilute the ownership of U.S. Foodservice's stockholders. In addition, U.S. Foodservice may not be able to obtain financing on acceptable terms. Low Margin Business; Economic Sensitivity. The foodservice distribution industry is characterized by relatively high inventory turnover with relatively low profit margins. The Company makes a significant portion of its sales at prices that are based on the cost of the products it sells plus a percentage markup. As a result, the Company's profit levels may be negatively affected during periods of food price deflation, even though the Company's gross profit percentage may remain relatively constant. The foodservice industry is sensitive to national and regional economic conditions. The demand for foodservice products supplied by the Company has been adversely affected in past years by economic downturns. The Company's operating results also are particularly sensitive to, and may be adversely affected by, other factors. These factors include difficulties with the collectability of accounts receivable, inventory control, competitive price pressures, severe weather conditions and unexpected increases in fuel or other transportation-related costs. Such factors generally have not had a material adverse impact on the Company's past operations. It is possible, however, that one or more of these factors will adversely affect the Company's future operating results. Year 2000 Compliance. The Company and third parties with which the Company does business rely on numerous computer programs in their day-to-day operations. The Company has undertaken a program to address the Year 2000 problem as it relates to the Company's internal computer systems and third-party computer systems, including the systems of certain suppliers and customers. The Company expects to continue to incur internal staff costs and other expenses, which may be significant and will be expensed as incurred, to address these issues. In addition, the appropriate course of action may include replacement or an upgrade of certain systems or equipment at a substantial cost to the Company. The Company cannot provide assurance that the Year 2000 issue will be resolved in 1998 or 1999. If not resolved, this issue could have a material adverse impact on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Information Systems and the Impact of the Year 2000 Issue." Labor Relations. At June 27, 1998, approximately 3,000 employees are members of approximately 40 different local unions associated with the International Brotherhood of Teamsters and other labor organizations. These employees represent approximately 27% of the Company's full-time employees and approximately 29% of the employees employed in the Company's warehouse and distribution operations. The Company has not experienced any significant labor disputes or work stoppages, and believes that its relations with its employees are satisfactory. A work stoppage, however, could have a material adverse effect on the Company. Competition. The Company operates in highly competitive markets. Its future success will depend in large part on its ability to provide superior service and high-quality products at competitive prices. The Company encounters competition from a variety of sources, including specialty and system foodservice distributors and other broadline distributors. -10- Dependence on Senior Management. The Company's success is largely dependent on the skills, experience and efforts of its senior management. The loss of the services of one or more of the Company's senior management could have a material adverse effect on the Company's business and development. To date, the Company generally has been successful in retaining the services of its senior management. ITEM 2. PROPERTIES Beginning in September 1998, the Company occupies new corporate headquarters in Columbia, Maryland, which consists of a total of approximately 95,000 square feet of office space, pursuant to a lease which expires in June 2003. The Company's 37 full-service distribution centers contain a total of approximately 6.5 million square feet of warehouse space. The distribution centers range in area from approximately 75,000 square feet to approximately 525,000 square feet. The centers contain dry, refrigerated and frozen storage areas and office space for the sales and administrative operations of the branch. As part of its Acquisition restructuring plan, the Company consolidated certain overlapping distribution centers in fiscal 1998 and plans to close additional facilities in fiscal 1999. The following table lists the Company's distribution centers at June 27, 1998:
Allentown, Pennsylvania Detroit, Michigan Norwich, Connecticut Altoona, Pennsylvania Englewood, New Jersey Oklahoma City, Oklahoma Atlanta, Georgia* Fort Mill, South Carolina Ormond Beach, Florida Austin, Texas Fort Wayne, Indiana Phoenix, Arizona* Baltimore, Maryland (two) Hartford, Connecticut Pittston, Pennsylvania Boston, Massachusetts Hurricane, West Virginia Portland, Oregon* Bridgeport, New Jersey Knoxville, Tennessee Reno, Nevada* Buffalo, New York La Mirada, California Riviera Beach, Florida Chicago, Illinois Las Vegas, Nevada Salem, Virginia Cincinnati, Ohio (two) Lubbock, Texas San Francisco, California* Columbus, Ohio* Mesquite, Texas Streator, Illinois Dallas, Texas* Minneapolis, Minnesota
- -------------------- * Indicates facility leased by the Company; all other facilities are owned. The Company occupies 16 contract and design offices in 15 states. Of such offices, 13 are located in distribution centers and three are leased. The Company also leases in-transit warehouses in Indiana and Maryland and manages an in-transit warehouse out of a third-party facility in California. The Company plans to close or lease certain non-distribution facilities to reduce excess capacity. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation and proceedings arising out of the ordinary course of its business. There are no pending material legal proceedings to which the Company is a party or to which the property of the Company is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the Company's security holders in the fourth quarter of fiscal 1998. -11- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock has been listed on the New York Stock Exchange ("NYSE") since December 31, 1996. The Company's current NYSE symbol is "UFS." From November 16, 1994 until December 31, 1996, the Common Stock was quoted on the Nasdaq National Market. The table below sets forth, for the last two fiscal years, the reported high and low bid prices of the Common Stock on the Nasdaq National Market prior to December 31, 1996 and, beginning on December 31, 1996, the reported high and low sales prices on the NYSE Composite Tape:
HIGH LOW ------ ------ Fiscal Year Ended June 28, 1997 First Quarter................ $26.00 $20.50 Second Quarter............... 28.75 20.38 Third Quarter................ 29.25 25.75 Fourth Quarter............... 30.19 26.00 Fiscal Year Ended June 27, 1998 First Quarter................ $32.44 $28.25 Second Quarter............... 36.06 27.50 Third Quarter................ 37.19 32.13 Fourth Quarter............... 37.63 31.31
As of September 18, 1998, there were approximately 800 holders of record and approximately 12,000 beneficial holders of the Common Stock. On September 24, 1998, the reported closing sale price of the Common Stock on the NYSE Composite Tape was $41.94 per share. The Company has never declared or paid cash dividends on its Common Stock and does not anticipate doing so in the foreseeable future. The current policy of the Company's Board of Directors is to retain all earnings to support operations and to finance the expansion of the Company's business. The Company's revolving credit facility and the indenture governing public notes issued by Rykoff-Sexton restrict the Company's ability to pay cash dividends on the Common Stock. Pursuant to each instrument, cash dividends payable to U.S. Foodservice by specified subsidiaries generally may not exceed the sum of (i) 50% of the cumulative consolidated net income of such subsidiaries earned after a stated date, plus (ii) the net cash proceeds to such subsidiaries from the issuance or sale of their capital stock, plus (iii) any net return of capital from investments in or advances to certain subsidiaries or from restricted investments, plus (iv) a specified amount. -12- ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data of the Company as of July 2, 1994, July 1, 1995, June 29, 1996, June 28, 1997 and June 27, 1998 and for each of the years then ended. The selected financial data as of June 28, 1997 and June 27, 1998 and for each of the years in the three-year period ended June 27, 1998 are derived from the Company's audited Consolidated Financial Statements appearing elsewhere in this report. The selected financial data as and for the fiscal years ended July 2, 1994, July 1, 1995, June 29, 1996 and June 28, 1997 have been restated to include the financial data of Rykoff-Sexton as of and for the years ended April 30, 1994, April 29, 1995, April 27, 1996 and June 28, 1997, respectively. -13-
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Fiscal Years Ended ----------------------------------------------------------------------- July 2, July 1, June 29, June 28, June 27, 1994 1995 1996 1997 1998 (1) ----------- ----------- ----------- ----------- ----------- Statements of Operations Data: Net sales.......................................... $ 2,623,052 $ 2,857,334 $ 3,238,781 $ 5,169,406 $ 5,506,949 Cost of sales...................................... 2,071,087 2,262,819 2,586,096 4,166,332 4,465,281 ----------- ----------- ----------- ----------- ----------- Gross profit....................................... 551,965 594,515 652,685 1,003,074 1,041,668 Operating expenses................................. 497,136 526,871 590,446 845,901 876,170 Amortization of intangible assets.................. 2,421 2,792 4,244 15,349 15,354 Restructuring costs (reversal)..................... - - (6,441) (4,000) 53,715 Charge for impairment of long-lived assets......... - - 29,700 - 35,530 ----------- ----------- ----------- ----------- ----------- Income from operations............................. 52,408 64,852 34,736 145,824 60,899 Interest expense and other financing costs, net........................................ 44,201 32,941 32,527 76,063 73,894 Nonrecurring charges............................... - - 1,517 5,400 17,822 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and extraordinary charge............................................ 8,207 31,911 692 64,361 (30,817) Provision for income taxes......................... 4,384 13,608 559 26,075 6,475 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before extraordinary charge....................... 3,823 18,303 133 38,286 (37,292) Income from discontinued operations................ - 137 - - - Gain on disposal of discontinued operations........................................ 3,241 23,359 - - - Extraordinary charge............................... (1,444) (4,590) - - (9,712) ----------- ----------- ----------- ----------- ----------- Net income (loss).................................. 5,620 37,209 133 38,286 (47,004) Preference dividends............................... (504) (40) - - - ----------- ----------- ----------- ----------- ----------- Net income (loss) applicable to common shareholders...................................... $ 5,116 $ 37,169 $ 133 $ 38,286 $ (47,004) =========== =========== =========== =========== =========== Per Share Data: Net income (loss) per common share: Basic: Before extraordinary charge..................... $ 0.24 $0.75 $ 0.00 $ 0.88 $ (0.83) Net income (loss)............................... $ 0.32 $1.52 $ 0.00 $ 0.88 $ (1.04) Diluted: Before extraordinary charge..................... $ 0.24 $0.74 $ 0.00 $ 0.87 $ (0.83) Net income (loss) .............................. $ 0.32 $1.51 $ 0.00 $ 0.87 $ (1.04) Weighted average common shares: Basic............................................. 15,885,000 24,520,000 30,388,000 43,451,000 45,320,000 Diluted........................................... 15,949,000 24,567,000 30,515,000 44,063,000 45,320,000 Balance Sheet Data (at end of period): Working capital.................................... $ 248,679 $ 270,942 $ 208,130 $ 234,803 $ 287,816 Total assets....................................... 856,744 939,280 1,052,211 1,732,183 1,817,791 Long-term debt, excluding current maturities........................................ 430,379 306,702 303,728 655,246 680,625 Stockholders' equity............................... 145,079 315,060 316,676 579,146 584,720
- ----------------------- (1) In connection with the acquisition of Rykoff-Sexton, the Company incurred restructuring costs, asset impairment charges, transaction costs and certain other operating charges, resulting from the integration of the two businesses (the "Acquisition Related Costs") totaling approximately $138.0 million, which significantly affected the Company's results for the fiscal year ended June 27, 1998. Excluding the impact of the Acquisition Related Costs, the Company's net income before extraordinary charge was $62.6 million or $1.37 per share, on a diluted basis. -14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION U.S. Foodservice's business strategy is to increase net sales through internal growth of chain and street sales, while acquiring other foodservice distributors to expand the Company's distribution capabilities and increase penetration of its existing markets. With the acquisition of Rykoff-Sexton, Inc. on December 23, 1997 (the "Acquisition"), U.S. Foodservice (formerly JP Foodservice, Inc.) became the second largest broadline foodservice distributor in the United States based on net sales. The Acquisition expanded the Company's distribution capabilities nationwide and strengthened its competitive position in several major markets. A renewed focus on the growth of chain and street sales at the former Rykoff-Sexton distribution centers, combined with additional sales by companies acquired in the fiscal years ended June 28, 1997 ("fiscal 1997") and June 27, 1998 ("fiscal 1998"), resulted in net sales growth of 6.5% in fiscal 1998 and 11.5% in the fourth quarter of fiscal 1998 over the corresponding prior periods. The Company's fiscal year ends on the Saturday closest to June 30. Prior to April 28, 1996, Rykoff-Sexton had a fiscal year that ended on the Saturday closest to April 30. The Acquisition was accounted for under the pooling-of-interests method of accounting and, accordingly, the Company's consolidated statements of operations for the fiscal years ended June 28, 1997 and June 29, 1996 ("fiscal 1996") have been restated to include the results of operations for Rykoff-Sexton. The consolidated financial statements for the fiscal years ended June 28, 1997 and June 29, 1996 combine the results of JP Foodservice for such periods with the results of Rykoff-Sexton for the years ended June 28, 1997 and April 27, 1996, respectively. Fiscal 1996, 1997 and 1998 each consist of 52-week periods. In connection with the Acquisition, the Company incurred restructuring costs, asset impairment charges, transaction costs and certain other operating charges resulting from the integration of the two businesses (the "Acquisition Related Costs"), which significantly affected the Company's results for fiscal 1998. The Acquisition Related Costs totaled approximately $138.0 million, of which $76.6 million consisted of non-cash charges. Excluding the impact of the Acquisition Related Costs, the Company's net income before extraordinary item was $62.6 million or $1.37 per share on a diluted basis, representing a 41% improvement over combined results of the Company for fiscal 1997 computed on the same basis. The following includes a discussion of the results of JP Foodservice and Rykoff-Sexton prior to the Acquisition. Since each company was separately managed prior to the Acquisition, certain operating results are discussed on a combined basis, but in the context of the individual companies. References to JP Foodservice below generally relate to activities of the Company prior to the Acquisition. Other Fiscal 1998 Acquisitions. The Company has pursued an active program of strategic acquisitions to take advantage of growth opportunities from ongoing consolidation in the fragmented foodservice distribution industry. In the second quarter of fiscal 1998, the Company acquired Outwest Meat Company ("Outwest"), located in Las Vegas, Nevada. In the third quarter of fiscal 1998, the Company acquired Westlund Provisions, Inc. ("Westlund"), a foodservice distributor specializing in custom-cut meats located in Minneapolis, Minnesota. These two acquisitions complemented the Company's existing operations in those markets, while enabling the Company to enhance significantly its custom-cut meat offerings. Also in the third quarter of fiscal 1998, the Company expanded the scope of its distribution network into the northeastern United States by acquiring Sorrento Food Service, Inc. ("Sorrento"), a broadline distributor located in Buffalo, New York. These acquisitions were accounted for under the purchase method of accounting, and accordingly, their operating results are included from the date of the respective acquisitions. -15- Fiscal 1997 Acquisitions. Prior to the Acquisition, JP Foodservice extended the scope of its distribution network into the Western region of the United States through its acquisition in the first quarter of fiscal 1997 of Valley Industries, Inc. ("Valley"), a broadline distributor located in Las Vegas, Nevada. Also in the first quarter of fiscal 1997, pursuant to JP Foodservice's strategy to increase penetration of its existing service areas, JP Foodservice acquired Arrow Paper and Supply Co., Inc. ("Arrow"), a broadline distributor located in Connecticut serving the New England, New York, New Jersey and Pennsylvania markets. In the second quarter of fiscal 1997, JP Foodservice filled a gap in its Midwestern distribution network by acquiring Squeri Food Service, Inc. ("Squeri"), a broadline distributor located in Ohio serving the greater Cincinnati, Dayton, Columbus, Indianapolis, Louisville and Lexington markets. In the fourth quarter of fiscal 1997, JP Foodservice strengthened its presence in the Mid-Atlantic region through its acquisition of Mazo-Lerch Company ("Mazo-Lerch"), a broadline distributor located in Virginia serving the District of Columbia, Virginia, Maryland, southern New Jersey and northern North Carolina markets. The Valley and Squeri acquisitions were accounted for under the pooling-of-interests method of accounting, and accordingly, the operating results for all years presented have been restated to incorporate the results of Valley and Squeri. The Arrow and Mazo-Lerch acquisitions were accounted for under the purchase method of accounting, and accordingly, the operating results of Arrow and Mazo-Lerch are included only from the date of the respective acquisitions. Fiscal 1996 Acquisitions. In May 1996, Rykoff-Sexton significantly expanded the geographic coverage of its distribution network in the Southeastern, Southwestern and Mid-Atlantic regions of the United States through its acquisition of US Foodservice Inc. ("USF"). In addition, in November 1995, Rykoff-Sexton enhanced its distribution network throughout the State of Nevada when it acquired substantially all of the assets of H&O Foods, Inc. ("H&O Foods"), a regional, broadline institutional foodservice distributor. Both of these acquisitions were accounted for under the purchase method of accounting, and accordingly, the operating results of USF and H&O Foods are included only from the date of the respective acquisitions. RESULTS OF OPERATIONS The Company sells a significant portion of its products at prices based on product cost plus a percentage markup. Periods of inflation in food prices result in higher product costs, which are reflected in higher sales prices and higher gross profits. Gross margins generally are lower for chain accounts than for street accounts. However, because there are typically no commission sales costs related to chain account sales and because chain accounts usually have larger deliveries to individual locations, sales and delivery costs generally are lower for chain accounts than for street accounts. Gross margins generally are higher for private label products than for national brand products of comparable quality. The Company, however, incurs additional advertising and other marketing costs in promoting private label products. The principal components of expenses include cost of sales, which represent the amount paid to manufacturers and food processors for products sold, and operating expenses, which include selling (primarily labor-related) expenses, warehousing, transportation and other distribution costs, and administrative expenses. Because distribution and administrative expenses are relatively fixed in the short term, unexpected changes in net sales, such as those resulting from adverse weather, can have a significant short-term impact on operating income. FISCAL 1998 COMPARED TO FISCAL 1997 Net Sales. Net sales increased 6.5% to $5.5 billion in fiscal 1998 from $5.2 billion in fiscal 1997. Higher chain account and street sales contributed significantly to net sales growth. -16- Acquisitions of foodservice distributors other than Rykoff-Sexton in late fiscal 1997 and during fiscal 1998 accounted for net sales growth of 3.3%. An increase of 5.8% in chain account sales reflected the continued growth in sales to the Company's larger customers. Street account sales increased 6.8% in fiscal 1998 primarily as a result of the growth of the sales force and continued improvements in sales force productivity. Gross Profit. Gross profit margin decreased to 18.9% in fiscal 1998 from 19.4% in fiscal 1997. The decline in gross profit margin was primarily attributable to a continuing shift in product mix from certain high-margin items to higher turnover, lower-margin items ("center-of-the-plate" products) in the former Rykoff-Sexton operations, as well as decreased margins at certain of the operating units that were closed as part of the Acquisition restructuring plan. Acquisition Related Costs of $8.6 million for writedowns of inventory at operating units undergoing consolidation or realignment also caused a decline in the Company's margins for fiscal 1998. The effect on gross profit of the shift in product mix was offset in part by an increase in street sales as a percentage of net sales and the growth of the Company's private brand and signature brand product sales in fiscal 1998. Sales of private brand and signature brand products increased by 5.6% in fiscal 1998 over fiscal 1997. In addition, the Company estimates that it achieved approximately $9.0 million in savings from the consolidation and renegotiation of its purchasing programs. Operating Expenses. Operating expenses increased 3.6% to $876.2 million in fiscal 1998 from $845.9 million in fiscal 1997. The increase was primarily attributable to $19.4 million of Acquisition Related Costs recognized in fiscal 1998, which consisted principally of writedowns of receivables and other assets at operating units undergoing consolidation or realignment. Excluding charges for Acquisition Related Costs in fiscal 1998, operating expenses increased by 1.8% ($14.9 million) in fiscal 1998 over fiscal 1997. As a percentage of net sales, operating expenses declined to 15.6% in fiscal 1998 from 16.3% in fiscal 1997. The decrease was primarily attributable to operating efficiencies resulting from the Acquisition restructuring plan, an increase in the average size of customer deliveries, and synergies achieved through the consolidation of the Company's general and administrative functions. The Company also recognized a $7.4 million curtailment gain upon the suspension of all participation and benefit accruals under one of Rykoff-Sexton's defined benefit plans. Amortization of Goodwill and Other Intangible Assets. Goodwill and other intangible amortization totaled $15.3 million in both fiscal 1998 and fiscal 1997. Restructuring, Impairment of Long-Lived Assets and Other Charges. The Acquisition Related Costs in fiscal 1998 included a net restructuring charge of $53.7 million. These costs consist primarily of change in control payments made to former executives of Rykoff-Sexton and severance, idle facility and facility closure costs related to the Company's plan to consolidate and realign certain operating units and consolidate various overhead functions and a reversal of $3.0 million of unutilized reserves from a prior restructuring. The Acquisition Related Costs also included asset impairment charges of $35.5 million. These charges were related to writedowns to net realizable value of assets and facilities at operating units that are being consolidated or realigned and assets related to management information systems which are being replaced and not currently utilized. The Company expects that it will recover the cash portion of the Acquisition Related Costs over the next two years through income tax benefits and proceeds from the sale of closed facilities. Income from Operations. Income from operations decreased 58.2% to $60.9 million in fiscal 1998 from $145.8 million in fiscal 1997 primarily as a result of the Acquisition Related Costs. Operating margin decreased to 1.1% in fiscal 1998 from 2.8% in fiscal 1997. -17- Excluding the impact of the Acquisition Related Costs, income from operations increased 22% to $178.1 million in fiscal 1998 from $145.8 million in fiscal 1997. The increase resulted in an operating margin of 3.2% in fiscal 1998 compared to an operating margin of 2.8% in fiscal 1997. The increase in income from operations was primarily attributable to reduced operating expenses and the synergies achieved in integrating the Rykoff-Sexton operations. Interest Expense and Other Financing Costs, Net. Interest expense and other financing costs decreased 2.9% to $73.9 million in fiscal 1998 from $76.1 million in fiscal 1997. The decrease was primarily attributable to the refinancing of certain indebtedness of JP Foodservice and Rykoff-Sexton, as described below, in connection with the Acquisition. The Company's new credit facility reduced average borrowing costs by approximately 275 basis points during the second half of fiscal 1998 from the level in fiscal 1997. The interest rate reduction was offset in part by higher average borrowings, which were primarily attributable to the nonrecurring charges associated with the Acquisition. Nonrecurring Charges. Acquisition Related Costs included nonrecurring charges of $17.8 million principally related to fees for financial advisory, legal, accounting and other professional services incurred by both companies to consummate the Acquisition. During fiscal 1997, the Company recorded nonrecurring charges of $5.4 million with respect to legal and other professional fees required to complete the acquisitions of Valley and Squeri. Income Taxes. The provision for income taxes for fiscal 1998 decreased $19.6 million from the $26.0 million provision for fiscal 1997. The Company's effective tax rate in fiscal 1997 was 40.5%, which approximates the Company's normal rate. Certain non-deductible Acquisition Related Costs had a significant adverse effect on the Company's income tax rate in fiscal 1998. Extraordinary Charge. Subsequent to the Acquisition, the Company applied the proceeds of its new credit facility to refinance substantially all of its indebtedness (excluding capital leases, $130 million of public notes and approximately $30 million of other indebtedness) in order to lower significantly its overall borrowing rates. As a result of this refinancing during fiscal 1998, the Company recorded an extraordinary charge of $9.7 million (net of $6.3 million income tax benefit) related to the write-off of deferred financing costs with respect to the extinguished debt and additional payments to holders of the Company's senior notes due 2004, which were paid in full in accordance with their terms. FISCAL 1997 COMPARED TO FISCAL 1996 The following comparison of fiscal 1997 operating results to fiscal 1996 operating results is materially affected by the acquisitions of USF and H&O Foods consummated by Rykoff-Sexton in fiscal 1996. Because of the significance of the USF acquisition and the related change in Rykoff Sexton's fiscal year end from April (for years 1996 and before) to June (for subsequent years), there are no directly comparable financial statements. The operating results of Rykoff- Sexton for fiscal 1997 therefore have been compared to the operating results for the 52-week period ended April 27, 1996. Results for fiscal 1996 do not include any periods for USF and include the six-month period from November 2, 1995 to April 27, 1996 for H&O Foods. Net Sales. Net sales increased 59.6% to $5.2 billion in fiscal 1997 from $3.2 billion in fiscal 1996. Rykoff-Sexton's net sales increased 94.3% to $3.5 billion in fiscal 1997 from $1.8 billion in fiscal 1996 primarily as a result of the acquisitions of USF and H&O Foods. -18- JP Foodservice's net sales increased 16.7% to $1.7 billion in fiscal 1997 from $1.4 billion in fiscal 1996. The Arrow acquisition accounted for net sales growth of 5.8%. Higher chain account and street sales both contributed to JP Foodservice's net sales growth in fiscal 1997. An increase of 17.2% in chain account sales reflected the continued growth in sales to JP Foodservice's larger customers. As a percentage of net sales, chain account sales increased to 42.6% in fiscal 1997 from 42.4% in fiscal 1996. Street sales increased 16.4% over fiscal 1996 primarily as a result of the growth of the sales force and continued improvements in sales force productivity. Gross Profit. Gross profit margin decreased to 19.4% in fiscal 1997 from 20.2% in fiscal 1996. The decline in gross profit margin at Rykoff-Sexton was offset in part by improved gross margin at JP Foodservice. Rykoff-Sexton's gross profit margin in fiscal 1997 was 20.3% compared to 22.5% in fiscal 1996. The acquisition of USF, as well as the inclusion of a full year of operating results for H&O Foods, were primarily responsible for the reduction. Both USF and H&O Foods operate as broadline distributors which typically have lower gross margins than the historical Rykoff-Sexton divisions. The gross profit margin also was affected by the transition of the historical Rykoff-Sexton divisions from niche distributors to broadline distributors that provide customers with an expanded selection of product categories, including fresh meats, produce and seafood, typically carrying lower margins. The synergies achieved through the effective integration of the acquisitions and improved pricing of food and non-food related products from enhanced purchasing programs resulted in an improvement in gross profit of approximately $6.0 million. This improvement was offset in part by $2.0 million in nonrecurring inventory and promotion-related charges incurred in the integration of USF. JP Foodservice's gross profit margin increased to 17.5% in fiscal 1997 from 17.3% in fiscal 1996. The increase was primarily attributable to increased sales of JP Foodservice's private and signature brand products, which increased to 20.0% of street sales at the end of fiscal 1997 from 16.3% at the end of fiscal 1996. JP Foodservice also realized purchasing synergies through the consolidation of its purchasing programs with those of the acquired entities. Operating Expenses. Operating expenses increased 43.3% to $845.9 million in fiscal 1997 from $590.4 million in fiscal 1996 primarily as a result of the increase in net sales and Rykoff-Sexton's acquisition of USF and H&O Foods. As a percentage of net sales, operating expenses declined to 16.4% in fiscal 1997 from 18.2% in fiscal 1996. Rykoff-Sexton's operating expenses increased 57.3% to $609.5 million in fiscal 1997 from $387.5 million in fiscal 1996 primarily as a result of its acquisition of USF and H&O Foods. As a percentage of net sales, operating expenses decreased to 17.5% in fiscal 1997 from 21.7% in fiscal 1996. The improvement in operating expenses as a percentage of net sales from fiscal 1996 to fiscal 1997 was attributable to the closure, consolidation or other significant changes at certain divisions, realignment of the management structure, consolidation of several corporate functions, insurance reductions and other integration efforts. The improvement also was attributable to the transition to broadline distribution discussed above, which generally produces lower operating expense levels. The decrease in operating expenses as a percentage of net sales was partially offset by approximately $2.0 million in nonrecurring charges incurred in connection with the integration plan for Rykoff-Sexton and USF. Operating expenses for fiscal 1997 included net gains of $1.5 million related to sales of certain assets and the reversal of $3.4 million of insurance reserves. Operating expenses for fiscal 1996 were negatively affected by the relocation of Rykoff-Sexton's Los Angeles division to a new distribution center and higher than expected bad debt and insurance expense. JP Foodservice's operating expenses increased 14.5% to $232.4 million in fiscal 1997 from $203.0 million in fiscal 1996 primarily as a result of the increase in net sales. As a percentage of net sales, operating expenses decreased to 13.7% in fiscal 1997 from 14.0% in fiscal 1996. The decrease in operating expenses as a percentage of net sales resulted from distribution cost savings related to a -19- higher percentage of sales to chain accounts, increased penetration of street accounts, savings resulting from revised management compensation agreements relating to certain of the acquired businesses, and the absence of costs corresponding to those associated with the severe winter weather conditions experienced in a majority of JP Foodservice's markets in fiscal 1996. Amortization of Goodwill and Other Intangible Assets. Goodwill and other intangible amortization was $15.3 million in fiscal 1997 compared with $4.2 million in fiscal 1996. The increase was attributable to the goodwill arising from the USF acquisition. Restructuring, Impairment of Long-Lived Assets and Other Charges. During fiscal 1997, $4.0 million of the restructuring liability recorded in the nine- week period ended June 28, 1997 was reversed into income upon the determination that such liability was no longer required. In addition, the employment of two senior executives was terminated, and the present value of severance compensation and related benefits, aggregating $4.0 million, was charged to expense. Income from Operations. Income from operations increased 319.8% to $145.8 million in fiscal 1997 from $34.7 million in fiscal 1996 primarily as a result of the fiscal 1997 increase in net sales, the increase in gross profit margin, the decrease in operating expenses as a percentage of sales and the USF acquisition. Operating margin increased to 2.8% in fiscal 1997 from 1.1% in fiscal 1996. Interest Expense and Other Financing Costs, Net. Interest expense and other financing costs increased 133.8% to $76.1 million in fiscal 1997 from $32.5 million in fiscal 1996 principally as a result of the increase in average outstanding debt resulting from the USF acquisition. Rykoff-Sexton's interest expense and other financing costs increased 243.4% to $59.5 million in fiscal 1997 from $17.3 million in fiscal 1996. The increase was primarily attributable to the assumption of outstanding USF debt in connection with the USF acquisition. JP Foodservice's interest expense and other financing costs increased 8.8% to $16.5 million in fiscal 1997 from $15.2 million in fiscal 1996. The increase was primarily attributable to increased borrowings incurred in connection with the acquisitions consummated in fiscal 1997. Income Taxes. The provision for income taxes for fiscal 1997 increased $25.5 million over the provision for fiscal 1996. The effective income tax rate for fiscal 1997 was 40.5%. Rykoff-Sexton's effective income tax rate for fiscal 1997 was 38.2% compared to an effective income tax benefit of (40.0)% for fiscal 1996. During the fourth quarter of fiscal 1997, Rykoff-Sexton recorded a reduction in the valuation allowance of $2.8 million based on an analysis of expected combined operating results that included USF. JP Foodservice's provision for income taxes for fiscal 1997 increased $4.6 million over the provision for fiscal 1996. The increase in the provision was attributable to JP Foodservice's greater pretax profit level in fiscal 1997. JP Foodservice's effective tax rate of 42.1% for fiscal 1997 increased from the effective rate of 40.7% for fiscal 1996 primarily because of the nondeductible portion of the nonrecurring charges related to the acquisitions consummated in fiscal 1997. QUARTERLY RESULTS AND SEASONALITY Historically, the Company's operating results have reflected modest seasonal variations. The Company generally experiences lower net sales and income from operations during its third quarter, which includes the winter months. In the second and third quarters of fiscal 1998, the Company incurred Acquisition Related Costs totaling approximately $138.0 million, which significantly affected the Company's reported results for those quarters. See Note 3 to the Company's Consolidated Financial Statements appearing elsewhere in this report. -20- The following table sets forth certain statement of operations data for each of the last eight fiscal quarters: -21-
(Dollars in thousands, except per share amounts) FISCAL YEAR ENDED JUNE 28, 1997 ----------------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Net sales................................... $ 1,319,189 $ 1,304,983 $ 1,238,937 $ 1,306,297 Gross profit................................ 248,118 254,424 243,269 257,263 Income from operations...................... 30,993 36,883 35,553 42,395 Operating margin............................ 2.3% 2.8% 2.9% 3.2% Net income before extraordinary charge....................... 4,100 8,631 9,090 16,465 Net income per common share: Basic: Before extraordinary charge................ $ 0.09 $ 0.20 $ 0.21 $ 0.37 Net income................................. $ 0.09 $ 0.20 $ 0.21 $ 0.37 Diluted: Before extraordinary charge................ $ 0.09 $ 0.20 $ 0.20 $ 0.37 Net income................................. $ 0.09 $ 0.20 $ 0.20 $ 0.37
FISCAL YEAR ENDED JUNE 27, 1998 ----------------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER (1) QUARTER (2) QUARTER ------- ------- ------- ------- Net sales................................... $ 1,338,828 $ 1,373,258 $ 1,338,138 $ 1,456,725 Gross profit................................ 256,246 256,497 248,126 280,799 Income (loss) from operations............... 35,720 (49,735) 12,710 62,204 Operating margin............................ 2.7% (3.6%) 0.9% 4.3% Net income (loss) before extraordinary charge....................... 9,791 (70,622) (3,260) 26,799 Net income (loss) per common share: Basic: Before extraordinary charge................ $ 0.20 $ (1.56) $ (0.07) $ 0.58 Net income (loss).......................... $ 0.20 $ (1.78) $ (0.07) $ 0.58 Diluted: Before extraordinary charge................ $ 0.20 $ (1.56) $ (0.07) $ 0.57 Net income (loss).......................... $ 0.20 $ (1.78) $ (0.07) $ 0.57
- ---------------- (1) In the second quarter, the Company incurred $112.6 million of Acquisition Related Costs. Excluding these charges, gross profit was $262.5 million, income from operations was $42.0 million, the operating margin was 3.1% and net income before extraordinary charge was $12.8 million. Basic and diluted earnings per common share, before extraordinary charge, were $.28 per share. (2) In the third quarter, the Company incurred $25.4 million of Acquisition Related Costs. Excluding these charges, gross profit was $250.6 million, income from operations was $38.1 million, the operating margin was 2.8% and net income before extraordinary charge was $13.3 million. Basic and diluted earnings per common share, before extraordinary charge, were $.29 per share. -22- LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations and growth primarily with cash flow from operations, equity offerings, and borrowings under its credit facilities, operating and capital leases. Cash Flows from Operating Activities. Net cash flows provided by (used in) operating activities were $70.7 million, $116.1 million and ($3.1) million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The $45.4 million decrease in net cash flows from operations in fiscal 1998 compared to fiscal 1997 primarily reflected the Company's adoption in January 1997, as required, of Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), pursuant to which the Company accounted for the $50.0 million received from the securitization of JP Foodservice accounts receivable as a sale of those receivables. Prior to the adoption of SFAS No. 125, the Company had accounted for this transaction as a financing. In addition, in fiscal 1998, the Company experienced a $61.9 million increase in accounts receivable and inventories as a result of net sales growth in the fourth quarter of fiscal 1998. This increase was offset in part by higher levels of accounts payable and accrued expenses, including restructuring charges which have not been expended. The Company's net working capital requirements generally average between 4.5% and 5.5% of annual sales (net of the $250 million of receivables sold under accounts receivable securitization arrangements). The Company's net working capital balance at June 27, 1998 was $287.8 million. Cash Flows from Investing Activities. Net cash used in investing activities was $102.3 million, $106.8 million and $74.3 million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. The Company used $102.3 million in net cash flows in fiscal 1998 for investing activities, which included $95.5 million of capital expenditures. The capital expenditures were used primarily for construction of new distribution centers in Fort Mill, South Carolina and Las Vegas, Nevada, expansion of distribution centers at various locations, and upgrading of management information systems. The Company currently expects to make capital expenditures of approximately $68 million in fiscal 1999, including approximately $41 million to upgrade and expand its existing facilities. Net cash flows used for investing activities in fiscal 1998 also included $38.7 million of costs related to the acquisitions of Outwest, Sorrento, and Westlund and $32.1 million in proceeds from sales of idle facilities and other properties. Cash Flows from Financing Activities. Net cash flows provided by financing activities were $15.0 million, $30.8 million and $79.8 million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively. Net cash flows provided by financing activities in fiscal 1998 included $33.2 million from the issuance of common stock and $12.4 million used to purchase common stock in connection with a stock repurchase program announced by JP Foodservice in the second quarter of fiscal 1998. As of June 27, 1998, the Company's long-term indebtedness, including current portion, totaled $688.2 million. On December 23, 1997, in connection with the consummation of the Acquisition, the Company entered into a new credit facility which provides for a $550 million five-year revolving credit facility and a $200 million revolver/term loan facility which is renewable annually. Initial borrowings under the new credit facility were used to repay the former JP Foodservice revolving line of credit loans and senior notes due 2004 and the former Rykoff-Sexton revolving and term loan facilities. The total debt repaid was approximately $551.0 million. Amounts borrowed under the new credit facility bear interest at the option of the Company at a rate equal to the sum of (a) the London Interbank Offered Rate ("LIBOR"), a specified prime rate plus .5%, or the federal funds rate plus .5%, and (b) an applicable margin. The applicable margin will vary from .175% to .55%, based on a formula tied to the Company's leverage from time to time. Annual facility fees are based on the same formula and will vary between .055% and .2%. At June 27, 1998, borrowing rates were based on LIBOR plus an applicable margin of .45% and averaged 6.17% (excluding deferred financing costs). The new credit facility includes a $75 million facility for standby and -23- commercial letters of credit and a $50 million swing-line facility for same day borrowings. At June 27, 1998, borrowings of $502.2 million were outstanding and the Company had available borrowings of $211.8 million under the new credit facility. The new credit facility includes a number of covenants which require the Company to maintain certain financial ratios and restrict the Company's ability to pay dividends and to incur additional indebtedness. From time to time, the Company acquires other foodservice businesses. Any such business may be acquired for cash, common stock of the Company, or a combination of cash and common stock. Accordingly, management may determine that it is necessary or desirable to obtain financing for acquisitions through additional bank borrowings or the issuance of new debt or equity securities. The Company believes that the combination of cash flow generated by its operations, additional capital leasing activity, sales of duplicate assets, and borrowings under the new credit facility will be sufficient to enable it to finance its growth and meet its currently projected capital expenditures and other liquidity requirements for at least the next twelve months. INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue results from a programming convention in which computer programs use two digits rather than four to define the applicable year. Software and hardware may recognize a date using "00" as the year 1900, rather than the year 2000. Such an inability of computer programs to recognize a year that begins with "20" could result in system failures, miscalculations or errors causing disruptions of operations or other business problems, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company's Program. The Company has undertaken a program to address the Year 2000 issue with respect to the following: (i) the Company's information technology and operating systems (including its billing, accounting and financial reporting systems); (ii) the Company's non-information technology systems (such as buildings, plant, equipment, telephone systems and other infrastructure systems that may contain embedded microcontroller technology); (iii) certain systems of the Company's major vendors and material service providers (insofar as such systems relate to the Company's business activities with such parties); and (iv) the Company's material customers (insofar as the Year 2000 issue relates to the Company's ability to provide services to such customers). As described below, the Company's Year 2000 program involves (i) an assessment of the Year 2000 problems that may affect the Company, (ii) the development of remedies to address the problems discovered in the assessment phase, (iii) the testing of such remedies and (iv) the preparation of contingency plans to deal with worst case scenarios. Assessment Phase. In order to determine the extent to which its internal systems are vulnerable to the Year 2000 issue, the Company is currently evaluating the systems that are date sensitive. The Company's 37 distribution centers and corporate headquarters currently use various information systems to process transactions and meet financial reporting needs. Most of these systems are not fully Year 2000 compliant. As of June 27, 1998, information systems used by seven of the distribution centers are Year 2000 compliant. The Company's data processing systems represent its most significant challenge with respect to Year 2000 compliance. The Company expects that its evaluation of its internal systems will be completed by December 31, 1998. In addition, in the second quarter of fiscal 1999, the Company will complete sending letters to certain of its significant hardware, software and other equipment vendors and other material service providers, as well as to its significant customers, requesting them to provide the Company with detailed, written information concerning existing or anticipated Year 2000 compliance by their systems insofar as the systems relate to such parties' business activities with the Company. The Company expects that it will complete its distribution of these inquiries by December 31, 1998. Remediation and Testing Phase. The activities conducted during the remediation and testing phase are intended to address potential Year 2000 problems in Company-developed computer -24- software and in its other information technology and non-information technology systems in an attempt to demonstrate that this software will be made substantially Year 2000 compliant on a timely basis. In this phase, the Company will first evaluate a program application and, if a potential Year 2000 problem is identified, will take steps to attempt to remediate the problem and individually test the application to confirm that the remediating changes are effective and have not adversely affected the functionality of that application. The Company will undertake similar remediation and testing with respect to the hardware and other equipment that runs or is run by the software. After the individual applications and system components have undergone remediation and testing phases, the Company will conduct integrated testing for the purpose of demonstrating functional integrated systems operation. Following completion of its internal, integrated systems testing, the Company intends to conduct laboratory-simulated integrated systems testing in an attempt to demonstrate substantial Year 2000 compliance of the Company's systems as they interface with external systems and equipment of major vendors, other material service providers and material customers. During fiscal 1998, among other activities, the Company replaced information processing systems (consisting of hardware and software) at five distribution centers, initiated software remediation efforts at 15 locations, and installed new payroll and human resources information systems at 14 locations. As of the date of this report, the Company has initiated software and hardware remediation efforts at the remaining distribution centers and its corporate headquarters. The Company currently seeks to have most of its software remediated by December 1998 and to have all of its information systems at its distribution centers and its corporate headquarters Year 2000 compliant by July 1999. Contingency Plans. The Company intends to develop contingency plans to handle its most reasonably likely worst case Year 2000 scenarios, which it has not yet identified fully. The Company intends to complete its determination of worst case scenarios after it has received and analyzed responses to substantially all of the inquiries it has made of third parties. Following its analysis, the Company intends to develop a timetable for completing its contingency plans. Costs Related to the Year 2000 Issue. To date, the Company has incurred approximately $0.5 million in costs for its Year 2000 program. It has also made approximately $7.0 million of capital expenditures on new information processing systems that are already Year 2000 compliant. The Company currently estimates that it will incur additional costs, which are not expected to exceed approximately $5.0 million, to complete its Year 2000 compliance work with respect to the Company's major information systems. Of such additional costs, approximately $3.0 million are expected to be incurred during fiscal 1999 and approximately $2.0 million are expected to be incurred during fiscal 2000. These costs will be expensed as incurred. The Company currently believes that the costs to resolve compliance issues with respect to other information systems and its non-information technology systems will not be material. However, there can be no assurance that the foregoing cost estimate will not change as the Company completes its assessment. Risks Related to the Year 2000 Issue. Although the Company's Year 2000 efforts are intended to minimize the adverse effects of the Year 2000 issue on the Company's business and operations, the actual effects of the issue and the success or failure of the Company's efforts described above cannot be known until the year 2000. Failure by the Company and its major vendors, other material service providers and material customers to address adequately their respective Year 2000 issues in a timely manner (insofar as such issues relate to the Company's business) could have a material adverse effect on the Company's business, results of operations and financial condition. Changes in Accounting Standards During 1997 and 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 130 and 131 generally require additional financial statement disclosure. SFAS No. 133 establishes accounting and -25- reporting standards for derivative instruments and for hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company expects to adopt SFAS No. 130 and 131 during fiscal 1999 and SFAS No. 133 during fiscal 2000, in accordance with the pronouncements, and is currently evaluating the impact, if any, that SFAS No. 133 will have on its consolidated financial statements. During 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that costs incurred during a start-up activity be expensed as incurred and that the initial application of the SOP, as of the beginning of the fiscal year in which the SOP is adopted, be reported as a cumulative effect of a change in accounting principle. The Company expects to adopt SOP 98-5 in fiscal 2000. The cumulative effect of adoption is not expected to be material. -26- ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following information constitutes forward-looking information. See "Foward-Looking Statements." The Company's major market risk exposure is to changing interest rates. The Company's policy is to manage interest rates through the use of a combination of fixed and floating rate debt. The Company uses interest rate swap, cap and collar contracts to manage its exposure to fluctuations in interest rates on floating long-term debt. Certain management monitoring processes are designed to minimize the impact of sudden and sustained changes in interest rates. As of June 27, 1998, the Company had effectively capped its interest rate exposure at 7.85% on approximately $400.0 million of its floating rate debt for the next 12 months. The Company would have had a loss of approximately $1.8 million if it had terminated each of its interest rate contracts as of June 27, 1998. The tables below provide information about the Company's debt obligations and derivative financial instruments that are sensitive to changes in interest rates:
(DOLLARS IN MILLIONS) DEBT OBLIGATIONS -------------------------------------------------------------------------------------- EXPECTED MATURITY DATES (1) ----------------------------------------------------------- FAIR 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE Long-term debt: Fixed rate................. - - - - - $ 120.2 $ 120.2 $ 125.5 Average interest rate.... - - - - - 8.875% Variable rate.............. - - - $ 502.2 - $ 25.9 $ 528.1 $ 528.1 Average interest rate.... - - - LIBOR - LIBOR INTEREST RATE DERIVATIVES -------------------------------------------------------------------------------------- EXPECTED MATURITY DATES (1) ----------------------------------------------------------- FAIR 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE Interest rate swap: Variable to fixed.......... - $ 70.0 - - - - $ 70.0 $ (0.4) Average rate received.... - LIBOR - - - - Average rate paid........ - 5.97% - - - - Swaption (2): Variable to fixed.......... - - - - $ 129.0 - $ 129.0 $ (7.0) Average rate received.... - - - - LIBOR+0.625% - Average rate paid........ - - - - 8.875% - Collars: Variable to fixed.......... $ 300.0 - - - - - $ 300.0 $ - Receive over............. 7.41% - - - - - Pay under................ 5.00% - - - - - Cap: Variable to fixed.......... $ 100.0 - - - - - $ 100.0 $ - Receive over............. 7.41% - - - - -
- ---------------------------------- (1) Maturity dates are based on fiscal years ending in June. (2) The swaption is for a notional amount of $129.0 million and can be exercised by the holder commencing November 1998. The Company received $5.6 million upon sale of the swaption and will receive an additional $1.9 million to 5.7 million when, and if, exercised by the holder. For debt obligations, the table presents principal cash flows and the related interest rates by expected maturity dates for each of the Company's major debt obligations. For interest rate derivatives, the table presents notional amounts and interest rates by contractual maturity date. -27- Notional amounts are the amounts used to calculate the contractual payments to be exchanged under the contract. Interest rates for debt obligations exclude the premium or margin included in the debt instrument. See Note 7 to the Company's Consolidated Financial Statements appearing elsewhere in this report. In addition to the instruments listed above, the Company sells $250.0 million of accounts receivable on a revolving basis under accounts receivable securitization arrangements. The proceeds received from sales of receivables under these arrangements, which are accounted for under SFAS No. 125, are based to a large extent on LIBOR. The Company also uses fixed-rate capital leases to finance certain of its trucks and trailers. Currently, the Company does not use foreign currency forward contracts or commodity contracts and does not have any material foreign currency exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed in Item 14 are filed as part of this report and appear on Pages F-2 through F-36. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -28- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responsive to this Item is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION Information responsive to this Item is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information responsive to this Item is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responsive to this Item is incorporated herein by reference to the Company's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders. -29- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS The following financial statements of the Company appear on pages F-2 through F-32 of this report and are incorporated by reference in Part II, Item 8: Independent Auditors' Reports Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998. Consolidated Statements of Operations for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998. Consolidated Statements of Stockholders' Equity for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998. Consolidated Statements of Cash Flows for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998. Notes to Consolidated Financial Statements. 2. FINANCIAL STATEMENT SCHEDULES I. - Condensed Financial Information of Registrant II. - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. EXHIBITS The Commission File No. of Rykoff-Sexton, Inc. was 0-8105. 3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-3 (No. 333-59785) and incorporated herein by reference. 3.2 Amended and Restated By-Laws of the Company. Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-3 (No. 333- 41795) and incorporated herein by reference. 4.1 Specimen certificate representing common stock, par value $.01 per share, of the Company. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 333-27275) and incorporated herein by reference. 4.2.1 Rights Agreement, dated as of February 19, 1996, between the Company and The Bank of New York, as Rights Agent (the "Rights Agreement"). -30- Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated February 22, 1996 and incorporated herein by reference. 4.2.2 Amendment No. 1 to the Rights Agreement, dated as of May 17, 1996. Filed as Exhibit 10.26 to Amendment No. 1 to the Company's Registration Statement on Form S-3 (No. 333-07321) and incorporated herein by reference. 4.2.3 Amendment No. 2 to the Rights Agreement, dated as of September 26, 1996. Filed as Exhibit 10.1 to Amendment No. 2 to the Company `s Registration Statement on Form S-3 (No. 333-14039) and incorporated herein by reference. 4.2.4 Amendment No. 3 to the Rights Agreement, dated as of June 30, 1997. Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July 2, 1997 and incorporated herein by reference. 4.2.5 Amendment No. 4 to the Rights Agreement, dated as of December 23, 1997. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 7, 1998 and incorporated herein by reference. 4.3 Common Stock Purchase Warrant Expiring September 30, 2005 issued to Bankers Trust New York Corporation. Filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.1 Employment Agreement, dated as of July 3, 1989, as amended, between the Company and James L. Miller. Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33- 82724) and incorporated herein by reference. 10.2 Employment Agreement, dated as of August 9, 1991, between the Company and Lewis Hay, III. Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (No. 33-82724) and incorporated herein by reference. 10.3 Second Amendment, dated as of June 27, 1995, to Employment Agreement, dated as of July 3, 1989, as amended, between the Company and James L. Miller. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. 10.4 First Amendment, dated as of June 27, 1995, to Employment Agreement, dated as of August 9, 1991, between the Company and Lewis Hay, III. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. 10.5 Severance Agreement, dated as of September 27, 1995, between the Company and Mark P. Kaiser. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. -31- 10.6 Severance Agreement, dated as of September 27, 1995, between the Company and George T. Megas. Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 30, 1995 and incorporated herein by reference. 10.7 Employment Agreement, dated as of January 4, 1996, between the Company and James L. Miller. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.8 Employment Agreement, dated as of January 4, 1996, between the Company and Lewis Hay, III. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.9 Employment Agreement, dated as of January 4, 1996, between the Company and Mark P. Kaiser. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.10 Employment Agreement, dated as of January 4, 1996, between the Company and George T. Megas. Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and incorporated herein by reference. 10.11 Employment Agreement, dated as of June 10, 1996, between the Company and David M. Abramson. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1996 and incorporated herein by reference. 10.12 1994 Stock Incentive Plan, as amended, of U.S. Foodservice. Filed as Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 333-32711) and incorporated herein by reference. 10.13 Stock Option Plan for Outside Directors, as amended, of U.S. Foodservice. Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-4 (No. 333-32711) and incorporated herein by reference. 10.14 U.S. Foodservice Supplemental Executive Retirement Plan. Filed herewith. 10.15 U.S. Foodservice Restricted Stock Unit Plan. Filed herewith. 10.16 Description of the Company's annual bonus plan. Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 33-82724) and incorporated herein by reference. 10.17 Rykoff-Sexton, Inc. 1993 Director Stock Option Plan, as amended. Filed herewith. 10.18 Amended and Restated Support Agreement, dated as of June 30, 1997, among JP Foodservice, Inc. and certain stockholders of Rykoff-Sexton, Inc. Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on September 9, 1997 and incorporated herein by reference. -32- 10.19 Receivables Purchase Agreement, dated as of May 30, 1996, among JP Foodservice Distributors, Inc., Illinois Fruit & Produce Corp. and Sky Bros., Inc., JPFD Funding Company and the Company. Filed as Exhibit 10.27 to the Company's Registration Statement on Form S-3 (No. 333- 07321) and incorporated herein by reference. 10.20.1 Transfer and Administration Agreement, dated May 30, 1996, among Enterprise Funding Corporation, JPFD Funding Company, JP Foodservice Distributors, Inc., NationsBank, N.A. and certain other financial institutions from time to time parties thereto. Filed as Exhibit 10.28 to the Company's Registration Statement on Form S-3 (No. 333-07321) and incorporated herein by reference. 10.20.2 Amendment No. 1, dated as of July 1, 1996, to the Transfer and Administration Agreement, dated as of May 30, 1996, by and among JPFD Funding Company, JP Foodservice Distributors, Inc., Enterprise Funding Corporation, NationsBank, N.A., and the financial institutions from time to time parties thereto. Filed as Exhibit 10.33 to the Company's Registration Statement on Form S-3 (No. 333-07321) and incorporated herein by reference. 10.20.3 Amendment No. 2, dated as of May 19, 1997, to the Transfer and Administration Agreement, dated as of May 30, 1996, by and among JPFD Funding Company, JP Foodservice Distributors, Inc., Enterprise Funding Corporation, NationsBank, N.A., and the financial institutions from time to time parties thereto. Filed herewith. Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1997 and incorporated herein by reference. 10.21.1 Indenture, dated as of November 1, 1993, between Rykoff- Sexton, Inc. and Norwest Bank Minnesota, N.A., as trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 1993). 10.21.2 Supplemental Indenture, dated as May 17, 1996, among Rykoff- Sexton, Inc., the guarantors listed on the signature pages thereof and Norwest Bank Minnesota, N.A., as trustee. Filed as Exhibit 4.1.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.21.3 Second Supplemental Indenture, dated as of December 23, 1997, among Rykoff-Sexton, Inc., the guarantors listed on the signature pages thereof and Norwest Bank Minnesota, N.A., as trustee. Filed as Exhibit 4.1.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.21.4 Third Supplemental Indenture, dated as of February 10, 1998, among Rykoff-Sexton, Inc., the guarantors listed on the signature pages thereof and Norwest Bank Minnesota, N.A., as trustee. Filed herewith. 10.22 Registration Rights Agreement, dated as of May 17, 1996, by Rykoff-Sexton, Inc. and the other signatories listed on the signature pages thereto (incorporated by reference from Rykoff- Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended April 27, 1996). -33- 10.23.1 Five Year Credit Agreement, dated as of December 23, 1997, among Rykoff-Sexton, Inc. and JP Foodservice Distributors, Inc., the Lenders Parties Thereto, NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities, Inc. and Chase Securities, Inc., as Co-Arrangers, The Chase Manhattan Bank, as Syndication Agent, and Bank of America, NT & SA, as Documentation Agent. Filed as Exhibit 10.1.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.23.2 Five Year Guaranty Agreement, dated as of December 23, 1997, among JP Foodservice, Inc., the Subsidiaries of the Borrowers identified therein and NationsBank, N.A., as Administrative Agent. Filed as Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.24.1 364-Day Credit Agreement, dated as of December 23, 1997, among Rykoff-Sexton, Inc. and JP Foodservice Distributors, Inc., the Lenders Parties Thereto, NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities, Inc. and Chase Securities, Inc., as Co-Arrangers, The Chase Manhattan Bank, as Syndication Agent, and Bank of America, NT & SA, as Documentation Agent. Filed as Exhibit 10.2.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.24.2 364-Day Guaranty Agreement, dated as of December 23, 1997, among JP Foodservice, Inc., the Subsidiaries of the Borrowers identified therein and NationsBank, N.A., as Administrative Agent. Filed as Exhibit 10.2.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.25.1 Participation Agreement, dated as of April 29, 1994, entered into among Rykoff-Sexton, Inc., as Lessee ("Lessee"), Tone Brothers, Inc., as Sublessee ("Sublessee"), BA Leasing & Capital Corporation, as Agent ("Agent"), Manufacturers Bank and Pitney Bowes Credit Corporation, as Lessors (the "Lessors") (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended April 30, 1994). 10.25.2 Waiver, Consent and Fifth Amendment to Participation Agreement, dated as of December 23, 1997, among Lessee, Hudson Acquisition Corp., Agent and the Lessors. Filed as Exhibit 10.3.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.25.3 Guaranty, dated as of December 23, 1997, of JP Foodservice, Inc. in favor of Agent. Filed as Exhibit 10.3.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.26.1 Receivables Sale Agreement, dated as of November 15, 1996, among Rykoff-Sexton, Inc., John Sexton & Co., Biggers Brothers, Inc., White Swan, Inc., F.H. Bevevino & Company, Inc., Roanoke Restaurant Service, Inc., King's Foodservice, Inc., U.S. Foodservice of Florida, Inc., US Foodservice of Atlanta, Inc., RS Funding Inc. and US Foodservice Inc., as Servicer (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). -34- 10.26.2 Servicing Agreement, dated as of November 15, 1996, among RS Funding Inc., as Company, US Foodservice Inc., as Servicer, Rykoff-Sexton, Inc. and its other subsidiaries named therein as Sub-Servicers and The Chase Manhattan Bank, Trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.26.3 Pooling Agreement, dated as of November 15, 1996, among RS Funding Inc., as Company, US Foodservice Inc., as Servicer, and The Chase Manhattan Bank, as Trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.26.4 Series 1996-1 Supplement to Pooling Agreement among RS Funding Inc., as Company, US Foodservice Inc., as Servicer, and The Chase Manhattan Bank, as Trustee (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.27 Indenture of Trust, dated as of November 1, 1996, between La Mirada Industrial Development Authority and Bankers Trust Company of California, N.A. (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.28 Loan Agreement, dated as of November 1, 1996, among La Mirada Industrial Development Authority and Bankers Trust Company of California, N.A. (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.29.1 Reimbursement Agreement, dated as of November 1, 1996, between Rykoff-Sexton, Inc. and the First National Bank of Chicago (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 28, 1997). 10.29.2 Amendment, Consent and Assumption Agreement, dated as of December 18, 1997, among Rykoff-Sexton, Inc., Hudson Acquisition Corp. and The First National Bank of Chicago. Filed as Exhibit 10.7.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.30.1 Commitment Agreement, dated as of August 10, 1992, between BRB Holdings, Inc. and its subsidiaries and Sara Lee Corporation (incorporated by reference from Rykoff-Sexton, Inc.'s Registration Statement on Form S-4 (No. 333-02715)). 10.30.2 Amendment Number One to BRB Holdings Commitment Agreement, dated as of September 27, 1995, by Sara Lee Corporation and BRB Holdings, Inc. and guaranteed by US Foodservice Inc. (incorporated by reference from Rykoff-Sexton, Inc.'s Registration Statement on Form S-4 (No. 333-02715)). 10.31.1 Commitment Agreement, dated as of August 10, 1992, between WS Holdings Corporation and its subsidiaries and Sara Lee Corporation (incorporated by reference from Rykoff-Sexton's Registration Statement on Form S-4 (No. 333-02715)). -35- 10.32.2 Amendment Number One to WS Holdings Commitment Agreement, dated as of September 27, 1995, by Sara Lee Corporation and WS Holdings Corporation (incorporated by reference from Rykoff- Sexton, Inc.'s Registration Statement on Form S-4 (File No. 333- 02715)). 10.33 Standstill Agreement, dated as of as of May 17, 1996, by Rykoff- Sexton, Inc. and the other signatories listed on the signature pages thereto (incorporated by reference from Rykoff-Sexton, Inc.'s Annual Report on Form 10-K for the fiscal year ended April 27, 1996). 10.34 Participation Agreement, dated as of June 29, 1998, among JP Foodservice Distributors, Inc., the signatories listed on the signature pages thereto as Guarantors, First Security Bank, National Association, as Owner Trustee, the Various Banks and Other Lending Institutions Parties Thereto, as Holders and Lenders, and First Union National Bank, as Agent. Filed herewith. 10.35 Credit Agreement, dated as of June 29, 1998, among First Security Bank, National Association, as Borrower, the Several Lenders Parties Thereto, and First Union National Bank, as Agent. Filed herewith. 10.36 Lease Agreement, dated as of June 29, 1998, between First Security Bank, National Association, as Lessor, and JP Foodservice Distributors, Inc., as Lessee, relating to the corporate headquarters of U.S. Foodservice. Filed herewith. 21 Subsidiaries of the Company. Filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP, independent public accountants. Filed herewith. 23.2 Consent of KPMG Peat Marwick LLP, independent public accountants. Filed herewith. 23.3 Consent of KPMG Peat Marwick LLP, independent public accountants. Filed herewith. 23.4 Consent of Arthur Andersen LLP, independent public accountants. Filed herewith. 27 Financial Data Schedule. Filed herewith. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company in the fourth quarter of fiscal 1998. -36- U.S. FOODSERVICE AND SUBSIDIARIES Index to Consolidated Financial Statements
PAGE Consolidated Financial Statements: Independent Auditors' Reports........................................... F-2 Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998...... F-7 Consolidated Statements of Operations for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998....................... F-8 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998................. F-9 Consolidated Statements of Cash Flows for the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998....................... F-10 Notes to Consolidated Financial Statements............................. F-12
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders U.S. Foodservice: We have audited the accompanying consolidated balance sheets of U.S. Foodservice (formerly JP Foodservice, Inc.) and subsidiaries as of June 28, 1997 and June 27, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedules listed under Item 14 (a)(2). These consolidated financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules based on our audits. We did not audit the consolidated financial statements of Rykoff-Sexton, Inc. as of and for the year ended June 28, 1997, which consolidated financial statements reflect total assets constituting 70 percent, net sales constituting 67 percent and net income constituting 42 percent of the related 1997 consolidated financial statement totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion on the 1997 consolidated financial statements, insofar as it relates to the amounts included for Rykoff-Sexton, Inc., is based solely on the report of other auditors. The consolidated financial statements of U.S. Foodservice and subsidiaries for the year ended June 29, 1996, prior to their restatement for the pooling of interests transaction described in note 3 to the consolidated financial statements, were audited by other auditors whose report, presented herein dated August 2, 1996, expressed an unqualified opinion on those statements. Separate financial statements of Rykoff-Sexton, Inc. also included in the restated consolidated financial statements of U.S. Foodservice for the year ended June 29, 1996, were audited by other auditors whose report, presented herein dated August 14, 1997, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. 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 also 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the 1997 and 1998 consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Foodservice and subsidiaries as of June 28, 1997 and June 27, 1998, and the results of their operations and their cash flows for each of the years then ended in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein. F-2 We also audited the combination of the accompanying consolidated financial statements and schedules as of June 28, 1997, and for each of the years in the two-year period then ended, after restatement for the Rykoff-Sexton, pooling of interests transaction and in our opinion, such financial statements and schedules have been properly combined on the basis described in note 3 to the consolidated financial statements. /s/ KPMG Peat Marwick LLP Baltimore, Maryland August 14, 1998 F-3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rykoff-Sexton, Inc.: We have audited the consolidated balance sheet of Rykoff-Sexton, Inc. (a Delaware Corporation) and subsidiaries as of June 28, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal years ended June 28, 1997, and April 27, 1996, and the nine-week transition period ended June 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rykoff-Sexton, Inc. and subsidiaries as of June 28, 1997 and the results of their operations and their cash flows for the fiscal years ended June 28, 1997, and April 27, 1996, and the nine-week transition period ended June 29, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Philadelphia, PA August 14, 1997 F-4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of JP Foodservice, Inc.: In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated statements of operations, stockholders' equity and cash flows as of and for the fiscal year ended June 29, 1996 present fairly, in all material respects, the results of operations and cash flows of JP Foodservice, Inc. and its subsidiaries for the fiscal year ended June 29, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management, our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Valley Industries, Inc., which statements reflect total revenues of $121,504,000 for the year ended January 31, 1996. This statement was audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Valley Industries, Inc. is based solely on the report of the other auditors. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of JP Foodservice, Inc. for any period subsequent to June 29, 1996. /s/ PricewaterhouseCoopers LLP Linthicum, Maryland August 2, 1996, except as to Note 16, which is as of September 10, 1996 and except as to the pooling of interests with Valley Industries, Inc. and with Squeri Food Service, Inc. which is as of November 14, 1996 F-5 REPORT OF INDEPENDENT AUDITORS OF VALLEY INDUSTRIES AND SUBSIDIARIES AND Z LEASING (A GENERAL PARTNERSHIP) The Board of Directors, Stockholders and Partners Valley Industries, Inc. and Subsidiaries and Z Leasing Company (A General Partnership): We have audited the combined statements of earnings, stockholders' and partners' equity, and cash flows of Valley Industries, Inc. and Subsidiaries and Z Leasing Company (A General Partnership), collectively, the Company, for the year ended January 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined results of the Company's operations and their cash flows for the year ended January 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Las Vegas, Nevada June 17, 1996 F-6 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------- June 28, June 27, 1997 1998 - ---------------------------------------------------------------------------------------------- (Note 3) ASSETS Current assets: Cash and cash equivalents $ 74,432 $ 57,817 Receivables, net 261,717 322,040 Inventories 314,897 349,583 Other current assets 29,919 28,548 Deferred income taxes 28,944 39,294 - ---------------------------------------------------------------------------------------------- Total current assets 709,909 797,282 Property and equipment, net 437,736 437,265 Goodwill, net of accumulated amortization of $31,304 and $45,960 541,519 561,695 Other noncurrent assets 29,354 21,549 Deferred income taxes 13,665 - - ---------------------------------------------------------------------------------------------- Total assets $ 1,732,183 $ 1,817,791 - ---------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 22,492 $ 604 Current obligations under capital leases 5,690 6,933 Accounts payable 321,442 381,151 Accrued expenses 125,482 120,778 - ---------------------------------------------------------------------------------------------- Total current liabilities 475,106 509,466 Long-term debt 621,788 650,679 Obligations under capital leases 33,458 29,946 Deferred income taxes - 6,064 Other noncurrent liabilities 22,685 36,916 - ---------------------------------------------------------------------------------------------- Total liabilities 1,153,037 1,233,071 - ---------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued - - Common stock, $.01 par value, 150,000,000 shares authorized, 44,300,999 and 46,542,321 shares outstanding 443 465 Additional paid-in-capital 526,979 579,535 Retained earnings 51,724 4,720 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 579,146 584,720 - ---------------------------------------------------------------------------------------------- Commitments and contingent liabilities (notes 9 and 15) - ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,732,183 $ 1,817,791 - ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Operations (Dollars in thousands, except per share amounts)
_____________________________________________________________________________________________________________ Fiscal Years Ended (Notes 3 and 4) --------------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------- Net sales $ 3,238,781 $ 5,169,406 $ 5,506,949 Cost of sales 2,586,096 4,166,332 4,465,281 - ------------------------------------------------------------------------------------------------------------- Gross profit 652,685 1,003,074 1,041,668 Operating expenses 590,446 845,901 876,170 Amortization of intangible assets 4,244 15,349 15,354 Restructuring costs (reversal) (6,441) (4,000) 53,715 Charge for impairment of long-lived assets 29,700 - 35,530 - ------------------------------------------------------------------------------------------------------------- Income from operations 34,736 145,824 60,899 Interest expense and other financing costs, net 32,527 76,063 73,894 Nonrecurring charges 1,517 5,400 17,822 - ------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary charge 692 64,361 (30,817) Provision for income taxes 559 26,075 6,475 - ------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary charge 133 38,286 (37,292) Extraordinary charge on early extinguishment of debt, (net of income taxes of $6,325) - - (9,712) - ------------------------------------------------------------------------------------------------------------- Net income (loss) $ 133 $ 38,286 $ (47,004) ============================================================================================================= Net income (loss) per common share: Basic: Before extraordinary charge $ 0.00 $ 0.88 $ (0.83) Extraordinary charge - - (0.21) - ------------------------------------------------------------------------------------------------------------- Net income (loss) per common share $ - $ 0.88 $ (1.04) - ------------------------------------------------------------------------------------------------------------- Diluted: Before extraordinary charge $ 0.00 $ 0.87 $ (0.83) Extraordinary charge - - (0.21) - ------------------------------------------------------------------------------------------------------------- Net income (loss) per common share $ 0.00 $ 0.87 $ (1.04) ============================================================================================================= Weighted average common shares: Basic 30,388,000 43,451,000 45,320,000 Diluted 30,515,000 44,063,000 45,320,000 =============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-8 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------- Additional Distribution in Common paid-in Retained excess of net stock capital earnings book value Total - ------------------------------------------------------------------------------------------------------------------------------- Balance July 1, 1995 $ 301 $ 278,057 $ 79,257 $ (44,943) $ 312,672 Net income -- -- 133 -- 133 Dividends and distributions to stockholders of acquired companies -- -- (1,599) -- (1,599) Stock options exercised, including related tax benefit 2 3,558 -- -- 3,560 Treasury stock purchased and canceled -- (40) -- -- (40) Employee stock purchases -- 338 -- -- 338 Contributions to 401(k) plan 1 1,611 -- -- 1,612 Net activity for the period April 28, 1996 to June 29, 1996 (note 3): Net loss of Rykoff-Sexton, Inc. -- -- (60,180) -- (60,180) Shares issued for US Foodservice, Inc. (note 4) 100 203,572 -- -- 203,672 Other net activity -- 53 -- -- 53 - ------------------------------------------------------------------------------------------------------------------------------- Balance June 29, 1996 404 487,149 17,611 (44,943) 460,221 Net income -- -- 38,286 -- 38,286 Reclassification in connection with Sara Lee Offering -- (44,943) -- 44,943 -- Public stock offering 31 65,944 -- -- 65,975 Stock issued in connection with business acquisitions 4 9,754 -- -- 9,758 Dividends to stockholders of acquired companies -- -- (1,670) -- (1,670) Stock options exercised, including related tax benefit 3 3,692 -- -- 3,695 Treasury stock purchased and canceled -- (12) -- -- (12) Stock compensation -- 554 -- -- 554 Employee stock purchases -- 837 -- -- 837 Contributions to 401(k) plan 1 1,554 -- -- 1,555 Adjustments with respect to acquisitions -- 2,450 (2,503) -- (53) - ------------------------------------------------------------------------------------------------------------------------------- Balance June 28, 1997 443 526,979 51,724 -- 579,146 Net loss -- -- (47,004) -- (47,004) Stock issued in connection with business acquisitions 6 17,592 -- -- 17,598 Stock options exercised, including related tax benefit 13 32,009 -- -- 32,022 Treasury stock purchased and canceled (4) (12,413) -- -- (12,417) Stock compensation 6 12,211 -- -- 12,217 Employee stock purchases -- 1,197 -- -- 1,197 Contributions to 401(k) plan 1 1,960 -- -- 1,961 - ------------------------------------------------------------------------------------------------------------------------------- Balance June 27, 1998 $ 465 $ 579,535 $ 4,720 $ -- $ 584,720 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
F-9 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ---------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 133 $ 38,286 $ (47,004) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of property and equipment 28,193 41,834 44,475 Amortization of intangible assets 4,244 15,349 15,354 Gain on disposal of property and equipment (1,489) (1,649) (1,670) Write-off of deferred financing costs - - 9,172 Non-cash restructuring charge - - 13,110 Charge for impairment of long-lived assets 29,700 - 35,530 Deferred income taxes (5,456) 8,848 9,379 Changes in operating assets and liabilities, net of effects from purchase acquisitions: (Increase) decrease in receivables (36,571) 22,990 (39,765) (Increase) decrease in inventories (13,035) 12,952 (22,109) (Increase) decrease in other current assets (13,636) 10,623 1,905 Increase (decrease) in accounts payable and accrued expenses 2,284 (33,819) 45,985 Other 2,475 732 6,298 - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (3,158) 116,146 70,660 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (53,591) (88,436) (95,511) Costs of businesses acquired, net of cash acquired (11,451) (35,964) (38,742) (Issuance) collection of note receivable (5,500) 5,500 - Proceeds from sales of property and equipment 2,649 10,321 32,086 Other (6,363) 1,816 (123) - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (74,256) (106,763) (102,290) - --------------------------------------------------------------------------------------------------------------
(Continued) F-10 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ----------------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in borrowings under revolving lines of credit $ 36,000 $ 47,700 $ 438,500 Proceeds from issuance of long-term debt 51,024 25,953 -- Principal payments on long-term debt (3,433) (105,614) (439,843) Payments of obligations under capital lease (4,536) (5,957) (6,184) Net proceeds from public offerings of common stock -- 65,975 -- Purchases of treasury stock (40) (12) (12,417) Proceeds from other issuances of common stock 3,863 5,086 33,219 Dividends paid by Rykoff-Sexton, Inc. (884) (1,670) -- Other (2,180) (681) 1,740 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 79,814 30,780 15,015 - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 2,400 40,163 (16,615) Cash and cash equivalents: Beginning of period 20,649 34,269 74,432 - ------------------------------------------------------------------------------------------------------------------ End of period $ 23,049 $ 74,432 $ 57,817 - ------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash paid during the year for: Interest $ 32,166 $ 59,035 $ 54,454 Income taxes $ 11,781 $ 15,777 $ 851 - ------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these consolidated financial statements.
F-11 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 1 - DESCRIPTION OF BUSINESS U.S. Foodservice, formerly JP Foodservice, Inc. ("JP Foodservice"), and its consolidated subsidiaries (the "Company") operate as a broadline distributor of fresh, frozen and packaged foods, paper products, equipment and ancillary products to foodservice businesses. Upon the acquisition of Rykoff-Sexton, Inc. ("Rykoff-Sexton") on December 23, 1997, the Company became the second largest broadline foodservice distributor in the United States. The Company's market area includes most of the continental United States. The Company's principal customers are restaurants, hotels, healthcare facilities, cafeterias and schools encompassing both independent and multi-unit businesses. No single customer accounts for more than 10% of the Company's trade receivables or sales for any of the periods presented. Effective February 27, 1998, the Company changed its name to U.S. Foodservice. References to JP Foodservice generally relate to activities of the Company prior to its acquisition of Rykoff-Sexton on December 23, 1997. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of U.S. Foodservice and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. B. CASH EQUIVALENTS For purposes of financial statement disclosure, cash equivalents consist of all highly liquid instruments with original maturities of three months or less. The cost of these investments is equivalent to fair market value. C. FAIR VALUE OF FINANCIAL INSTRUMENTS Information regarding fair value of long-term debt is set forth in Note 7 to the consolidated financial statements. Fair values of other financial instruments, such as receivables and payables, approximate carrying values because of the short-term nature of these items. D. REVENUE AND RECEIVABLES Revenue is recognized when product is shipped to the customer. Allowances are provided for estimated uncollectible receivables based on historical experience and review of specific accounts. Allowances and credits received from suppliers in connection with the Company's buying and merchandising activities are recognized as earned. (Continued) F-12 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 2 - CONTINUED E. INVENTORIES Inventories consist principally of fresh, frozen and packaged foods and related non-food products. Inventories are valued at the lower of cost or market, and include the cost of purchased merchandise (net of applicable purchase rebates), and for manufactured products, the cost of material, labor and factory overhead. Cost for substantially all inventories is determined using the first-in, first- out method. Inventories consist primarily of finished goods. F. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Major renewals and betterments are capitalized, and ordinary repairs and maintenance are charged against operations in the period in which the costs are incurred. Related costs and accumulated depreciation are eliminated from the accounts upon disposition of an asset and the resulting gain or loss is reflected in the consolidated statement of operations. Depreciation is computed using the straight-line method over estimated useful lives from date of acquisition as follows: Buildings and improvements 15-40 years Machinery and equipment 3-15 years Leasehold improvements Life of lease Delivery vehicles 3-10 years The Company capitalizes the costs of computer software developed or obtained for internal use. G. GOODWILL Goodwill is amortized using the straight-line method over the periods expected to be benefited not to exceed 40 years. The Company assesses the recoverability of goodwill by determining whether amortization of the goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations. Goodwill impairment, if any, is measured by determining the amount by which the carrying value of the goodwill exceeds its fair value based upon discounting future cash flows. H. OTHER NONCURRENT ASSETS Other noncurrent assets consist principally of deferred financing costs, noncompete agreements, and other deferred costs. Deferred financing costs associated with the acquisition of loans are capitalized and amortized using the effective interest method over the term of the related debt. Such costs are written off upon refinancing of the related debt. (Continued) F-13 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 2 - CONTINUED I. IMPAIRMENT OF LONG-LIVED ASSETS The recoverability of long-lived assets is assessed whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable through future undiscounted cash flows expected to be generated by the asset. If such assets are deemed to be impaired, the impairment is measured by determining the amount by which the carrying value of the asset exceeds its estimated fair value. J. INCOME TAXES Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that included the enactment date. K. NET INCOME (LOSS) PER COMMON SHARE The Company adopted Statement of Financial Accounting Standard No. 128, Earnings Per Share, as of December 27, 1997, and, accordingly, has restated all prior periods in accordance with the pronouncement. The impact on adoption was not material. Basic net income (loss) per common share is based on the weighted average number of common shares outstanding. Diluted net income (loss) per common share is based on the weighted average number of common shares and dilutive securities outstanding. Dilutive securities consist of outstanding stock options and warrants. L. DERIVATIVE INSTRUMENTS The Company uses interest rate swap, cap and collar contracts to manage its exposure to fluctuations in interest rates. The interest rate differential on interest rate contracts used to hedge underlying debt obligations is reflected as an adjustment to interest expense over the life of the contract. Upon early termination of an interest rate contract, the gains or losses on termination are deferred and amortized as an adjustment to the interest expense on the related debt instrument over the remaining period originally covered by the contract. M. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company applies the intrinsic value method to account for stock-based compensation to employees and directors. (Continued) F-14 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 2 - CONTINUED N. ACCOUNTING ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. O. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS STATEMENT OF FINANCIAL ACCOUNTING STANDARDS - During 1997 and 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 130 and 131 generally require additional financial statement disclosure. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company expects to adopt SFAS No. 130 and No. 131 during fiscal 1999 and SFAS No. 133 during fiscal 2000, in accordance with the pronouncements, and is currently evaluating the impact, if any, that SFAS No. 133 will have on its consolidated financial statements. STATEMENT OF POSITIONS - During 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that costs incurred during a start-up activity be expensed as incurred and that the initial application of the SOP, as of the beginning of the fiscal year in which the SOP is adopted, be reported as a cumulative effect of a change in accounting principle. The Company expects to adopt SOP 98-5 in fiscal 2000. The cumulative effect of adoption is not expected to be material. P. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year's presentation. NOTE 3 - BASIS OF PRESENTATION AND ACQUISITION OF RYKOFF-SEXTON, INC. On December 23, 1997, Rykoff-Sexton, the nation's third-largest broadline foodservice distributor based on net sales, was merged into a wholly owned subsidiary of JP Foodservice. In connection with the merger, JP Foodservice issued 22,657,498 shares of common stock with an approximate value of $782 million. Each outstanding share of common stock of Rykoff-Sexton was exchanged for .775 of a share of JP Foodservice common stock (the "Exchange Ratio"). The transaction has been accounted for under the pooling-of-interests method of accounting. (Continued) F-15 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 3 - CONTINUED Accordingly, the consolidated financial statements for the years ended June 29, 1996 and June 28, 1997 have been restated to include consolidated financial information for Rykoff-Sexton. Both the Company and Rykoff-Sexton have fiscal years which end on the Saturday closest to June 30. Prior to April 28, 1996, Rykoff-Sexton had a fiscal year that ended on the Saturday closest to April 30. The consolidated balance sheet as of June 28, 1997, combines the consolidated balance sheets of JP Foodservice and Rykoff-Sexton as of that date. The consolidated statements of operations for the years ended June 28, 1997 ("fiscal 1997") and June 29, 1996 ("fiscal 1996") combine the results of JP Foodservice for such periods with the results of Rykoff-Sexton for the fiscal years ended June 28, 1997 and April 27, 1996, respectively. Retained earnings activity of Rykoff-Sexton for the period April 28, 1996 to June 29, 1996 (the "transition period"), has been reflected as adjustments to retained earnings as of June 29, 1996, in the consolidated statement of stockholders' equity. Rykoff-Sexton's net sales, loss from operations and net loss for the period from April 28, 1996 to June 29, 1996, were $519,903, ($79,532) and ($60,180), respectively. In connection with the acquisition, the Company incurred restructuring costs, asset impairment charges, transaction costs and certain other operating charges resulting from the integration of the two businesses during the year ended June 27, 1998 ("fiscal 1998"). These charges, which approximate $138 million or $2.20 per share after income tax benefit, are further described as follows: RESTRUCTURING COSTS - The Company recognized restructuring charges of $56.7 million, of which $13.1 million were non-cash charges. These restructuring costs consist primarily of $26.8 million for change in control payments made to former executives of Rykoff-Sexton and $12.7 million for severance and benefits, $10.3 million for future lease commitments and $6.9 for idle facility and facility closure costs related to the Company's plan to consolidate and realign certain operating units and consolidate various overhead functions. Severance and benefits were based on severance and other agreements with employees and included an estimate of health and other benefits. Lease commitments were based on amounts due under terminated lease agreements or facilities to be vacated for which the Company is obligated to pay. Idle facility and facility closure costs relate primarily to closing of duplicate facilities, including estimated expenses associated with cleaning and maintaining closed facilities until they are sold or subleased. As of June 27, 1998, $7.3 million of severance and benefits, $10.4 million of lease commitment and $5.2 million of idle facility and facility closure costs have yet to be expended. Of such amounts, $12 million are estimated to be paid in fiscal 1999, with the balance being paid over the following four fiscal years. ASSET IMPAIRMENT CHARGE - The Company recognized a non-cash asset impairment charge of $35.5 million related to the Company's plan to consolidate and realign certain operating units and install new management information systems at each of the Company's operating units. These charges consist of writedowns to net realizable value of assets of operating units that are being consolidated or realigned. (Continued) F-16 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 3 - CONTINUED OTHER OPERATING CHARGES - The Company charged $8.6 million to cost of goods sold and $19.4 million to operating expenses for writedowns of inventory, receivables and other current assets resulting from operating unit consolidation and realignment during fiscal 1998. NONRECURRING CHARGES- The Company recorded nonrecurring charges of approximately $17.8 million for merger costs and expenses (consisting primarily of legal and other professional fees) required to complete the transaction. Net sales and net income previously reported by JP Foodservice and Rykoff-Sexton and the combined amounts presented in the accompanying consolidated financial statements are summarized as follows:
Fiscal Years Ended ---------------------------------------- June 29, 1996 June 28, 1997 - ----------------------------------------------------------------------------------------------------------------------- Net sales: JP Foodservice $ 1,449,303 $ 1,691,913 Rykoff-Sexton 1,789,478 3,477,493 - ----------------------------------------------------------------------------------------------------------------------- Combined $ 3,238,781 $ 5,169,406 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss): JP Foodservice $ 16,913 $ 22,248 Rykoff-Sexton (16,780) 16,038 - ----------------------------------------------------------------------------------------------------------------------- Combined $ 133 $ 38,286 - -----------------------------------------------------------------------------------------------------------------------
NOTE 4 - OTHER ACQUISITIONS ACQUISITIONS ACCOUNTED FOR AS POOLINGS OF INTERESTS MERGER WITH VALLEY - On August 30, 1996, JP Foodservice completed a merger with Valley Industries, Inc. (together with its affiliates, "Valley"), a broadline distributor located in Las Vegas, Nevada. Under the terms of the merger, JP Foodservice exchanged 1,936,494 shares of common stock for all of Valley's common shares and ownership interests. MERGER WITH SQUERI - On September 30, 1996, JP Foodservice completed a merger with Squeri Food Service, Inc. (together with its affiliates, "Squeri"), a broadline distributor located in Cincinnati, Ohio. Under the terms of the merger, JP Foodservice exchanged 1,079,875 shares of common stock for all of Squeri's common shares and ownership interests. The fiscal years of Valley and Squeri have been conformed with the Company's fiscal year as of June 29, 1996. Accordingly, retained earnings activity for the period February 1, 1996 to June 29, 1996, for Valley and the period January 1, 1996 to June 29, 1996, for Squeri has been reflected as adjustments to retained earnings as of June 29, 1996. Combined net sales, loss from operations and (Continued) F-17 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 4 - CONTINUED net loss for the periods February 1, 1996 to June 29, 1996, for Valley and January 1, 1996 to June 29, 1996, for Squeri were $99,660, $2,028 and $1,848, respectively. The net sales and net income of Valley and Squeri, on a combined basis, included in the consolidated financial results of the Company for the year ended June 29, 1996 were $206,627 and $2,856, respectively. In connection with the mergers of Valley and Squeri, the Company recorded nonrecurring charges of approximately $5.4 million for merger costs and expenses (consisting primarily of legal and professional fees) required to complete the transactions. ACQUISITIONS ACCOUNTED FOR AS PURCHASES WESTLUND ACQUISITION - On March 20, 1998, the Company completed the acquisition of Westlund Provisions, Inc. ("Westlund"), a foodservice distributor specializing in custom-cut meats located in Minneapolis, Minnesota. Under the terms of the acquisition, the Company acquired all of the outstanding common stock and assumed certain liabilities of Westlund in exchange for 229,070 shares of the Company's common stock. The excess of the purchase price over the fair value of the net assets acquired of approximately $8.5 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of Westlund for the period March 21, 1998 to June 27, 1998 have been included in the Company's fiscal 1998 consolidated statement of operations. SORRENTO ACQUISITION - On January 23, 1998, the Company completed the acquisition of Sorrento Food Service, Inc. ("Sorrento"), a broadline foodservice distributor located in Buffalo, New York. Under the terms of the acquisition, the Company acquired all of the outstanding common stock and assumed or discharged certain liabilities of Sorrento and paid cash consideration of approximately $39 million. The excess of the purchase price over the fair value of the net assets acquired of approximately $18.2 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of Sorrento for the period January 24, 1998 to June 27, 1998 have been included in the Company's fiscal 1998 consolidated statement of operations. OUTWEST ACQUISITION - On October 30, 1997, the Company completed the acquisition of Outwest Meat Company ("Outwest"), a foodservice distributor specializing in meats, located in Las Vegas, Nevada. Under the terms of the acquisition, the Company acquired all of the common stock of Outwest in exchange for 372,917 shares of the Company's common stock. The excess of the purchase price over the fair value of the net assets acquired of approximately $7.1 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of Outwest for the period November 1, 1997 to June 27, 1998 have been included in the Company's fiscal 1998 consolidated statement of operations. (Continued) F-18 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 4 - CONTINUED PRO FORMA INFORMATION - Unaudited pro forma information for fiscal 1997 and fiscal 1998, as if the Westlund, Sorrento and Outwest acquisitions had occurred on the first day of the fiscal year, is shown below, in thousands, except for share data.
FISCAL YEARS ENDED ------------------------------- JUNE 28, 1997 JUNE 27, 1998 ------------------------------- Net sales $ 5,388,722 $ 5,631,176 Income from operations $ 150,127 $ 65,163 Income (loss) before extraordinary item $ 39,454 $ (36,918) Net income (loss) $ 39,454 $ (46,630) Income (loss) per common share before extraordinary item: Basic $ 0.90 $ (0.81) Diluted $ 0.88 $ (0.81) Net income (loss) per common share: Basic $ 0.90 $ (1.02) Diluted $ 0.88 $ (1.02) ================================================================================
MAZO-LERCH ACQUISITION - On June 19, 1997, JP Foodservice completed the acquisition of Mazo-Lerch Company, Inc. ("Mazo-Lerch"), a broadline foodservice distributor located in Alexandria, Virginia. Under the terms of the acquisition, JP Foodservice acquired all of the outstanding common stock of Mazo-Lerch in exchange for 279,268 shares of JP Foodservice common stock. The excess of the purchase price over the fair value of net tangible assets acquired of approximately $1.3 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of Mazo-Lerch for the period June 20, 1997 to June 28, 1997, are included in the fiscal 1997 consolidated statement of operations. ARROW ACQUISITION - On August 31, 1996, JP Foodservice completed the acquisition of Arrow Paper and Supply Co., Inc. (together with its affiliate, "Arrow"), a broadline foodservice distributor located in Norwich, Connecticut. Under the terms of the acquisition, JP Foodservice purchased certain assets, assumed or discharged certain liabilities and paid consideration of $28.9 million. Approximately $1.7 million of the consideration was paid with 73,977 shares of JP Foodservice common stock and the remainder was paid in cash. The excess of the purchase price over the fair value of net tangible assets acquired of approximately $28.2 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of Arrow for the period September 1, 1996 to June 28, 1997, are included in the fiscal 1997 consolidated statement of operations. US FOODSERVICE ACQUISITION - On May 17, 1996, Rykoff-Sexton merged with US Foodservice Inc. ("USF"), a privately held broadline foodservice distribution company. As part of the merger, USF stockholders received 1.457 shares of Rykoff-Sexton common stock for each share of outstanding Class A and Class B common stock of USF. Options and warrants to acquire approximately one million shares of USF were converted into options and warrants to acquire Rykoff-Sexton common stock on the same basis. The aggregate purchase price was approximately $217 million, which included the costs of acquisition. Liabilities assumed in the acquisition (Continued) F-19 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 4 - CONTINUED approximated $477.2 million. In addition, all outstanding shares of the USF cumulative redeemable exchangeable preferred stock were purchased for $26.6 million. The excess of the purchase price over fair value of net tangible assets acquired of approximately $409 million was allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of USF for the period May 17, 1996 to June 29, 1996, are included in the adjustment to retained earnings for the period April 28, 1996 to June 29, 1996 related to Rykoff-Sexton. The Company's consolidated statements of operations include results for USF for periods after June 29, 1996. H&O FOODS ACQUISITION - On November 1, 1995, Rykoff-Sexton acquired substantially all of the assets of H&O Foods, Inc. ("H&O"), a regional, institutional distributor located in Nevada. The aggregate purchase price was approximately $29.6 million, which included the costs of acquisition. The excess of the purchase price over the fair value of the net assets acquired of approximately $18.4 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results for H&O for the period November 2, 1995 to April 29, 1996 are included in the fiscal 1996 consolidated statement of operations. NOTE 5 - RECEIVABLES Receivables are composed of the following:
June 28, June 27, 1997 1998 - -------------------------------------------------------------------------------- Customer accounts and notes $ 68,826 $ 93,742 Residual interest in customer accounts sold 121,398 135,494 Less allowance for doubtful accounts (16,792) (16,982) - -------------------------------------------------------------------------------- Net customer 173,432 212,254 Other, net, principally from suppliers 88,285 109,786 - -------------------------------------------------------------------------------- $ 261,717 $ 322,040 - --------------------------------------------------------------------------------
The Company sells customer accounts receivable under two securitization arrangements aggregating $250 million (see Note 8). (Continued) F-20 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 6 - PROPERTY AND EQUIPMENT The components of property and equipment are as follows:
June 28, June 27, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------ Land, buildings and improvements $ 338,750 $ 368,850 Machinery and equipment 285,675 273,769 Assets held under capital leases (Note 9) 50,113 52,740 - ------------------------------------------------------------------------------------------------------------------------------ 674,538 695,359 Accumulated depreciation (236,802) (258,094) - ------------------------------------------------------------------------------------------------------------------------------ $ 437,736 $ 437,265 - ------------------------------------------------------------------------------------------------------------------------------
The Company capitalizes interest costs as part of major asset construction projects. Capitalized interest was $1,077, $1,071 and $3,081 in fiscal 1996, 1997 and 1998, respectively. The Company has facilities available for sale, largely attributable to the restructurings discussed in Notes 3 and 14, with a carrying value of approximately $24.6 million at June 27, 1998. NOTE 7 - LONG-TERM DEBT Long-term debt is composed of the following:
June 28, June 27, 1997 1998 - -------------------------------------------------------------------------------------------------------------------------------- Revolving lines of credit $ 63,700 $ 502,200 Term loans 330,125 -- Industrial development revenue bonds 25,900 25,900 8.875% Senior subordinated notes 129,287 120,163 8.55% Senior notes payable 85,000 -- Other 10,268 3,020 - -------------------------------------------------------------------------------------------------------------------------------- Total long-term debt 644,280 651,283 Less current maturities of long-term debt 22,492 604 - -------------------------------------------------------------------------------------------------------------------------------- $ 621,788 $ 650,679 - --------------------------------------------------------------------------------------------------------------------------------
REVOLVING LINE OF CREDIT - In connection with the acquisition of Rykoff-Sexton, the Company entered into a bank credit facility which provides for a $550 million five-year revolving credit facility and a $200 million revolving/term facility (the "Credit Facility") which is renewable annually. Borrowings outstanding under the Credit Facility bear interest at the Company's option at a rate equal to the sum of (a) the London Interbank Offered Rate (LIBOR), a specified prime rate plus .5%, or the federal funds rate plus .5% and (b) an applicable margin. The applicable margin will vary from (Continued) F-21 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 7 - CONTINUED .175% to .55%, based on a formula tied to the Company's leverage from time to time. At June 27, 1998, borrowing rates were based on LIBOR plus an applicable margin of .45% and averaged 6.17%. Annual facility fees are based on the same formula and will vary from .055% to .2%. The revolving credit facility includes a $75 million facility for standby and commercial letters of credit and a $50 million swing-line facility for same day borrowings. At June 27, 1998, borrowings of $502,200 were outstanding and the Company had available borrowings of $211,800 under the Credit Facility. The Credit Facility includes a number of covenants which require the maintenance of certain financial ratios and restrict the Company's ability to pay dividends and to incur additional indebtedness. At June 28, 1997, JP Foodservice had a $175 million unsecured revolving line of credit agreement. The agreement required quarterly interest payments on outstanding borrowings at the prime rate or, at the Company's option, LIBOR plus .275% per annum. At June 28, 1997, Rykoff-Sexton had a credit facility which consisted of a $150 million revolving line of credit and three term loans. Borrowings under the Rykoff-Sexton line of credit required monthly or quarterly interest payments based on LIBOR plus 2.5%. The Rykoff-Sexton term loans required interest at LIBOR plus margins ranging from 2.5% to 3.25%. The JP Foodservice line of credit and the Rykoff-Sexton line of credit and term loans were replaced by the Credit Facility. SENIOR SUBORDINATED NOTES - In 1993, Rykoff-Sexton issued $130 million principal amount of 8 7/8% Senior Subordinated Notes due November 1, 2003 (the "8 7/8% Notes"), with interest payable semi-annually commencing May 1, 1994. The 8 7/8% Notes were sold at a discount for an aggregate price of $128.9 million. Provisions of the 8 7/8% Notes include, without limitation, restrictions on liens, indebtedness, asset sales, and dividends and other restricted payments. The 8 7/8% Notes are redeemable at the option of the Company, in whole or in part, at 104.44% of their principal amount beginning November 1998, and thereafter at prices declining annually to 100% on and after November 2001. The Company retired $9.2 million of the 8 7/8% Notes in fiscal 1998. INDUSTRIAL DEVELOPMENT REVENUE BONDS - These bonds are secured by a letter of credit issued on behalf of Rykoff-Sexton which is secured by a real estate lien against a distribution facility. The bonds will mature on December 1, 2026, and from time to time bear and pay interest under daily, weekly, commercial paper or long-term interest rate indices at the election of the Company. The interest rate on the bonds approximates LIBOR plus .625% (6.33% at June 27, 1998). EXTRAORDINARY ITEM - In connection with the refinancing of the JP Foodservice and the Rykoff-Sexton indebtedness described above, the Company recorded an extraordinary charge of $9.7 million (net of $6.3 million income tax benefit). The charge related to the write-off of deferred financing costs with respect to the extinguished debt and additional payments to holders of the Company's senior notes payable, which were retired in full. (Continued) F-22 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 7 - CONTINUED DERIVATIVE FINANCIAL INSTRUMENTS - The Company enters into interest rate swaps, caps and collars to manage its exposure to interest rates on floating rate long- term debt. As of June 27, 1998, the Company has effectively capped its interest rate exposure at 7.85% on approximately $400 million of its floating rate debt for the next twelve months. The Company has entered into a swaption agreement for a notional amount of $129 million which can be exercised by the holder commencing in November 1998. The Company received $5.6 million upon execution of the swaption agreement and will receive an additional amount ranging from $1.9 million to $5.7 million when, and if, the swaption is exercised by the holder. The amounts received from the holder will be amortized over the life of the swap arrangement. If the Company had terminated each of the contracts on June 27, 1998, it would have had a loss of approximately $1.8 million. Interest expense and other financing costs were $32,527, $76,063 and $73,894 in fiscal 1996, 1997 and 1998, respectively. Interest expense included amortization of deferred financing cost of $735, $2,680 and $1,945, respectively. Other financing costs of $235, $15,978 and $14,190 in fiscal 1996, 1997 and 1998, respectively, represent costs associated with the Company's trade accounts receivable securitization arrangements (see Note 8). The Company's aggregate annual principal payments applicable to long-term debt are as follows:
Fiscal Years Ended - -------------------------------------------------------------------------------- 1999 $ 604 2000 271 2001 284 2002 288 2003 502,442 Thereafter 147,394 - -------------------------------------------------------------------------------- $ 651,283 - --------------------------------------------------------------------------------
Based on the borrowing rates currently available to the Company for indebtedness with similar terms and average maturities, the fair value of the Company's long- term debt is estimated to be $656,000. NOTE 8 - TRADE ACCOUNTS RECEIVABLE SECURITIZATION ARRANGEMENTS The Company maintains revolving securitization arrangements for accounts receivable of $200 million and $50 million. Under the arrangements, receivables are sold by the Company to wholly owned, bankruptcy remote subsidiaries, which in turn sell interests in the receivables to third-party investors. In order to maintain the designated receivable balances, the Company is required to sell interests in new receivables as existing receivables are collected. Under the $200 million agreement, (Continued) F-23 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 8 - CONTINUED all customer receivables of participating subsidiaries of the Company are sold to a master trust and the Company acquires a participation interest in the master trust equal to the amount in excess of the $200 million third-party interest. Under the $50 million agreement, the Company sells an undivided percentage ownership interest in a designated pool of accounts receivable to an independent issuer of receivable-backed paper. Under both arrangements, the Company effectively retains credit risk and is responsible for collection and administration activities. The Company's interest in the master trust and its retained interest in the undivided pool of receivables have been included in receivables in the accompanying consolidated balance sheets. NOTE 9 - LEASES The Company leases its corporate office facilities and certain distribution facilities and equipment under operating leases. The Company leases certain of its delivery fleet under capital leases. Charges to operations for all operating leases were $35,282, $50,656 and $50,504 in fiscal 1996, 1997 and 1998, respectively. Set forth below are the future minimum lease payments under operating leases and capital leases with noncancelable terms beyond one year.
Operating Capital Fiscal Years Ended leases leases - -------------------------------------------------------------------------------- 1999 $ 42,486 $ 9,775 2000 37,431 8,388 2001 29,606 7,724 2002 25,389 4,794 2003 16,908 5,369 Thereafter 42,127 36,020 - -------------------------------------------------------------------------------- Total minimum lease payments 193,947 72,070 Less interest portion 35,191 - -------------------------------------------------------------------------------- Obligations under capital leases 36,879 Less current obligations 6,933 - -------------------------------------------------------------------------------- $ 29,946 - --------------------------------------------------------------------------------
During fiscal years 1996, 1997 and 1998, the Company's additions to property and equipment of $4,536, $5,957 and $2,979, respectively, were financed through capital lease obligations. (Continued) F-24 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 10 - INCOME TAXES The components of income taxes with respect to income (loss) before extraordinary charge are as follows:
Fiscal Years Ended ----------------------------------- June 29, June 28, June 27, 1996 1997 1998 - -------------------------------------------------------------------------------- Current tax expense (benefit): Federal $ 4,426 $ 14,224 $ (1,857) State and local 1,589 3,003 (1,047) - -------------------------------------------------------------------------------- Total current 6,015 17,227 (2,904) - -------------------------------------------------------------------------------- Deferred tax expense (benefit): Federal (4,896) 10,354 7,216 State and local (560) (1,506) 2,163 - -------------------------------------------------------------------------------- Total deferred (5,456) 8,848 9,379 - -------------------------------------------------------------------------------- $ 559 $ 26,075 $ 6,475 ================================================================================
In addition, in fiscal 1998, the Company recognized current federal and state income tax benefits of $5,230 and $1,095, respectively, with respect to the loss on early extinguishment of debt of $16,037. Temporary differences and the resulting deferred income tax assets and liabilities are as follows:
June 28, June 27, 1997 1998 - -------------------------------------------------------------------------------- Deferred tax assets: Loss carryforwards $ 25,474 $ 24,906 Restructuring reserves and asset impairment 22,383 45,821 Allowance for doubtful accounts 6,565 674 Capital leases 4,331 5,196 Accrued expenses 19,476 13,751 Other, net 10,513 1,528 Valuation allowance (1,398) (648) - -------------------------------------------------------------------------------- Deferred tax assets 87,344 91,228 - -------------------------------------------------------------------------------- Deferred tax liabilities: Property and equipment (30,687) (34,075) Intangible assets (4,165) (5,823) Other, net (9,883) (18,100) - -------------------------------------------------------------------------------- Deferred tax liabilities (44,735) (57,998) - -------------------------------------------------------------------------------- Net deferred tax assets $ 42,609 $ 33,230 - --------------------------------------------------------------------------------
(Continued) F-25 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 10 - CONTINUED Management believes it is more likely than not that the deferred tax assets, net of valuation allowances, at June 27, 1998, including federal and state net operating loss carryforwards, will be realizable through the combination of future taxable income, alternative tax planning strategies and the reversal of existing taxable temporary differences. A reconciliation of the statutory Federal income tax rate to the income tax rate on income (loss) before income taxes and extraordinary charge, is as follows:
Fiscal Years Ended - -------------------------------------------------------------------------------------------------------------------------- June 29, 1996 June 28, 1997 June 27, 1998 - -------------------------------------------------------------------------------------------------------------------------- Computed statutory expense (benefit) $ 242 35.0% $ 22,526 35.0% $ (10,786) (35.0)% State and local income tax, net of federal tax benefit (1,140) (164.7) 973 1.5 725 2.4 Permanent differences 3,084 445.7 4,853 7.5 17,448 56.6 Reversal of valuation allowance 916 132.4 (2,800) (4.4) (750) (2.4) Gas tax credit and other (2,543) (367.5) 523 0.8 (162) (0.6) - --------------------------------------------------------------------------------------------------------------------------- $ 559 80.9% $ 26,075 40.4% $ 6,475 21.0% - ---------------------------------------------------------------------------------------------------------------------------
Federal net operating loss carryforwards as of June 27, 1998 approximate $56,154 and expire in various amounts through 2011. Included in such amounts are net operating losses incurred prior to the USF acquisition. The use of these net operating losses is subject to certain limitations imposed by the Internal Revenue Code. The Company does not anticipate these limitations will affect utilization of the carryforwards prior to their expiration date. All tax years of the Company, since fiscal 1994, are open for examination. The Internal Revenue Service and certain state authorities have examinations in progress. NOTE 11 - STOCKHOLDERS' EQUITY ISSUANCE OF COMMON STOCK - In August and September 1996, the Company sold 3,075,000 shares of common stock in a public offering for $65.9 million, net. The net proceeds of the offering were used to fund the cash portion of the Arrow purchase price and to repay indebtedness assumed or discharged by the Company in connection with its acquisitions of Valley and Arrow, as discussed in Note 4. RELATED PARTY TRANSACTIONS - In December 1996, Sara Lee Corporation sold its ownership interest of approximately 27% of the Company's outstanding common stock in a public offering. As a result, the Company has reclassified $44,943 of distributions in excess of net book value of continuing stockholder's interest as a reduction to additional paid-in-capital. EMPLOYEE STOCK PURCHASE PLAN - The Company sponsors an employee stock purchase plan, pursuant to which all full-time employees of the Company and its subsidiaries who have been employed by the Company for 90 days or more are eligible to purchase shares of common stock from (Continued) F-26 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 11 - CONTINUED the Company. An aggregate of 1,500,000 shares of common stock may be issued and purchased under the plan. Eligible employees may purchase shares of common stock at a price equal to 85% of the market price per share on each quarterly investment date. Purchases under this plan totaled 33,940 shares, 38,902 shares and 32,830 shares during fiscal 1996, 1997 and 1998, respectively. WARRANTS - At June 27, 1998, the Company had warrants outstanding to purchase 231,066 shares of common stock at $13.11 per share. The warrants expire on September 30, 2005. Subsequent to June 27, 1998, a warrant to purchase 159,968 shares of common stock was exercised. SHAREHOLDER RIGHTS PLAN - The Company has a shareholder rights plan under which the issuance of rights, subject to specified exceptions, would be triggered by the acquisition (or certain actions that would result in the acquisition) of 10% or more of the Company's common stock by any person or group (or 15% or more by any person eligible to report its ownership of the Company's common stock on Schedule 13G under the Securities Exchange Act of 1934). Pursuant to this plan, each share of common stock has attached one preferred share purchase right (a "Right") which entitles the registered holder of common stock to purchase from the Company, upon the occurrence of the specified triggering events, one-hundredth of a share of a newly authorized issue of junior participating preferred stock at a price of $95, subject to adjustment. The Company may redeem the Rights at a price of $.01 per Right prior to a triggering event. The Rights expire on February 19, 2006. NOTE 12 - STOCK OPTION PLANS The Company sponsors an employee stock incentive plan and an outside director stock option plan. The employee plan authorizes the grant, at the discretion of the Company's Board of Directors, of incentive stock options, non-qualified stock options, restricted stock awards, stock appreciation rights, or any combination thereof, at the fair market value on the date of grant. Options granted under the employee plan generally have a life of ten years and vest over a three-year period. The outside director plan provides for an initial award of 5,000 options and an annual award of 2,000 options, at fair market value, for a ten-year period with one-fourth vesting upon grant and the balance vesting equally over three years. Stockholders of the Company have authorized for issuance pursuant to the employee plan and the outside director plan 2,600,000 and 200,000 shares of common stock, respectively. Rykoff-Sexton sponsored several stock option plans for employees and directors. In connection with the acquisition, options to purchase shares of Rykoff-Sexton were exchanged for options to purchase the Company's common stock on the same terms and conditions after adjusting the option amounts and exercise prices for the Exchange Ratio. Virtually all of the options were immediately exercisable as the result of the change of control provisions contained in each of the option agreements. F-27 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 12 - CONTINUED The aggregate number of shares reserved for the issuance of common stock under all plans was 3,297,001 at June 27, 1998. Upon a change of control of the Company, as defined in the plans, all outstanding and previously unvested options will become immediately exercisable. A summary of changes in outstanding stock options follows:
Weighted average Stock exercise price options per share - ---------------------------------------------------------------------------------------------------------------- Balance July 1, 1995 1,250,193 $ 17.73 Options granted 1,428,198 15.24 Options cancelled (148,774) 17.55 Options exercised (123,678) 5.71 - ---------------------------------------------------------------------------------------------------------------- Balance June 29, 1996 2,405,939 16.62 Options granted 681,545 21.79 Options cancelled (73,695) 16.10 Options exercised (249,848) 12.86 - ---------------------------------------------------------------------------------------------------------------- Balance June 28, 1997 2,763,941 18.19 Options granted 693,714 32.46 Options cancelled (231,251) 27.38 Options exercised (1,331,329) 19.11 - ---------------------------------------------------------------------------------------------------------------- Balance June 27, 1998 1,895,075 $ 22.49 - ----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at June 27, 1998:
Number Weighted average Weighted Number Weighted Range of outstanding remaining average exercisable average exercise prices June 27, 1998 contractual life exercise price June 27, 1998 exercise price - ------------------------------------------------------------------------------------------------------------------------ $ 0.13-$ 4.48 10,749 4.54 $ 0.73 10,749 $ 0.73 $11.00-$15.75 457,726 6.00 $ 12.77 410,781 $ 12.59 $16.65-$24.84 812,687 7.68 $ 20.87 434,981 $ 19.91 $27.56-$35.19 613,913 8.68 $ 32.26 21,133 $ 29.96 ---------------- -------------- 1,895,075 7.58 $ 22.49 877,644 $ 16.49 ---------------- --------------
(Continued) F-28 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 12 - CONTINUED The Company applies the intrinsic value method when accounting for stock-based employee compensation grants. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined under the fair value method of SFAS No. 123, the Company's net income (loss) and net income (loss) per common share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
Fiscal Years Ended ------------------------------------------ June 29, 1996 June 28, 1997 June 27,1998 - -------------------------------------------------------------------------------- Net income (loss): As reported $ 133 $ 38,286 $ (47,004) Pro forma (145) 36,479 (51,609) - -------------------------------------------------------------------------------- Basic earnings (loss) per share: As reported $ 0.00 $ 0.88 $ (1.04) Pro forma 0.00 0.83 (1.14) - -------------------------------------------------------------------------------- Diluted earnings (loss) per share: As reported $ 0.00 $ 0.87 $ (1.04) Pro forma 0.00 0.83 (1.14) - --------------------------------------------------------------------------------
The fair value of each option is estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted average assumptions used for grants in fiscal 1996, 1997 and 1998: dividend yield of 0%; expected volatility of 41.45%, 45.44% and 41.02% for fiscal 1996, 1997 and 1998, respectively; risk-free interest rate of 6.18%, 6.36% and 6.10% for fiscal 1996, 1997 and 1998, respectively; and expected lives of five years. The weighted average fair value of options granted during fiscal 1996, 1997 and 1998 was $6.48, $11.21 and $13.87, respectively. Pro forma net income (loss) reflects only options granted in fiscal 1996, 1997 and 1998, as compensation cost for options granted prior to July 2, 1995 is not considered. Compensation cost is reflected over the options' vesting periods of three to four years. NOTE 13 - EMPLOYEE RETIREMENT PLANS DEFINED CONTRIBUTION PLANS - The Company and certain of its subsidiaries sponsor several defined contribution profit sharing plans for which all full-time non- union employees are generally eligible. Terms of the plans provide for employee and Company contributions, which may be made in cash or common stock of the Company. Charges to operations for employer contributions to the plans were $1,775, $3,911 and $4,521 in fiscal 1996, 1997 and 1998, respectively. Of such amounts, the Company made contributions in common stock of $1,612, $1,555 and $1,961, respectively. (Continued) F-29 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 13 - CONTINUED MULTI-EMPLOYER PLANS - The majority of the Company's union employees are covered by union-administered pension plans. Since these plans are part of multi- employer pension arrangements, it is not practicable to determine the amount of accumulated plan benefits or plan net assets applicable solely to the Company's employees. With the passage of the Multi-Employer Pension Plan Amendments Act of 1980 (the "Act"), the Company may, under certain circumstances, become subject to liabilities in excess of contributions made under collective bargaining agreements. Generally, these liabilities are contingent upon the termination, withdrawal, or partial withdrawal from these plans. Charges to operations for all employer defined benefit pension contributions required by union agreements aggregated $8,459, $8,546 and $9,210 in fiscal 1996, 1997 and 1998, respectively. DEFINED BENEFIT PLANS - The Company maintains six non-contributory pension plans for its salaried, commissioned and certain of its hourly employees. Under the plans, the Company is required to make annual contributions that are determined by the plans' consulting actuary, using participant data that is supplied by the Company. It is the Company's policy to fund pension costs currently. Pension benefits are based on length of service and either a percentage of final average annual compensation or a dollar amount for each year of service. Benefits under three of the plans are frozen at June 27, 1998. Projected benefit obligations of plans for which benefits were not frozen at June 27, 1998 were $4,956. During fiscal 1998, the Company recognized a curtailment gain of $7.4 million reflecting the freezing of benefits from one of those defined benefit plans. Net pension expense for defined benefit pension plans for fiscal 1996, 1997 and 1998 are included in the following components:
Fiscal Years Ended ------------------------------------------------------- June 29, June 28, June 27, 1996 1997 1998 - ---------------------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 3,700 $ 5,045 $ 3,061 Interest cost on projected benefit obligation 4,473 6,055 5,911 Actual return on plan asset (5,452) (14,255) (8,556) Effect of curtailment - - (7,390) Net amortization and deferral (105) 7,555 (537) - --------------------------------------------------------------------------------- ------------------- ------------------ Net pension expense (income) $ 2,616 $ 4,400 $ (7,511) - -----------------------------------------------------------------------------------------------------------------------------
F-30 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 13 - CONTINUED The following table reconciles the pension plans' funded status to accrued expense as of June 28, 1997 and June 27, 1998:
Fiscal Years Ended ------------------------------------- June 28, June 27, 1997 1998 - ------------------------------------------------------------------------------------------------------------------------- Market value of plan assets in equities and bonds $ 88,784 $ 95,187 - ------------------------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated benefits: Vested 69,007 86,751 Non-vested 4,279 583 Additional benefits based on estimated future salary levels 7,248 40 - ------------------------------------------------------------------------------------------------------------------------- Projected benefit obligations 80,534 87,374 - ------------------------------------------------------------------------------------------------------------------------- Plan assets more than projected benefit obligations 8,250 7,813 Unrecognized net obligation to be amortized over 10 years 2,778 221 Unrecognized net gain (22,365) (8,446) - ------------------------------------------------------------------------------------------------------------------------- Accrued pension expense $ (11,337) $ (412) - -------------------------------------------------------------------------------------------------------------------------
The weighted average discount rates were 7.75% and 6.75% and the expected long- term rates of return on plan assets were 9.5% and 9% at June 28, 1997 and June 27, 1998, respectively. As of June 27, 1998, plans are either frozen or have benefits that accrue based on fixed amounts for each year of service. OTHER POSTRETIREMENT BENEFIT PLANS - The Company has several nonpension postretirement benefit plans, certain of which are contributory. The present value of future benefits to be paid to current employees and eligible retirees amounted to approximately $2.3 million at June 27, 1998 and is included in other noncurrent liabilities in the accompanying consolidated balance sheet. NOTE 14 - OTHER RESTRUCTURINGS In connection with the USF acquisition described in Note 4, Rykoff-Sexton recorded a restructuring charge of $57.6 million ($35.7 million after tax) in the nine-week fiscal period ended June 29, 1996 (see Note 3). The restructuring charge consisted of severance and employee benefits of $10.7 million, lease related costs of $20.2 million and other closure and integration costs of $26.7 million. During the nine week fiscal year transition period and fiscal 1997, Rykoff-Sexton charged costs of $28.1 million (consisting of severance and employee benefits of $4.5 million, lease related costs of $2.7 million and other closure and integration costs of $20.9 million against the restructuring reserve and reversed $4.0 million into income, as management determined that such liability was no longer required. During fiscal 1998, the Company paid $6.0 million for severance and lease commitments and reversed $3.0 million of unutilized reserves against restructuring costs. As of June 27, 1998, reserves for $1.0 million of severance and benefits, $12.5 million of lease commitments and $3.0 million of other exit costs have yet to be expended. F-31 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except where noted) - -------------------------------------------------------------------------------- NOTE 14 - CONTINUED In fiscal 1996, Rykoff-Sexton recorded a pre-tax charge of $29.7 million which was principally reflected as a reduction in the net carrying value of land, buildings and improvements. In October 1995, Rykoff-Sexton concluded a restructuring plan initiated in 1993 and credited the remaining unutilized restructuring reserve of $6.4 million into income. NOTE 15 - OTHER COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS - The Company is involved, from time to time, in litigation and proceedings arising out of the ordinary course of business. There are no pending material legal proceedings or environmental investigations to which the Company is a party or to which the property of the Company is subject. LETTERS OF CREDIT - The Company utilizes standby letters of credit principally for worker's compensation self-insurance security deposit requirements. These letters of credit are irrevocable and have one-year renewable terms. Outstanding standby and commercial letters of credit as of June 27, 1998 were approximately $36 million. NOTE 16 - SUBSEQUENT EVENT (UNAUDITED) On August 28, 1998, the Company completed the outsourcing of the Rykoff-Sexton Manufacturing Division through the sale of its assets to a third party and entered into a six-year supply agreement to purchase products from the new company. Gross proceeds from the supply agreement and asset sale totaled $101 million. F-32 SCHEDULE I Page 1 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF REGISTRANT The following are the condensed balance sheets, statements of operations and cash flows for U.S. Foodservice with its subsidiaries at equity:
JUNE 28, JUNE 27, Condensed Balance Sheets 1997 1998 - --------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Assets - ------ Cash and cash equivalents $ 126 $ 125 Other current assets 125 1 Intra-company receivables 82,384 135,072 Investments in subsidiaries 496,511 449,522 -------- -------- Total assets $579,146 $584,720 ======== ======== Stockholders' Equity - -------------------- Common stock $ 443 $ 465 Additional paid-in-capital 526,979 579,535 Retained earnings 51,724 4,720 -------- -------- Total stockholders' equity $579,146 $584,720 ======== ========
F-33 SCHEDULE I Page 2 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FISCAL YEARS ENDED ------------------------------------------------------------- JUNE 29, JUNE 28, JUNE 27, Condensed Statements of Operations 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Operating expenses $ (6) $ (29) $ (15) Net income (loss) of unconsolidated subsidiaries 139 38,315 (46,989) ----- ------- -------- Net income (loss) $ 133 $38,286 $(47,004) ===== ======= ========
F-34 SCHEDULE I Page 3 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FISCAL YEARS ENDED ------------------------------------ JUNE 29, JUNE 28, JUNE 27, Condensed Statements of the Cash Flows 1996 1997 1998 - ----------------------------------------------------------------------------------------------------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss) $ 133 $ 38,286 $(47,004) Adjustments to reconcile net income (loss) to net cash used in operating activities Net (income) loss of unconsolidated subsidiaries (139) (38,315) 46,989 Non-cash restructuring charge 12,217 Increase (decrease) in other assets 129 (6) 124 Increase in other assets (1,869) (68,817) (35,090) Other 1,961 ------- -------- -------- Net cash used in operating activities (1,746) (68,852) (20,803) ------- -------- -------- Cash flows from financing activities: Net proceeds from initial public offering 65,975 Purchases of treasury stock (12,417) Proceeds from issuance of other common stock 33,219 Proceeds from employee stock purchase 1,846 2,869 ------- -------- -------- Net cash provided by financing activities 1,846 68,844 20,802 ------- -------- -------- Net increase (decrease) in cash and cash equivalents 100 (8) (1) Cash and cash equivalents, at beginning of period 34 134 126 ------- -------- -------- Cash and cash equivalents, at end of period $ 134 $ 126 $ 125 ======= ======== ========
F-35 SCHEDULE II U.S. FOODSERVICE VALUATION AND QUALIFYING ACCOUNTS (1) (IN THOUSANDS)
ADDITIONS ----------------------------- BALANCE AT CHARGED CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS (2) TO RECOVERIES PERIOD (4) - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $6,856 $5,600 $108 $4,616 $7,948
YEAR ENDED JUNE 28, 1997
ADDITIONS ----------------------------- BALANCE AT CHARGED CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS (3) TO RECOVERIES PERIOD (4) - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $7,948 $7,854 $10,608 $9,363 $17,047
YEAR ENDED JUNE 27, 1998
ADDITIONS ----------------------------- BALANCE AT CHARGED CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS (2) TO RECOVERIES PERIOD (4) - -------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $17,047 $12,336 $480 $12,581 $17,282
(1) See Note 3 to consolidated financial statements for basis of presentation. (2) Other charges consist of reserves acquired through purchase acquisitions. (3) Other charges consist of $7,439 in reserves acquired through purchase acquisitions during the year, net increase in reserves of $8,562 during the transition period from pooled acquisitions, less amounts written off by Rykoff-Sexton, Inc. during the period April 27, 1996 to June 29, 1996 of $5,393. (4) Includes $100, $255, and $300 with respect to supplier receivables at June 29, 1996, June 28, 1997, and June 27, 1998, respectively. F-36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. FOODSERVICE /s/ JAMES L. MILLER ------------------------------------- By: James L. Miller, President and Chief Executive Officer (Duly Authorized Officer) Date: September 24, 1998 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/ JAMES L. MILLER Chairman of the Board, President September 24, 1998 - ------------------------- and Chief Executive Officer James L. Miller (Principal Executive Officer) /s/ LEWIS HAY, III Director, Executive Vice President September 24, 1998 - ------------------------- and Chief Financial Officer Lewis Hay, III (Principal Executive Officer) /s/ GEORGE T. MEGAS Vice President-Finance September 24, 1998 - ------------------------- (Principal Accounting Officer) George T. Megas /s/ MICHAEL J. DRABB Director September 24, 1998 - ------------------------- Michael J. Drabb /s/ DAVID M. ABRAMSON Director September 24, 1998 - ------------------------- David M. Abramson /s/ ERIC E. GLASS Director September 24, 1998 - ------------------------- Eric E. Glass /s/ MARK P. KAISER Director September 24, 1998 - ------------------------- Mark P. Kaiser /s/ PAUL I. LATTA, JR. Director September 24, 1998 - ------------------------- Paul I. Latta, Jr. /s/ DEAN R. SILVERMAN Director September 24, 1998 - ------------------------- Dean R. Silverman /s/ JEFFREY D. SERKES Director September 24, 1998 - ------------------------- Jeffrey D. Serkes /s/ JAMES P. MISCOLL Director September 24, 1998 - ------------------------- James P. Miscoll
/s/ BERNARD SWEET Director September 24, 1998 - --------------------------------- Bernard Sweet /s/ JAMES I. MASLON Director September 24, 1998 - --------------------------------- James I. Maslon /s/ NEIL I. SELL Director September 24, 1998 - --------------------------------- Neil I. Sell /s/ ALBERT J. FITZGIBBONS, III Director September 24, 1998 - --------------------------------- Albert J. Fitzgibbons, III /s/ MATTHIAS B. BOWMAN Director September 24, 1998 - --------------------------------- Matthias B. Bowman
EX-10.14 2 U.S. FOODSERVICE SUPP. EXECUTIVE RETIREMENT PLAN EXHIBIT 10.14 U.S. FOODSERVICE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective: July 1, 1998 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS................................................................ 1 2. SHARES SUBJECT TO THE PLAN................................................. 3 3. EMPLOYER CONTRIBUTION...................................................... 3 4. DEFERRED COMPENSATION ACCOUNTS............................................. 3 4.1. Accounts.............................................................. 3 4.2. Company Stock Account................................................. 3 4.3. Employee Self Directed Account........................................ 4 4.4. Account Credits and Debits............................................ 4 4.5. Trust Accounts........................................................ 4 4.6. Subaccounts........................................................... 4 5. VESTING.................................................................... 4 5.1. General............................................................... 4 5.2. Retirement; Disability; Death; Termination of Plan; Change in Control................................................... 5 5.3. Change of Control..................................................... 5 5.4. Good Reason........................................................... 6 5.5. Termination for Cause................................................. 7 6. INVESTMENT EXPERIENCE...................................................... 8 6.1. Employee Self Directed Account........................................ 8 6.2. Company Stock Account................................................. 8 6.3. Taxes; Statements..................................................... 9 7. DISTRIBUTIONS.............................................................. 9 7.1. Separation From Service............................................... 9 7.2. Death; Disability; Retirement......................................... 10 7.3. Resignation........................................................... 10 7.4. Hardship.............................................................. 11 7.5. Change of Control..................................................... 11 7.6. Form of Payment....................................................... 12 8. ADMINISTRATION............................................................. 12 8.1. Committee............................................................. 12 8.2. Rules for Administration.............................................. 12 8.3. Committee Action...................................................... 12 8.4. Delegation............................................................ 13 8.5. Services.............................................................. 13 8.6. Indemnification....................................................... 13 9. AMENDMENT AND TERMINATION.................................................. 13 10. GENERAL PROVISIONS........................................................ 13 10.1. Limitation of Rights................................................. 13 10.2. Employment Rights.................................................... 13 10.3. Assignment, Pledge or Encumbrance.................................... 14
- i -
10.4. Minor or Incompetent................................................. 14 10.5. Beneficiary.......................................................... 14 10.6. Binding Provisions................................................... 14 10.7. Notices.............................................................. 15 10.8. Governing Law........................................................ 15 10.9. Pronouns............................................................. 15 10.10. Withholding......................................................... 15 10.11. Effective Dates..................................................... 15
- ii - 1. DEFINITIONS 1.1 "Affiliate" means any legal entity controlled, directly or indirectly, by --------- U.S. Foodservice. 1.2 "Beneficiary" means any person(s) or legal entity(ies) designated by the ----------- Participant or otherwise determined in accordance with SECTION 10.5. 1.3 "Board of Directors" means the Board of Directors of the Company. ------------------ 1.4 "Cause" shall have the meaning set forth in SECTION 5.5. ----- 1.5 "Change of Control" shall have the meaning set forth in SECTION 5.3. ----------------- 1.6 "Committee" means the Administrative Committee which administers the Plan --------- in accordance with SECTION 8. 1.7 "Common Stock" means the common stock, par value $0.01 per share, of the ------------ Company. 1.8 "Company" means U.S. Foodservice, a Delaware corporation, or any successor ------- thereto. 1.9 "Continuous Service" means the total uninterrupted service of a Participant ------------------ with the Company or an Affiliate from a measurement date to the date of the Participant's Separation from Service. 1.10 "Disability" means the absence of the Participant from the Participant's ---------- duties with the Participant's Employer on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant's legal representative. 1.11 "Earnings" for any Plan Year means the base salary of an Eligible Employee -------- for such Plan Year, including any authorized deferrals and payroll deductions and Target Bonus, but excluding the value of any perquisites, stock options, restricted stock or Restricted Stock Units unless granted in connection with authorized deferrals. 1.12 "Eligible Employee" for each Plan Year means an officer or other key ----------------- management employee of the Employer designated by the Compensation Committee as eligible to participate in the Plan for such Plan Year or portion thereof. 1 1.13 "Employer" means the Company and any Affiliate thereof which shall be -------- designated by the Board of Directors as a participating employer under the Plan. 1.14 "Employer Contribution Account" means any account maintained for a ----------------------------- Participant pursuant to SECTION 4.1. 1.15 "Fair Market Value" means the opening price of a share of Common Stock ----------------- reported on the New York Stock Exchange (the "NYSE") on the date Fair Market Value is being determined, provided that if there is no opening price reported on such date, the Fair Market Value of a share of Common Stock on such date shall be deemed equal to the closing price as reported by the NYSE for the last preceding date on which sales of shares of Common Stock were reported. Notwithstanding the foregoing, in the event that the shares of Common Stock are listed upon more than one established stock exchange, "Fair Market Value" means the opening price of the shares of Common Stock reported on the exchange that trades the largest volume of shares of Common Stock on the date Fair Market Value is being determined. 1.16 "Good Reason" shall have the meaning set forth in SECTION 5.4. ----------- 1.17 "Participant" for any Plan Year means an Eligible Employee who participates ----------- in the Plan for that Plan Year in accordance with SECTION 3. 1.18 "Plan" means the U.S. Foodservice Supplemental Executive Retirement Plan ---- as set forth herein and as amended from time to time. 1.19 "Plan Year" means each fiscal year of the Company. --------- 1.20 "Prime Rate" means the base rate on corporate loans at large U.S. money ---------- center commercial banks, as such rate is reported under "Prime Rate" in the "Money Rates" section of The Wall Street Journal. ----------------------- 1.21 "Restricted Stock Unit" means a unit which represents a conditional right --------------------- to receive a share of Common Stock in the future. 1.22 "Retirement" means a Participant's Separation from Service on or after ---------- reaching age 55 other than due to Disability, death or termination for Cause. 1.23 "Separation from Service" means termination of a Participant's employment ----------------------- with the Participant's Employer by reason of Retirement, Disability, death, resignation, termination for Cause or otherwise. Transfer to employment with an Affiliate shall not be deemed to be Separation from Service. 2 1.24 "Target Bonus" for any Plan Year means 100% of base salary provided that ------------ the Target Bonus for any Plan Year is subject to change by the Compensation Committee prior to the end of the first quarter of such Plan Year. 1.25 "Trust" means the trust established by the Company that identifies the Plan ----- as a plan with respect to which assets are to be held by the Trustee. 1.26 "Trustees" means the trustee or trustees or their successors under the -------- Trust. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in SECTION 6.1, the aggregate number of shares of Common Stock that may be made available for distribution to Participants under the Plan is the sum of (i) 45,000 and (ii) any shares of Common Stock that are represented by awards under the Company's Restricted Unit Plan which are forfeited, expire or are canceled with the delivery of shares or which result in the forfeiture of shares to the Company. The shares issuable under the Plan shall be issued pursuant to the U.S. Foodservice 1994 Stock Incentive Plan, and may be authorized but unissued shares, treasury shares or issued and outstanding shares that are purchased in the open market. 3. EMPLOYER CONTRIBUTION As an initial Employer Contribution, the Employer shall credit to each Participant's Employer Contribution Account, as of July 1, an amount equal to the amounts shown on SCHEDULE 1 attached hereto. The Employer shall credit to each Participant's Employer Contribution Account an amount equal to 15% of Earnings for the Plan Year. Amounts shall be credited to each Participant's Employer Contribution Account at such times as may be determined by the Committee, but not less frequently than every three (3) months. 4. DEFERRED COMPENSATION ACCOUNTS 4.1. ACCOUNTS Within the Employer Contribution Account, the Committee shall establish a Company Stock Account and an Employee Self Directed Account for each Participant for all periods during which such Participant participates in the Plan. 4.2. COMPANY STOCK ACCOUNT Each Participant's Company Stock Account shall be credited with 50% of the Employer Contribution for the relevant period and shall be credited with 3 dividends deemed attributable to the Restricted Stock Units credited to that Account, subject to adjustment as provided in SECTION 6.1. 4.3. EMPLOYEE SELF DIRECTED ACCOUNT Each Participant's Employee Self Directed Account shall be credited with 50% of the Employer Contribution and shall be credited or debited with any amounts deemed attributable to the investment experience of that Account. 4.4. ACCOUNT CREDITS AND DEBITS All amounts credited to each Company Stock Account and Employee Self Directed Account shall at all times be the sole and absolute property of the Company, subject to the terms of any Trust with respect thereto. The Company Stock Accounts and the Employee Self Directed Accounts shall be debited to the extent of any distributions made pursuant to SECTION 7. 4.5. TRUST ACCOUNTS The Committee may cause the Trustee, if any, to maintain and invest separate asset accounts or subaccounts corresponding to each Participant's Company Stock Account and Employee Self Directed Account. 4.6. SUBACCOUNTS The Committee may establish such subaccounts or separate accounts for each Participant as may be appropriate for the proper administration of the Plan. 5. VESTING 5.1. GENERAL A Participant shall be separately vested in the amount credited to the Participant's Employer Contribution Account for each Plan Year, and the earnings thereon, in accordance with the following schedule:
Years of Continuous Service From the First Day of the Plan Year Vested Percentage ------------------------------------- ----------------- Less than 1 0 At least 1 20 At least 2 40
4
At least 3 60 At least 4 80 5 or more 100
provided however, that Participants shall be separately vested in the initial contribution amount credited to the Participant's Employer Contribution Account as of July 1, 1998, and the earnings thereon, in accordance with the following schedule:
Years of Continuous Service From July 1, 1998 Vested Percentage ----------------------------- ----------------- Less than .5 0 At least .5 20 At least 1.5 40 At least 2.5 60 At least 3.5 80 4.5 or more 100
5.2. RETIREMENT; DISABILITY; DEATH; TERMINATION OF PLAN; CHANGE IN CONTROL Notwithstanding the provisions of SECTION 5.1, the amount credited to a Participant's Employer Contribution Account shall be 100% vested in the event of (i) Separation from Service by reason of Retirement, Good Reason (as defined below), Disability, or death of a Participant, (ii) termination of the Plan or (iii) a "Change of Control" (as defined below). 5.3. CHANGE OF CONTROL "Change of Control" shall mean the happening of any of the following: (a) individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, 5 was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person (as defined in Paragraph (b) below) other than the Board of Directors; (b) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the Company's stock generally entitled to vote for the election of directors ("Voting Stock") or the consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or other transaction (a "Business Transaction"), in each case, unless, following such Business Transaction, (i) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Transaction) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of Voting Stock of the Company or the corporation resulting from such Business Transaction and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Transaction; or (c) consummation of a complete liquidation or dissolution of the Company. 5.4. GOOD REASON "Good Reason" shall mean the happening of any of the following: (a) the assignment to the Participant of any duties inconsistent, negatively, in any material respect with the Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by such Participant's position and any employment agreement between the Participant and the Participant's Employer, or any other action by the Employer which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by 6 the Employer promptly after receipt of notice thereof given by the Participant; (b) any failure by the Employer to comply with any of the provisions governing compensation of any employment agreement between the Participant and the Employer other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Employer promptly after receipt of notice thereof given by the Participant; or (c) any action by the Employer requiring the Participant to be based at any office or location outside the metropolitan area of the office at which the Participant was based at the time the Participant commenced participating in the Plan or requiring the Participant to travel on Employer business to a substantially greater extent than required at the time the Participant commenced participating in the Plan. For purposes of this SECTION 5.4, any good faith determination of "Good Reason" made by the Participant shall be conclusive. 5.5. TERMINATION FOR CAUSE If a Participant in the Plan incurs a termination of employment for Cause or, in the reasonable judgment of the Board of Directors, has failed to comply with the terms of any restrictive covenant of any employment agreement between the Participant and the Participant's Employer, the Participant shall forfeit all rights to receive any distributions or payments under the Plan. "Cause" means (i) the willful and continued failure of the Participant to perform substantially the Participant's duties with the Participant's Employer (other than any failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board of Directors or Chief Executive Officer believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Employer. For purposes of this definition, no act or failure to act, on the part of the Participant, shall be considered "willful" unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant's action or omission was in the best interests of the Employer. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors or upon instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company 7 shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Employer. The cessation of employment of the Participant shall not be deemed to be for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership 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 Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Participant has engaged in the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. 6. INVESTMENT EXPERIENCE 6.1. EMPLOYEE SELF DIRECTED ACCOUNT In its sole discretion, the Committee shall designate investments in which each Participant's Employee Self Directed Account may be deemed to be invested. From such designated investments each Participant may select from time to time the investments in which the Participant's Employee Self Directed Account will be deemed to be invested. Based on such selection, the Committee will credit or debit to each Participant's Employee Self Directed Account, as provided in SECTIONS 4.3 and 4.4, the amounts by which the Participant's Employee Self Directed Account would have increased or decreased as if they had been invested in the investments designated by the Participant. The selection of investments is to be used only for the purpose of valuing each Participant's Employee Self Directed Account. The Company and the Committee are under no obligation to acquire or provide any of the investments designated by a Participant, and any investments actually made by the Committee will be made solely in the name of the Company and will remain the property of the Company subject to the terms of any Trust. During any period when the Company does not designate investments in which each Participant's Employee Self Directed Account may be deemed invested, the Company shall credit interest on each Participant's Employee Self Directed Account at a rate equivalent to the Prime Rate in effect during such period. 6.2. COMPANY STOCK ACCOUNT Each Participant's Company Stock Account shall be deemed to be invested in the number of Restricted Stock Units determined by dividing the Fair Market Value of the Common Stock on the date the Company Stock Account is credited with such Restricted Stock Units into the portion of the Employer 8 Contribution allocated to the Participant's Company Stock Account. The Committee will credit and adjust each Participant's Company Stock Account, as provided in SECTIONS 4.2 and 4.4, in the amounts by which the Participant's Company Stock Account would have increased or been adjusted if it had been invested in Common Stock. The deemed investment is to be used only for the purpose of valuing each Participant's Company Stock Account. The Company and the Committee are under no obligation to acquire or provide any Common Stock, and any investments actually made by the Committee will be made solely in the name of the Company and will remain the property of the Company subject to the terms of any Trust. If the number of outstanding shares of Common Stock is increased or decreased or the shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company, in each case on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company, the number and kinds of shares in which the Company Stock Account is deemed invested shall be adjusted proportionately and accordingly by the Company. 6.3. TAXES; STATEMENTS All taxes required to be paid in connection with the deemed investment experience of Company Stock Accounts and Employee Self Directed Accounts, but not in connection with the distributions to Participants, shall be paid by the Employer. At least as often as 30 days after the last business day of each calendar quarter, the Committee shall provide the Participant with a statement of the Participant's account, in such reasonable detail as the Committee shall deem appropriate, showing the income, gains and losses (realized and unrealized), amounts of Employer Contributions, and distributions from the Participant's Company Stock Account and Employee Self Directed Account since the prior statement. 7. DISTRIBUTIONS 7.1. SEPARATION FROM SERVICE. At the time an Eligible Employee commences participation in the Plan, such Eligible Employee shall also elect in such manner as approved by the Committee one of the following methods for the payment of the vested portion of the Participant's Company Stock Account and Employee Self Directed Account commencing within five years of the Participant's Separation from Service: 9 (a) a lump sum payment; or (b) pro-rata annual installment payments for a period not to exceed 15 years after Separation from Service, with each installment equal to the unpaid balance of such accounts divided by the number of remaining payments; and, if the Participant dies before all payments are made, the remaining payments to be made to the Participant's Beneficiary. A Participant may elect one method of payment to such Participant and a different method of payment to the Participant's Beneficiary. A Participant may request a change of the Participant's election as to the method of payment, by written notice to the Committee, subject to approval by the Committee in its sole discretion, at any time in a tax year prior to the tax year of the Participant's Separation from Service, provided, however, if a Participant's Separation from Service for any reason other than death occurs less than ninety (90) days following any election or request for a change in election of a method of payment to himself, such election may be disregarded by the Committee. 7.2. DEATH; DISABILITY; RETIREMENT Upon a Participant's Separation from Service by reason of the Participant's death, Disability or Retirement, the Company shall pay to such Participant, or to such Participant's Beneficiary in the case of the Participant's death, such Participant's Company Stock Account and Employee Self Directed Account as of the date of Separation from Service. Payment shall be made by the method and on the date(s) previously elected by the Participant, or in the sole discretion of the Committee, in a lump sum. Lump sum payments shall be made on the last day of the calendar quarter in which the Participant's Separation from Service occurs or on the date previously elected by the Participant, if applicable. 7.3. RESIGNATION Notwithstanding the provisions of SECTION 7.1, upon a Participant's Separation from Service by reason of the Participant's resignation, the Company shall pay to such Participant the vested portion of the Participant's Company Stock Account and Employee Self Directed Account as of the Date of Separation from Service resulting from the Participant's resignation. Payment shall be made to the Participant in a single lump sum on the last day of the calendar quarter in which the Participant's resignation occurs. 10 Notwithstanding the foregoing, at the Participant's request, the Committee, at its option, may defer payment of the Participant's then vested Company Stock Account and Employee Self Directed Account to the time(s) previously selected by such Participant pursuant to SECTION 7.1. In the event of the Participant's death, the balance of such accounts shall be distributed in accordance with SECTION 7.2. 7.4. HARDSHIP (a) Upon application by a Participant and approval thereof by the Committee, the Participant may withdraw, upon a showing of hardship, part or all of the amount vested in the Participant's Company Stock Account and Employee Self Directed Account. (b) For purposes of SECTION 7.4(A), "hardship" shall mean severe financial hardship to a Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Internal Revenue Code of 1986, as amended) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, which hardship may not be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent such liquidation would not itself cause severe financial hardship). 7.5. CHANGE OF CONTROL. Notwithstanding anything to the contrary contained in this Plan, upon the consummation, of a Change of Control as defined in SECTION 5.3, each Participant's Company Stock Account shall be immediately vested and distributed to such Participant in a lump sum distribution within 15 days following the consummation of such Change in Control. Notwithstanding anything to the contrary contained in this Plan, upon the consummation, of a Change of Control as defined in SECTION 5.3, each Participant's Employee Self-Directed Account shall be immediately vested and distributed to such Participant in a lump sum distribution within 15 days following Participant's Separation from Service subsequent to consummation of such Change in Control, or, in the event there is a Trust in effect with respect to the Plan, in accordance with the terms of the Trust. For purposes of this SECTION 7.5, a Participant will be deemed to have Separated from Service if the Participant is providing services for less than 20 hours per week. 11 7.6. FORM OF PAYMENT. (a) The value of the Employee Self-Directed Account shall be distributed to the Participant in cash. (b) The value of the Company Stock Account shall be distributed to the Participant in shares of Common Stock, provided, however that cash will be distributed in lieu of fractional shares. The Company shall take use its best efforts to maintain the effectiveness of a registration statement on Form S-8 (or any successor form) or another appropriate form with respect to shares of Common Stock distributable pursuant to the Plan. 8. ADMINISTRATION 8.1. COMMITTEE The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in an Administrative Committee. The Committee shall consist of at least two members appointed from time to time by the Board of Directors to serve at the pleasure thereof. The initial Administrative Committee shall consist of the Chief Financial Officer and the General Counsel of the Company. Any member of the Committee may resign by delivering the Participant's written resignation to the Company, and may be removed at any time by action of the Board of Directors. 8.2. RULES FOR ADMINISTRATION Subject to the limitations of the Plan, the Committee may from time to time establish rules and procedures for the administration and interpretation of the Plan and the transaction of its business as the Committee may deem necessary or appropriate. The determination of the Committee as to any disputed question shall be conclusive. 8.3. COMMITTEE ACTION Any act which the Plan authorizes or requires the Committee to do may be done by a majority of its members. The action of such majority, expressed from time to time by a vote at a meeting (a) in person, (b) by telephone or other means by which all members may hear one another or (c) in writing without a meeting, shall constitute the action of the Committee and shall have the same effect for all purposes as if assented to by all members of the Committee at the time in office. 12 8.4. DELEGATION The members of the Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Committee to do. 8.5. SERVICES The Committee may employ or retain agents to perform such clerical, accounting, trust, trustee and other services as they may require in carrying out the provisions of the Plan. 8.6. INDEMNIFICATION The Company shall indemnify and save harmless each member of the Committee against all expenses and liabilities arising out of membership on the Committee, excepting only expenses and liabilities arising from the such member's own gross negligence or willful misconduct, as determined by the Board of Directors. 9. AMENDMENT AND TERMINATION The Company, by action of the Board of Directors or the Compensation Committee thereof, may at any time or from time to time modify or amend any or all of the provisions of the Plan, or may at any time terminate the Plan provided that the Company may not amend SECTION 5 or 7.5 to adversely affect any Participant rights under such SECTIONS 5 and 7.5. No such action shall adversely affect the accrued or vested rights of any Participant hereunder without the Participant's consent thereto. 10. GENERAL PROVISIONS 10.1. LIMITATION OF RIGHTS No Participant or other Eligible Employee shall have any right to any payment or benefit hereunder except to the extent provided in the Plan. 10.2. EMPLOYMENT RIGHTS The employment rights of any Participant or other Eligible Employee shall not be enlarged, guaranteed or affected by reason of any of the provisions of the Plan. 13 10.3. ASSIGNMENT, PLEDGE OR ENCUMBRANCE Assignment, pledge or other encumbrance of any payments or benefits under the Plan shall not be permitted or recognized and, to the extent permitted by law, no such payments or benefits shall be subject to legal process or attachment for the payment of any claim of any person entitled to receive the same, except to the extent such assignment, pledge or other encumbrance is in favor of the Company to secure a loan or other extension of credit from the Company to the Participant. 10.4. MINOR OR INCOMPETENT If the Committee determines that any person to whom a payment is due hereunder is a minor or is incompetent by reason of physical or mental disability, the Committee shall have the power to cause the payments becoming due to such person to be made to another for the benefit of such minor or incompetent without responsibility of the Company or the Committee to see to the application of such payment, unless claim prior to such payment is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Company and the Committee. 10.5. BENEFICIARY Each Participant may designate, by written notice to the Committee, any person or persons or legal entity or legal entities, including such Participant's estate, as such Participant's Beneficiary under the Plan. A Participant may revoke the Participant's designation of a Beneficiary or change such Participant's Beneficiary at any time prior to such Participant's death by written notice to the Committee. If no person or legal entity shall be designated by a Participant as such Participant's Beneficiary or if no designated Beneficiary survives such Participant, such Participant's Beneficiary shall be such Participant's estate. 10.6. BINDING PROVISIONS The provisions of this Plan shall be binding upon each Participant as a consequence of the Participant's election to participate in the Plan, and upon the Company, and their respective heirs, executors, administrators, successors and assigns. 14 10.7. NOTICES Any election made or notice given by a Participant pursuant to the Plan shall be in writing to the Committee or to such representative thereof as may be designated by the Committee for such purpose and shall be deemed to have been made or given on the date received by the Committee or its representative. 10.8. GOVERNING LAW The validity and interpretation of the Plan and of any of its provisions shall be construed under the laws of the State of Maryland without giving effect to the choice of law provisions thereof. 10.9. PRONOUNS The masculine pronoun shall be deemed to include the feminine wherever it appears in the Plan unless a different meaning is required by the context. 10.10. WITHHOLDING Upon the request of the Participant, the Company shall withhold from the shares of Common Stock distributable to such Participant such number of shares as shall be sufficient to satisfy all or a portion of any federal, state and local tax withholding requirements applicable to the designated distribution. If the Participant has not requested to have sufficient shares withheld to satisfy all such withholding requirements, the Company shall have the right to deduct first from cash distributions hereunder any federal, state, or local taxes required by law to be withheld with respect to such distributions, and such additional amounts of withholding as are reasonably requested by the Participant. Accordingly, the amount of federal, state, or local taxes required, or agreed, to be withheld by the Company with respect to the dollar amount determined pursuant to SECTION 7.6(A) above shall, for purposes of satisfying such withholding obligations, be deducted from the dollar amount of the cash payment and paid by the Company to the appropriate taxing authorities. If the entire cash distribution is insufficient to satisfy the withholding obligations, the Company shall have the right to deduct amounts from the Common Stock distributable to satisfy such withholding obligations. 10.11. EFFECTIVE DATES This Plan shall be effective as of July 1, 1998. * * * * * 15 EX-10.15 3 U.S. FOODSERVICE RESTRICTED STOCK PLAN EXHIBIT 10.15 U.S. FOODSERVICE RESTRICTED UNIT PLAN Effective: July 1, 1998 TABLE OF CONTENTS
Page 1. DEFINITIONS................................................................ 1 2. SHARES SUBJECT TO THE PLAN................................................. 2 3. RESTRICTED UNIT GRANT...................................................... 2 4. RESTRICTED UNIT ACCOUNTS................................................... 3 4.1. Restricted Unit Account............................................... 3 4.2. Account Credits and Debits............................................ 3 4.3. Subaccounts........................................................... 3 5. VESTING.................................................................... 3 5.1. General............................................................... 3 5.2. Retirement; Disability; Death; Termination of Plan; Change in Control................................................... 4 5.3. Change of Control..................................................... 4 5.4. Good Reason........................................................... 5 5.5. Termination for Cause................................................. 5 5.6. Termination Without Cause............................................. 6 6. INVESTMENT EXPERIENCE...................................................... 7 6.1. Restricted Unit Account............................................... 7 6.2. Taxes................................................................. 8 7. DISTRIBUTIONS.............................................................. 8 7.1. Distribution After Vesting............................................ 8 7.2. Separation From Service............................................... 8 7.3. Death; Disability; Retirement......................................... 9 7.4. Resignation........................................................... 9 7.5. Hardship.............................................................. 10 7.6. Change of Control..................................................... 10 7.7. Form of Payment....................................................... 10 8. ADMINISTRATION............................................................. 11 8.1. Committee............................................................. 11 8.2. Rules for Administration.............................................. 11 8.3. Committee Action...................................................... 11 8.4. Delegation............................................................ 11 8.5. Services.............................................................. 11 8.6. Indemnification....................................................... 12 9. AMENDMENT AND TERMINATION.................................................. 12 10. GENERAL PROVISIONS........................................................ 12 10.1. Limitation of Rights................................................. 12 10.2. Employment Rights.................................................... 12 10.3. Assignment, Pledge or Encumbrance.................................... 12 10.4. Minor or Incompetent................................................. 13 10.5. Beneficiary.......................................................... 13
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Page 10.6. Binding Provisions................................................... 13 10.7. Notices.............................................................. 13 10.8. Governing Law........................................................ 13 10.9. Pronouns............................................................. 14 10.10. Withholding......................................................... 14 10.11. Effective Dates..................................................... 14
- ii - 1. DEFINITIONS 1.1 "Affiliate" means any legal entity controlled, directly or indirectly, by --------- U.S. Foodservice. 1.2 "Beneficiary" means any person(s) or legal entity(ies) designated by the ----------- Participant or otherwise determined in accordance with SECTION 10.5. 1.3 "Board of Directors" means the Board of Directors of the Company. ------------------ 1.4 "Cause" shall have the meaning set forth in SECTION 5.5. ----- 1.5 "Change of Control" shall have the meaning set forth in SECTION 5.3. ----------------- 1.6 "Committee" means the Administrative Committee which administers the Plan --------- in accordance with SECTION 8. 1.7 "Common Stock" means the common stock, par value $0.01 per share, of the ------------ Company. 1.8 "Company" means U.S. Foodservice, a Delaware corporation, or any successor ------- thereto. 1.9 "Continuous Service" means the total uninterrupted service of a Participant ------------------ with the Company or an Affiliate from July 1, 1998 to the date of his Separation from Service. 1.10 "Disability" means the absence of the Participant from the Participant's ---------- duties with the Participant's Employer on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Participant or the Participant's legal representative. 1.11 "Eligible Employee" for each Plan Year means an officer or other key ----------------- management employee of the Employer designated by the Compensation Committee as eligible to participate in the Plan. 1.12 "Employer" means the Company and any Affiliate thereof which shall be -------- designated by the Board of Directors as a participating employer under the Plan. 1.13 "Good Reason" shall have the meaning set forth in SECTION 5.4. ----------- 1.14 "Grant" means an award of Restricted Stock Units under the Plan. ----- 1 1.15 "Participant" means an Eligible Employee who participates in the Plan in ----------- accordance with SECTION 3. 1.16 "Plan" means the U.S. Foodservice Restricted Unit Plan as set forth herein ---- and as amended from time to time. 1.17 "Restricted Stock Unit" means a unit awarded to a Participant pursuant to --------------------- SECTION 3, which represents a conditional right to receive a share of Common Stock in the future, and which is subject to restrictions and to a risk of forfeiture. 1.18 "Retirement" means a Participant's Separation from Service on or after ---------- attaining age 55 other than due to Disability, death or termination for Cause. 1.19 "Separation from Service" means termination of a Participant's employment ----------------------- with the Participant's Employer by reason of Retirement, Disability, death, resignation, termination for Cause or otherwise. Transfer to employment with an Affiliate shall not be deemed to be Separation from Service. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in SECTION 7.1, the aggregate number of shares of Common Stock that may be made available for distribution to Participants under the Plan is the sum of (i) 250,000 and (ii) any shares of Common Stock that are reserved for issuance under the Company's Supplemental Executive Retirement Plan, including shares which are forfeited, expire or are canceled with the delivery of shares or which result in the forfeiture of shares to the Company. The shares issuable under the Plan shall be issued pursuant to the U.S. Foodservice 1994 Stock Incentive Plan and may, in the discretion of the Board of Directors, be authorized but unissued shares, treasury shares or issued and outstanding shares that are purchased in the open market. 3. RESTRICTED UNIT GRANT The Employer shall credit each Participant's Restricted Unit Account with the number of units awarded to the Participant set forth in APPENDIX A to the Plan, which represent a conditional right to receive a share of Common Stock in the future, and which are subject to restrictions and to a risk of forfeiture. 2 4. RESTRICTED UNIT ACCOUNTS 4.1. RESTRICTED UNIT ACCOUNT Each Participant's Restricted Unit Account shall be credited with the Restricted Stock Units awarded to the Participant and shall be credited with dividends deemed attributable to the Restricted Stock Units credited to that Account subject to adjustment as provided in SECTION 7.1. 4.2. ACCOUNT CREDITS AND DEBITS All amounts credited to the Participant's Restricted Unit Account shall at all times be the sole and absolute property of the Company. The Restricted Unit Accounts shall be debited to the extent of any distributions made pursuant to SECTION 7. 4.3. SUBACCOUNTS The Committee may establish such subaccounts or separate accounts for each Participant as may be appropriate for the proper administration of the Plan. 5. VESTING 5.1. GENERAL A Participant shall be vested in the amount credited to the Restricted Unit Account established for him in accordance with the following schedule:
Years of Continuous Service Vested Percentage --------------------------- ----------------- Less than 6.5 0 At least 6.5 25 At least 7.5 50 At least 8.5 75 9.5 or more 100
3 5.2. RETIREMENT; DISABILITY; DEATH; TERMINATION OF PLAN; CHANGE IN CONTROL Notwithstanding the provisions of SECTION 5.1, the amount credited to a Participant's Employer Contribution Account shall be 100% vested in the event of (i) Separation from Service by reason of Retirement, Good Reason (as defined below), Disability, or death of a Participant, (ii) termination of the Plan or (iii) a "Change of Control" (as defined below). 5.3. CHANGE OF CONTROL "Change of Control" shall mean the happening of any of the following: (a) individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person (as defined in Paragraph (b) below) other than the Board of Directors; (b) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the Company's stock generally entitled to vote for the election of directors ("Voting Stock") or the consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or other transaction (a "Business Transaction"), in each case, unless, following such Business Transaction, (i) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Transaction) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of Voting Stock of the Company or the corporation resulting from such Business Transaction and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Transaction were members of the Incumbent Board at the time of the 4 execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Transaction; or (c) consummation of a complete liquidation or dissolution of the Company. 5.4. GOOD REASON "Good Reason" shall mean the happening of any of the following: (a) the assignment to the Participant of any duties inconsistent, negatively, in any material respect with the Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by such Participant's position and any employment agreement between the Participant and the Participant's Employer, or any other action by the Employer which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Employer promptly after receipt of notice thereof given by the Participant; (b) any failure by the Employer to comply with any of the provisions governing compensation of any employment agreement between the Participant and the Employer other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Employer promptly after receipt of notice thereof given by the Participant; or (c) any action by the Employer requiring the Participant to be based at any office or location outside the metropolitan area of the office at which the Participant was based at the time the Participant commenced participating in the Plan or requiring the Participant to travel on Employer business to a substantially greater extent than required at the time the Participant commenced participating in the Plan. For purposes of this SECTION 5.4, any good faith determination of "Good Reason" made by the Participant shall be conclusive. 5.5. TERMINATION FOR CAUSE If a Participant in the Plan incurs a termination of employment for Cause or, in the reasonable judgment of the Board of Directors, has failed to comply with the terms of any restrictive covenant of any employment agreement between the Participant and the Participant's Employer, the Participant 5 shall forfeit all rights to receive any distributions or payments under the Plan. "Cause" means (i) the willful and continued failure of the Participant to perform substantially the Participant's duties with the Participant's Employer (other than any failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board of Directors or Chief Executive Officer believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Employer. For purposes of this definition, no act or failure to act, on the part of the Participant, shall be considered "willful" unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant's action or omission was in the best interests of the Employer. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors or upon instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Employer. The cessation of employment of the Participant shall not be deemed to be for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership 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 Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Participant has engaged in the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. 5.6. TERMINATION WITHOUT CAUSE If the Company terminates the Participant's employment other than for Cause, the Participant shall be vested in the amount credited to the Restricted Unit Account established for him in accordance with the following schedule:
Years of Continuous Service Vested Percentage ----------------------------- ----------------- Less than .5 0 At least .5 10 At least 1.5 20
6
At least 2.5 30 At least 3.5 40 At least 4.5 50 At least 5.5 60 At least 6.5 70 At least 7.5 80 At least 8.5 90 9.5 or more 100
provided, however, if the Participant is over 45 years of age on July 1, 1998, and if the Company terminates the Participant's employment other than for Cause, the Participant shall be vested in the amount credited to the Restricted Unit Account established for him pro-rata based on the ratio of (x) the Participant's Years of Continuous Service from July 1, 1998 to the date of termination to (y) the number of years from July 1, 1998 to the date the Participant would attain 55 years of age. 6. INVESTMENT EXPERIENCE 6.1. RESTRICTED UNIT ACCOUNT Each Participant's Restricted Unit Account shall be deemed to be invested in Restricted Stock Units. The Committee will credit and adjust each Participant's Restricted Unit Account, as provided in SECTIONS 4.1 and 4.2, the amounts by which the Participant's Restricted Unit Account would have increased or been adjusted if it had been invested in Common Stock. The deemed investment is to be used only for the purpose of valuing each Participant's Restricted Unit Account. The Company and the Committee are under no obligation to acquire or provide any Common Stock, and any investments actually made by the Committee will be made solely in the name of the Company and will remain the property of the Company. If the number of outstanding shares of Common Stock is increased or decreased or the shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company, in each case on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company, the number and kinds of shares in 7 which the Restricted Unit Account is deemed invested shall be adjusted proportionately and accordingly by the Company. 6.2. TAXES All taxes required to be paid in connection with the deemed investment experience of Restricted Unit Accounts, but not in connection with the distributions to Participants, shall be paid by the Employer. 7. DISTRIBUTIONS 7.1. DISTRIBUTION AFTER VESTING In addition to the election with respect to the method of payment upon Separation from Service specified in SECTION 7.2, each Participant may elect, at the time and in such manner as approved by the Committee, one of the following methods to receive payment of his Restricted Stock Account on or after the date the Restricted Stock Account is 100% vested: (a) a lump sum payment; (b) pro-rata annual installment payments for a period not to exceed 15 years with each installment equal to the unpaid balance of such accounts divided by the number of remaining payments; or (c) one or more installments in an amount or amounts and at the date or dates elected by the Eligible Employee. A Participant may request a change in his election as to the method of payment, by written notice to the Committee, subject to approval by the Committee in its sole discretion, at any time in a tax year prior to the tax year in which distributions would otherwise commence; however, if a Participant's Separation from Service for any reason other than death occurs less than ninety (90) days following any election or request for a change in election of a method of payment to himself, such election may be disregarded by the Committee. 7.2. SEPARATION FROM SERVICE. At the time an Eligible Employee commences participation in the Plan, he shall also elect, in such manner as approved by the Committee, one of the following methods for the payment of the vested portion of his Restricted Unit Account commencing within five years of his Separation from Service: 8 (a) a lump sum payment; or (b) pro-rata annual installment payments for a period not to exceed 15 years after Separation from Service, with each installment equal to the unpaid balance of such accounts divided by the number of remaining payments; and, if the Participant dies before all payments are made, the remaining payments are to be made to his Beneficiary. A Participant may elect one method of payment to himself and a different method of payment to his Beneficiary. A Participant may request a change of his election as to the method of payment, by written notice to the Committee, subject to approval by the Committee in its sole discretion, at any time in a tax year prior to the tax year of his Separation from Service, provided, however, if a Participant's Separation from Service for any reason other than death occurs less than ninety (90) days following any election or request for a change in election of a method of payment to himself, such election may be disregarded by the Committee. 7.3. DEATH; DISABILITY; RETIREMENT Upon a Participant's Separation from Service by reason of his death, Disability or Retirement, the Company shall pay to him, or to his Beneficiary in the case of his death, his Restricted Unit Account as of the date of Separation from Service. Payment shall be made by the method and on the date(s) previously elected by the Participant or, in the sole discretion of the Committee, in a lump sum. Lump sum payments shall be made on the last day of the calendar quarter in which the Participant's Separation from Service occurs or on the date previously elected by the Participant, if applicable. 7.4. RESIGNATION Notwithstanding the provisions of SECTION 7.2, upon a Participant's Separation from Service by reason of his resignation prior to age 55, the Company shall pay to him the vested portion of his Restricted Unit Account as of the Date of Separation from Service resulting from his resignation. Payment shall be made to the Participant in a single lump sum on the last day of the calendar quarter in which his resignation or discharge occurs. Notwithstanding the foregoing, at the Participant's request, the Committee, at its option, may defer payment of the Participant's then vested Restricted 9 Unit Account to the time(s) previously selected by such Participant pursuant to SECTION 7.2. In the event of the Participant's death, the balance of such accounts shall be distributed in accordance with SECTION 7.3. 7.5. HARDSHIP (a) Upon application by a Participant and approval thereof by the Committee, the Participant may withdraw, upon a showing of hardship, part or all of the amount vested in his Restricted Unit Account. (b) For purposes of SECTION 7.5(A), "hardship" shall mean severe financial hardship to a Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Internal Revenue Code of 1986, as amended) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, which hardship may not be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent such liquidation would not itself cause severe financial hardship). 7.6. CHANGE OF CONTROL. Notwithstanding anything to the contrary contained in this Plan, upon the consummation, of a Change of Control as defined in SECTION 5.3, each Participant's Restricted Unit Account shall be immediately vested and distributed to him in a lump sum distribution within 15 days following the consummation of such Change in Control. 7.7. FORM OF PAYMENT. The value of the Restricted Unit Account shall be distributed to the Participant in shares of Common Stock. The Company shall take use its best efforts to maintain the effectiveness of a registration statement on Form S-8 (or any successor form) or another appropriate form with respect to shares of Common Stock distributable pursuant to the Plan. 10 8. ADMINISTRATION 8.1. COMMITTEE The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in an Administrative Committee. The Committee shall consist of at least two members appointed from time to time by the Board of Directors to serve at the pleasure thereof. The initial Administrative Committee shall consist of the Chief Financial Officer and the General Counsel of the Company. Any member of the Committee may resign by delivering his written resignation to the Company, and may be removed at any time by action of the Board of Directors. 8.2. RULES FOR ADMINISTRATION Subject to the limitations of the Plan, the Committee may from time to time establish rules and procedures for the administration and interpretation of the Plan and the transaction of its business as the Committee may deem necessary or appropriate. The determination of the Committee as to any disputed question shall be conclusive. 8.3. COMMITTEE ACTION Any act which the Plan authorizes or requires the Committee to do may be done by a majority of its members. The action of such majority, expressed from time to time by a vote at a meeting (a) in person, (b) by telephone or other means by which all members may hear one another or (c) in writing without a meeting, shall constitute the action of the Committee and shall have the same effect for all purposes as if assented to by all members of the Committee at the time in office. 8.4. DELEGATION The members of the Committee may authorize one or more of their number to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Committee to do. 8.5. SERVICES The Committee may employ or retain agents to perform such clerical, accounting and other services as they may require in carrying out the provisions of the Plan. 11 8.6. INDEMNIFICATION The Company shall indemnify and save harmless each member of the Committee against all expenses and liabilities arising out of membership on the Committee, excepting only expenses and liabilities arising from such member's own gross negligence or willful misconduct, as determined by the Board of Directors. 9. AMENDMENT AND TERMINATION The Company, by action of the Board of Directors or the Compensation Committee thereof, may at any time or from time to time modify or amend any or all of the provisions of the Plan or may at any time terminate the Plan provided that the Company may not amend SECTION 5 or 7.6 to adversely affect any Participant rights under such SECTIONS 5 and 7.6. No such action shall adversely affect the accrued or vested rights of any Participant hereunder without his consent thereto. 10. GENERAL PROVISIONS 10.1. LIMITATION OF RIGHTS No Participant or other Eligible Employee shall have any right to any payment or benefit hereunder except to the extent provided in the Plan. 10.2. EMPLOYMENT RIGHTS The employment rights of any Participant or other Eligible Employee shall not be enlarged, guaranteed or affected by reason of any of the provisions of the Plan. 10.3. ASSIGNMENT, PLEDGE OR ENCUMBRANCE Assignment, pledge or other encumbrance of any payments or benefits under the Plan shall not be permitted or recognized and, to the extent permitted by law, no such payments or benefits shall be subject to legal process or attachment for the payment of any claim of any person entitled to receive the same, except to the extent such assignment, pledge or other encumbrance is in favor of the Company to secure a loan or other extension of credit from the Company to the Participant. 12 10.4. MINOR OR INCOMPETENT If the Committee determines that any person to whom a payment is due hereunder is a minor or is incompetent by reason of physical or mental disability, the Committee shall have the power to cause the payments becoming due to such person to be made to another for the benefit of such minor or incompetent without responsibility of the Company or the Committee to see to the application of such payment, unless claim prior to such payment is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Company and the Committee. 10.5. BENEFICIARY Each Participant may designate, by written notice to the Committee, any person or persons or legal entity or legal entities, including such Participant's estate, as such Participant's Beneficiary under the Plan. A Participant may revoke the Participant's designation of a Beneficiary or change such Participant's Beneficiary at any time prior to such Participant's death by written notice to the Committee. If no person or legal entity shall be designated by a Participant as such Participant's Beneficiary or if no designated Beneficiary survives such Participant, such Participant's Beneficiary shall be such Participant's estate. 10.6. BINDING PROVISIONS The provisions of this Plan shall be binding upon each Participant as a consequence of his election to participate in the Plan, and upon the Company, and their respective heirs, executors, administrators, and assigns. 10.7. NOTICES Any election made or notice given by a Participant pursuant to the Plan shall be in writing to the Committee or to such representative as may be designated by it for such purpose and shall be deemed to have been made or given on the date received by the Committee or its representative. 10.8. GOVERNING LAW The validity and interpretation of the Plan and of any of its provisions shall be construed under the laws of the State of Maryland without giving effect to the choice of law provisions thereof. 13 10.9. PRONOUNS The masculine pronoun shall be deemed to include the feminine wherever it appears in the Plan unless a different meaning is required by the context. 10.10. WITHHOLDING Subject to the right of the Participant pay to the Company, in cash or cash equivalents, any amounts as may be necessary to satisfy all or a portion of any federal, state and local tax withholding requirements, the Company shall withhold from the shares of Common Stock distributable to such Participant such number of shares as shall be sufficient to satisfy all or any federal, state and local tax withholding requirements applicable to the designated distribution. 10.11. EFFECTIVE DATES This Plan shall be effective as of July 1, 1998. * * * * * 14 EX-10.17 4 RYKOFF-SEXTON, INC. 1993 DIR STOCK OPTION PLAN EXHIBIT 10.17 RYKOFF-SEXTON, INC. 1993 DIRECTOR STOCK OPTION PLAN 1. PURPOSE. The purpose of the Rykoff-Sexton, Inc. 1993 Director Stock Option Plan (the "Plan") is to advance the interests of Rykoff-Sexton, Inc. (the "Company") and its shareholders by encouraging increased share ownership by members of the Board of Directors of the Company (the "Board") who are not employees of the Company or any of its subsidiaries, in order to promote long- term shareholder value through continuing ownership of the Company's common stock. 2. ADMINISTRATION. The plan shall be administered by the Board. The Board shall have all the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described hereto) to prescribe the form of the agreement embodying awards of nonqualified stock options made under the Plan ("Options"). The Board shall, subject to the provisions of the Plan, grant Options under the Plan and shall have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. Any decisions of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Board may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their number or any other officer of the Company to execute and deliver documents on behalf of the Board. No member of the Board shall be liable for anything done or omitted to be done by him or by any other member of the Board in connection with the Plan, except for his own willful misconduct or as expressly provided by statute. 3. PARTICIPATION. Each member of the Board who is not an employee of the Company or any of its subsidiaries (a "Non-Employee Director") shall be eligible to receive an Option in accordance with Paragraph 5 below. 4. AWARDS UNDER THE PLAN. (a) Awards under the Plan shall include only Options, which are rights to purchase common stock of the Company having a par value of $0.10 per share (the "Common Stock"). Such Options are subject to the terms, conditions and restrictions specified in Paragraph 5 below. (b) There may be issued under the Plan pursuant to the exercise of Options an aggregate of not more than 100,000 shares of Common Stock, subject to adjustment as provided in Paragraph 6 below. If any Option is cancelled, terminates or expires unexercised, in whole or in part, any shares of Common Stock that would otherwise have been issuable pursuant thereto will be available for issuance under new Options. (c) A Non-Employee Director to whom an Option is granted (and any person succeeding to such a Non-Employee Director's rights pursuant to the Plan) shall have no rights as a shareholder with respect to any Common Stock issuable pursuant to any such Option until the date of the issuance of a stock certificate to him for such shares. Except as provided in Paragraph 6 below, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. 5. NONQUALIFIED STOCK OPTIONS. Each Option granted under the Plan shall be evidenced by an agreement in such form as the Board shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions: (a) The Option exercise price shall be the "Fair Market Value" (as herein defined) of the Common Stock subject to such Option on the date the Option is granted. Fair Market Value shall be the closing sales price of a share of Common Stock on the date of grant as reported on the New York Stock Exchange Composite Transactions Tape or, if the New York Stock Exchange is closed on that date, on the last preceding date on which the New York Stock Exchange was open for trading, but in no event will such Option exercise price be less than the par value of the Common Stock. (b) Each Non-Employee Director shall receive, as of the date of the adoption of the Plan by the Board, a one-time only Option for 5,000 shares of Common Stock (the "the One-Time Option"); provided, however, that the One-Time Option shall be granted only to those directors who are elected to new terms at the 1993 Annual Meeting of Stockholders or whose terms of office will continue after such meeting. In addition, for each year beginning in 1993, on the date of the annual meeting of shareholders of the Company, each Non-Employee Director shall automatically receive an Option for 1,000 shares of Common Stock (the "Annual Option"). (c) The Option shall not be transferable by the optionee otherwise than by will or the laws of descent and distribution, and shall be exercisable during his lifetime only by him. (d) Options shall not be exercisable; (i) before the expiration of one year from the date it is granted and after the expiration of ten years from the date it is granted, and (A) the One-Time Option may be exercised during such period as follows: one-third (33 1/3%) of the total number of shares covered by the One-Time Option shall become exercisable each year beginning with the first anniversary of the date it is granted, and (B) the Annual Option shall become exercisable in full upon the first anniversary of the date it is granted; provided that a Non-Employee Director who does not stand for re-election to the Board may exercise any otherwise unexercisable Annual Options beginning on the date such director's successor is elected and qualified, subject to all of the other terms and conditions of such Annual Options. Notwithstanding anything to the contrary herein, an Option shall automatically become immediately exercisable in full upon the death of a Non-Employee Director; (ii) unless payment in full is made for the shares of Common Stock being acquired thereunder at the time of exercise; such payment shall be made in United States dollars by cash or check; or in lieu thereof, by tendering to the Company Common Stock owned by the person exercising the Option and having a Fair Market Value equal to the cash exercise price applicable to such Option, or by a combination of United States dollars and Common Stock as aforesaid; and (iii) unless the person exercising the Option has been at all times during the period beginning with the date of grant of the Option and ending on the date of such exercise, a Non- Employee Director of the Company, except that (A) if such person shall cease to be such a Non- Employee Director for reasons other than death, while holding an Option that has not expired and has not been fully exercised, such person may, at any time within three years of the date he ceased to be a Non-Employee Director (but in no event after the Option has expired under the provisions of subparagraph 5(d)(i) above), exercise the Option with respect to any Common Stock as to which he could have exercised on the date he ceased to be such a Non-Employee Director; or 3 (B) If any person to whom an Option has been granted shall die holding an Option that has not expired and has not been fully exercised, his executors, administrators, heirs or distributees, as the case may be, may, at any time within one year after the date of such death (but in no event after the Option has expired under the provisions of subparagraph 5(d)(i) above), exercise the Option with respect to any shares subject to the Option. (e) If, on any date on which Options are automatically granted, the number of shares of Common Stock remaining available under the Plan is insufficient for the grant to each Non-Employee Director of Options to purchase 1,000 shares of Common Stock, then Options to purchase a proportionate amount of such available number of shares of Common Stock (rounded to the nearest whole share) shall be granted to each Non- Employee Director. 6. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, stock dividend, split-up, split-off, spin-off, recapitalization, merger, consolidation, rights offering, reorganization, combination or exchange of shares, a sale by the Company of all or part of its assets, any distribution to shareholders other than a normal cash dividend, or other extraordinary or unusual event, the number or kind of shares that may be issued under the Plan pursuant to subparagraph 4(b) above, and the number or kind of shares subject to, and the Option price per share under, all outstanding Options shall be automatically adjusted so that the proportionate interest of the participant shall be maintained as before the occurrence of such event; such adjustment in outstanding Options shall be made without change in the total Option exercise price applicable to the unexercised portion of such Options and with a corresponding adjustment in the Option exercise price per share, and such adjustment shall be conclusive and binding for all purposes of the Plan. 7. MISCELLANEOUS PROVISIONS (a) Except as expressly provided for in the Plan, no Non- Employee Director or other person shall have any claim or right to be granted an Option under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be retained in the service of the Company. (b) A participant's rights and interest under the Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a participant's death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any 4 other manner, and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant. (c) Common Stock shall not be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign securities, securities exchange and other applicable laws and requirements. (d) It shall be a condition to the obligation of the Company to issue Common Stock upon exercise of an Option, that the participant (or any beneficiary or person entitled to act under subparagraph 5(d)(iii)(B) above) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. If the amount requested is not paid, the Company may refuse to issue such Common Stock. (e) The expenses of the Plan shall be borne by the Company. (f) By accepting any Option or other benefit under the Plan, each participant and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company or the Board. (g) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Options hereunder or any Common Stock issued pursuant hereto as may be required by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, or any other applicable statute, rule or regulation. 8. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any time and from time to time by the Board as the Board shall deem advisable; provided, however, that no amendment shall become effective without shareholder approval if such shareholder approval is required by law, rule or regulation. No amendment of the Plan shall materially and adversely affect any right of any participant with respect to any Option theretofore granted without such participant's written consent. 9. TERMINATION. This Plan shall terminate upon the earlier of the following dates or events to occur: (a) upon the adoption of a resolution of the Board termination the Plan; or 5 (b) ten years from the date the Plan is initially approved and adopted by the shareholders of the Company. No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person, without his consent, under any Option theretofore granted under the Plan. 10. EFFECTIVE DATE OF PLAN. The Plan will become effective on the date that it is approved by the affirmative vote of the holders of a majority of the shares of Common Stock entitled to notice of and to vote at the Company's 1993 Annual Meeting of Stockholders. 6 FIRST AMENDMENT TO THE RYKOFF-SEXTON, INC 1993 DIRECTOR STOCK OPTION PLAN THIS AMENDMENT is made effective as of October 1, 1994, by RYKOFF-SEXTON INC., a Delaware corporation (the "Company"), with respect to the Rykoff-Sexton, Inc. 1993 Director Stock Option Plan (the "Plan"). RECITALS: -------- WHEREAS, by an instrument in writing effective as of the date of the Company's 1993 Annual Meeting and entitled "Rykoff-Sexton, Inc. 1993 Director Stock Option Plan", the Company did create and establish the Plan for the benefit of the members of its Board of Directors (the "Board"); WHEREAS, Section 8 of the Plan provides for the amendment thereof by the Board in the manner and upon the terms and conditions therein recited; WHEREAS, the Board has been advised by counsel that it would be advisable to amend the Plan to facilitate compliance with an amendment to Rule 16b-3 that was adopted by the Securities and Exchange Commission in Exchange Release Number 28869; and Whereas, the Board has also been advised by counsel that such amendment may be adopted without shareholder approval; NOW, THEREFORE, in accordance with the provisions of the Plan and as provided for thereby, the Plan is hereby amended in the following manner: 1. Effective October 1, 1994, Section 8 is hereby revoked and a new Section 8 is hereby adopted in lieu thereof, reading as follows: 8. Amendment or Discontinuance. The Plan may be amended at any time and from time to time by the Board as the Board shall deem advisable; provided, however that: (a) no amendment shall become effective without shareholder approval if such shareholder approval is required by law, rule or regulation; (b) no amendment shall materially and adversely affect any right of any participant with respect to any Option theretofore granted, without such participant's written consent; and (c) the following Plan provisions shall not be amended more than once every six (6) months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or the rules thereunder: (i) those designating the categories of individuals eligible to participate; (ii) those stating the amount and price of securities to be awarded; and (iii) those specifying the timing of awards. 2. Save as herein expressly amended, all of the terms and covenants of, and Options awarded under the Plan shall remain in full force and effect. The Secretary of the Company hereby certifies that this Amendment was duly adopted by the Board on the __ day of ____________, 1994. By: ---------------------------- Neil I. Sell, Secretary EX-10.21.4 5 INDENTURE, DATED AS OF NOV 1, 1993 EXHIBIT 10.21.4 --------------- THIRD SUPPLEMENTAL INDENTURE ---------------------------- This THIRD SUPPLEMENTAL INDENTURE dated as of February 10, 1998 (this "Supplemental Indenture") is between RYKOFF-SEXTON, INC., a Delaware corporation ---------------------- (the "Company"), and NORWEST BANK MINNESOTA, N.A., as trustee under the ------- Indenture referred to below (in such capacity, the "Trustee"). ------- WITNESSETH: ----------- WHEREAS, the Trustee and Rykoff-Sexton, Inc., a Delaware corporation and the Company's predecessor in interest (the "Predecessor"), were parties to ----------- the Indenture dated as of November 1, 1993 (as supplemented, the "Indenture"), --------- pursuant to which the Predecessor issued its 8 7/8% Senior Subordinated Notes due 2003 (the "Securities"); ---------- WHEREAS, in connection with the Agreement and Plan of Merger dated as of June 30, 1997, as amended, among the Predecessor, JP Foodservice, Inc., a Delaware corporation ("JP Foodservice"), and the Company, the Predecessor merged -------------- with and into the Company, with the Company being the surviving entity of such merger (the "Merger"); ------ WHEREAS, in accordance with Section 5.1(a)(1) of the Indenture, the Company, as the surviving entity of the Merger, has assumed all obligations of the Predecessor under the Securities and the Indenture; WHEREAS, Section 4.8(a) of the Indenture requires the Company, whether or not it is subject to Section 13(a) or 15(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to file certain reports and other ------------ documents with the Securities and Exchange Commission (the "Commission") and to ---------- provide copies of such reports and other documents to the Trustee and the registered holders of the Securities (the "Holders") (the "Commission Reporting ------- -------------------- Requirement"); - ----------- WHEREAS, the Company is a wholly-owned subsidiary of JP Foodservice and is not subject to Section 13(a) or 15(d) of the Exchange Act; WHEREAS, JP Foodservice is subject to Section 13(a) or 15(d) of the Exchange Act and in accordance therewith files reports and other documents with the Commission (the "JP Foodservice Commission Reports"); --------------------------------- WHEREAS, the Company has requested the Trustee to enter into this Supplemental Indenture to authorize the Company, subject to certain conditions provided herein, to satisfy the Commission Reporting Requirement by providing the Trustee and the Holders with copies of the JP Foodservice Commission Reports; WHEREAS, Section 9.1(7) of the Indenture permits the Company, when authorized by a Board Resolution, and the Trustee to supplement the Indenture without the consent of any Holder for the purpose of making provisions with respect to matters or questions arising under the Indenture, provided, that, such action shall not adversely affect the interests of any of the Holders in any respect; and WHEREAS, in the opinion of the Board of Directors as evidenced by a Board Resolution delivered to the Trustee on the date hereof, the provisions in the Third Supplemental Indenture with respect to the Commission Reporting Requirement will not adversely affect the interests of any of the Holders in any respect; NOW, THEREFORE, in consideration of the premises and mutual agreements set forth herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Indenture. ARTICLE II EFFECTIVENESS This Supplemental Indenture shall be effective as of the date first above written. ARTICLE III AMENDMENT OF SECTION 4.8(a) Section 4.8(a) of the Indenture is hereby amended by adding the following sentence after the penultimate sentence of such Section 4.8(a): Notwithstanding the foregoing, if and for so long as the Company is not subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall be deemed to have complied with the -2- requirements of the first two sentences of this Section 4.8(a) if it provides to the Holders and the Trustee, within 15 days of each Required Filing Date, copies of the annual reports, quarterly reports and other documents (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which JP Foodservice, Inc. is required to file with the Commission pursuant to such Section 13(a) or 15(d); provided, that, (i) JP Foodservice, Inc. is subject to Section 13(a) or 15(d) of the Exchange Act and files the reports and other documents with the Commission required to be filed in accordance therewith, (ii) JP Foodservice, Inc. owns, directly or indirectly, all the outstanding Capital Stock (other than directors' qualifying shares) of the Company and (iii) the Company complies with the provisions of Section 4.8(b). ARTICLE IV MISCELLANEOUS Section 4.1. Ratification of Indenture. This Supplemental Indenture shall be construed as supplemental to the Indenture and shall form a part thereof, and the Indenture is hereby incorporated by reference herein and, as supplemented, modified and restated hereby, is ratified, approved and confirmed. Section 4.2 Governing Law. This Supplemental Indenture shall be governed and construed in accordance with the laws of the State of New York. Section 4.3 Counterparts. This Supplemental Indenture may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed an original of this Supplemental Indenture. IN WITNESS WHEREOF, the Company and the Trustee have caused this Third Supplemental Indenture to be duly executed as of the day and year first above written. -3- RYKOFF-SEXTON, INC. By: /s/ Lewis Hay, III ------------------------- Lewis Hay, III Title: Vice President NORWEST BANK MINNESOTA, N.A., as Trustee By: /s/ Jane Y. Schweiger ------------------------- Name: Jane Y. Schweiger ------------------------- Title: Corporate Trust Officer ------------------------- -4- EX-10.34 6 PARTICIPATION AGREEMENT DATED JUNE 29, 1998 EXHIBIT 10.34 - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT Dated as of June 29, 1998 among JP FOODSERVICE DISTRIBUTORS, INC., as the Construction Agent and as the Lessee, THE VARIOUS PARTIES HERETO FROM TIME TO TIME, as the Guarantors, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES HERETO FROM TIME TO TIME, as the Holders, THE VARIOUS BANKS AND OTHER LENDING INSTITUTIONS WHICH ARE PARTIES HERETO FROM TIME TO TIME, as the Lenders, and FIRST UNION NATIONAL BANK, as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and the Holders, to the extent of their interests - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- SECTION 1A. INITIAL LENDER AND INITIAL HOLDER..........................................1 SECTION 1. THE LOANS...................................................................1 SECTION 2. HOLDER ADVANCES.............................................................2 SECTION 3. SUMMARY OF TRANSACTIONS.....................................................2 3.1. Operative Agreements..........................................................2 3.2. Property Purchase.............................................................2 3.3. Construction of Improvements; Commencement of Basic Rent......................3 SECTION 4. THE CLOSINGS................................................................3 4.1. Initial Closing Date..........................................................3 4.2. Transaction Expenses; Acquisition Advances; Construction Advances.............3 SECTION 5. FUNDING OF ADVANCES; CONDITIONS PRECEDENT; REPORTING REQUIREMENTS ON COMPLETION DATE; THE LESSEE'S DELIVERY OF NOTICES; RESTRICTIONS ON LIENS...............3 5.1. General.......................................................................3 5.2. Procedures for Funding........................................................4 5.3. Conditions Precedent for the Lessor, the Agent, the Lenders and the Holders Relating to the Initial Closing Date and the Advance of Funds for the Acquisition of a Property......................................................6 5.4. Conditions Precedent for the Lessor, the Agent, the Lenders and the Holders Relating to the Advance of Funds after the Acquisition Advance.............11 5.5. Additional Reporting and Delivery Requirements on Completion Date and on Construction Period Termination Date............................................12 5.6. The Construction Agent Delivery of Construction Budget Modifications..........13 5.7. Restrictions on Liens.........................................................13 5.8 Joinder Agreement Requirements.................................................13 5.9 Payments.......................................................................14 SECTION 6. REPRESENTATIONS AND WARRANTIES..............................................14 6.1. Representations and Warranties of the Trust Company and the Borrower..........14 6.2. Representations and Warranties of Each Credit Party...........................17 SECTION 6B. GUARANTY...................................................................21 6B.1. Guaranty of Payment and Performance..........................................21 6B.2. Obligations Unconditional....................................................21 6B.3. Modifications................................................................22 6B.4. Waiver of Rights.............................................................23 6B.5. Reinstatement................................................................23 6B.6. Remedies.....................................................................24 6B.7. Limitation of Guaranty.......................................................24 6B.9. Release of Guarantors........................................................24 SECTION 7. PAYMENT OF CERTAIN EXPENSES..................................................25 7.1. Transaction Expenses..........................................................25 7.2. Brokers' Fees.................................................................26 7.3. Certain Fees and Expenses.....................................................26
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7.4. Facility Fee..................................................................26 SECTION 8. OTHER COVENANTS AND AGREEMENTS..............................................27 8.1. Cooperation with the Construction Agent or the Lessee.........................27 8.2. Covenants of the Owner Trustee and the Holders................................27 8.3. Credit Party Covenants, Consent and Acknowledgment............................29 8.4. Sharing of Certain Payments...................................................33 8.5. Grant of Easements, etc.......................................................33 8.6. Appointment by the Agent, the Lenders, the Holders and the Owner Trustee......33 8.7. Collection and Allocation of Payments and Other Amounts.......................34 8.8. Release of Properties, etc....................................................37 8.9. Recordation of Memoranda of Lease and Lease Supplements.......................37 SECTION 9. CREDIT AGREEMENT AND TRUST AGREEMENT........................................38 9.1. The Construction Agent's and the Lessee's Credit Agreement Rights.............38 9.2. The Construction Agent's and the Lessee's Trust Agreement Rights..............39 SECTION 10. TRANSFER OF INTEREST.......................................................39 10.1. Restrictions on Transfer.....................................................39 10.2. Effect of Transfer...........................................................40 SECTION 11. INDEMNIFICATION............................................................40 11.1. General Indemnity............................................................40 11.2. General Tax Indemnity........................................................43 11.3. Increased Costs, Illegality, etc.............................................47 11.4. Funding/Contribution Indemnity...............................................49 11.5. EXPRESS INDEMNIFICATION FOR ORDINARY NEGLIGENCE, STRICT LIABILITY, ETC.......49 SECTION 12. MISCELLANEOUS..............................................................50 12.1. Survival of Agreements.......................................................50 12.2. Notices......................................................................50 12.3. Counterparts.................................................................52 12.4. Terminations, Amendments, Waivers, Etc.; Unanimous Vote Matters..............52 12.5. Headings, etc................................................................53 12.6. Parties in Interest..........................................................53 12.7. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; VENUE; ARBITRATION........................................................................54 12.8. Severability.................................................................56 12.9. Liability Limited............................................................56 12.10. Rights of the Credit Parties................................................57 12.11. Further Assurances..........................................................57 12.12. Calculations under Operative Agreements.....................................58 12.13. Confidentiality.............................................................58 12.14. Financial Reporting/Tax Characterization....................................59 12.15. Set-off.....................................................................59 12.16. Obligations of the Lenders, the Agent, the Owner Trustee, the Trust Company and the Holders.....................................................60
ii EXHIBITS A - Form of Requisition - Sections 4.2, 5.2, 5.3 and 5.4 B - Form of Outside Counsel Opinion for the Lessee - Section 5.3(j) C - Form of Officer's Certificate - Section 5.3(z) D - Form of Secretary's Certificate - Section 5.3(aa) E - Form of Officer's Certificate - Section 5.3(cc) F - Form of Secretary's Certificate - Section 5.3(dd) G - Form of Outside Counsel Opinion for the Owner Trustee - Section 5.3(ee) H - Form of Outside Counsel Opinion for the Lessee - Section 5.3(ff) I - Form of Officer's Certificate - Section 5.5 J - Form of Joinder Agreement - Section 5.8(a) K -Description of Material Litigation - Section 6.2(d) L - State of Incorporation/Formation and Principal Place of Business of Each Guarantor - Section 6.2(i) M - Form of Officer's Compliance Certificate - Section 8.3(l) N - Unrestricted Subsidiaries and Restricted Subsidiaries Appendix A - Rules of Usage and Definitions iii PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT dated as of June 29, 1998 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, this "Agreement") is by and among JP FOODSERVICE DISTRIBUTORS, INC., a Delaware - ---------- corporation (the "Lessee" or the "Construction Agent"); the various parties ------ ------------------ hereto from time to time as guarantors (subject to the definition of Guarantors in Appendix A hereto, individually, a "Guarantor" and collectively, the --------- "Guarantors"); FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking - ----------- association, not individually, except as expressly stated herein (in its individual capacity, the "Trust Company"), but solely as the Owner Trustee under ------------- the USF Real Estate Trust 1998-1 (the "Owner Trustee", the "Borrower" or the ------------- -------- "Lessor"); the various banks and other lending institutions which are parties - ------- hereto from time to time as holders of certificates issued with respect to the USF Real Estate Trust 1998-1 (subject to the definition of Holders in Appendix A ---------- hereto, individually, a "Holder" and collectively, the "Holders"); the various ------ ------- banks and other lending institutions which are parties hereto from time to time as lenders (subject to the definition of Lenders in Appendix A hereto, ---------- individually, a "Lender" and collectively, the "Lenders"); and FIRST UNION ------ ------- NATIONAL BANK, a national banking association, as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (in such capacity, the "Agent"). Capitalized ----- terms used but not otherwise defined in this Agreement shall have the meanings set forth in Appendix A hereto. ---------- In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1A. INITIAL LENDER AND INITIAL HOLDER. Notwithstanding the various references in the Operative Agreements to multiple Lenders and multiple Holders, First Union National Bank is the only Lender and the only Holder as of the date of this Agreement. Additional Lenders and additional Holders may become parties to the Operative Agreements subsequent to the date hereof pursuant to the assignment provisions set forth in the applicable Operative Agreements. SECTION 1. THE LOANS. Subject to the terms and conditions of this Agreement and the other Operative Agreements and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, the Lenders have agreed to make Loans to the Lessor from time to time in an aggregate principal amount of up to the aggregate amount of the Commitments of the Lenders in order for the Lessor to acquire the Properties and certain Improvements, to develop and construct certain Improvements in accordance with the Agency Agreement and the terms and provisions hereof and for the other purposes described herein, and in consideration of the receipt of proceeds of the Loans, the Lessor will issue the Notes. The Loans shall be made and the Notes shall be issued pursuant to the Credit Agreement. Pursuant to Section 5 of this Agreement and Section 2 of the Credit Agreement, the Loans will be made to the Lessor from time to time at the request of the Construction Agent in consideration for the Construction Agent agreeing for the benefit of the Lessor, pursuant to the Agency Agreement, to acquire the Properties, to acquire the Equipment, to construct certain Improvements and to cause the Lessee to lease the Properties, each in accordance with the Agency Agreement and the other Operative Agreements. The Loans and the obligations of the Lessor under the Credit Agreement shall be secured by the Collateral. SECTION 2. HOLDER ADVANCES. Subject to the terms and conditions of this Agreement and the other Operative Agreements and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, on each date Advances are requested to be made in accordance with Section 5 hereof, each Holder shall make a Holder Advance on a pro rata basis to the Lessor with respect to the USF Real Estate Trust 1998-1 based on its Holder Commitment in an amount in immediately available funds such that the aggregate of all Holder Advances on such date shall be three percent (3%) of the amount of the Requested Funds on such date; provided, that no Holder shall be obligated for any Holder Advance in -------- excess of its pro rata share of the Available Holder Commitment. The aggregate amount of Holder Advances shall be up to the aggregate amount of the Holder Commitments. No prepayment or any other payment with respect to any Advance shall be permitted such that the Holder Advance with respect to such Advance is less than three percent (3%) of the outstanding amount of such Advance, except in connection with termination or expiration of the Term or in connection with the exercise of remedies relating to the occurrence of a Lease Event of Default. The representations, warranties, covenants and agreements of the Holders herein and in the other Operative Agreements are several, and not joint or joint and several. SECTION 3. SUMMARY OF TRANSACTIONS. 3.1. OPERATIVE AGREEMENTS. -------------------- On the date hereof, each of the respective parties hereto and thereto shall execute and deliver this Agreement, the Lease, each applicable Ground Lease, the Agency Agreement, the Credit Agreement, the Notes, the Trust Agreement, the Certificates, the Security Agreement, each applicable Mortgage Instrument and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. 3.2. PROPERTY PURCHASE. ----------------- On each Property Closing Date and subject to the terms and conditions of this Agreement (a) the Holders will each make a Holder Advance in accordance with Sections 2 and 5 of this Agreement and the terms and provisions of the Trust Agreement, (b) the Lenders will each make Loans in accordance with Sections 1 and 5 of this Agreement and the terms and provisions of the Credit Agreement, (c) the Lessor will purchase and acquire good and marketable title to or ground lease pursuant to a Ground Lease, the applicable Property, each to be within an Approved State, identified by the Construction Agent, in each case pursuant to a Deed, Bill of Sale or 2 Ground Lease, as the case may be, and grant the Agent a lien on such Property by execution of the required Security Documents, (d) the Agent, the Lessee and the Lessor shall execute and deliver a Lease Supplement relating to such Property and (e) the Term shall commence with respect to such Property. 3.3. CONSTRUCTION OF IMPROVEMENTS; COMMENCEMENT OF BASIC RENT. -------------------------------------------------------- Construction Advances will be made with respect to particular Improvements to be constructed and with respect to ongoing Work regarding the Equipment and construction of particular Improvements, in each case, pursuant to the terms and conditions of this Agreement and the Agency Agreement. The Construction Agent will act as a construction agent on behalf of the Lessor respecting the Work regarding the Equipment, the construction of such Improvements and the expenditures of the Construction Advances related to the foregoing. The Construction Agent shall promptly notify the Lessor upon Completion of the Improvements and the Lessee shall commence to pay Basic Rent as of the Rent Commencement Date. SECTION 4. THE CLOSINGS. 4.1. INITIAL CLOSING DATE. -------------------- All documents and instruments required to be delivered on the Initial Closing Date shall be delivered at the offices of Moore & Van Allen, PLLC, Charlotte, North Carolina, or at such other location as may be determined by the Lessor, the Agent and the Lessee. 4.2. TRANSACTION EXPENSES; ACQUISITION ADVANCES; CONSTRUCTION ADVANCES. ----------------------------------------------------------------- The Construction Agent shall deliver to the Agent a requisition (a "Requisition"), in the form attached hereto as Exhibit A or in such other form ----------- --------- as is satisfactory to the Agent, in its reasonable discretion, in connection with (a) the Transaction Expenses and other fees, expenses and disbursements payable, pursuant to Section 7.1, by the Lessor and (b) each Acquisition Advance pursuant to Section 5.3 and (c) each Construction Advance pursuant to Section 5.4. SECTION 5. FUNDING OF ADVANCES; CONDITIONS PRECEDENT; REPORTING REQUIREMENTS ON COMPLETION DATE; THE LESSEE'S DELIVERY OF NOTICES; RESTRICTIONS ON LIENS. 5.1. GENERAL. ------- (a) To the extent funds have been advanced to the Lessor as Loans by the Lenders and as Holder Advances by the Holders, the Lessor will use such funds from time to time in accordance with the terms and conditions of this Agreement and the other Operative Agreements (i) at the direction of the Construction Agent to acquire the Properties in accordance with the terms of this Agreement, the Agency Agreement and the other Operative Agreements, (ii) to make Advances to the Construction Agent to permit the acquisition, testing, engineering, installation, development, construction, modification, design, and renovation, as applicable, of the Properties (or components 3 thereof) in accordance with the terms of the Agency Agreement and the other Operative Agreements, and (iii) to pay Transaction Expenses, fees, expenses and other disbursements payable by the Lessor under Sections 7.1(a) and 7.1(b). (b) In lieu of the payment of interest on the Loans and Holder Yield on the Holder Advances on any Scheduled Interest Payment Date with respect to any Property during the period prior to the Rent Commencement Date with respect to such Property, (i) each Lender's Loan shall automatically be increased by the amount of interest accrued and unpaid on such Loan for such period (except to the extent that at any time such increase would cause such Lender's Loan to exceed such Lender's Available Commitment, in which case the Lessee shall pay such excess amount to such Lender in immediately available funds on the date such Lender's Available Commitment was exceeded), and (ii) each Holder's Holder Advance shall automatically be increased by the amount of Holder Yield accrued and unpaid on such Holder Advance for such period (except to the extent that at any time such increase would cause the Holder Advance of such Holder to exceed such Holder's Available Holder Commitment, in which case the Lessee shall pay such excess amount to such Holder in immediately available funds on the date the Available Holder Commitment of such Holder was exceeded). Such increases in a Lender's Loan and a Holder's Holder Advance shall occur without any disbursement of funds by any Person but the applicable accrued interest or accrued Holder Yield shall be deemed to be paid as a result of such increase. 5.2. PROCEDURES FOR FUNDING. ---------------------- (a) The Construction Agent shall designate the date for Advances hereunder in accordance with the terms and provisions hereof; provided, -------- however, it is understood and agreed that no more than two (2) Advances ------- (excluding any conversion and/or continuation of any Loans or Holder Advances) may be requested during any calendar month. Prior to 12:00 Noon, Charlotte, North Carolina time, at least (i) three (3) Business Days prior to the Initial Closing Date and (ii) three (3) Business Days prior to the date on which any Acquisition Advance or Construction Advance is to be made, the Construction Agent shall deliver to the Agent, (A) with respect to the Initial Closing Date and each Acquisition Advance, a Requisition as described in Section 4.2 hereof (including without limitation a legal description of the Land, if any, a schedule of the Improvements, if any, and a schedule of the Equipment, if any, acquired or to be acquired on such date, and a schedule of the Work, if any, to be performed, each of the foregoing in a form reasonably acceptable to the Agent) and (B) with respect to each Construction Advance, a Requisition identifying (among other things) the Property to which such Construction Advance relates. (b) Each Requisition shall: (i) be irrevocable, (ii) request funds in an amount that is not in excess of the total aggregate of the Available Commitments plus the Available Holder Commitments at such time, and (iii) request that the Holders make Holder Advances and that the Lenders make Loans to the Lessor for the payment of Transaction Expenses, Property Acquisition Costs (in the case of an Acquisition Advance) or other Property Costs (in the case of a Construction Advance) that have 4 previously been incurred or are to be incurred on the date of such Advance to the extent such were not subject to a prior Requisition, in each case as specified in the Requisition. (c) Subject to the satisfaction of the conditions precedent set forth in Sections 5.3 or 5.4, as applicable, and subject to the last sentence of this Section 5.2(c), on each Property Closing Date or the date on which the Construction Advance is to be made, as applicable, (i) the Lenders shall make Loans based on their respective Lender Commitments to the Lessor in an aggregate amount equal to ninety-seven percent (97%) of the Requested Funds specified in any Requisition (ratably between the Tranche A Lenders and the Tranche B Lenders with the Tranche A Lenders funding eighty-five percent (85%) of the Requested Funds and the Tranche B Lenders funding twelve percent (12%) of the Requested Funds), up to an aggregate principal amount equal to the aggregate of the Available Commitments, (ii) each Holder shall make a Holder Advance based on its Holder Commitment in an amount such that the aggregate of all Holder Advances at such time shall be three percent (3%) of the balance of the Requested Funds specified in such Requisition, up to the aggregate advanced amount equal to the aggregate of the Available Holder Commitments; and (iii) the total amount of such Loans and Holder Advances made on such date shall (x) be used by the Lessor to pay Property Costs and/or Transaction Expenses within three (3) Business Days of the receipt by the Lessor of such Advance or (y) be advanced by the Lessor on the date of such Advance to the Construction Agent or the Lessee to pay Property Costs, as applicable. Notwithstanding that the Operative Agreements state that Advances shall be directed to the Lessor, each Advance shall in fact be directed to the Agent (for the benefit of the Lessor) and applied by the Agent (for the benefit of the Lessor) pursuant to the requirements imposed on the Lessor under the Operative Agreements. (d) With respect to an Advance obtained by the Lessor to pay for Property Costs and/or Transaction Expenses or other costs payable under Section 7.1 hereof and not expended by the Lessor for such purpose on the date of such Advance, such amounts shall be held by the Lessor (or the Agent on behalf of the Lessor) until the time designated for use of such funds or, if such funds are not used within three (3) Business Days of the date of the Lessor's receipt of such Advance, shall be applied regarding the applicable Advance to repay the Lenders and the Holders and shall remain available for future Advances in accordance with the terms hereof, and of the Credit Agreement and the Trust Agreement. Any such amounts held by the Lessor (or the Agent on behalf of the Lessor) shall be subject to the lien of the Security Agreement. (e) All Operative Agreements which are to be delivered to the Lessor, the Agent, the Lenders or the Holders shall be delivered to the Agent, on behalf of the Lessor, the Agent, the Lenders or the Holders, and such items (except for Notes, Certificates, Bills of Sale, the Ground Leases and chattel paper originals, with respect to which in each case there shall be only one original) shall be delivered with originals sufficient for the Lessor, the Agent, each Lender and each Holder. All other items which are to be delivered to the Lessor, the Agent, the Lenders or the Holders shall be delivered to the Agent, on behalf of the Lessor, the Agent, the Lenders or the Holders, and such other items shall be held by the Agent. To the extent any such other items are requested 5 in writing from time to time by the Lessor, any Lender or any Holder, the Agent shall provide a copy of such item to the party requesting it. (f) Notwithstanding the completion of any closing under this Agreement pursuant to Sections 5.3 or 5.4, each condition precedent in connection with any such closing may be subsequently enforced by the Agent (unless such has been expressly waived in writing by the Agent). 5.3. CONDITIONS PRECEDENT FOR THE LESSOR, THE AGENT, THE LENDERS AND THE -------------------------------------------------------------------- HOLDERS RELATING TO THE INITIAL CLOSING DATE AND THE ADVANCE OF FUNDS --------------------------------------------------------------------- FOR THE ACQUISITION OF A PROPERTY. --------------------------------- The obligations (i) on the Initial Closing Date of the Lessor, the Agent, the Lenders and the Holders to enter into the transactions contemplated by this Agreement, including without limitation the obligation to execute and deliver the applicable Operative Agreements to which each is a party on the Initial Closing Date, (ii) on the Initial Closing Date of the Holders to make Holder Advances, and of the Lenders to make Loans in order to pay Transaction Expenses, fees, expenses and other disbursements payable by the Lessor under Section 7.1(a) of this Agreement and (iii) on a Property Closing Date for the purpose of providing funds to the Lessor necessary to pay the Transaction Expenses, fees, expenses and other disbursements payable by the Lessor under Section 7.1(b) of this Agreement and to acquire or ground lease a Property (an "Acquisition ----------- Advance"), in each case (with regard to the foregoing Sections 5.3(i), (ii) and - ------- (iii)) are subject to the satisfaction or waiver of the following conditions precedent on or prior to the Initial Closing Date or the applicable Property Closing Date, as the case may be (to the extent such conditions precedent require the delivery of any agreement, certificate, instrument, memorandum, legal or other opinion, appraisal, commitment, title insurance commitment, lien report or any other document of any kind or type, such shall be in form and substance satisfactory to the Agent, in its reasonable discretion; notwithstanding the foregoing, the obligations of each party shall not be subject to any conditions contained in this Section 5.3 which are required to be performed by such party): (a) the material correctness of the representations and warranties of the parties to this Agreement contained herein, in each of the other Operative Agreements and each certificate delivered pursuant to any Operative Agreement (including without limitation the Incorporated Representations and Warranties) on each such date; (b) the performance by the parties to this Agreement of their respective agreements contained herein and in the other Operative Agreements to be performed by them on or prior to each such date; (c) the Agent shall have received a fully executed counterpart copy of the Requisition, appropriately completed; (d) title to each such Property shall conform to the representations and warranties set forth in Section 6.2(l) hereof; 6 (e) the Construction Agent shall have delivered to the Agent a good standing certificate for the Construction Agent in the state where each such Property is located, the Deed with respect to the Land and existing Improvements (if any), a copy of the Ground Lease (if any), and a copy of the Bill of Sale with respect to the Equipment (if any), respecting such of the foregoing as are being acquired or ground leased on each such date with the proceeds of the Loans and Holder Advances or which have been previously acquired or ground leased with the proceeds of the Loans and Holder Advances and such Land, existing Improvements (if any) and Equipment (if any) shall be located in an Approved State; (f) there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Advance requested by each such Requisition; (g) the Construction Agent shall have delivered to the Agent title insurance commitments to issue policies respecting each such Property in favor of the Lessor and the Agent from a title insurance company reasonably acceptable to the Agent, with such title exceptions thereto as are reasonably acceptable to the Agent; (h) the Construction Agent shall have delivered to the Agent a Phase I environmental site assessment respecting each such Property prepared by an independent recognized professional reasonably acceptable to the Agent; (i) the Construction Agent shall have delivered to the Agent a survey (with a flood hazard certification) respecting each such Property prepared by an independent recognized professional reasonably acceptable to the Agent; (j) unless such an opinion has previously been delivered with respect to a particular state, the Construction Agent shall have caused to be delivered to the Agent a legal opinion in the form attached hereto as Exhibit B or in such other form as is reasonably acceptable to the Agent --------- with respect to local law real property issues respecting the state in which each such Property is located addressed to the Lessor, the Agent, the Lenders and the Holders, from counsel located in the state where each such Property is located, prepared by counsel reasonably acceptable to the Agent; (k) [INTENTIONALLY OMITTED]; (l) the Construction Agent shall have delivered to the Agent invoices for, or other reasonably satisfactory evidence of, the various Transaction Expenses and other fees, expenses and disbursements referenced in Sections 7.1(a) or 7.1(b) of this Agreement, as appropriate; (m) the Construction Agent shall have caused to be delivered to the Agent a Mortgage Instrument (in such form as is reasonably acceptable to the Agent, with 7 revisions as necessary to conform to applicable state law), Lessor Financing Statements and Lender Financing Statements respecting each such Property, all fully executed and in recordable form; (n) the Lessee shall have delivered to the Agent with respect to each such Property a Lease Supplement and a memorandum (or short form lease) regarding the Lease and such Lease Supplement (such memorandum or short form lease to be in the form attached to the Lease as Exhibit B or in such --------- other form as is reasonably acceptable to the Agent, with modifications as necessary to conform to applicable state law, and in form suitable for recording); (o) with respect to each Acquisition Advance, the sum of the Available Commitment plus the Available Holder Commitment (after deducting the Unfunded Amount, if any, and after giving effect to the Acquisition Advance) will be sufficient to pay all amounts payable therefrom; (p) if any such Property is subject to a Ground Lease, the Construction Agent shall have caused a lease memorandum (or short form lease) to be delivered to the Agent for such Ground Lease and, if requested by the Agent, a landlord waiver and a mortgagee waiver (in each case, in such form as is reasonably acceptable to the Agent); (q) counsel (reasonably acceptable to the Agent) for the ground lessor of each such Property subject to a Ground Lease shall have issued to the Lessor, the Agent, the Lenders and the Holders, its opinion; (r) the Construction Agent shall have delivered to the Agent a preliminary Construction Budget for each such Property, if applicable; (s) the Construction Agent shall have provided evidence to the Agent of insurance with respect to each such Property as provided in the Lease; (t) the Construction Agent shall have caused an Appraisal regarding each such Property to be provided to the Agent from an appraiser reasonably satisfactory to the Agent; (u) the Construction Agent shall cause (i) Uniform Commercial Code lien searches, tax lien searches and judgment lien searches regarding the Lessee to be conducted (and copies thereof to be delivered to the Agent) in such jurisdictions as determined by the Agent by a nationally recognized search company reasonably acceptable to the Agent and (ii) the liens referenced in such lien searches which are objectionable to the Agent to be either removed or otherwise handled in a manner reasonably satisfactory to the Agent; provided, that if such lien searches regarding the Lessee previously -------- have been conducted in any jurisdiction, the Construction Agent shall cause updates to such searches to be conducted in such jurisdictions; 8 (v) all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Agreements and/or documents related thereto shall have been paid or provisions for such payment shall have been made by Lessor to the reasonable satisfaction of the Agent; (w) in the reasonable opinion of the Agent (after consultation with its counsel), the transactions contemplated by the Operative Agreements do not and will not subject the Lessor, the Lenders, the Agent or the Holders to any adverse regulatory prohibitions, constraints, penalties or fines; (x) each of the Operative Agreements to be entered into on such date shall have been duly authorized, executed and delivered by the parties thereto, and shall be in full force and effect, and the Agent shall have received a fully executed copy of each of the Operative Agreements; (y) [INTENTIONALLY OMITTED]. (z) as of the Initial Closing Date only, the Agent shall have received an Officer's Certificate, dated as of the Initial Closing Date, of the Lessee in the form attached hereto as Exhibit C or in such other form as is --------- reasonably acceptable to the Agent stating that (i) each and every representation and warranty of each Credit Party contained in the Operative Agreements to which it is a party is true and correct in all material respects on and as of the Initial Closing Date (or, if as to an earlier date, on and as of such earlier date); (ii) no Default or Event of Default has occurred and is continuing under any Operative Agreement; (iii) each Operative Agreement to which any Credit Party is a party is in full force and effect with respect to it; and (iv) each Credit Party has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Initial Closing Date; (aa) as of the Initial Closing Date only, the Agent shall have received (i) a certificate of the Secretary or an Assistant Secretary of each Credit Party, dated as of the Initial Closing Date, in the form attached hereto as Exhibit D or in such other form as is reasonably acceptable to the Agent --------- attaching and certifying as to (1) the resolutions of the Board of Directors of such Credit Party duly authorizing the execution, delivery and performance by such Credit Party of each of the Operative Agreements to which it is or will be a party, (2) the articles of incorporation of such Credit Party certified as of a recent date by the Secretary of State of its state of incorporation and its by-laws and (3) the incumbency and signature of persons authorized to execute and deliver on behalf of such Credit Party the Operative Agreements to which it is or will be a party and (ii) a good standing certificate (or local equivalent) from the respective states where such Credit Party is incorporated and where the principal place of business of such Credit Party is located as to its good standing in each such state. To the extent any Credit Party is a partnership, a limited liability company or is otherwise organized, such Person shall deliver to the Agent (in form and substance reasonably satisfactory to the Agent) as of the Initial Closing Date (A) a certificate regarding such Person and any 9 corporate general partners covering the matters described in Exhibit D and --------- (B) a good standing certificate, a certificate of limited partnership or a local equivalent of either the foregoing as applicable; (bb) [INTENTIONALLY OMITTED]; (cc) as of the Initial Closing Date only, the Agent shall have received an Officer's Certificate of the Lessor dated as of the Initial Closing Date in the form attached hereto as Exhibit E or in such other form as is --------- reasonably acceptable to the Agent, stating that (i) each and every representation and warranty of the Lessor contained in the Operative Agreements to which it is a party is true and correct in all material respects on and as of the Initial Closing Date (or, if as to an earlier date, on and as of such earlier date), (ii) each Operative Agreement to which the Lessor is a party is in full force and effect with respect to it and (iii) the Lessor has duly performed and complied with all covenants, agreements and conditions contained herein or in any Operative Agreement required to be performed or complied with by it on or prior to the Initial Closing Date; (dd) as of the Initial Closing Date only, the Agent shall have received (i) a certificate of the Secretary, an Assistant Secretary, Trust Officer or Vice President of the Trust Company in the form attached hereto as Exhibit F or in such other form as is reasonably acceptable to the Agent, --------- attaching and certifying as to (A) the signing resolutions duly authorizing the execution, delivery and performance by the Lessor of each of the Operative Agreements to which it is or will be a party, (B) its articles of association or other equivalent charter documents and its by-laws, as the case may be, certified as of a recent date by an appropriate officer of the Trust Company and (C) the incumbency and signature of persons authorized to execute and deliver on its behalf the Operative Agreements to which it is a party and (ii) a good standing certificate from the Office of the Comptroller of the Currency; (ee) as of the Initial Closing Date only, counsel for the Lessor reasonably acceptable to the Agent shall have issued to the Lessee, the Holders, the Lenders and the Agent its opinion in the form attached hereto as Exhibit G or in such other form as is reasonably acceptable to the --------- Agent; and (ff) as of the Initial Closing Date only, the Construction Agent shall have caused to be delivered to the Agent a legal opinion in the form attached hereto as Exhibit H or in such other form as is reasonably --------- acceptable to the Agent, addressed to the Lessor, the Agent, the Lenders and the Holders, from counsel reasonably acceptable to the Agent; and (gg) as of the Initial Closing Date only, the Construction Agent shall cause (i) tax lien searches and judgment lien searches regarding each Credit Party to be conducted (and copies thereof to be delivered to the Agent) in such jurisdictions as determined by the Agent by a nationally recognized search company reasonably acceptable to the Agent and (ii) the liens referenced in such lien searches which are 10 objectionable to the Agent to be either removed or otherwise handled in a manner reasonably satisfactory to the Agent. 5.4. CONDITIONS PRECEDENT FOR THE LESSOR, THE AGENT, THE LENDERS AND THE ------------------------------------------------------------------- HOLDERS RELATING TO THE ADVANCE OF FUNDS AFTER THE ACQUISITION -------------------------------------------------------------- ADVANCE. ------- The obligations of the Holders to make Holder Advances, and the Lenders to make Loans in connection with all requests for Advances subsequent to the acquisition of a Property (and to pay the Transaction Expenses, fees, expenses and other disbursements payable by the Lessor under Section 7.1 of this Agreement in connection therewith) are subject to the satisfaction or waiver of the following conditions precedent (to the extent such conditions precedent require the delivery of any agreement, certificate, instrument, memorandum, legal or other opinion, appraisal, commitment, title insurance commitment, lien report or any other document of any kind or type, such shall be in form and substance satisfactory to the Agent, in its reasonable discretion; notwithstanding the foregoing, the obligations of each party shall not be subject to any conditions contained in this Section 5.4 which are required to be performed by such party): (a) the material correctness on such date of the representations and warranties of the parties to this Agreement contained herein, in each of the other Operative Agreements and in each certificate delivered pursuant to any Operative Agreement (including without limitation the Incorporated Representations and Warranties); (b) the performance by the parties to this Agreement of their respective agreements contained herein and in the other Operative Agreements to be performed by them on or prior to each such date; (c) the Agent shall have received a fully executed counterpart of the Requisition, appropriately completed; (d) based upon the applicable Construction Budget which shall satisfy the requirements of this Agreement, the Available Commitments plus the Available Holder Commitment (after deducting the Unfunded Amount, if any, and after giving effect to the Construction Advance) will be sufficient to complete the Improvements; (e) there shall not have occurred and be continuing any Default or Event of Default under any of the Operative Agreements and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Construction Advance requested by the applicable Requisition; (f) the title insurance policy delivered in connection with the requirements of Section 5.3(g) shall provide for (or shall be endorsed to provide for) insurance in an amount at least equal to the maximum total Property Cost indicated by the Construction Budget referred to in subparagraph (d) above and there shall be no title change or exception objectionable to the Agent in its reasonable discretion; 11 (g) the Construction Agent shall have delivered to the Agent copies of the Plans and Specifications for the applicable Improvements; (h) the Construction Agent shall have delivered to the Agent invoices for, or other reasonably satisfactory evidence of, any Transaction Expenses and other fees, expenses and disbursements referenced in Section 7.1(b) that are to be paid with the Advance; (i) the Construction Agent shall have delivered, or caused to be delivered to the Agent, invoices, Bills of Sale or other documents reasonably acceptable to the Agent, in each case with regard to any Equipment or other components of such Property then being acquired with the proceeds of the Loans and Holder Advances and naming the Lessor as purchaser and transferee; (j) all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Agreements shall have been paid or provisions for such payment shall have been made by Lessor to the reasonable satisfaction of the Agent; (k) since the date of the most recent audited financial statements of the Lessee, there shall not have occurred any event, condition or state of facts which shall have or could reasonably be expected to have a Material Adverse Effect, other than as specifically contemplated by the Operative Agreements; and (l) in the opinion of the Agent (after consultation with its counsel), the transactions contemplated by the Operative Agreements do not and will not subject the Lessor, the Lenders, the Agent or the Holders to any adverse regulatory prohibitions, constraints, penalties or fines. 5.5. ADDITIONAL REPORTING AND DELIVERY REQUIREMENTS ON COMPLETION DATE AND --------------------------------------------------------------------- ON CONSTRUCTION PERIOD TERMINATION DATE. --------------------------------------- On or prior to the Completion Date for each Property, the Construction Agent shall deliver to the Agent an Officer's Certificate in the form attached hereto as Exhibit I or in such other form as is reasonably acceptable to the Agent --------- specifying (a) the address for such Property, (b) the Completion Date for such Property, (c) the aggregate Property Cost for such Property, (d) detailed, itemized documentation supporting the asserted Property Cost figures and (e) that all representations and warranties of the Construction Agent and Lessee in each of the Operative Agreements and each certificate delivered pursuant thereto (including without limitation the Incorporated Representations and Warranties) are true and correct in all material respects as of the Completion Date (or, if as to an earlier date, on and as of such earlier date). The Agent shall have the right to contest the information contained in such Officer's Certificate. Furthermore, on or prior to the Completion Date for each Property, the Construction Agent shall deliver or cause to be delivered to the Agent (unless previously delivered to the Agent) originals of the following, each of which shall be in form and substance acceptable to the Agent, in its reasonable discretion: (v) a title insurance endorsement regarding the title insurance policy delivered in 12 connection with the requirements of Section 5.3(g), but only to the extent such endorsement is necessary to provide for insurance in an amount at least equal to the maximum total Property Cost and, if endorsed, the endorsement shall not include a title change or exception objectionable to the Agent; (w) an as-built survey for such Property, (x) insurance certificates respecting such Property as required hereunder and under the Lease Agreement, (y) if requested by the Agent, amendments to the Lessor Financing Statements executed by the appropriate parties and (z) an Appraisal regarding such Property; provided, however, such -------- ------- an Appraisal shall not be required if, as of such Completion Date, the Agent has previously received Appraisal(s) pursuant to Section 5.3(t) for Properties that are then subject to the Lease and that have an aggregate value (as established by such Appraisal(s)) of at least $12,000,000. In addition, on the Completion Date for such Property the Construction Agent covenants and agrees that the recording fees, documentary stamp taxes or similar amounts required to be paid in connection with the related Mortgage Instrument shall have been paid in an amount required by applicable law, subject, however, to the obligations of the Lenders and the Holders to fund such costs to the extent required pursuant to Section 7.1. 5.6. THE CONSTRUCTION AGENT DELIVERY OF CONSTRUCTION BUDGET MODIFICATIONS. -------------------------------------------------------------------- The Construction Agent covenants and agrees to deliver to the Agent each month notification of any modification to any Construction Budget regarding any Property if such modification increases the cost to construct such Property; provided no Construction Budget may be increased unless (a) the title insurance - -------- policies referenced in Section 5.3(g) are also modified or endorsed, if necessary, to provide for insurance in an amount that satisfies the requirements of Section 5.4(f) of this Agreement and (b) after giving effect to any such amendment, the Construction Budget remains in compliance with the requirements of Section 5.4(d) of this Agreement. 5.7. RESTRICTIONS ON LIENS. --------------------- On each Property Closing Date, the Construction Agent shall cause each Property acquired by the Lessor on such date to be free and clear of all Liens except those referenced in Sections 6.2(r)(i) and 6.2(r)(ii). On each date a Property is either sold to a third party in accordance with the terms of the Operative Agreements or, pursuant to Section 22.1(a) of the Lease Agreement, retained by the Lessor, the Lessee shall cause such Property to be free and clear of all Liens (other than Lessor Liens and such other Liens that are expressly set forth as title exceptions on the title commitment issued under Section 5.3(g) with respect to such Property, to the extent such title commitment has been approved by the Agent). 5.8 JOINDER AGREEMENT REQUIREMENTS. ------------------------------ Each Restricted Subsidiary formed or acquired subsequent to the Initial Closing Date shall become a Guarantor and shall satisfy the following conditions within thirty (30) days after the formation or acquisition of such Restricted Subsidiary: (a) such Restricted Subsidiary shall execute and deliver to the Agent a Joinder Agreement in the form attached hereto as EXHIBIT J; --------- 13 (b) such Restricted Subsidiary shall have delivered to the Agent (x) an Officer's Certificate of such Restricted Subsidiary in the form attached hereto as EXHIBIT C, (y) a certificate of the Secretary or an Assistant --------- Secretary of such Restricted Subsidiary in the form attached hereto as EXHIBIT D and (z) good standing certificates (or local equivalent) from the --------- respective states where such Restricted Subsidiary is incorporated and where the principal place of business of such Restricted Subsidiary is located as to its good standing in each such state; (c) such Restricted Subsidiary shall have delivered to the Agent an opinion of counsel (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to in this Section 5.8), all in form, content and scope reasonably satisfactory to the Agent; and (d) the Agent shall have received such other documents, certificates and information as the Agent shall have reasonably requested. 5.9 PAYMENTS. -------- All payments of principal, interest, Holder Advances, Holder Yield and other amounts to be made by the Construction Agent or the Lessee on behalf of the Lessor under this Agreement or any other Operative Agreements (excluding Excepted Payments which shall be paid directly to the party to whom such payments are owed) shall be made to the Agent at the office designated by the Agent from time to time in Dollars and in immediately available funds, without setoff, deduction, or counterclaim. Subject to the definition of "Interest Period" in Appendix A attached hereto, whenever any payment under this Agreement ---------- or any other Operative Agreements shall be stated to be due on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time in such case shall be included in the computation of interest, Holder Yield and fees payable pursuant to the Operative Agreements, as applicable and as the case may be. SECTION 6. REPRESENTATIONS AND WARRANTIES. 6.1. REPRESENTATIONS AND WARRANTIES OF THE TRUST COMPANY AND THE BORROWER. -------------------------------------------------------------------- Effective as of the Initial Closing Date and the date of each Advance, the Trust Company in its individual capacity and as the Borrower, as indicated, represents and warrants to each of the other parties hereto as follows, provided, that the representations in the following paragraphs (h), (j) and (k) - -------- are made solely in its capacity as the Borrower: (a) It is a national banking association and is duly organized and validly existing and in good standing under the laws of the United States of America and has the power and authority to enter into and perform its obligations under the Trust Agreement and (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) has the corporate and trust power and authority to act as the Owner Trustee and 14 to enter into and perform the obligations under each of the other Operative Agreements to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party and each other agreement, instrument and document to be executed and delivered by it on or before such Closing Date in connection with or as contemplated by each such Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party; (b) The execution, delivery and performance of each Operative Agreement to which it is or will be a party, either in its individual capacity or (assuming due authorization, execution and delivery of the Trust Agreement by the Holders) as the Owner Trustee, as the case may be, has been duly authorized by all necessary action on its part and neither the execution and delivery thereof, nor the consummation of the transactions contemplated thereby, nor compliance by it with any of the terms and provisions thereof (i) does or will require any approval or consent of any trustee or holders of any of its indebtedness or obligations, (ii) does or will contravene any Legal Requirement relating to its banking or trust powers, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lien upon any of its property under, (A) its charter or by-laws, or (B) any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it is a party or by which it or its properties may be bound or affected, which contravention, breach, default or Lien under clause (B) would materially and adversely affect its ability, in its individual capacity or as the Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or (iv) does or will require any Governmental Action by any Governmental Authority regulating its banking or trust powers; (c) The Trust Agreement and, assuming the Trust Agreement is the legal, valid and binding obligation of the Holders, each other Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is or will be a party have been, or on or before such Closing Date will be, duly executed and delivered by the Trust Company or the Owner Trustee, as the case may be, and the Trust Agreement and each such other Operative Agreement to which the Trust Company or the Owner Trustee, as the case may be, is a party constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against the Trust Company or the Owner Trustee, as the case may be, in accordance with the terms thereof; (d) There is no action or proceeding pending or, to its knowledge, threatened to which it is or will be a party, either in its individual capacity or as the Owner Trustee, before any Governmental Authority that, if adversely determined, would materially and adversely affect its ability, in its individual capacity or as the Owner Trustee, to perform its obligations under the Operative Agreements to which it is a party or would question the validity or enforceability of any of the Operative Agreements to which it is or will become a party; 15 (e) It has not assigned or transferred any of its right, title or interest in or under the Lease, the Agency Agreement or its interest in any Property or any portion thereof, except in accordance with the Operative Agreements; (f) No Default of Event of Default under the Operative Agreements attributable to it has occurred and is continuing; (g) Except as otherwise contemplated in the Operative Agreements, the proceeds of the Loans and Holder Advances shall not be applied by the Owner Trustee for any purpose other than the purchase and/or lease of the Properties, the acquisition, installation and testing of the Equipment, the construction of Improvements and the payment of Transaction Expenses and the fees, expenses and other disbursements referenced in Sections 7.1(a) and 7.1(b) of this Agreement, in each case which accrue prior to the Rent Commencement Date with respect to a particular Property; (h) Neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf has offered or sold any interest in the Trust Estate or the Notes, or in any similar security relating to a Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than, in the case of the Notes, the Agent, and neither the Owner Trustee nor any Person authorized by the Owner Trustee to act on its behalf will take any action which would subject, as a direct result of such action alone, the issuance or sale of any interest in the Trust Estate or the Notes to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Agreement under the Trust Indenture Act of 1939, as amended; (i) The Owner Trustee's principal place of business, chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 79 South Main Street, Salt Lake City, Utah 84111; (j) The Owner Trustee is not engaged principally in, and does not have as one (1) of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States), and no part of the proceeds of the Loans or the Holder Advances will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System of the United States; (k) The Owner Trustee is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act; 16 (l) Each Property is free and clear of all Lessor Liens attributable to the Owner Trustee in its individual capacity; and (m) The Owner Trustee, in its trust capacity, is a party to no documents, instruments or agreements other than the Operative Agreements to which it is a party and any other documents delivered by the Owner Trustee in connection with the Operative Agreements. 6.2. REPRESENTATIONS AND WARRANTIES OF EACH CREDIT PARTY. --------------------------------------------------- Effective as of the Initial Closing Date, the date of each Advance, the date each Restricted Subsidiary delivers a Joinder Agreement and the Rent Commencement Date, each Credit Party represents and warrants to each of the other parties hereto that: (a) The Incorporated Representations and Warranties are true and correct (unless such relate solely to an earlier point in time) and the Lessee has delivered to the Agent the financial statements and other reports referred to in Article IX of the Lessee Credit Agreement; (b) The execution and delivery by each Credit Party of this Agreement and the other applicable Operative Agreements as of such date and the performance by each Credit Party of its respective obligations under this Agreement and the other applicable Operative Agreements are within the corporate, partnership or limited liability company (as the case may be) powers of such Credit Party, have been duly authorized by all necessary corporate, partnership or limited liability company (as the case may be) action on the part of such Credit Party (including without limitation any necessary shareholder action), have been duly executed and delivered, have received all necessary governmental approval, and do not and will not (i) violate any Legal Requirement which is binding on any Credit Party or any of its Subsidiaries, (ii) contravene or conflict with, or result in a breach of, any provision of the Articles of Incorporation, By-Laws or other organizational documents of any Credit Party or any of its Subsidiaries or of any agreement, indenture, instrument or other document which is binding on any Credit Party or any of its Subsidiaries or (iii) result in, or require, the creation or imposition of any Lien (other than pursuant to the terms of the Operative Agreements) on any asset of any Credit Party or any of its Subsidiaries; (c) This Agreement and the other applicable Operative Agreements, executed prior to and as of such date by any Credit Party, constitute the legal, valid and binding obligation of such Credit Party, as applicable, enforceable against such Credit Party, as applicable, in accordance with their terms. Each Credit Party has executed the various Operative Agreements required to be executed by such Credit Party as of such date; (d) Except as described in EXHIBIT K, there are no material actions, --------- suits or proceedings pending or, to the knowledge of such Credit Party, threatened against any Credit Party in any court or before any Governmental Authority (nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental 17 Authority to set aside, restrain, enjoin or prevent the full performance of any Operative Agreement or any transaction contemplated thereby) that (i) concern any Property or any Credit Party's interest therein, (ii) question the validity or enforceability of any Operative Agreement to which any Credit Party is a party or the overall transaction described in the Operative Agreements to which any Credit Party is a party or (iii) have or could reasonably be expected to have a Material Adverse Effect; (e) No Governmental Action by any Governmental Authority or other authorization, registration, consent, approval, waiver, notice or other action by, to or of any other Person pursuant to any Legal Requirement, contract, indenture, instrument or agreement or for any other reason is required to authorize or is required in connection with (i) the execution, delivery or performance by such Credit Party of any Operative Agreement, (ii) the legality, validity, binding effect or enforceability of any Operative Agreement with respect to such Credit Party, (iii) the acquisition, ownership, construction, completion, occupancy, operation, leasing or subleasing of any Property or (iv) any Advance, in each case, except those which have been obtained and are in full force and effect; (f) Upon the execution and delivery of each Lease Supplement to the Lease, (i) the Lessee will have unconditionally accepted the Property subject to the Lease Supplement and, to the Lessee's knowledge, will have a valid and subsisting leasehold interest in such Property, subject only to the Permitted Liens, and (ii) no offset will exist with respect to any Rent or other sums payable under the Lease; (g) Except as otherwise contemplated by the Operative Agreements, the Construction Agent shall not use the proceeds of any Holder Advance or Loan for any purpose other than the purchase and/or lease of the Properties, the acquisition, installation and testing of the Equipment, the construction of Improvements and the payment of Transaction Expenses and the fees, expenses and other disbursements referenced in Sections 7.1(a) and 7.1(b) of this Agreement, in each case which accrue prior to the Rent Commencement Date with respect to a particular Property; (h) All information heretofore or contemporaneously herewith furnished by each Credit Party or its Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all information hereafter furnished by or on behalf of each Credit Party or its Subsidiaries to the Agent, the Owner Trustee, any Lender or any Holder pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and such information, taken as a whole, does not and will not omit to state any material fact necessary to make such information, taken as a whole, not misleading; (i) The principal place of business, chief executive office and office of the Construction Agent and the Lessee where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at 9830 Patuxent Woods Drive, Columbia, Maryland and the states of 18 formation and the chief executive offices of each other Credit Party are located at the places set forth in EXHIBIT L; --------- (j) The representations and warranties of each Credit Party set forth in any of the Operative Agreements are true and correct in all material respects on and as of each such date as if made on and as of such date (or, if as to an earlier date, on and as of such earlier date). Each Credit Party is in all material respects in compliance with its obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements which is continuing and which has not been cured within any cure period expressly granted under the terms of the applicable Operative Agreement or otherwise waived in accordance with the applicable Operative Agreement. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on the date of each Advance; (k) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, each Property then being financed consists of (i) unimproved Land or (ii) Land and existing Improvements thereon which Improvements are either suitable for occupancy at the time of acquisition or ground leasing or will be renovated and/or modified in accordance with the terms of this Agreement. Each Property then being financed is located at the location set forth on the applicable Requisition, each of which is in one (1) of the Approved States; (l) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, the Lessor has good and marketable fee simple title to each Property, or, if any Property is the subject of a Ground Lease, the Lessor will have a valid ground leasehold interest enforceable against the ground lessor of such Property in accordance with the terms of such Ground Lease, subject only to (i) such Liens referenced in Sections 6.2(r)(i) and 6.2(r)(ii) on the applicable Property Closing Date and (ii) subject to Section 5.7, Permitted Liens after the applicable Property Closing Date; (m) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, no portion of any Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended; (n) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, each Property complies with all Insurance Requirements and all standards of Lessee with respect to similar properties owned by Lessee; 19 (o) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, each Property complies with all Legal Requirements as of such date (including without limitation all zoning and land use laws and Environmental Laws), except to the extent that failure to comply therewith, individually or in the aggregate, shall not have and could not reasonably be expected to have a Material Adverse Effect; (p) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, all utility services and facilities necessary for the construction and operation of the Improvements and the installation and operation of the Equipment regarding each Property (including without limitation gas, electrical, water and sewage services and facilities) are available at the applicable Land and will be constructed prior to the Completion Date for such Property; (q) As of each Property Closing Date, the date of each subsequent Advance and the Rent Commencement Date only, acquisition, installation and testing of the Equipment (if any) and construction of the Improvements (if any) to such date shall have been performed in a good and workmanlike manner, substantially in accordance with the applicable Plans and Specifications; (r) The Security Documents create, as security for the Obligations (as such term is defined in the Security Agreement), valid and enforceable security interests in, and Liens on, all of the Collateral, in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements, and such security interests and Liens are subject to no other Liens other than Liens that are expressly set forth as title exceptions on the title commitment issued under Section 5.3(g) with respect to the applicable Property, to the extent such title commitment has been approved by the Agent. Upon recordation of the Mortgage Instrument in the real estate recording office in the applicable Approved State identified by the Construction Agent or the Lessee, the Lien created by the Mortgage Instrument in the real property described therein shall be a perfected first priority mortgage Lien on such real property in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements. To the extent that the security interests in the portion of the Collateral comprised of personal property can be perfected by filing in the filing offices in the applicable Approved States or elsewhere identified by the Construction Agent or the Lessee, upon filing of the Lender Financing Statements in such filing offices, the security interests created by the Security Agreement shall be perfected first priority security interests in such personal property in favor of the Agent, for the ratable benefit of the Lenders and the Holders, as their respective interests appear in the Operative Agreements; (s) The Plans and Specifications for each Property will be prepared prior to the commencement of construction in accordance with all applicable Legal Requirements (including without limitation all applicable Environmental Laws and building, planning, zoning and fire codes), except to the extent the failure to comply therewith, individually or in the aggregate, shall not have and could not reasonably be expected to have a 20 Material Adverse Effect. Upon completion of the Improvements for each Property in accordance with the applicable Plans and Specifications, such Improvements will be within any building restriction lines and will not encroach in any manner onto any adjoining land (except as permitted by express written easements, which have been approved by the Agent); (t) As of the Rent Commencement Date only, each Property shall be improved in accordance with the applicable Plans and Specifications in a good and workmanlike manner and shall be operational; (u) As of the Initial Closing Date, each Restricted Subsidiary (formed prior to or on such date) shall have executed this Agreement in its capacity as a Guarantor; and (v) As of each Property Closing Date only, each Property has been acquired or ground leased pursuant to a Ground Lease at a price that is not in excess of fair market value or fair market rental value, as the case may be. SECTION 6B. GUARANTY 6B.1. GUARANTY OF PAYMENT AND PERFORMANCE. ----------------------------------- Subject to Section 6B.7, each Guarantor hereby, jointly and severally, unconditionally guarantees to each Financing Party the prompt payment and performance of the Company Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) or when such Obligations are otherwise to be performed; provided, notwithstanding the -------- foregoing, the obligations of the Guarantors under this Section 6B shall not constitute a direct guaranty of the indebtedness of the Lessor evidenced by the Notes but rather a guaranty of the Company Obligations arising under the Operative Agreements. This Section 6B is a guaranty of payment and performance and not of collection and is a continuing guaranty and shall apply to all Company Obligations whenever arising. All rights granted to the Financing Parties under this Section 6B shall be subject to the provisions of Sections 8.2(h) and 8.6. 6B.2. OBLIGATIONS UNCONDITIONAL. ------------------------- Each Guarantor agrees that the obligations of the Guarantors hereunder are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of any of the Operative Agreements, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Company Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety, guarantor or co-obligor, it being the intent of this Section 6B.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that this Section 6B may be enforced by the Financing Parties without the necessity at any time of resorting to or exhausting any other security or collateral and without the necessity at any time of having recourse to the Notes, the Certificates or any other of the 21 Operative Agreements or any collateral, if any, hereafter securing the Company Obligations or otherwise and each Guarantor hereby waives the right to require the Financing Parties to proceed against the Construction Agent, the Lessee or any other Person (including without limitation a co-guarantor) or to require the Financing Parties to pursue any other remedy or enforce any other right. Each Guarantor further agrees that it hereby waives any and all right of subrogation, indemnity, reimbursement or contribution against the Lessee and the Construction Agent or any other Guarantor of the Company Obligations for amounts paid under this Section 6B until such time as the Loans, Holder Advances, accrued but unpaid interest, accrued but unpaid Holder Yield and all other amounts owing under the Operative Agreements have been paid in full. Without limiting the generality of the waiver provisions of this Section 6B, each Guarantor hereby waives any rights to require the Financing Parties to proceed against the Construction Agent, the Lessee or any co-guarantor or to require Lessor to pursue any other remedy or enforce any other right, including without limitation, any and all rights under N.C. Gen. Stat. (S) 26-7 through 26-9. Each Guarantor further agrees that nothing contained herein shall prevent the Financing Parties from suing on any Operative Agreement or foreclosing any security interest in or Lien on any collateral, if any, securing the Company Obligations or from exercising any other rights available to it under any Operative Agreement, or any other instrument of security, if any, and the exercise of any of the aforesaid rights and the completion of any foreclosure proceedings shall not constitute a discharge of any Guarantor's obligations hereunder; it being the purpose and intent of each Guarantor that its obligations hereunder shall be absolute, independent and unconditional under any and all circumstances; provided that any amounts due under this Section 6B which -------- are paid to or for the benefit of any Financing Party shall reduce the Company Obligations by a corresponding amount (unless required to be rescinded at a later date). Neither any Guarantor's obligations under this Section 6B nor any remedy for the enforcement thereof shall be impaired, modified, changed or released in any manner whatsoever by an impairment, modification, change, release or limitation of the liability of the Construction Agent or the Lessee or by reason of the bankruptcy or insolvency of the Construction Agent or the Lessee. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Company Obligations and notice of or proof of reliance by any Financing Party upon this Section 6B or acceptance of this Section 6B. The Company Obligations shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Section 6B. All dealings between the Construction Agent, the Lessee and any of the Guarantors, on the one hand, and the Financing Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Section 6B. 6B.3. MODIFICATIONS. ------------- Each Guarantor agrees that (a) all or any part of the security now or hereafter held for the Company Obligations, if any, may be exchanged, compromised or surrendered from time to time; (b) no Financing Party shall have any obligation to protect, perfect, secure or insure any such security interests, liens or encumbrances now or hereafter held, if any, for the Company Obligations or the properties subject thereto; (c) with the written consent of the Lessee, the time or place of payment of the Company Obligations may be changed or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part; (d) the Construction Agent, the Lessee and any other party liable for payment under the Operative Agreements may be granted indulgences generally; (e) with the written consent of the Lessee, any of the provisions of 22 the Notes, the Certificates or any of the other Operative Agreements may be modified, amended or waived; (f) any party (including any co-guarantor) liable for the payment thereof may be granted indulgences or be released; and (g) any deposit balance for the credit of the Construction Agent, the Lessee or any other party liable for the payment of the Company Obligations or liable upon any security therefor may be released, in whole or in part, at, before or after the stated, extended or accelerated maturity of the Company Obligations, all without notice to or further assent by such Guarantor, which shall remain bound thereon, notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence or release. 6B.4. WAIVER OF RIGHTS. ---------------- Each Guarantor expressly waives to the fullest extent permitted by applicable law: (a) notice of acceptance of this Section 6B by any Financing Party and of all extensions of credit or other Advances to the Construction Agent and the Lessee by the Lenders pursuant to the terms of the Operative Agreements; (b) presentment and demand for payment or performance of any of the Company Obligations; (c) protest and notice of dishonor or of default with respect to the Company Obligations or with respect to any security therefor; (d) notice of any Financing Party obtaining, amending, substituting for, releasing, waiving or modifying any security interest, lien or encumbrance, if any, hereafter securing the Company Obligations, or any Financing Party's subordinating, compromising, discharging or releasing such security interests, liens or encumbrances, if any; and (e) all other notices to which such Guarantor might otherwise be entitled. Notwithstanding anything to the contrary herein, (i) each Guarantor's payments hereunder shall be due five (5) Business Days after written demand by the Agent for such payment (unless the Company Obligations are automatically accelerated pursuant to the applicable provisions of the Operative Agreements in which case the Guarantors' payments shall be automatically due) and (ii) any modification of the Operative Agreements which has the effect of increasing the Company Obligations shall not be enforceable against a Guarantor unless such Guarantor executes the document evidencing such modification or otherwise reaffirms its guaranty in writing in connection with such modification. 6B.5. REINSTATEMENT. ------------- The obligations of the Guarantors under this Section 6B shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Company Obligations is rescinded or must be otherwise restored by any holder of any of the Company Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each Guarantor agrees that it will indemnify each Financing Party on demand for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred by any Financing Party in connection with such rescission or restoration, including without limitation any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 23 6B.6. REMEDIES. -------- The Guarantors agree that, as between the Guarantors, on the one hand, and each Financing Party, on the other hand, the Company Obligations may be declared to be forthwith due and payable as provided in the applicable provisions of the Operative Agreements (and shall be deemed to have become automatically due and payable in the circumstances provided therein) notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing such Company Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or such Company Obligations being deemed to have become automatically due and payable), such Company Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors in accordance with the applicable provisions of the Operative Agreements. 6B.7. LIMITATION OF GUARANTY. ---------------------- Notwithstanding any provision to the contrary contained herein or in any of the other Operative Agreements, to the extent the obligations of any Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including without limitation because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including without limitation the Bankruptcy Code). Subject to Section 6B.5, upon the satisfaction of the Company Obligations in full, regardless of the source of payment, the Guarantors' obligations hereunder shall be deemed satisfied, discharged and terminated other than indemnifications set forth herein that expressly survive. 6B.8. PAYMENT OF AMOUNTS TO THE AGENT. ------------------------------- Each Financing Party hereby instructs each Guarantor, and each Guarantor hereby acknowledges and agrees, that until such time as the Loans and the Holder Advances are paid in full and the Liens evidenced by the Security Agreement and the Mortgage Instruments have been released any and all Rent (excluding Excepted Payments which shall be payable to each Holder or other Person as appropriate) and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person shall instead be paid directly to the Agent (excluding Excepted Payments which shall be payable to each Holder or other Person as appropriate) or as the Agent may direct from time to time for allocation and distribution in accordance with the procedures set forth in Section 8.7 hereof. 6B.9. RELEASE OF GUARANTORS. --------------------- Each Financing Party hereby agrees that (a) the Agent shall be permitted to release any Guarantor from its guaranty obligations under this Section 6B without the consent of any other Financing Party if the release is granted in connection with a disposition by the applicable Credit Party of all the shares of stock or partnership or other equity interest in such Guarantor and such disposition is permitted pursuant to the applicable provisions of the Operative Agreements and the 24 Lessee Credit Agreement and (b) the Agent shall be permitted to release any Guarantor from its guaranty obligations under this Section 6B.9 without the consent of any other Financing Party if the release is requested by JPFDI in connection with a dissolution of the Guarantor, subject to JPFDI providing to the Agent written representations to the effect that such Guarantor has no business operations and no assets. SECTION 7. PAYMENT OF CERTAIN EXPENSES. 7.1. TRANSACTION EXPENSES. -------------------- (a) The Lessor agrees on the Initial Closing Date, to pay, or cause to be paid, all Transaction Expenses arising from the Initial Closing Date, including without limitation all reasonable fees, expenses and disbursements of the various legal counsels for the Lessor and the Agent in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Initial Closing Date, the initial fees and expenses of the Owner Trustee due and payable on such Initial Closing Date, all fees, taxes and expenses for the recording, registration and filing of documents and all other reasonable fees, expenses and disbursements incurred in connection with such Initial Closing Date; provided, however, the Lessor shall pay such amounts described in this -------- ------- Section 7.1(a) only if (i) such amounts are properly described in a Requisition delivered on or before the Initial Closing Date; provided, that -------- Lessor shall provide to Lessee information regarding fees, expenses and disbursements of its legal counsel, and (ii) funds are made available by the Lenders and the Holders in connection with such Requisition in an amount sufficient to allow such payment. On the Initial Closing Date after delivery and receipt of the Requisition referenced in Section 4.2(a) hereof and satisfaction of the other conditions precedent for such date, the Holders shall make Holder Advances and the Lenders shall make Loans to the Lessor to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in this Section 7.1(a). (b) Subject to the provisions of Section 4.1(a) of the Agency Agreement and assuming no Default or Event of Default shall have occurred and be continuing and only for the period prior to the Rent Commencement Date, the Lessor agrees on each Property Closing Date, on the date of any Construction Advance and on the Completion Date to pay, or cause to be paid, all Transaction Expenses including without limitation all reasonable fees, expenses and disbursements of the various legal counsels for the Lessor and the Agent in connection with the transactions contemplated by the Operative Agreements and billed in connection with such Advance or such Completion Date, all amounts described in Section 7.1(a) of this Agreement which have not been previously paid, the annual fees and reasonable out-of- pocket expenses of the Owner Trustee, all fees, expenses and disbursements incurred with respect to the various items referenced in Sections 5.3, 5.4 and/or 5.5 (including without limitation any premiums for title insurance policies and charges for any updates to such policies) and all other reasonable fees, expenses and disbursements in connection with such Advance or such Completion Date including without limitation all expenses relating 25 to and all fees, taxes and expenses for the recording, registration and filing of documents and during the Commitment Period, all fees, expenses and costs referenced in Sections 7.3(a), 7.3(b), 7.3(d) and 7.4; provided, -------- however, the Lessor shall pay such amounts described in this Section 7.1(b) ------- only if (i) such amounts are properly described in a Requisition delivered on the applicable date and (ii) funds are made available by the Lenders and the Holders in connection with such Requisition in an amount sufficient to allow such payment. On each Property Closing Date, on the date of any Construction Advance or any Completion Date, after delivery of the applicable Requisition and satisfaction of the other conditions precedent for such date, the Holders shall make a Holder Advance and the Lenders shall make Loans to the Lessor to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in this Section 7.1(b). 7.2. BROKERS' FEES. ------------- The Lessee agrees to pay or cause to be paid any and all brokers' fees, if any, including without limitation any interest and penalties thereon, which are payable in connection with the transactions contemplated by this Agreement and the other Operative Agreements. 7.3. CERTAIN FEES AND EXPENSES. ------------------------- The Lessee agrees to pay or cause to be paid (a) the initial and annual Owner Trustee's fee and all reasonable expenses of the Owner Trustee and any co- trustees (including without limitation reasonable counsel fees and expenses) or any successor owner trustee and/or co-trustee, for acting as the owner trustee under the Trust Agreement, (b) all reasonable costs and expenses incurred by the Credit Parties, the Agent, the Lenders, the Holders or the Lessor in entering into any Lease Supplement and any future amendments, modifications, supplements, restatements and/or replacements with respect to any of the Operative Agreements, whether or not such Lease Supplement, amendments, modifications, supplements, restatements and/or replacements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by any Credit Party, the Agent, the Lenders, the Holders or the Lessor, (c) all reasonable costs and expenses incurred by the Credit Parties, the Agent, the Lenders, the Holders or the Lessor in connection with any exercise of remedies under any Operative Agreement or any purchase of any Property by the Construction Agent, the Lessee or any third party and (d) all reasonable costs and expenses incurred by the Credit Parties, the Agent, the Lenders, the Holders or the Lessor in connection with any transfer or conveyance of any Property, whether or not such transfer or conveyance is ultimately accomplished. 7.4. FACILITY FEE. ------------ During the Commitment Period, the Lessee agrees to pay or to cause to be paid to the Agent for the account of (a) the Lenders, respectively, a facility fee (the "Lender Facility Fee") equal to the product of the Commitment of each ------------------- Lender multiplied by a per annum rate equal to the Applicable Percentage for the Lender Facility Fee and (b) the Holders, respectively, a facility fee (the "Holder Facility Fee") equal to the product of the Holder Commitment of each - -------------------- Holder multiplied by a per annum rate equal to the Applicable Percentage for the Holder Facility Fee. Such Facility Fees shall be calculated on the basis of a year of three hundred sixty (360) days for 26 the actual days elapsed and shall be payable quarterly in arrears on each Facility Fee Payment Date. If all or a portion of any such Facility Fee shall not be paid when due, such overdue amount shall bear interest, payable by the Lessee on demand, at a rate per annum equal to the ABR (or in the case of Holder Yield, the ABR plus the Applicable Percentage for Eurodollar Holder Advances) plus two percent (2%) from the date of such non-payment until such amount is paid in full. SECTION 8. OTHER COVENANTS AND AGREEMENTS. 8.1. COOPERATION WITH THE CONSTRUCTION AGENT OR THE LESSEE. ----------------------------------------------------- The Holders, the Lenders, the Lessor (at the direction of the Majority Secured Parties) and the Agent shall, at the expense of and to the extent reasonably requested by the Construction Agent or the Lessee (but without assuming additional liabilities on account thereof and only to the extent such is acceptable to the Holders, the Lenders, the Lessor (at the direction of the Majority Secured Parties) and the Agent in their reasonable discretion), cooperate with the Construction Agent or the Lessee in connection with the Construction Agent or the Lessee satisfying its covenant obligations contained in the Operative Agreements including without limitation at any time and from time to time, promptly and duly executing and delivering any and all such further instruments, documents and financing statements (and continuation statements related thereto). 8.2. COVENANTS OF THE OWNER TRUSTEE AND THE HOLDERS. ---------------------------------------------- Each of the Owner Trustee and the Holders hereby agrees that so long as this Agreement is in effect: (a) Neither the Owner Trustee (in its trust capacity or in its individual capacity) nor any Holder will create or permit to exist at any time, and each of them will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, or to cause to be discharged, all Lessor Liens on the Properties attributable to it; provided, however, that the Owner Trustee and the Holders shall not be -------- ------- required to so discharge any such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not materially and adversely affect the rights of the Lessee under the Lease and the other Operative Agreements or involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, any Property or title thereto or any interest therein or the payment of Rent; (b) Without prejudice to any right under the Trust Agreement of the Owner Trustee to resign (subject to requirement set forth in the Trust Agreement that such resignation shall not be effective until a successor shall have agreed to accept such appointment), or the Holders' rights under the Trust Agreement to remove the institution acting as the Owner Trustee (after consent to such removal by the Agent as provided in the Trust Agreement), each of the Owner Trustee and the Holders hereby agrees with the 27 Lessee and the Agent (i) not to terminate or revoke the trust created by the Trust Agreement except as permitted by Article VIII of the Trust Agreement, (ii) not to amend, supplement, terminate or revoke or otherwise modify any provision of the Trust Agreement in such a manner as to adversely affect the rights of any such party without the prior written consent of such party and (iii) to comply with all of the terms of the Trust Agreement, the nonperformance of which would adversely affect such party; (c) The Owner Trustee or any successor may resign or be removed by the Holders as the Owner Trustee, a successor Owner Trustee may be appointed and a corporation may become the Owner Trustee under the Trust Agreement, only in accordance with the provisions of Article IX of the Trust Agreement and, with respect to such appointment, with the consent of the Lessee (so long as no Lease Event of Default shall have occurred and be continuing), which consent shall not be unreasonably withheld or delayed; (d) The Owner Trustee, in its capacity as the Owner Trustee under the Trust Agreement, and not in its individual capacity, shall not contract for, create, incur or assume any Debt, or enter into any business or other activity or enter into any contracts or agreements, other than pursuant to or under the Operative Agreements; (e) The Holders will not instruct the Owner Trustee to take any action in violation of the terms of any Operative Agreement; (f) Neither any Holder nor the Owner Trustee shall (i) commence any case, proceeding or other action with respect to the Owner Trustee under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding- up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official with respect to the Owner Trustee or for all or any substantial benefit of the creditors of the Owner Trustee; and neither any Holder nor the Owner Trustee shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph; (g) The Owner Trustee shall give prompt notice to the Lessee, the Holders and the Agent if the Owner Trustee's principal place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to any Property are kept, shall cease to be located at 79 South Main Street, Salt Lake City, Utah 84111, or if it shall change its name; (h) The Owner Trustee shall take or refrain from taking such actions and grant or refrain from granting such approvals with respect to the Operative Agreements and/or relating to any Property in each case as directed in writing by the Agent (until such time as the Loans are paid in full, and then by the Majority Holders) or, in connection with Sections 8.5 and 9.2 hereof, the Lessee; provided, however, that notwithstanding the -------- ------- foregoing provisions of this subparagraph (h) the Owner Trustee, the Agent, the Lenders and the Holders each acknowledge, covenant and agree that neither the Owner Trustee 28 nor the Agent shall act or refrain from acting, regarding each Unanimous Vote Matter, until such party has received the approval of each Lender and each Holder affected by such matter. (i) The Owner Trustee shall maintain the trust power and authority to act as the Owner Trustee and to perform its obligations under each of the Operative Agreements to which it is a party; (j) Except as otherwise provided in any Operative Agreement, and provided no Event of Default shall have occurred and be continuing, the Owner Trustee shall not make any Improvement with respect to any Property without the consent of the Lessee (which shall not be unreasonably withheld); and (k) The Owner Trustee shall use its best efforts to provide the Lessee or the Construction Agent, as the case may be, with any notices received in connection with any Property or the transactions contemplated hereby, unless the Owner Trustee, in its reasonable judgment, believes that such notice has previously been provided to the Lessee or the Construction Agent, as the case may be. 8.3. CREDIT PARTY COVENANTS, CONSENT AND ACKNOWLEDGMENT. -------------------------------------------------- (a) Each Credit Party acknowledges and agrees that the Owner Trustee, pursuant to the terms and conditions of the Security Agreement and the Mortgage Instruments, shall create Liens respecting the various personal property, fixtures and real property described therein in favor of the Agent. Each Credit Party hereby irrevocably consents to the creation, perfection and maintenance of such Liens. Each Credit Party shall, to the extent reasonably requested by any of the other parties hereto, cooperate with the other parties and shall from time to time duly execute and deliver any and all such future instruments, documents and financing statements (and continuation statements related thereto) as any other party hereto may reasonably request for the purpose of more fully effectuating the provisions of the Operative Agreements. (b) The Lessor hereby instructs each Credit Party, and each Credit Party hereby acknowledges and agrees, that until such time as the Loans and the Holder Advances are paid in full and the Liens evidenced by the Security Agreement and the Mortgage Instruments have been released (i) any and all Rent (excluding Excepted Payments which shall be payable to each Holder or other Person as appropriate) and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person shall instead be paid directly to the Agent (excluding Excepted Payments which shall be payable to each Holder or other Person as appropriate) or as the Agent may direct from time to time for allocation and distribution in accordance with the procedures set forth in Section 8.7 hereof, (ii) all rights of the Lessor under the Lease shall be exercised by the Agent and (iii) each Credit Party shall cause all notices, certificates, financial statements, communications and other information which are delivered, or are required to be delivered, to the Lessor, to also be delivered at the same time to the Agent. 29 (c) No Credit Party shall consent to or permit any amendment, supplement or other modification of the terms or provisions of any Operative Agreement except in accordance with Section 12.4 of this Agreement. (d) Each Credit Party hereby covenants and agrees that, except for amounts payable as Basic Rent, any and all payment obligations owing from time to time under the Operative Agreements by any Person to the Agent, any Lender, any Holder or any other Person shall (without further action) be deemed to be Supplemental Rent obligations payable by the Lessee and guaranteed by the other Credit Parties. Without limitation, such obligations shall include without limitation such arrangement fees, administrative fees, facility fees, breakage costs, indemnities, trustee fees and transaction expenses that the Operative Agreements provide are to be paid by the Lessee and which are incurred by the parties hereto in connection with the transactions contemplated by the Operative Agreements. (e) The Lessee hereby covenants and agrees to cause an Appraisal or reappraisal (in form and substance reasonably satisfactory to the Agent and from an appraiser selected by the Agent) to be issued respecting any Property as reasonably requested by the Agent from time to time (i) at each and every time as such shall be required to satisfy any regulatory requirements imposed on the Agent, the Lessor, the Trust Company, any Lender and/or any Holder and (ii) after the occurrence of an Event of Default. (f) The Lessee hereby covenants and agrees that, except for amounts payable as Basic Rent, any and all payment obligations owing from time to time under the Operative Agreements by any Person to the Agent, any Lender, any Holder or any other Person shall (without further action) be deemed to be Supplemental Rent obligations payable by the Lessee. Without limitation, such obligations of the Lessee shall include the Supplement Rent obligations pursuant to Section 3.3 of the Lease, arrangement fees, administrative fees, participation fees, commitment fees, facility fees, prepayment penalties, breakage costs, indemnities, trustee fees and transaction expenses incurred by the parties hereto in connection with the transactions contemplated by the Operative Agreements. (g) At any time the Lessor or the Agent is entitled under the Operative Agreements to possession of a Property or any component thereof, each of the Construction Agent and the Lessee hereby covenants and agrees, at its own cost and expense, to assemble and make the same available to the Agent (on behalf of the Lessor). (h) The Lessee hereby covenants and agrees that Equipment (other than Equipment that is essential to the operation of any individual parcel of Property where such Equipment is located) respecting any individual parcel of Property shall at no time constitute in excess of five percent (5%) of the aggregate Advances respecting such parcel of Property funded at such time under the Operative Agreements. 30 (i) The Lessee hereby covenants and agrees that as of Completion (i) the Property Cost for each individual parcel of the Property shall be no less than $5,000,000 and (ii) each parcel of the Property shall be a Permitted Facility. (j) The Lessee hereby covenants and agrees that it shall give prompt notice to the Agent if the Lessee's principal place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to any Property are kept, shall cease to be located at 9830 Patuxent Woods Drive, Columbia, Maryland or if it shall change its name. (k) Unless the Agent otherwise agrees in writing, the Lessee hereby covenants and agrees that Lessee will not exercise its Purchase Option prior to the Expiration Date with respect to less than all of the Properties if, after the exercise of such Purchase Option, the aggregate Property Cost of all Properties remaining after giving effect to such purchase will be less than $15,000,000. (l) Until all the obligations of the Credit Parties under the Operative Agreements have been finally and indefeasibly paid and satisfied in full, the Commitments and the Holder Commitments terminated and the Term has expired or been earlier terminated, then unless consent has been obtained from the Majority Secured Parties, the Lessee will furnish or cause to be furnished to each Holder, each Lender and the Agent at their respective addresses set forth or referenced in Section 12.2 of this Agreement, or such other office as may be designated by any such Holder, Lender or the Agent from time to time: (i) not later than forty-five (45) days after the end of each fiscal quarter, a certificate duly signed by the chief executive officer, chief operating officer, chief financial officer, treasurer or controller of USF setting forth the Total Debt Ratio for the period of four (4) consecutive fiscal quarters ending with such quarter-end and setting forth the computations employed in calculating the ratio (the "Margin Certificate") and (ii) at each time financial statements are ------------------- delivered or to be delivered pursuant to Section 28.1 of the Lease, a compliance certificate duly executed by the president, treasurer, chief financial offer or controller of USF substantially in the form of EXHIBIT M --------- attached hereto (the "Officer's Compliance Certificate"). -------------------------------- (m) The Lessee hereby covenants and agrees that the rights of the Lessee under this Agreement and the Lease shall not impair or in any way diminish the obligations of the Construction Agent and/or the rights of the Lessor under the Agency Agreement. (n) Each Credit Party hereby covenants and agrees to cause each Restricted Subsidiary formed after the Initial Closing Date to execute a Joinder Agreement within thirty (30) days of the formation of such Restricted Subsidiary. (o) Each Credit Party shall promptly notify the Agent, or cause the Agent to be promptly notified, upon such Credit Party gaining knowledge of the occurrence of any Default or Event of Default which is continuing at such time. In any event, such notice shall be provided to the Agent within ten (10) days of when such Credit Party gains such knowledge. 31 (p) Until all of the obligations under the Operative Agreements have been finally and indefeasibly paid and satisfied in full and the Commitments and the Holder Commitments terminated (unless consent has been obtained from the Majority Secured Parties), each Credit Party will: (i) except as permitted by the express provisions of the Lessee Credit Agreement, preserve and maintain its separate legal existence and all material rights, franchises, licenses and privileges necessary to the conduct of its business, and qualify and remain qualified as a foreign corporation (or partnership, limited liability company or other such similar entity, as the case may be) and authorized to do business in each jurisdiction in which the failure to do so qualify would have a Material Adverse Effect; (ii) pay and perform all obligations of the Credit Parties under the Operative Agreements and pay and perform (A) all taxes, assessments and other governmental charges that may be levied or assessed upon it or any of its property, and (B) all other indebtedness, obligations and liabilities in accordance with customary trade practices, which if not paid would have a Material Adverse Effect; provided that any Credit Party may contest any item described -------- in this Section 8.3(p)(ii) in good faith so long as adequate reserves are maintained with respect thereto in accordance with GAAP; (iii) to the extent failure to do so would have a Material Adverse Effect, observe and remain in compliance with all applicable Laws and maintain in full force and effect all Governmental Actions, in each case applicable to the conduct of its business, keep in full force and effect all licenses, certifications or accreditations necessary for any Facility to carry on its business, and not permit the termination of any insurance reimbursement program available to any Facility; and (iv) provided that the Agent, the Lenders and the Holders use reasonable efforts to minimize disruption to the business of the Credit Parties, permit representatives of the Agent or any Lender or Holder, from time to time, to visit and inspect its properties; inspect, audit and make extracts from its books, records and files, including without limitation management letters prepared by independent accountants; and discuss with its principal officers, and its independent accountants, its business, assets, liabilities, financial condition, results of operations and business prospects. (q) Lessee shall take all action as is necessary in Lessee's reasonable opinion to assure that Lessee's computer based systems are able to operate and effectively process data including dates on and after January 1, 2000. 32 (r) Lessee shall perform any and all obligations of Lessor under, and cause Lessor to otherwise remain in full compliance with, the terms and provisions of each Ground Lease, if any. 8.4. SHARING OF CERTAIN PAYMENTS. --------------------------- Except for Excepted Payments, the parties hereto acknowledge and agree that all payments due and owing by any Credit Party to the Lessor under the Lease or any of the other Operative Agreements shall be made by any Credit Party directly to the Agent as more particularly provided in Section 8.3 hereof. The Lessor, the Holders, the Agent, the Lenders and the Credit Parties acknowledge the terms of Section 8.7 of this Agreement regarding the allocation of payments and other amounts made or received from time to time under the Operative Agreements and agree that all such payments and amounts are to be allocated as provided in Section 8.7 of this Agreement. 8.5. GRANT OF EASEMENTS, ETC. ------------------------ The Agent, the Lenders and the Holders hereby agree that, so long as no Default or Event of Default shall have occurred and be continuing, the Owner Trustee shall, from time to time at the request of the Lessee (and with the prior consent of the Agent), in connection with the transactions contemplated by the Agency Agreement, the Lease or the other Operative Agreements, (i) grant easements and other rights in the nature of easements with respect to any Property, (ii) release existing easements or other rights in the nature of easements which are for the benefit of any Property, (iii) execute and deliver to any Person any instrument appropriate to confirm or effect such grants or releases, and (iv) execute and deliver to any Person such other documents or materials in connection with the acquisition, development, construction, testing or operation of any Property, including without limitation reciprocal easement agreements, construction contracts, operating agreements, development agreements, plats, replats or subdivision documents; provided, that each of the -------- agreements referred to in this Section 8.5 shall be of the type normally executed by the Lessee in the ordinary course of the Lessee's business and shall be on commercially reasonable terms so as not to diminish the value of any Property in any material respect. 8.6. APPOINTMENT BY THE AGENT, THE LENDERS, THE HOLDERS AND THE OWNER ---------------------------------------------------------------- TRUSTEE. ------- The Holders hereby appoint the Agent to act as collateral agent for the Holders in connection with the Lien granted by the Security Documents to secure the Holder Amount. The Lenders and the Holders acknowledge and agree and direct that the rights and remedies of the beneficiaries of the Lien of the Security Documents shall be exercised by the Agent on behalf of the Lenders and the Holders as directed from time to time by the Majority Secured Parties or, pursuant to Sections 8.2(h) and 12.4, all of the Lenders and the Holders, as the case may be; provided, in all cases, the Agent shall allocate payments and other -------- amounts received in accordance with Section 8.7. The Agent is further appointed to provide notices under the Operative Agreements on behalf of the Owner Trustee (as determined by the Agent, in its reasonable discretion), to receive notices under the Operative Agreements on behalf of the Owner Trustee and (subject to Sections 8.5 and 9.2) to take such other action under the Operative 33 Agreements on behalf of the Owner Trustee as the Agent shall determine in its reasonable discretion from time to time. The Agent hereby accepts such appointments. For purposes hereof, the provisions of Section 7 of the Credit Agreement, together with such other terms and provisions of the Credit Agreement and the other Operative Agreements as required for the full interpretation and operation of Section 7 of the Credit Agreement are hereby incorporated by reference as if restated herein for the mutual benefit of the Agent and each Holder as if each Holder were a Lender thereunder. Outstanding Holder Advances and outstanding Loans shall each be taken into account for purposes of determining Majority Secured Parties. Further, the Agent shall be entitled to take such action on behalf of the Owner Trustee as is delegated to the Agent under any Operative Agreement (whether express or implied) as may be reasonably incidental thereto. The parties hereto hereby agree to the provisions contained in this Section 8.6. Any appointment of a successor agent under Section 7.9 of the Credit Agreement shall also be effective as an appointment of a successor agent for purposes of this Section 8.6. 8.7. COLLECTION AND ALLOCATION OF PAYMENTS AND OTHER AMOUNTS. ------------------------------------------------------- (a) Each Credit Party has agreed pursuant to Section 5.9 and otherwise in accordance with the terms of this Agreement to pay to (i) the Agent any and all Rent (excluding Excepted Payments) and any and all other amounts of any kind or type under any of the Operative Agreements due and owing or payable to any Person and (ii) each Person as appropriate the Excepted Payments. Promptly after receipt, the Agent shall apply and allocate, in accordance with the terms of this Section 8.7, such amounts received from any Credit Party and all other payments, receipts and other consideration of any kind whatsoever received by the Agent pursuant to the Security Agreement or otherwise received by the Agent, the Holders or any of the Lenders in connection with the Collateral, the Security Documents or any of the other Operative Agreements. Ratable distributions among the Lenders and the Holders under this Section 8.7 shall be made based on (in the case of the Lenders) the ratio of the outstanding Loans to the aggregate Property Cost and (in the case of the Holders) the ratio of the outstanding Holder Advances to the aggregate Property Cost. Ratable distributions among the Tranche A Lenders under this Section 8.7 shall be made based on the ratio of the individual Tranche A Lender's Commitment for Tranche A Loans to the aggregate of all the Tranche A Lenders' Commitments for Tranche A Loans. Ratable distributions among the Tranche B Lenders under this Section 8.7 shall be made based on the ratio of the individual Tranche B Lender's Commitment for Tranche B Loans to the aggregate of all the Tranche B Lenders' Commitments for Tranche B Loans. Ratable distributions among the Lenders (in situations where the Tranche A Lenders are not differentiated from the Tranche B Lenders) shall be made based on the ratio of the individual Lender's Commitment to the aggregate of all the Lenders' Commitments. Ratable distributions among the Holders under this Section 8.7 shall be based on the ratio of the individual Holder's Holder Commitment to the aggregate of all the Holders' Holder Commitments. (b) Payments and other amounts received by the Agent from time to time in accordance with the terms of subparagraph (a) shall be applied and allocated as follows: 34 (i) Any such payment or amount identified as or deemed to be Basic Rent shall be applied and allocated by the Agent first, ratably to the ----- Lenders for application and allocation to the payment of interest on the Loans and thereafter the principal of the Loans which is due and payable on such date and second, to the Holders for the payment of ------ accrued Holder Yield with respect to the Holder Advances and thereafter the portion of the Holder Advances which is due on such date; and third, if no Default or Event of Default is in effect, any ----- excess shall be paid to such Person or Persons as the Lessee may designate; provided, that if a Default or Event of Default is in -------- effect, such excess (if any) shall instead be held by the Agent until the earlier of (I) the first date thereafter on which no Default or Event of Default shall be in effect (in which case such payments or returns shall then be made to such other Person or Persons as the Lessee may designate) and (II) the Maturity Date or the Expiration Date, as the case may be (or, if earlier, the date of any Acceleration), in which case such amounts shall be applied and allocated in the manner contemplated by Section 8.7(b)(iv). (ii) If on any date the Agent or the Lessor shall receive any amount in respect of (A) any Casualty or Condemnation pursuant to Sections 15.1(a) or 15.1(g) of the Lease (excluding any payments in respect thereof which are payable to the Lessee in accordance with the Lease), or (B) the Termination Value in connection with the delivery of a Termination Notice pursuant to Article XVI of the Lease, or (C) the Termination Value in connection with the exercise of the Purchase Option under Section 20.1 of the Lease or the exercise of the option of the Lessor to transfer the Properties to the Lessee pursuant to Section 20.3 of the Lease, or (D) any payment required to be made or elected to be made by the Construction Agent to the Lessor pursuant to the terms of the Agency Agreement, then in each case, the Lessor shall be required to pay such amount received (1) if no Acceleration has occurred, first to prepay the principal balance of the Loans and ------ accrued interest thereon, on a pro rata basis, and second, to prepay the Holder Advances and accrued Holder Yield thereon, each on a pro rata basis, or (2) if an Acceleration has occurred, to apply and allocate the proceeds respecting Sections 8.7(b)(ii)(A) through 8.7(b)(ii)(D) in accordance with Section 8.7(b)(iii) hereof. (iii) Subject to Section 8.7(c), an amount equal to any payment identified as proceeds of the sale or other disposition (or lease upon the exercise of remedies) of the Properties or any portion thereof, whether pursuant to Article XXII of the Lease or the exercise of remedies under the Security Documents or otherwise, the execution of remedies set forth in the Lease and any payment in respect of excess wear and tear pursuant to Section 22.3 of the Lease (whether such payment relates to a period before or after the Construction Period Termination Date) shall be applied and allocated by the Agent first, ----- ratably to the payment of the principal and interest of the Tranche B Loans then outstanding, , second, to the extent such amount exceeds ------ the maximum amount to be returned pursuant to the foregoing provisions of this paragraph (iii), ratably to the payment of the principal and interest of the Tranche A Loans then outstanding, third, to any and ----- all other amounts owing under the Operative Agreements to the Lenders 35 under the Tranche B Loans, fourth, to any and all other amounts owing ------ under the Operative Agreements to the Lenders under the Tranche A Loans, fifth, ratably to the payment to the Holders of the outstanding ----- principal balance of all Holder Advances plus all outstanding Holder Yield with respect to such outstanding Holder Advances, sixth, to any ----- and all other amounts owing under the Operative Agreements to the Holders, and seventh, to the extent moneys remain after application ------- and allocation pursuant to clauses first through sixth above, to the ----- ----- Owner Trustee for application and allocation to any and all other amounts owing to the Holders or the Owner Trustee and as the Holders shall determine; provided, where no Event of Default shall exist and -------- be continuing and a prepayment is made for any reason with respect to less than the full amount of the outstanding principal amount of the Loans and the outstanding Holder Advances, the proceeds shall be applied and allocated ratably to the Lenders and to the Holders. (iv) Subject to Section 8.7(c), an amount equal to (A) any such payment identified as a payment pursuant to Section 22.1(b) of the Lease (or otherwise) of the Maximum Residual Guarantee Amount (and any such lesser amount as may be required by Section 22.1(b) of the Lease) in respect of the Properties, (B) any other amount payable upon any exercise of remedies after the occurrence of an Event of Default not covered by Sections 8.7(b)(i) or 8.7(b)(iii) above (including without limitation any amount received in connection with an Acceleration which does not represent proceeds from the sale or liquidation of the Properties) and (C) any other amount payable by any Guarantor pursuant to Section 6B shall be applied and allocated by the Agent first, ----- ratably, to the payment of the principal and interest balance of Tranche A Loans then outstanding, second, ratably to the payment of ------ the principal and interest balance of the Tranche B Loans then outstanding, third, to the payment of any other amounts owing to the ----- Lenders hereunder or under any other Operative Agreement, fourth, ------ ratably to the payment of the principal balance of all Holder Advances plus all outstanding Holder Yield with respect to such outstanding Holder Advances, and fifth, to the extent moneys remain after ----- application and allocation pursuant to clauses first through fourth -------------------- above, to the Owner Trustee for application and allocation to Holder Advances and Holder Yield and any other amounts owing to the Holders or the Owner Trustee as the Holders shall determine. (v) An amount equal to any such payment identified as Supplemental Rent shall be applied and allocated by the Agent to the payment of any amounts then owing to the Agent, the Lenders, the Holders and the other parties to the Operative Agreements (or any of them) (other than any such amounts payable pursuant to the preceding provisions of this Section 8.7(b)) as shall be determined by the Agent in its reasonable discretion; provided, however, that Supplemental Rent received upon -------- ------- the exercise of remedies after the occurrence and continuance of an Event of Default in lieu of or in substitution of the Maximum Residual Guarantee Amount or as a partial payment thereon shall be applied and allocated as set forth in Section 8.7(b)(iv). 36 (vi) The Agent in its reasonable judgment shall identify the nature of each payment or amount received by the Agent and apply and allocate each such amount in the manner specified above. (c) Upon the termination of the Commitments and the payment in full of the Loans and all other amounts owing by the Owner Trustee hereunder or under any Credit Document and the payment in full of all amounts owing to the Holders and the Owner Trustee under the Trust Agreement, any moneys remaining with the Agent shall be returned to the Owner Trustee or such other Person or Persons as the Holders may designate for application and allocation to any and all other amounts owing to the Holders or the Owner Trustee and as the Holders shall determine. In the event of an Acceleration it is agreed that, prior to the application and allocation of amounts received by the Agent in the order described in Section 8.7(b) above, any such amounts shall first be applied and allocated to the payment of (i) any and all sums advanced by the Agent in order to preserve the Collateral or to preserve its Lien thereon, (ii) the expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing or realizing on the Collateral, or of any exercise by the Agent of its rights under the Security Documents, together with reasonable attorneys' fees and expenses and court costs and (iii) any and all other amounts reasonably owed to the Agent under or in connection with the transactions contemplated by the Operative Agreements (including without limitation any accrued and unpaid administration fees). 8.8. RELEASE OF PROPERTIES, ETC. --------------------------- If the Lessee shall at any time purchase any Property pursuant to the Lease, or the Construction Agent shall purchase any Property pursuant to the Agency Agreement, or if any Property shall be sold in accordance with Article XXII of the Lease, then, upon satisfaction by the Owner Trustee of its obligation to prepay the Loans, Holder Advances and all other amounts owing to the Lenders and the Holders under the Operative Agreements, the Agent is hereby authorized and directed to release such Properties from the Liens created by the Security Documents to the extent of its interest therein. In addition, upon the termination of the Commitments and the Holder Commitments and the payment in full of the Loans, the Holder Advances and all other amounts owing by the Owner Trustee and the Lessee hereunder or under any other Operative Agreement the Agent is hereby authorized and directed to release all of the Properties from the Liens created by the Security Documents to the extent of its interest therein. Upon request of the Owner Trustee following any such release, the Agent shall, at the sole cost and expense of the Lessee, execute and deliver to the Owner Trustee and the Lessee such documents as the Owner Trustee or the Lessee shall reasonably request to evidence such release. 37 8.9. RECORDATION OF MEMORANDA OF LEASE AND LEASE SUPPLEMENTS. ------------------------------------------------------- The Agent, the Lenders and the Holders hereby covenant and agree that, so long as no Lease Event of Default exists, the Agent shall hold in escrow and shall not record the Lease Supplements or memoranda of lease delivered to the Agent from time to time in accordance with the terms of Section 5.3(n) hereof. In the event that a Lease Event of Default occurs and is continuing, then (a) the Agent may, in its sole discretion, record any memorandum of lease and/or any Lease Supplement then held by (or thereafter delivered to) the Agent and (b) the Lessee covenants and agrees to pay all necessary recording fees, documentary stamp taxes and similar amounts required to be paid in connection with the recording of such memoranda of lease and/or such Lease Supplements. SECTION 9. CREDIT AGREEMENT AND TRUST AGREEMENT. 9.1. THE CONSTRUCTION AGENT'S AND THE LESSEE'S CREDIT AGREEMENT RIGHTS. ----------------------------------------------------------------- Notwithstanding anything to the contrary contained in the Credit Agreement, the Agent, the Lenders, the Holders, the Credit Parties and the Owner Trustee hereby agree that, prior to the occurrence and continuation of any Default or Event of Default, the Construction Agent or the Lessee, as the case may be, shall have the following rights: (a) the right to designate an account to which amounts funded under the Operative Agreements shall be credited pursuant to Section 2.3(a) of the Credit Agreement; (b) the right to terminate or reduce the Commitments pursuant to Section 2.5(a) of the Credit Agreement; (c) the right to exercise the conversion and continuation options pursuant to Section 2.7 of the Credit Agreement; (d) the right to receive any notice and any certificate, in each case issued pursuant to Section 2.11(a) of the Credit Agreement; (e) the right to replace any Lender pursuant to Section 2.11(b) of the Credit Agreement; (f) the right to approve any successor agent pursuant to Section 7.9 of the Credit Agreement; and (g) the right to consent to any assignment by a Lender to which the Lessor has the right to consent pursuant to Section 9.8 of the Credit Agreement. 38 9.2. THE CONSTRUCTION AGENT'S AND THE LESSEE'S TRUST AGREEMENT RIGHTS. ---------------------------------------------------------------- Notwithstanding anything to the contrary contained in the Trust Agreement, the Credit Parties, the Owner Trustee and the Holders hereby agree that, prior to the occurrence and continuation of any Default or Event of Default, the Construction Agent or the Lessee, as the case may be, shall have the following rights: (a) the right to exercise the conversion and continuation options pursuant to Section 3.8 of the Trust Agreement; (b) the right to receive any notice and any certificate, in each case issued pursuant to Section 3.9(a) of the Trust Agreement; (c) the right to replace any Holder pursuant to Section 3.9(b) of the Trust Agreement; (d) the right to exercise the removal options contained in Section 3.9 of the Trust Agreement; and (e) no removal of the Owner Trustee and appointment of a successor Owner Trustee pursuant to Section 9.1 of the Trust Agreement shall be made without the prior written consent (not to be unreasonably withheld or delayed) of the Lessee. (f) the right to designate an account to which amounts funded under the Operative Agreements shall be credited pursuant to Section 3.1(b) of the Trust Agreement. SECTION 10. TRANSFER OF INTEREST. 10.1. RESTRICTIONS ON TRANSFER. ------------------------ Each Lender may participate, assign or transfer all or a portion of its interest hereunder and under the other Operative Agreements in accordance with Sections 9.7 and 9.8 of the Credit Agreement; provided, each participant, -------- assignee or transferee must obtain the same ratable interest in Tranche A Loans, Tranche B Loans and Holder Advances. The Holders may, directly or indirectly, assign, convey or otherwise transfer any of their right, title or interest in or to the Trust Estate or the Trust Agreement with the prior written consent of the Agent and the Lessee (which consent shall not be unreasonably withheld or delayed) and in accordance with the terms of Section 11.8(b) of the Trust Agreement; provided, each participant, assignee or tranferee must obtain the --------- same ratable interest in Tranche A Loans, Tranche B Loans and Holder Advances. The Owner Trustee may, subject to the rights of the Lessee under the Lease and the other Operative Agreements and to the Lien of the applicable Security Documents but only with the prior written consent of the Agent (which consent may be withheld by the Agent in its sole discretion) and (provided, no Default -------- or Event of Default has occurred and is continuing) with the consent of the Lessee, directly or indirectly, assign, convey, appoint an agent with respect to 39 enforcement of, or otherwise transfer any of its right, title or interest in or to any Property, the Lease, the Trust Agreement and the other Operative Agreements (including without limitation any right to indemnification thereunder), or any other document relating to a Property or any interest in a Property as provided in the Trust Agreement and the Lease. The provisions of the immediately preceding sentence shall not apply to the obligations of the Owner Trustee to transfer Property to the Lessee or a third party purchaser pursuant to Article XXII of the Lease upon payment for such Property in accordance with the terms and conditions of the Lease. No Credit Party may assign any of the Operative Agreements or any of their respective rights or obligations thereunder or with respect to any Property in whole or in part to any Person without the prior written consent of the Agent, the Lenders, the Holders and the Lessor. 10.2. EFFECT OF TRANSFER. ------------------ From and after any transfer effected in accordance with this Section 10, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer; provided, -------- however, that any transferor shall remain liable hereunder and under such other - ------- documents to the extent that the transferee shall not have assumed the obligations of the transferor thereunder. Upon any transfer by the Owner Trustee, a Holder or a Lender as above provided, any such transferee shall assume the obligations of the Owner Trustee, the Holder or the Lender, as the case may be, and shall be deemed an "Owner Trustee", "Holder", or "Lender", as the case may be, for all purposes of such documents and each reference herein to the transferor shall thereafter be deemed a reference to such transferee for all purposes, except as provided in the preceding sentence. Notwithstanding any transfer of all or a portion of the transferor's interest as provided in this Section 10, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer including without limitation rights to indemnification under any such document. SECTION 11. INDEMNIFICATION. 11.1. GENERAL INDEMNITY. ----------------- Whether or not any of the transactions contemplated hereby shall be consummated, the Indemnity Provider hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims, which may be imposed on, incurred by or asserted against an Indemnified Person by any third party, including without limitation Claims arising from the negligence of an Indemnified Person (but not to the extent such Claims arise from the gross negligence or willful misconduct of such Indemnified Person) in any way relating to or arising or alleged to arise out of the execution, delivery, performance or enforcement of this Agreement, the Lease or any other Operative Agreement or on or with respect to any Property or any component thereof, including without limitation Claims in any way relating to or arising or alleged to arise out of (a) the financing, refinancing, purchase, acceptance, rejection, ownership, design, construction, refurbishment, development, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, occupancy, operation, maintenance, repair, modification, transportation, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of any Property or any 40 part thereof, including without limitation the acquisition, holding or disposition of any interest in the Property, lease or agreement comprising a portion of any thereof; (b) any latent or other defects in any Property or any portion thereof whether or not discoverable by an Indemnified Person or the Indemnity Provider; (c) an Environmental Violation, Environmental Claims or other loss of or damage to any property or the environment relating to the Property, the Lease, the Agency Agreement or the Indemnity Provider; (d) the Operative Agreements, or any transaction contemplated thereby; (e) any breach by the Indemnity Provider of any of its representations or warranties under the Operative Agreements to which the Indemnity Provider is a party or failure by the Indemnity Provider to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreements; and (f) personal injury, death or property damage, including without limitation Claims based on strict or absolute liability in tort. If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including without limitation a written notice of such proceeding), for any Claim, such Indemnified Person shall promptly notify the Indemnity Provider in writing and shall not take action with respect to such Claim without the consent of the Indemnity Provider for thirty (30) days after the receipt of such notice by the Indemnity Provider; provided, however, that in the case of any such Claim, if action shall be - -------- ------- required by law or regulation to be taken prior to the end of such period of thirty (30) days, such Indemnified Person shall endeavor to, in such notice to the Indemnity Provider, inform the Indemnity Provider of such shorter period, and no action shall be taken with respect to such Claim without the consent of the Indemnity Provider before seven (7) days before the end of such shorter period. If, within thirty (30) days of receipt of such notice from the Indemnified Person (or such shorter period as the Indemnified Person has notified the Indemnity Provider is required by law or regulation for the Indemnified Person to respond to such Claim), the Indemnity Provider shall request in writing that such Indemnified Person respond to such Claim, the Indemnified Person shall, at the expense of the Indemnity Provider, in good faith conduct and control such action (including without limitation by pursuit of appeals) (provided, however, -------- ------- that (A) if such Claim, in the Indemnity Provider's reasonable discretion, can be pursued by the Indemnity Provider on behalf of or in the name of such Indemnified Person, the Indemnified Person, at the Indemnity Provider's request, shall allow the Indemnity Provider to conduct and control the response to such Claim and (B) in the case of any Claim (and notwithstanding the provisions of the foregoing subsection (A)), the Indemnified Person may request the Indemnity Provider to conduct and control the response to such Claim (with counsel to be selected by the Indemnity Provider and consented to by such Indemnified Person, such consent not to be unreasonably withheld; provided, however, that any -------- ------- Indemnified Person may retain separate counsel at the expense of the Indemnity Provider in the event of a conflict of interest between such Indemnified Person and the Indemnity Provider)) by, in the sole discretion of the Person conducting and controlling the response to such Claim (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by the Indemnity Provider from time to time. 41 The party controlling the response to any Claim shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of the response to such Claim; provided, -------- that all decisions ultimately shall be made in the discretion of the controlling party. The parties agree that an Indemnified Person may at any time decline to take further action with respect to the response to such Claim and may settle such Claim if such Indemnified Person shall waive its rights to any indemnity from the Indemnity Provider that otherwise would be payable in respect of such Claim (and any future Claim, the pursuit of which is precluded by reason of such resolution of such Claim) and shall pay to the Indemnity Provider any amount previously paid or advanced by the Indemnity Provider pursuant to this Section 11.1 by way of indemnification or advance for the payment of an amount regarding such Claim, together with all reasonable costs and expenses incurred by the Indemnity Provider in connection therewith. Notwithstanding the foregoing provisions of this Section 11.1, an Indemnified Person shall not be required to take any action and the Indemnity Provider shall not be permitted to respond to any Claim in its own name or that of the Indemnified Person unless (A) the Indemnity Provider shall have agreed to pay and shall pay to such Indemnified Person on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Indemnified Person actually incurs in connection with such Claim, including without limitation all reasonable legal, accounting and investigatory fees and disbursements and, if the Indemnified Person has informed the Indemnity Provider that it intends to contest such Claim (whether or not the control of the contest is then assumed by the Indemnity Provider), the Indemnity Provider shall have agreed that the Claim is an indemnifiable Claim hereunder, (B) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related Claims that have been or could be raised for which the Indemnity Provider may be liable to pay an indemnity under this Section 11.1) exceeds $10,000 (or such lesser amount as may be subsequently agreed between the Indemnity Provider and the Indemnified Person), (C) the Indemnified Person shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of the Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such Claim shall involve the payment of any amount prior to the resolution of such Claim, the Indemnity Provider shall provide to the Indemnified Person an interest-free advance in an amount equal to the amount that the Indemnified Person is required to pay (with no additional net after-tax cost to such Indemnified Person) prior to the date such payment is due, (E) in the case of a Claim that must be pursued in the name of an Indemnified Person (or an Affiliate thereof), the Indemnity Provider shall have demonstrated to the reasonable satisfaction of the Indemnified Person that a reasonable basis exists to contest such Claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that the position asserted in such appeal will more likely than not prevail and (F) no Event of Default shall have occurred and be continuing. In no event shall an Indemnified Person be required to appeal an adverse judicial determination to the United States Supreme Court. In addition, an Indemnified Person shall not be required to contest any Claim in its name (or that of an Affiliate) if the subject matter thereof shall be of a continuing nature and shall have previously been decided adversely by a court of competent jurisdiction pursuant to the contest provisions of this Section 11.1, unless there shall have been a change in law (or interpretation thereof) and the Indemnified Person shall have 42 received, at the Indemnity Provider's expense, an opinion of independent counsel selected by the Indemnity Provider and reasonably acceptable to the Indemnified Person stating that as a result of such change in law (or interpretation thereof), it is more likely than not that the Indemnified Person will prevail in such contest. In no event shall the Indemnity Provider be permitted to adjust or settle any Claim without the consent of the Indemnified Person to the extent any such adjustment or settlement involves, or is reasonably likely to involve, any performance by or adverse admission by or with respect to the Indemnified Person. 11.2. GENERAL TAX INDEMNITY. --------------------- (a) The Indemnity Provider shall pay and assume liability for, and does hereby agree to indemnify, protect and defend each Property and all Indemnified Persons, and hold them harmless against, all Impositions on an After Tax Basis, and all payments pursuant to the Operative Agreements shall be made free and clear of and without deduction for any and all present and future Impositions. (b) Notwithstanding anything to the contrary in Section 11.2(a) hereof, the following shall be excluded from the indemnity required by Section 11.2(a): (i) Taxes (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on a Indemnified Person (other than the Lessor, the Owner Trustee and the Trust) by the United States federal government or any foreign government that are based on or measured by the net income (including without limitation taxes based on capital gains and minimum taxes) of such Person; provided, that this clause (i) shall not be -------- interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (ii) Taxes (other than Taxes that are, or are in the nature of, sales, use, rental, value added, transfer or property taxes) that are imposed on any Indemnified Person (other than the Lessor, the Owner Trustee and the Trust) by any state or local jurisdiction or taxing authority within any state or local jurisdiction and that are based upon or measured by the net income (including without limitation taxes based on capital gains and minimum taxes) of such Person; provided -------- that such Taxes shall not be excluded under this subparagraph (ii) to --- the extent such Taxes would have been imposed had the location, possession or use of any Property in, the location or the operation of the Lessee in, or the Lessee's making payments under the Operative Agreements from, the jurisdiction imposing such Taxes been the sole connection between such Indemnified Person and the jurisdiction imposing such Taxes; provided, further, that this clause (ii) shall -------- ------- not be interpreted to prevent a payment from being made on an After Tax Basis if such payment is otherwise required to be so made; (iii) any Tax to the extent it relates to any act, event or omission that occurs after the termination of the Lease and redelivery or sale of the Property in accordance with the terms of the Lease (but not any Tax that relates to such 43 termination, redelivery or sale and/or to any period prior to such termination, redelivery or sale); and (iv) any Taxes which are imposed on an Indemnified Person as a result of the gross negligence or willful misconduct of such Indemnified Person but not Taxes imposed as a result of ordinary negligence of such Indemnified Person; (c) (i) Subject to the terms of Section 11.2(f), the Indemnity Provider shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Indemnified Person, as appropriate, and the Indemnity Provider shall at its own expense, upon such Indemnified Person's reasonable request, furnish to such Indemnified Person copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 11.2(f) and which the Indemnity Provider pays directly to the taxing authorities, the Indemnity Provider shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Indemnity Provider reimburses an Indemnified Person, the Indemnity Provider shall do so within thirty (30) days after receipt by the Indemnity Provider of demand by such Indemnified Person describing in reasonable detail the nature of the Imposition and the basis for the demand (including without limitation the computation of the amount payable), accompanied by receipts or other reasonable evidence of such demand. In the case of Impositions for which a contest is conducted pursuant to Section 11.2(f), the Indemnity Provider shall pay such Impositions or reimburse such Indemnified Person for such Impositions, to the extent not previously paid or reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 11.2(f). (iii) At the Indemnity Provider's request, the amount of any indemnification payment by the Indemnity Provider pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Indemnity Provider and the Indemnified Person. The fees and expenses of such independent public accounting firm shall be paid by the Indemnity Provider unless such verification shall result in an adjustment in the Indemnity Provider's favor of fifteen percent (15%) or more of the payment as computed by the Indemnified Person, in which case such fee shall be paid by the Indemnified Person. (d) The Indemnity Provider shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of each Property and any other tax returns required for the Owner Trustee respecting the transactions described in the Operative Agreements. In case any other report or tax return shall be required to be made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a) and of which the Indemnity Provider has knowledge or should have 44 knowledge, the Indemnity Provider, at its sole cost and expense, shall notify the relevant Indemnified Person of such requirement and (except if such Indemnified Person notifies the Indemnity Provider that such Indemnified Person intends to prepare and file such report or return) (A) to the extent required or permitted by and consistent with Legal Requirements, make and file in the Indemnity Provider's name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Indemnified Person, advise such Indemnified Person of such fact and prepare such return, statement or report for filing by such Indemnified Person or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Indemnity Provider under or arising out of subsection (a), provide such Indemnified Person at the Indemnity Provider's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Indemnity Provider under or arising out of subsection (a). Such Indemnified Person shall, upon the Indemnity Provider's request and at the Indemnity Provider's expense, provide any data maintained by such Indemnified Person (and not otherwise available to or within the control of the Indemnity Provider) with respect to each Property which the Indemnity Provider may reasonably require to prepare any required tax returns or reports. (e) As between the Indemnity Provider on one hand, and each Financing Party on the other hand, the Indemnity Provider shall be responsible for, and the Indemnity Provider shall indemnify and hold harmless each Financing Party (without duplication of any indemnification required by subsection (a)) on an After Tax Basis against, any obligation for United States or foreign withholding taxes or similar levies, imposts, charges, fees, deductions or withholdings (collectively, "Withholdings") imposed in ------------ respect of the interest payable on the Notes, Holder Yield payable on the Certificates or with respect to any other payments under the Operative Agreement (all such payments being referred to herein as "Exempt Payments" --------------- to be made without deduction, withholding or set off) (and, if any Financing Party receives a demand for such payment from any taxing authority or a Withholding is otherwise required with respect to any Exempt Payment, the Indemnity Provider shall discharge such demand on behalf of such Financing Party); provided, however, that the obligation of the -------- ------- Indemnity Provider under this Section 11.2(e) shall not apply to: (i) Withholdings on any Exempt Payment to any Financing Party which is a non-U.S. Person unless such Financing Party is, on the date hereof (or on the date it becomes a Financing Party hereunder) and on the date of any change in the principal place of business or the lending office of such Financing Party, entitled to submit a Form 1001 (relating to such Financing Party and entitling it to a complete exemption from Withholding on such Exempt Payment) or Form 4224 or is otherwise subject to exemption from Withholding with respect to such Exempt Payment (except where the failure of the exemption results from a change in the principal place of business of the Lessee; provided if a failure of exemption for any Financing Party results from a change in the principal place of business or lending office of any other Financing Party, then such other Financing Party shall be liable for any Withholding or indemnity with respect thereto), or 45 (ii) Any U.S. Taxes imposed solely by reason of the failure by a non-U.S. Person to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of such non-U.S. Person if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Taxes. For the purposes of this Section 11.2(e), (A) "U.S. Person" shall mean a ----------- citizen, national or resident of the United States of America, a corporation, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income, (B) "U.S. Taxes" shall mean any present or future ---------- tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein, (C) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate ---------- Certificate) of the Department of the Treasury of the United States of America and (D) "Form 4224" shall mean Form 4224 (Exemption from --------- Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of Treasury of the United States of America (or in relation to either such Form such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates). Each of the Forms referred to in the foregoing clauses (C) and (D) shall include such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates. If a Financing Party or an Affiliate with whom such Financing Party files a consolidated tax return (or equivalent) subsequently receives the benefit in any country of a tax credit or an allowance resulting from U.S. Taxes with respect to which it has received a payment of an additional amount under this Section 11.2(e), such Financing Party will pay to the Indemnity Provider such part of that benefit as in the opinion of such Financing Party will leave it (after such payment) in a position no more and no less favorable than it would have been in if no additional payment had been required to be paid, provided always that (i) such Financing Party -------- will be the sole judge of the amount of any such benefit and of the date on which it is received, so long as such Financing Party acts reasonably in making such determination, (ii) such Financing Party will have the absolute discretion as to the order and manner in which it employs or claims tax credits and allowances available to it and (iii) such Financing Party will not be obliged to disclose to the Borrower any information regarding its tax affairs or tax computations. Each non-U.S. Person that shall become a Financing Party after the date hereof shall, upon the effectiveness of the related transfer or otherwise upon becoming a Financing Party hereunder, be required to provide all of the forms and statements referenced above or other evidences of exemption from Withholdings. 46 (f) If a written Claim is made against any Indemnified Person or if any proceeding shall be commenced against such Indemnified Person (including without limitation a written notice of such proceeding), for any Impositions, the provisions in Section 11.1 relating to notification and rights to contest shall apply; provided, however, that the Indemnity -------- ------- Provider shall have the right to conduct and control such contest only if such contest involves a Tax other than a Tax on net income of the Indemnified Person and can be pursued independently from any other proceeding involving a Tax liability of such Indemnified Person. 11.3. INCREASED COSTS, ILLEGALITY, ETC. --------------------------------- (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request hereafter adopted, promulgated or made by any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Financing Party of agreeing to make or making, funding or maintaining Advances, then the Lessee shall from time to time, upon demand by such Financing Party (with a copy of such demand to the Agent but subject to the terms of Section 2.11 of the Credit Agreement and 3.9 of the Trust Agreement, as the case may be), pay to the Agent for the account of such Financing Party additional amounts sufficient to compensate such Financing Party for such increased cost. A certificate as to the amount of such increased cost, submitted to the Lessee and the Agent by such Financing Party, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Financing Party determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law, but in each case promulgated or made after the date hereof) affects or would affect the amount of capital required or expected to be maintained by such Financing Party or any corporation controlling such Financing Party and that the amount of such capital is increased by or based upon the existence of such Financing Party's commitment to make Advances and other commitments of this type or upon the Advances, then, upon demand by such Financing Party (with a copy of such demand to the Agent but subject to the terms of Section 2.11 of the Credit Agreement and 3.9 of the Trust Agreement), the Lessee shall pay to the Agent for the account of such Financing Party, from time to time as specified by such Financing Party, additional amounts sufficient to compensate such Financing Party or such corporation in the light of such circumstances, to the extent that such Financing Party reasonably determines such increase in capital to be allocable to the existence of such Financing Party's commitment to make such Advances. A certificate as to such amounts submitted to the Lessee and the Agent by such Financing Party shall be conclusive and binding for all purposes, absent manifest error. (c) Without limiting the effect of the foregoing, the Lessee shall pay to each Financing Party on the last day of the Interest Period therefor so long as such Financing Party is maintaining reserves against "Eurocurrency liabilities" under Regulation D an additional amount (determined by such Financing Party and notified to the Lessee 47 through the Agent) equal to the product of the following for each Eurodollar Loan or Eurodollar Holder Advance, as the case may be, for each day during such Interest Period: (i) the principal amount of such Eurodollar Loan or Eurodollar Holder Advance, as the case may be, outstanding on such day; and (ii) the remainder of (x) a fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on such Eurodollar Loan or Eurodollar Holder Advance, as the case may be, for such Interest Period as provided in the Credit Agreement or the Trust Agreement, as the case may be (less the Applicable Percentage), and the denominator of which is one (1) minus the effective rate ----- (expressed as a decimal) at which such reserve requirements are imposed on such Financing Party on such day minus (y) such numerator; and (iii) 1/360. (d) Without affecting its rights under Sections 11.3(a), 11.3(b) or 11.3(c) or any other provision of any Operative Agreement, each Financing Party agrees that if there is any increase in any cost to or reduction in any amount receivable by such Financing Party with respect to which the Lessee would be obligated to compensate such Financing Party pursuant to Sections 11.3(a) or 11.3(b), such Financing Party shall use reasonable efforts to select an alternative office for Advances which would not result in any such increase in any cost to or reduction in any amount receivable by such Financing Party; provided, however, that no Financing Party shall -------- ------- be obligated to select an alternative office for Advances if such Financing Party determines that (i) as a result of such selection such Financing Party would be in violation of any applicable law, regulation, treaty, or guideline, or would incur additional costs or expenses or (ii) such selection would be inadvisable for regulatory reasons or materially inconsistent with the interests of such Financing Party. (e) With reference to the obligations of the Lessee set forth in Sections 11.3(a) through 11.3(d), the Lessee shall not have any obligation to pay to any Financing Party amounts owing under such Sections for any period which is more than one (1) year prior to the date upon which the request for payment therefor is delivered to the Lessee. (f) Notwithstanding any other provision of this Agreement, if any Financing Party shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Financing Party to perform its obligations hereunder to make or maintain Eurodollar Loans or Eurodollar Holder Advances, as the case may be, then (i) each Eurodollar Loan or Eurodollar Holder Advance, as the case may be, will automatically, at the earlier of the end of the Interest Period for such Eurodollar Loan or Eurodollar Holder Advance, as the case may be, or the date required by law, convert into an ABR Loan or an ABR Holder Advance, as the case may be, and (iii) the obligation of the Financing Parties to make, convert or continue Eurodollar Loans or Eurodollar Holder Advances, as the case may be, shall be suspended 48 until the Agent shall notify the Lessee that such Financing Party has determined that the circumstances causing such suspension no longer exist. 11.4. FUNDING/CONTRIBUTION INDEMNITY. ------------------------------ Subject to the provisions of Section 2.11(a) of the Credit Agreement and 3.9(a) of the Trust Agreement, as the case may be, the Lessee agrees to indemnify each Financing Party and to hold each Financing Party harmless from any loss or reasonable expense which such Financing Party may sustain or incur as a consequence of (a) any failure in connection with the drawing of funds for any Advance, (b) any failure in making any prepayment after a notice thereof has been given in accordance with the provisions of the Operative Agreements or (c) the making of a voluntary or involuntary prepayment of Eurodollar Loans or Eurodollar Holder Advances, as the case may be, on a day which is not the last day of an Interest Period with respect thereto. Such indemnification shall be in an amount equal to the excess, if any, of (x) the amount of interest or Holder Yield, as the case may be, which would have accrued on the amount so prepaid, or not so borrowed for the period from the date of such prepayment or of such failure to borrow to the last day of such Interest Period (or, in the case of a failure to borrow the Interest Period that would have commenced on the date of such failure) in each case at the applicable Eurodollar Rate plus the Applicable Percentage for such Loan or Holder Advance, as the case may be, for such Interest Period over (y) the amount of interest (as determined by such Financing Party in its reasonable discretion) which would have accrued to such Financing Party on such amount by (i) (in the case of the Lenders) reemploying such funds in loans of the same type and amount during the period from the date of prepayment or failure to borrow to the last day of the then applicable Interest Period (or, in the case of a failure to borrow, the Interest Period that would have commenced on the date of such failure) and (ii) (in the case of the Holders) placing such amount on deposit for a comparable period with leading banks in the relevant interest rate market. This covenant shall survive the termination of the Operative Agreements and the payment of all other amounts payable hereunder. 11.5. EXPRESS INDEMNIFICATION FOR ORDINARY NEGLIGENCE, STRICT LIABILITY, ------------------------------------------------------------------ ETC. ---- WITHOUT LIMITING THE GENERALITY OF THE INDEMNIFICATION PROVISIONS OF ANY AND ALL OF THE OPERATIVE AGREEMENTS, EACH PERSON PROVIDING INDEMNIFICATION OF ANOTHER PERSON UNDER ANY OPERATIVE AGREEMENT HEREBY FURTHER EXPRESSLY RELEASES EACH BENEFICIARY OF ANY SUCH INDEMNIFICATION FROM ALL CLAIMS FOR LOSS OR DAMAGE, DESCRIBED IN ANY OPERATIVE AGREEMENT, CAUSED BY ANY ACT OR OMISSION ON THE PART OF ANY SUCH BENEFICIARY ATTRIBUTABLE TO THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT LIABILITY OF ANY SUCH BENEFICIARY, AND INDEMNIFIES, EXONERATES AND HOLDS EACH SUCH BENEFICIARY FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, CLAIMS, LOSSES, COSTS, LIABILITIES, DAMAGES AND EXPENSES (INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEY'S FEES AND EXPENSES), DESCRIBED ABOVE, INCURRED BY ANY SUCH BENEFICIARY (IRRESPECTIVE 49 OF WHETHER ANY SUCH BENEFICIARY IS A PARTY TO THE ACTION FOR WHICH INDEMNIFICATION UNDER THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT IS SOUGHT) ATTRIBUTABLE TO THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT LIABILITY OF ANY SUCH BENEFICIARY. SECTION 12. MISCELLANEOUS. 12.1. SURVIVAL OF AGREEMENTS. ---------------------- The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Agreement, the transfer of any Property to the Owner Trustee, the acquisition of any Property (or any of its components), the construction of any Improvements, the Completion of any Property, any disposition of any interest of the Owner Trustee in any Property or any interest of the Holders in the Trust Estate and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. 12.2. NOTICES. ------- All notices required or permitted to be given under any Operative Agreement shall be in writing. Notices may be served by certified or registered mail, postage paid with return receipt requested; by private courier, prepaid; by telex, facsimile, or other telecommunication device capable of transmitting or creating a written record; or personally. Mailed notices shall be deemed delivered five (5) days after mailing, properly addressed. Couriered notices shall be deemed delivered when delivered as addressed, or if the addressee refuses delivery, when presented for delivery notwithstanding such refusal. Telex or telecommunicated notices shall be deemed delivered when receipt is either confirmed by confirming transmission equipment or acknowledged by the addressee or its office. Personal delivery shall be effective when accomplished. Unless a party changes its address by giving notice to the other party as provided herein, notices shall be delivered to the parties at the following addresses: If to the Construction Agent or the Lessee, to such entity at the following address: JP Foodservice Distributors, Inc. 9830 Patuxent Woods Drive Columbia, Maryland 21046 Attention: Robert W. Gillison Telephone: (410) 309-6468 Telecopy: (410) 309-6296 50 If to any Guarantor, to such entity in care of JP Foodservice Distributors, Inc. at the following address: JP Foodservice Distributors, Inc. 9830 Patuxent Woods Drive Columbia, Maryland 21046 Attention: Robert W. Gillison Telephone: (410) 309-6468 Telecopy: (410) 309-6296 If to the Owner Trustee or the Borrower, to it at the following address: First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 Attention: Val T. Orton, Vice President Telephone: (801) 246-5300 Telecopy: (801) 246-5053 If to the Holders, to each such Holder at the address set forth for such Holder on Schedule I of the Trust Agreement. ---------- If to the Agent, to it at the following address: First Union National Bank c/o First Union Capital Markets Group DC-6 301 South College Street Charlotte, North Carolina 28288-0166 Attention: Ms. Donna Hemingway, Capital Markets Services Telephone: (704) 383-8763 Telecopy: (704) 383-7989 If to any Lender, to it at the address set forth for such Lender in Schedule 1.1 of the Credit Agreement. ------------ From time to time any party may designate additional parties and/or another address for notice purposes by notice to each of the other parties hereto. Each notice hereunder shall be effective upon receipt or refusal thereof. 51 12.3. COUNTERPARTS. ------------ This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one (1) and the same instrument. 12.4. TERMINATIONS, AMENDMENTS, WAIVERS, ETC.; UNANIMOUS VOTE MATTERS. --------------------------------------------------------------- Each Operative Agreement may be terminated, amended, supplemented, waived or modified only by an instrument in writing signed by, subject to Article VIII of the Trust Agreement regarding termination of the Trust Agreement, the Majority Secured Parties and each Credit Party (to the extent such Credit Party is a party to such Operative Agreement); provided, to the extent no Default or Event -------- of Default shall have occurred and be continuing, the Majority Secured Parties shall not amend, supplement, waive or modify any provision of any Operative Agreement in such a manner as to adversely affect the rights of any Credit Party without the prior written consent (not to be unreasonably withheld or delayed) of such Credit Party. In addition, (a) the Unanimous Vote Matters shall require the consent of each Lender and each Holder affected by such matter and (b) any provision of any Operative Agreement incorporated by reference or otherwise referenced in a second Operative Agreement shall remain, respecting such second Operative Agreement, in its original form without regard to any such termination, amendment, supplement, waiver or modification in the first Operative Agreement except if such has been agreed to by an instrument in writing signed by, subject to Article VIII of the Trust Agreement regarding termination of the Trust Agreement, the Majority Secured Parties and each Credit Party (to the extent such Credit Party is a party to such Operative Agreement). Notwithstanding the foregoing, no such termination, amendment, supplement, waiver or modification shall, without the consent of the Agent and, to the extent affected thereby, each Lender and each Holder (collectively, the "Unanimous Vote Matters") (i) reduce the amount of any Note or any Certificate, - ----------------------- extend the scheduled date of maturity of any Note, extend the scheduled Expiration Date, extend any payment date of any Note or Certificate, reduce the stated rate of interest payable on any Note, reduce the stated Holder Yield payable on any Certificate (other than as a result of waiving the applicability of any post-default increase in interest rates or Holder Yields), modify the priority of any Lien in favor of the Agent under any Security Document, subordinate any obligation owed to any Lender or Holder, reduce any Lender Facility Fees or any Holder Facility Fees payable under the Participation Agreement, extend the scheduled date of payment of any Lender Facility Fees or any Holder Facility Fees or increase the amount or extend the expiration date of any Lender's Commitment or the Holder Commitment of any Holder, or (ii) terminate, amend, supplement, waive or modify any provision of this Section 12.4 or reduce the percentages specified in the definitions of Majority Lenders, Majority Holders or Majority Secured Parties, or consent to the assignment or transfer by the Owner Trustee of any of its rights and obligations under any Credit Document or release a material portion of the Collateral (except in accordance with Section 8.8) or release any Credit Party from its obligations under any Operative Agreement or otherwise alter any payment obligations of any Credit Party to the Lessor or any Financing Party under the Operative Agreements, or (iii) terminate, amend, supplement, waive or modify any provision of Section 7 of the Credit Agreement, or (iv) permit Advances for Work in excess of the Construction Budget, 52 or (v) eliminate the automatic option under Section 5.3(b) of the Agency Agreement requiring that the Construction Agent pay certain liquidated damages in exchange for the conveyance of a Property to the Construction Agent. Any such termination, amendment, supplement, waiver or modification shall apply equally to each of the Lenders and the Holders and shall be binding upon all the parties to this Agreement. In the case of any waiver, each party to this Agreement shall be restored to its former position and rights under the Operative Agreements, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. If at a time when the conditions precedent set forth in the Operative Agreements to any Loan are, in the opinion of the Majority Lenders, satisfied, any Lender shall fail to fulfill its obligations to make such Loan (any such Lender, a "Defaulting Lender") then, for so long as such failure shall continue, ----------------- the Defaulting Lender shall (unless the Lessee and the Majority Lenders, determined as if the Defaulting Lender were not a "Lender", shall otherwise consent in writing) be deemed for all purposes relating to terminations, amendments, supplements, waivers or modifications under the Operative Agreements to have no Loans, shall not be treated as a "Lender" when performing the computation of Majority Lenders or Majority Secured Parties, and shall have no rights under this Section 12.4; provided that any action taken pursuant to the -------- second paragraph of this Section 12.4 shall not be effective as against the Defaulting Lender. If at a time when the conditions precedent set forth in the Operative Agreements to any Holder Advance are, in the opinion of the Majority Holders, satisfied, any Holder shall fail to fulfill its obligations to make such Holder Advance (any such Holder, a "Defaulting Holder") then, for so long as such ----------------- failure shall continue, the Defaulting Holder shall (unless the Lessee and the Majority Holders, determined as if the Defaulting Holder were not a "Holder", shall otherwise consent in writing) be deemed for all purposes relating to terminations, amendments, supplements, waivers or modifications under the Operative Agreements to have no Holder Advances, shall not be treated as a "Holder" when performing the computation of Majority Holders or Majority Secured Parties, and shall have no rights under this Section 12.4; provided that any -------- action taken pursuant to the second paragraph of this Section 12.4 shall not be effective as against the Defaulting Holder. 12.5. HEADINGS, ETC. -------------- The Table of Contents and headings of the various Articles and Sections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. 12.6. PARTIES IN INTEREST. ------------------- Except as expressly provided herein, none of the provisions of this Agreement are intended for the benefit of any Person except the parties hereto. 53 12.7. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; ---------------------------------------------------------------- VENUE; ARBITRATION. ------------------ (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or proceeding with respect to this Agreement or any other Operative Agreement may be brought in the courts of the State of North Carolina in Mecklenburg County or of the United States for the Western District of North Carolina, and, by execution and delivery of this Agreement, each of the parties to this Agreement hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the nonexclusive jurisdiction of such courts. Each of the parties to this Agreement further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices pursuant to Section 12.2, such service to become effective three (3) days after such mailing. Nothing herein shall affect the right of any party to serve process in any other manner permitted by Law or to commence legal proceedings or to otherwise proceed against any party in any other jurisdiction. (b) EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY, TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. (c) Each of the parties to this Agreement hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Operative Agreement brought in the courts referred to in subsection (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (d) Notwithstanding the provisions of Section 12.7(a) or of any other Operative Agreement to the contrary, upon demand of any party to this Agreement and/or any other Operative Agreement, whether made before or within three (3) months after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Agreement and/or any other Operative Agreement between or among parties to this Agreement and/or any other Operative Agreement ("Disputes") -------- shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include without limitation tort claims, counterclaims, disputes as to whether a matter is subject to arbitration, claims brought as class actions, claims arising from agreements executed in the future, or claims arising out of or connected with the transaction reflected by this Agreement and/or any other Operative Agreement. 54 Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the ----------------- American Arbitration Association (the "AAA") and Title 9 of the United --- States Code. All arbitration hearings shall be conducted in Charlotte, North Carolina. A hearing shall begin within ninety (90) days of demand for arbitration and all hearings shall be concluded within one hundred twenty (120) days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then no more than a total extension of sixty (60) days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of -- --- less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys selected from the Commercial Financial Disputes Arbitration Panel of the AAA. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted or if such person is not available to serve, the single arbitrator may be a licensed attorney. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. Notwithstanding the immediately preceding binding arbitration provisions, the parties to this Agreement and/or any other Operative Agreement agree to preserve, without diminution, certain remedies that the Agent on behalf of the Lenders and the Holders may employ or exercise freely, independently or in connection with an arbitration proceeding or after an arbitration action is brought. The Agent on behalf of the Lenders and the Holders shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted under any Operative Agreement or under applicable Law or by judicial foreclosure and sale, including without limitation a proceeding to confirm the sale; (ii) all rights of self-help including without limitation peaceful occupation of real property and collection of rents, set-off and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including without limitation injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. Notwithstanding the provisions of this Section 12.7, the Lessee and the Construction Agent shall have the right of access to any court of proper jurisdiction in connection with the exercise by the Agent of one or more of the remedies referred to in this paragraph. The parties to this Agreement and/or any other Operative Agreement agree that they shall not have a remedy of special, punitive or exemplary damages against any other party in any Dispute and hereby waive any right or claim to special, punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. 55 By execution and delivery of this Agreement and/or any other Operative Agreement, each of the parties hereto and/or thereto accepts, for itself and in connection with its properties, generally and unconditionally, the non-exclusive jurisdiction relating to any arbitration proceedings conducted under the Arbitration Rules in Charlotte, North Carolina and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Agreement and/or any other Operative Agreement from which no appeal has been taken or is available. 12.8. SEVERABILITY. ------------ Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.9. LIABILITY LIMITED. ----------------- (a) The Lenders, the Agent, the Credit Parties, the Owner Trustee and the Holders each acknowledge and agree that the Owner Trustee is (except as otherwise expressly provided herein or therein) entering into this Agreement and the other Operative Agreements to which it is a party (other than the Trust Agreement and in Sections 6.1 and 12.16 of this Agreement, which the Trust Company is entering into in its individual capacity), solely in its capacity as trustee under the Trust Agreement and not in its individual capacity and that the Trust Company shall not be liable or accountable under any circumstances whatsoever in its individual capacity for or on account of any statements, representations, warranties, covenants or obligations stated to be those of the Owner Trustee, except (i) for its own gross negligence or willful misconduct and (ii) as otherwise expressly provided in the Trust Agreement, Sections 6.1 and 12.16 or in the other Operative Agreements. (b) Subject to Section 12.16, anything to the contrary contained in this Agreement, the Credit Agreement, the Notes or in any other Operative Agreement notwithstanding (except for such Section 12.16), no Exculpated Person shall be personally liable in any respect for any liability or obligation arising hereunder or in any other Operative Agreement including without limitation the payment of the principal of, or interest on, the Notes, or for monetary damages for the breach of performance of any of the covenants contained in the Credit Agreement, the Notes, this Agreement, the Security Agreement or any of the other Operative Agreements. The Lenders, the Holders and the Agent agree that, in the event any remedies under any Operative Agreement are pursued, neither the Lenders, the Holders nor the Agent shall have any recourse against any Exculpated Person, for any deficiency, loss or Claim for monetary damages or otherwise resulting therefrom and recourse shall be had solely and exclusively against the Trust Estate (excluding Excepted Payments) and the Credit Parties (with respect to the Credit Parties' obligations under the Operative Agreements); 56 but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Trust Estate (excluding Excepted Payments) in respect of any and all liabilities, obligations and undertakings contained herein and/or in any other Operative Agreement. Notwithstanding the provisions of this Section, nothing in any Operative Agreement shall: (i) constitute a waiver, release or discharge of any indebtedness or obligation evidenced by the Notes and/or the Certificates arising under any Operative Agreement or secured by any Operative Agreement, but the same shall continue until paid or discharged; (ii) relieve any Exculpated Person from liability and responsibility for (but only to the extent of the damages arising by reason of): active waste knowingly committed by any Exculpated Person with respect to any Property, any fraud, gross negligence or willful misconduct on the part of any Exculpated Person; (iii) relieve any Exculpated Person from liability and responsibility for (but only to the extent of the moneys misappropriated, misapplied or not turned over) (A) except for Excepted Payments, misappropriation or misapplication by the Lessor (i.e., application in a manner contrary to any of the Operative Agreements) of any insurance proceeds or condemnation award paid or delivered to the Lessor by any Person other than the Agent, (B) except for Excepted Payments, any deposits or any escrows or amounts owed by the Construction Agent under the Agency Agreement held by the Lessor or (C) except for Excepted Payments, any rent or other income received by the Lessor from any Credit Party that is not turned over to the Agent; or (iv) affect or in any way limit the Agent's rights and remedies under any Operative Agreement with respect to the Rents and rights and powers of the Agent under the Operative Agreements or to obtain a judgment against the Lessee's interest in the Properties or the Agent's rights and powers to obtain a judgment against the Lessor or any Credit Party (provided, that no deficiency judgment or other money judgment -------- shall be enforced against any Exculpated Person except to the extent of the Lessor's interest in the Trust Estate (excluding Excepted Payments) or to the extent the Lessor may be liable as otherwise contemplated in clauses (ii) and (iii) of this Section 12.9(b)). 12.10. RIGHTS OF THE CREDIT PARTIES. ---------------------------- If at any time all obligations (i) of the Owner Trustee under the Credit Agreement, the Security Documents and the other Operative Agreements and (ii) of the Credit Parties under the Operative Agreements have in each case been satisfied or discharged in full, then the Credit Parties shall be entitled to (a) terminate the Lease and guaranty obligations under Section 6B and (b) receive all amounts then held under the Operative Agreements and all proceeds with respect to any of the Properties. Upon the termination of the Lease and Section 6B pursuant to the foregoing clause (a), the Lessor shall transfer to the Lessee all of its right, title and interest free and clear of the Lien of the Lease, the Lien of the Security Documents and all Lessor Liens in and to any Properties then subject to the Lease and any amounts or proceeds referred to in the foregoing clause (b) shall be paid over to the Lessee. 12.11. FURTHER ASSURANCES. ------------------ The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee, all such further acts, conveyances, documents and assurances 57 as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Participation Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including without limitation the preparation, execution and filing of any and all Uniform Commercial Code financing statements, filings of Mortgage Instruments and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense and without need of any prior request from any other party, shall take such action as may be necessary (including without limitation any action specified in the preceding sentence), or (if the Owner Trustee shall so request) as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. In addition, in connection with the sale or other disposition of any Property or any portion thereof, the Lessee agrees to execute such instruments of conveyance as reasonably required in connection therewith. 12.12. CALCULATIONS UNDER OPERATIVE AGREEMENTS. --------------------------------------- The parties hereto agree that all calculations and numerical determinations to be made under the Operative Agreements by the Owner Trustee shall be made by the Agent and that such calculations and determinations shall be conclusive and binding on the parties hereto in the absence of error. 12.13. CONFIDENTIALITY. --------------- Each Financing Party severally agrees to use reasonable efforts to keep confidential all non-public information pertaining to any Credit Party or any of its Subsidiaries which is provided to it by any Credit Party or any of its Subsidiaries and which an officer of any Credit Party or any of its Subsidiaries has requested in writing be kept confidential (including non-public information pertaining to the financing structure described in the unrecorded Operative Agreements), and shall not intentionally disclose such information to any Person except: (a) to the extent such information is public when received by such Person or becomes public thereafter due to the act or omission of any party other than such Person; (b) to the extent such information is independently obtained from a source other than any Credit Party or any of its Subsidiaries and such information from such source is not, to such Person's knowledge, subject to an obligation of confidentiality or, if such information is subject to an obligation of confidentiality, that disclosure of such information is permitted; (c) to counsel, auditors or accountants retained by any such Person or any Affiliates of any such Person (if such Affiliates are permitted to receive such information pursuant to clause (f) or (g) below), provided they agree to keep such information confidential as if such Person or Affiliate were party to this Agreement and to financial institution regulators, including examiners of any Financing Party or any Affiliate thereof in the course of examinations of such Persons; 58 (d) in connection with any litigation or the enforcement or preservation of the rights of any Financing Party under the Operative Agreements; (e) to the extent required by any applicable statute, rule or regulation or court order (including without limitation, by way of subpoena) or pursuant to the request of any regulatory or Governmental Authority having jurisdiction over any such Person; provided, however, that such Person -------- -------- shall endeavor (if not otherwise prohibited by Law) to notify the Lessee prior to any disclosure made pursuant to this clause (e), except that no such Person shall be subject to any liability whatsoever for any failure to so notify the Lessee; (f) any Financing Party may disclose such information to another Financing Party or to any Affiliate of a Financing Party that is a direct or indirect owner of any Financing Party; (g) any Financing Party may disclose such information to an Affiliate of any Financing Party to the extent required in connection with the transactions contemplated hereby or to the extent such Affiliate is involved in, or provides advice or assistance to such Person with respect to, such transactions (provided, in each case that such Affiliate has -------- agreed in writing to maintain confidentiality as if it were such Financing Party (as the case may be)); or (h) to the extent disclosure to any other financial institution or other Person is appropriate in connection with any proposed or actual (i) assignment or grant of a participation by any of the Lenders of interests in the Credit Agreement or any Note to such other financial institution (who will in turn be required by the Agent to agree in writing to maintain confidentiality as if it were a Lender originally party to this Agreement) or (ii) assignment by any Holder of interests in the Trust Agreement to another Person (who will in turn be required by the transferring Holder to agree in writing to maintain confidentiality as if it were a Holder originally party to this Agreement). 12.14. FINANCIAL REPORTING/TAX CHARACTERIZATION. ---------------------------------------- Lessee agrees to obtain advice from its own accountants and tax counsel regarding the financial reporting treatment and the tax characterization of the transactions described in the Operative Agreements. Lessee further agrees that Lessee shall not rely upon any statement of any Financing Party or any of their respective Affiliates and/or Subsidiaries regarding any such financial reporting treatment and/or tax characterization. 12.15. SET-OFF. ------- In addition to any rights now or hereafter granted under applicable Law and not by way of limitation of any such rights, upon and after the occurrence of any Event of Default and during the continuance thereof, the Lenders, the Holders, their respective Affiliates and any assignee or participant of a Lender or a Holder in accordance with the applicable provisions of the Operative Agreements are hereby authorized by the Credit Parties at any time or from time to time, without 59 notice to the Credit Parties or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and to apply any and all deposits (general or special, time or demand, including without limitation indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Lenders, the Holders, their respective Affiliates or any assignee or participant of a Lender or a Holder in accordance with the applicable provisions of the Operative Agreements to or for the credit or the account of any Credit Party against and on account of the obligations of any Credit Party under the Operative Agreements irrespective of whether or not (a) the Lenders or the Holders shall have made any demand under any Operative Agreement or (b) the Agent shall have declared any or all of the obligations of any Credit Party under the Operative Agreements to be due and payable and although such obligations shall be contingent or unmatured. Notwithstanding the foregoing, neither the Agent nor any other Financing Party shall exercise, or attempt to exercise, any right of setoff, banker's lien, or the like, against any deposit account or property of any Credit Party held by the Agent or any other Financing Party, without the prior written consent of the Majority Secured Parties, and any Financing Party violating this provision shall indemnify the Agent and the other Financing Parties from any and all costs, expenses, liabilities and damages resulting therefrom. The contractual restriction on the exercise of setoff rights provided in the foregoing sentence is solely for the benefit of the Agent and the Financing Parties and may not be enforced by any Credit Party. 12.16. OBLIGATIONS OF THE LENDERS, THE AGENT, THE OWNER TRUSTEE, THE TRUST ------------------------------------------------------------------- COMPANY AND THE HOLDERS. ----------------------- Notwithstanding anything contained in this Agreement or in any other Operative Agreement to the contrary, the Lenders, the Agent, the Owner Trustee, the Trust Company and the Holders each covenant and agree with the Construction Agent, the Lessee and the Other Credit Parties that: (a) it will not violate, or take or omit to take any action that would cause the Construction Agent, the Lessee or any Credit Party to violate, any provision of any Operative Agreement; and (b) the Construction Agent, the Lessee or the applicable Credit Party may (to the extent permitted under applicable law) enforce any or all of the obligations of the Lenders, the Agent, the Owner Trustee, the Trust Company and the Holders under any one or more of the Operative Agreements, notwithstanding the fact that the Construction Agent, the Lessee or such Credit Party is not a party to such Operative Agreement, to the extent necessary to enable the Construction Agent, the Lessee or such Credit Party, as applicable, to enforce its rights or perform its obligations, or both, under the applicable Operative Agreements. [signature pages follow] 60 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. CONSTRUCTION AGENT - ------------------ AND LESSEE: - ----------- JP FOODSERVICE DISTRIBUTORS, INC., a Delaware corporation By: /s/ David B. Abramson ---------------------------------- Name: David B. Abramson -------------------------------- Title: Vice President & Secretary ------------------------------- GUARANTORS: - ---------- U.S. FOODSERVICE, a Delaware corporation By: /s/ David B. Abramson ----------------------------------------- Name: David B. Abramson --------------------------------------- Title: Executive Vice President & Secretary -------------------------------------- U.S. FOODSERVICE, INC., a Delaware corporation BEIJING CHEF, INC., a Delaware corporation E & H DISTRIBUTING CO., (d/b/a Valley Food Distributors of Nevada), a Nevada corporation HARRISON'S PRIME MEATS & PROVISIONS, INC., a Nevada corporation ILLINOIS FRUIT & PRODUCE CORP., an Illinois corporation TRANS-PORTE, INC., a Delaware corporation EL PASADO, INC., a Delaware corporation RITUALS COFFEE COMPANY, a Delaware corporation ROSELI PRODUCTS CORPORATION, a Delaware corporation SQUERI FOOD SERVICE, INC., an Ohio corporation NEVADA BAKING COMPANY, INC. a Nevada corporation OUTWEST MEAT COMPANY, a Nevada corporation HILLTOP HEARTH BAKERIES, INC., a Delaware corporation CROSS VALLEY FARMS, INC., a Delaware corporation By: /s/ David B. Abramson ----------------------------------------- Name: David B. Abramson --------------------------------------- Title: Vice President & Secretary -------------------------------------- for each of the foregoing OWNER TRUSTEE AND - ----------------- LESSOR: - ------ FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: /s/ C. Scott Nielsen ---------------------------------------------- Name: C. Scott Nielsen -------------------------------------------- Title: Vice President ------------------------------------------- TRUST COMPANY: - ------------- FIRST SECURITY BANK, NATIONAL ASSOCIATION, in its individual capacity solely with respect to Sections 6.1 and 12.16 By: /s/ C. Scott Nielsen ---------------------------------------------- Name: C. Scott Nielsen -------------------------------------------- Title: Vice President ------------------------------------------- THE AGENT, - ----------- LENDER AND HOLDER: - ----------------- FIRST UNION NATIONAL BANK, as a Holder, as a Lender and as the Agent By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- OWNER TRUSTEE AND - ----------------- LESSOR: - ------ FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- TRUST COMPANY: - ------------- FIRST SECURITY BANK, NATIONAL ASSOCIATION, in its individual capacity solely with respect to Sections 6.1 and 12.16 By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- THE AGENT, - ----------- LENDER AND HOLDER: - ----------------- FIRST UNION NATIONAL BANK, as a Holder, as a Lender and as the Agent By: /s/ Lucy C. Campbell ---------------------------------------------- Name: Lucy C. Campbell -------------------------------------------- Title: Vice President ------------------------------------------- - -------------------------------------------------------------------------------- Appendix A Rules of Usage and Definitions - -------------------------------------------------------------------------------- I. Rules of Usage The following rules of usage shall apply to this Appendix A and the Operative Agreements (and each appendix, schedule, exhibit and annex to the foregoing) unless otherwise required by the context or unless otherwise defined therein: (a) Except as otherwise expressly provided, any definitions set forth herein or in any other document shall be equally applicable to the singular and plural forms of the terms defined. (b) Except as otherwise expressly provided, references in any document to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits are references to articles, sections, paragraphs, clauses, annexes, appendices, schedules or exhibits in or to such document. (c) The headings, subheadings and table of contents used in any document are solely for convenience of reference and shall not constitute a part of any such document nor shall they affect the meaning, construction or effect of any provision thereof. (d) References to any Person shall include such Person, its successors, permitted assigns and permitted transferees. (e) Except as otherwise expressly provided, reference to any agreement means such agreement as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof. (f) Except as otherwise expressly provided, references to any law includes any amendment or modification to such law and any rules or regulations issued thereunder or any law enacted in substitution or replacement therefor. (g) When used in any document, words such as "hereunder", "hereto", "hereof" and "herein" and other words of like import shall, unless the context clearly indicates to the contrary, refer to the whole of the applicable document and not to any particular article, section, subsection, paragraph or clause thereof. (h) References to "including" means including without limiting the generality of any description preceding such term and for purposes hereof the rule of ejusdem generis shall not be applicable to limit a general statement, followed by or referable to an enumeration of specific matters, to matters similar to those specifically mentioned. Appendix A-1 (i) References herein to "attorney's fees", "legal fees", "costs of counsel" or other such references shall be deemed to include the allocated cost of in-house counsel. (j) Each of the parties to the Operative Agreements and their counsel have reviewed and revised, or requested revisions to, the Operative Agreements, and the usual rule of construction that any ambiguities are to be resolved against the drafting party shall be inapplicable in the construing and interpretation of the Operative Agreements and any amendments or exhibits thereto. (k) Capitalized terms used in any Operative Agreements which are not defined in this Appendix A but are defined in another Operative Agreement shall ---------- have the meaning so ascribed to such term in the applicable Operative Agreement. (l) Except as specifically provided herein, all accounting terms used herein which are not expressly defined in the Operative Agreements have the meanings given to them in accordance with GAAP and all computations made pursuant to the Operative Agreements shall be made in accordance with GAAP. All balance sheets and other financial statements delivered pursuant to Section 6.01 of the Lessee Credit Agreement shall be prepared in accordance with GAAP. If any changes in accounting principles from those used in the preparation of the most recent financial statements referred to in Section 6.01 of the Lessee Credit Agreement are hereafter required or permitted by the rules, regulations, pronouncements and opinions of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto) and are adopted by JPFDI and U.S. Foodservice, Inc. with the agreement of their respective independent certified public accountants and such changes result or could result (for any present or future period) in a change in the method of calculation of any of the financial covenants, standards or terms in or relating to Article VIII of the Lessee Credit Agreement, the parties hereto agree to enter into discussions with a view to amending the provisions hereof relating to such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating the financial condition of JPFDI and U.S. Foodservice, Inc. and their Restricted Subsidiaries shall be the same after such changes as if such changes had not been made, provided that, no change in GAAP -------- that would affect or could affect (for any present or future period) the method of calculation of any of said financial covenants, standards or terms shall be given effect in such calculations until such provisions are amended, in a manner satisfactory to JPFDI, U.S. Foodservice, Inc., the Lenders and the Holders, to so reflect such change in GAAP. II. Definitions "AAA" shall have the meaning given to such term in Section 12.7(d) of the Participation Agreement. "ABR" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/16 of 1%) equal to the greater of (a) the Prime Lending Rate in effect on such day, and (b) the Federal Funds Effective Rate in effect on such day plus one-half of one Appendix A-2 percent (0.5%). For purposes hereof: "Prime Lending Rate" shall mean the rate ------------------ announced by the Agent from time to time as its prime lending rate as in effect from time to time. The Prime Lending Rate is a reference rate and is one of several interest rate bases used by the Agent and does not necessarily represent the lowest or most favorable rate offered by the Agent actually charged to any customer. Any Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. The Prime Lending Rate shall change automatically and without notice from time to time as and when the prime lending rate of the Agent changes. "Federal Funds Effective Rate" shall mean, ---------------------------- for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members or the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three (3) Federal funds brokers of recognized standing selected by it. Any change in the ABR due to a change in the Prime Lending Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Lending Rate or the Federal Funds Effective Rate, respectively. "ABR Holder Advance" shall mean a Holder Advance bearing a Holder Yield based on the ABR. "ABR Loans" shall mean Loans the rate of interest applicable to which is based upon the ABR. "Acceleration" shall have the meaning given to such term in Section 6 of the Credit Agreement. "Accounts" shall have the meaning given to such term in Section 1 of the Security Agreement. "Acquired Assets" shall have the meaning assigned to such term in the definition of "Operating Cash Flow." "Acquired Subsidiary" shall have the meaning assigned to such term in the definition of "Operating Cash Flow." "Acquired Unit Adjustment" shall have the meaning assigned to such term in the definition of "Operating Cash Flow." "Acquisition Advance" shall have the meaning given to such term in Section 5.3 of the Participation Agreement. "Acquisition Loan" shall mean any Loan made in connection with an Acquisition Advance. Appendix A-3 "Additional Incorporated Terms" shall have the meaning given to such term in Section 28.1 of the Lease. "Advance" shall mean a Construction Advance or an Acquisition Advance. "Affiliate" shall mean, with respect to any designated Person, any other Person (a) directly or indirectly, through one or more intermediaries, controlling or controlled by or under direct or indirect common control with such designated Person, (b) which beneficially owns or holds 5% or more of the shares of any class of Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of such designated Person, or (c) 5% or more of any class of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by such designated Person; provided, however, that -------- ------- none of the Lenders, the Holders, the Owner Trustee or the Trust Company shall be deemed to be an Affiliate of JPFDI or any of its Subsidiaries solely by reason of ownership of any obligations of JPFDI to such Lender, Holder, Owner Trustee or Trust Company under any of the Operative Agreements or by reason of having the benefits of any agreements or covenants of JPFDI and its Subsidiaries contained in the Operative Agreements. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean 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 (or other equity interest) or by contract or otherwise. "After Tax Basis" shall mean, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient calculated at the then maximum marginal rates generally applicable to Persons of the same type as the recipients with respect to the receipt by the recipient of such amounts (less any tax savings, calculated at such rates, reasonably expected to be realized as a result of a payment of the indemnified amount), such increased payment (as so reduced) is equal to the payment otherwise required to be made. "Agency Agreement" shall mean the Agency Agreement, dated on or about the Initial Closing Date between the Construction Agent and the Lessor. "Agency Agreement Event of Default" shall mean an "Event of Default" as defined in Section 5.1 of the Agency Agreement. "Agent" shall mean First Union National Bank, as agent for the Lenders pursuant to the Credit Agreement, or any successor agent appointed in accordance with the terms of the Credit Agreement and respecting the Security Documents, for the Lenders and the Holders, to the extent of their interests. "Applicable Percentage" shall mean for Eurodollar Loans, the Lender Facility Fee, Eurodollar Holder Advances and the Holder Facility Fee, the margin (expressed as a percentage) to be used in determining the Eurodollar Rate and/or the applicable Facility Fee, as the case may be, and shall, from the Initial Closing Date until the receipt of the initial Officer's Compliance Appendix A-4 Certificate, be (a) 0.45%, for the Applicable Percentage for Eurodollar Loans, (b) 0.175%, for the Lender Facility Fee, (c) 1.200%, for the Eurodollar Holder Advances and (d) 0.175%, for the Holder Facility Fee, and for each fiscal quarter ending after the Initial Closing Date shall be determined, subject to the final paragraph of this definition, by reference to the Total Debt Ratio set forth in the most recently delivered Officer's Compliance Certificate as follows:
Applicable Applicable Percentage Applicable Percentage for Applicable Percentage for Percentage Total Debt Eurodollar for the Lender Facility Eurodollar Holder for the Ratio Loans Fee Advances Holder Facility Fee - ------------------------------------------------------------------------------------------------------------------------------- Less than or equal to 2.5 to 1.0 .175% .075% .925% .075% - ------------------------------------------------------------------------------------------------------------------------------- Greater than 2.5 to 1.0 but less than or equal to 3.0 to 1.0 .225% .100% .975% .100% - ------------------------------------------------------------------------------------------------------------------------------- Greater than 3.0 to 1.0 but less than or equal to 3.5 to 1.0 .275% .125% 1.025% .125% - ------------------------------------------------------------------------------------------------------------------------------- Greater than 3.5 to 1.0 but less than or equal to 4.0 to 1.0 .350% .150% 1.100% .150% - ------------------------------------------------------------------------------------------------------------------------------- Greater than 4.0 to 1.0 but less than or equal to 4.5 to 1.0 .450% .175% 1.200% .175% - ------------------------------------------------------------------------------------------------------------------------------- Greater than 4.5 to 1.0 .550% .200% 1.300% .200% ===============================================================================================================================
Adjustments, if any, in the Applicable Percentage shall be made by the Agent on the fifth (5th) Business Day after receipt by the Agent of quarterly financial statements for USF and its Subsidiaries and the accompanying Officer's Compliance Certificate setting forth the Total Debt Ratio of USF and its Consolidated Subsidiaries as of the most recent fiscal quarter end. Subject to Section 2.8(b) of the Credit Agreement and Section 3.2(b) of the Trust Agreement, in the event the Lessee fails to deliver, or to cause the delivery of, such financial statements and certificate within forty-five (45) days after the end of each fiscal quarter of USF, the Applicable Percentage shall be the highest Applicable Percentage until five (5) Business Days after receipt by the Agent of such financial statements and certificates. "Appraisal" shall mean, with respect to any Property, an appraisal to be delivered in connection with the Participation Agreement or in accordance with the terms of the Lease, in each case prepared by a reputable appraiser reasonably acceptable to the Agent, which in the judgment of counsel to the Agent, complies with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Legal Requirements. "Appraisal Procedure" shall have the meaning given such term in Section 22.4 of the Lease. "Approved State" shall mean each of the following: Maryland and any other state within the continental United States proposed by the Lessee and consented to in writing by the Agent. Appendix A-5 "Appurtenant Rights" shall mean (a) all agreements, easements, rights of way or use, rights of ingress or egress, privileges, appurtenances, tenements, hereditaments and other rights and benefits at any time belonging or pertaining to the Land underlying the Improvements or the Improvements, including without limitation the use of any streets, ways, alleys, vaults or strips of land adjoining, abutting, adjacent or contiguous to the Land and (b) all permits, licenses and rights, whether or not of record, appurtenant to such Land or the Improvements. "Arbitration Rules" shall have the meaning given to such term in Section 12.7(d) of the Participation Agreement. "Assignment and Acceptance" shall mean the Assignment and Acceptance in the form attached to the Credit Agreement as EXHIBIT B. --------- "Available Commitment" shall mean, as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Commitment over (b) the aggregate principal amount of all Loans made by such Lender as of such date after giving effect to Section 5.2(d) of the Participation Agreement (but without giving effect to any other repayments or prepayments of any Loans hereunder). "Available Holder Commitments" shall mean an amount equal to the excess, if any, of (a) the aggregate amount of the Holder Commitments over (b) the aggregate amount of the Holder Advances made since the Initial Closing Date after giving effect to Section 5.2(d) of the Participation Agreement (but without giving effect to any other repayments or prepayments of any Holder Advances). "Bankruptcy Code" shall mean Title 11 of the U. S. Code entitled "Bankruptcy," as now or hereafter in effect or any successor thereto. "Basic Rent" shall mean, the sum of (a) the Loan Basic Rent and (b) the Lessor Basic Rent, calculated as of the applicable date on which Basic Rent is due. "Benefitted Lender" shall have the meaning specified in Section 9.10(a) of the Credit Agreement. "Bill of Sale" shall mean a Bill of Sale regarding Equipment in form and substance reasonably satisfactory to the Agent. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States of America (or any successor). "Board of Directors" shall mean the board of directors of JPFDI or U.S. Foodservice, Inc., as the case may be, or a duly authorized committee of directors lawfully exercising the relevant powers of such board of directors. Appendix A-6 "Borrower" shall mean the Owner Trustee, not in its individual capacity but as Borrower under the Credit Agreement. "Borrowing Date" shall mean any Business Day specified in a notice delivered pursuant to Section 2.3 of the Credit Agreement as a date on which the Borrower requests the Lenders to make Loans thereunder. "Budgeted Total Property Cost" shall mean, at any date of determination with respect to any Construction Period Property, an amount equal to the aggregate amount which the Construction Agent in good faith expects to be expended in order to achieve Completion with respect to such Property. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banks in North Carolina and New York or any other states from which the Agent, any Lender or any Holder funds or engages in administrative activities with respect to the transactions under the Operative Agreements are authorized or required by law to close; provided, however, that when used in -------- ------- connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease" shall mean, as applied to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person or in the notes thereto, other than, in the case of any Restricted Subsidiary, any such lease under which JPFDI, U.S. Foodservice, Inc. or a Predominantly Owned Restricted Subsidiary is the lessor. "Capital Lease Obligation" shall mean, as at any date, with respect to any Capital Lease, the amount of the obligation of the lessee thereunder which would, in accordance with GAAP, appear on a balance sheet of such lessee or in the notes thereto in respect of such Capital Lease. "Capital Stock" shall mean any nonredeemable capital stock of any Credit Party or any of its Subsidiaries, whether common or preferred. "Casualty" shall mean any damage or destruction of all or any portion of the Property as a result of a fire or other casualty. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. (S) 9601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986. "Certificate" shall mean a Certificate in favor of each Holder regarding the Holder Commitment of such Holder issued pursuant to the terms and conditions of the Trust Agreement. "Change of Control" shall mean any acquisition subsequent to the Initial Closing Date by any Person or group of Persons (within the meaning of Section 13 or 14 of the Exchange Act), of Appedix A-7 (a) beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of a majority of the Voting Stock of USF or (b) all or substantially all of the properties and assets of USF. For purposes of this definition, "acquisition" by any Person or Persons of the Voting Stock or properties and assets referred to in the preceding sentence shall mean the earlier of (i) the actual possession thereof and (ii) the consummation of any transaction or series of transactions which, with the passage of time, will give such Person or Persons the actual possession thereof. "Chattel Paper" shall have the meaning given to such term in Section 1 of the Security Agreement. "Claims" shall mean any and all obligations, liabilities, losses, actions, suits, penalties, claims, demands, costs and expenses (including without limitation reasonable attorney's fees and expenses) of any nature whatsoever. "Closing Date" shall mean the Initial Closing Date and each Property Closing Date. "Closing Date Intangibles" shall mean all goodwill and other intangible assets that appear on a consolidated balance sheet of U.S. Foodservice, Inc., JPFDI and their Restricted Subsidiaries prepared in accordance with GAAP as of the Initial Closing Date. "Code" shall mean the Internal Revenue Code of 1986 together with rules and regulations promulgated thereunder, as amended from time to time, or any successor statute thereto. "Collateral" shall mean all assets of the Lessor, the Construction Agent and the Lessee, now owned or hereafter acquired, upon which a Lien is purported to be created by one or more of the Security Documents. "Commencement Date" shall have the meaning specified in Section 2.2 of the Lease. "Commitment" shall mean, as to any Lender, the obligation of such Lender to make the portion of the Loans to the Lessor in an aggregate principal amount at any time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1.1 of the Credit Agreement, as such amount may be increased or ------------ reduced from time to time in accordance with the provisions of the Operative Agreements. "Commitment Percentage" shall mean, as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the aggregate Commitments (or, at any time after the Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Loans then outstanding constitutes of the aggregate principal amount of all of the Loans then outstanding), and such Commitment Percentage shall take into account both the Lender's Tranche A Commitment and the Lender's Tranche B Commitment. "Commitment Period" shall mean the period from and including the Initial Closing Date to and including the Construction Period Termination Date, or such earlier date as the Commitments shall terminate as provided in the Credit Agreement or the Holder Commitment shall terminate as provided in the Trust Agreement. Appendix A-8 "Company Obligations" shall mean the obligations of JPFDI, in any and all capacities under and with respect to the Operative Agreements and each Property. "Completion" shall mean, with respect to a Property, such time as the acquisition, installation, testing and final completion of the Improvements on such Property has been achieved in accordance with the Plans and Specifications, the Agency Agreement and/or the Lease, and in compliance with all Legal Requirements and Insurance Requirements and a certificate of occupancy has been issued with respect to such Property by the appropriate governmental entity (except if non-compliance, individually or in the aggregate, shall not have and could not reasonably be expected to have a Material Adverse Effect). If the Lessor purchases a Property that includes existing Improvements that are to be immediately occupied by the Lessee, the date of Completion for such Property shall be the Property Closing Date. "Completion Date" shall mean, with respect to a Property, the earlier of (a) the date on which Completion for such Property has occurred or (b) the Construction Period Termination Date. "Condemnation" shall mean any taking or sale of the use, access, occupancy, easement rights or title to any Property or any part thereof, wholly or partially (temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Person having the power of eminent domain, including without limitation an action by a Governmental Authority to change the grade of, or widen the streets adjacent to, any Property or alter the pedestrian or vehicular traffic flow to any Property so as to result in a change in access to such Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. "Consolidated Subsidiary" shall mean, as to any Person, any Subsidiary of such Person which under the rules of GAAP consistently applied should have its financial results consolidated with those of such Person for purposes of financial accounting statements. "Construction Advance" shall mean an advance of funds to pay Property Costs pursuant to Section 5.4 of the Participation Agreement. "Construction Agent" shall mean JP Foodservice Distributors, Inc., a Delaware corporation, as the construction agent under the Agency Agreement. "Construction Budget" shall mean the cost of acquisition, installation, testing, constructing and developing any Property as determined by the Construction Agent in its reasonable, good faith judgment. "Construction Commencement Date" shall mean, with respect to Improvements, the date on which construction of such Improvements commences pursuant to the Agency Agreement. Appendix A-9 "Construction Contract" shall mean any contract entered into between the Construction Agent or the Lessee with a Contractor for the construction of Improvements or any portion thereof on the Property. "Construction Loan" shall mean any Loan made in connection with a Construction Advance. "Construction Loan Property Cost" shall mean with respect to each Construction Period Property at the date of determination, an amount equal to (a) the aggregate principal amount of Construction Loans made on or prior to such date with respect to the Property minus (b) the aggregate principal amount of ----- prepayments or repayments of the Loans allocated to reduce the Construction Loan Property Cost of such Property pursuant to Section 2.6(c) of the Credit Agreement. "Construction Period" shall mean, with respect to a Property, the period commencing on the Construction Commencement Date for such Property and ending on the Completion Date for such Property. "Construction Period Property" means, at any date of determination, any Property as to which the Rent Commencement Date has not occurred on or prior to such date. "Construction Period Termination Date" shall mean (a) the earlier of (i) the date that the Commitments have been terminated in their entirety in accordance with the terms of Section 2.5(a) of the Credit Agreement, or (ii) the date forty-two (42) months after the Initial Closing Date or (b) such later date as shall be agreed to by the Majority Secured Parties. "Contractor" shall mean each entity with whom the Construction Agent or the Lessee contracts to construct any Improvements or any portion thereof on the Property. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Credit Party, are treated as a single employer under Section 414 of the Code. "Co-Owner Trustee" shall have the meaning specified in Section 9.2 of the Trust Agreement. "Credit Agreement" shall mean the Credit Agreement, dated on or about the Initial Closing Date, among the Borrower, the Agent and the Lenders, as specified therein. "Credit Agreement Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Credit Agreement Event of Default. "Credit Agreement Event of Default" shall mean any event or condition defined as an "Event of Default" in Section 6 of the Credit Agreement. Appendix A-10 "Credit Documents" shall mean the Participation Agreement, the Credit Agreement, the Notes and the Security Documents. "Credit Parties" shall mean the Construction Agent, the Lessee and each Guarantor. "Debt" shall mean, as applied to any Person, as of any date of determination (without duplication): (a) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes, drafts or similar instruments, or upon which interest payments are customarily made except for all such obligations of JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary to one or more of USF, U.S. Foodservice, Inc., JPFDI and the other Restricted Subsidiaries; (b) all obligations of such Person for all or any part of the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business which are not overdue by more than 45 days or which are being contested in good faith by appropriate proceedings) or for the cost of property constructed or of improvements; (c) all obligations secured by any Lien other than a Lien deemed to exist in connection with any Permitted Receivables Financing (including any related filings of financing statements) provided that, for purposes of determining the "Total Debt Ratio" as used herein (including, as used in the definition of "Applicable Margin"), any obligation incurred by U.S. Foodservice, Inc., JPFDI or any of their Restricted Subsidiaries pursuant to any Permitted Receivables Financing shall be considered Debt, and it being understood and agreed that the Permitted Receivables Financing Amount in respect of any Permitted Receivables financing shall be deemed to be an obligation secured by Liens in connection with a Permitted Receivables Financing on or payable out of the proceeds of production from property owned or held by such Person even though such Person has not assumed or become liable for the payment of such obligations; (d) all Capital Lease Obligations of such Person; (e) all preferred stock issued by such Person or required by the terms thereof to be redeemed, or for which mandatory sinking fund payments are due, by a fixed date; (f) the aggregate amount of the net liability exposure of such Person under all Hedging Agreements relating to speculative hedge arrangements (those hedge arrangements which are required to be marked-to-market under GAAP) as determined under GAAP; and (g) any Guaranty by such Person of or with respect to obligations of the character referred to in the foregoing clauses (a) through (f) of another Person; Appendix A-11 provided, however, that in determining the Debt of JPFDI, so long as the Sara - -------- ------- Lee Offset Agreement shall remain in full force and effect and shall be effective to permit the offset of principal and interest due under the Sara Lee Note against principal and interest due under PYA's Note (or to establish JPFDI's obligation in respect of the indebtedness evidenced by the Sara Lee Note from and after a prepayment in full of PYA's Note as the remaining principal balance of the Sara Lee Note after offset against amounts owing thereon of the principal of and accrued and unpaid interest to the date of prepayment on the PYA Note), the Debt evidenced by the Sara Lee Note shall be deemed equal to the net amounts for which JPFDI is obligated under the Sara Lee Offset Agreement. "Deed" shall mean a warranty deed regarding the Land and/or Improvements in form and substance satisfactory to the Agent. "Default" shall mean the occurrence of any default which upon notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Holder" shall have the meaning given to such term in Section 12.4 of the Participation Agreement. "Defaulting Lender" shall have the meaning given to such term in Section 12.4 of the Participation Agreement. "Deficiency Balance" shall have the meaning given to such term in Section 22.1(b) of the Lease. "Disposed Assets" shall have the meaning assigned to such term in the definition of "Operating Cash Flow." "Disposed Subsidiary" shall have the meaning assigned to such term in the definition of "Operating Cash Flow." "Disposed Unit Adjustment" shall have the meaning assigned to such term in the definition of "Operating Cash Flow." "Disputes" shall have the meaning given to such term in Section 12.7(d) of the Participation Agreement. "Documents" shall have the meaning given to such term in Section 1 of the Security Agreement. "Dollars" and "$" shall mean lawful currency of the United States of America. "Election Date" shall have the meaning given to such term in Section 20.1 of the Lease. "Election Notice" shall have the meaning given to such term in Section 20.1 of the Lease. Appendix A-12 "Employee Benefit Plan" or "Plan" shall mean an employee benefit plan (within the meaning of Section 3(3) of ERISA, including without limitation any Multiemployer Plan), or any "plan" as defined in Section 4975(e)(1) of the Code and as interpreted by the Internal Revenue Service and the Department of Labor in rules, regulations, releases or bulletins in effect on any Closing Date. "Environmental Claims" shall mean any event, condition or circumstance that could prevent continued compliance in all material respects with the Environmental Permits or any scheduled renewals thereof, or any applicable Environmental Laws currently in effect, or that could give rise to any liability on the part of JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary or otherwise form the basis of any claim, action, demand, request, notice, suit, proceeding, hearing, study or investigation involving JPFDI, U.S. Foodservice, Inc. or any of their Restricted Subsidiaries, based on or related to (i) a violation of any applicable Environmental Laws currently in effect or (ii) the manufacture, generation, refining, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport, arranging for transport or handling, or the emission, discharge, release or threatened release into the environment, of any Hazardous Substance in violation of any applicable Environmental Laws currently in effect. "Environmental Law" shall mean any past, present or future Federal, state or local law, or any regulation, ordinance, code, plan, order, permit, grant, franchise, concession, restriction or agreement issued, entered, promulgated or approved thereunder, relating to (a) the environment, human health or safety, including, without limitation, emissions, discharges, releases or threatened releases of Hazardous Substances into the environment, or (b) the manufacture, generation, refining, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport, arranging for transport, or handling of Hazardous Substances. "Environmental Permits" shall mean, collectively, any and all permits, consents, licenses, approvals and registrations of any nature at any time required pursuant to or in order to comply with any Environmental Law. "Environmental Violation" shall mean any activity, occurrence or condition that violates or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to violate or results in or threatens (if the threat requires remediation under any Environmental Law and is not remediated during any grace period allowed under such Environmental Law) to result in noncompliance with any Environmental Law. "Equipment" shall mean equipment, apparatus, furnishings, fittings and personal property of every kind and nature whatsoever purchased, leased or otherwise acquired using the proceeds of the Loans or the Holder Advances by the Construction Agent, the Lessee or the Lessor and all improvements and modifications thereto and replacements thereof, whether or not now owned or hereafter acquired or now or subsequently attached to, contained in or used or usable in any way in connection with any operation of any Improvements, including but without limiting the generality of the foregoing, all equipment described in the Appraisal including without limitation all heating, electrical, and mechanical equipment, lighting, switchboards, plumbing, ventilation, air conditioning and air-cooling apparatus, refrigerating, and incinerating equipment, escalators, Appendix A-13 elevators, loading and unloading equipment and systems, cleaning systems (including without limitation window cleaning apparatus), telephones, communication systems (including without limitation satellite dishes and antennae), televisions, computers, sprinkler systems and other fire prevention and extinguishing apparatus and materials, security systems, motors, engines, machinery, pipes, pumps, tanks, conduits, appliances, fittings and fixtures of every kind and description. "Equipment Schedule" shall mean (a) each Equipment Schedule attached to the applicable Requisition and (b) each Equipment Schedule attached to the applicable Lease Supplement. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "ERISA Affiliate" shall mean each entity required to be aggregated with any Credit Party pursuant to the requirements of Section 414(b) or (c) of the Code. "Eurocurrency Reserve Requirements" shall mean for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal) of reserve requirements in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed on eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D) maintained by a member bank of the Federal Reserve System. "Eurodollar Holder Advance" shall mean a Holder Advance bearing a Holder Yield based on the Eurodollar Rate. "Eurodollar Loans" shall mean Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "Eurodollar Rate" shall mean for the Interest Period for each Eurodollar Loan or Eurodollar Holder Advance comprising part of the same borrowing or advance (including without limitation conversions, extensions and renewals), a per annum interest rate equal to the per annum rate determined by the Agent on the basis of the offered rates for deposits in dollars for a period of time corresponding to such Interest Period (and commencing on the first day of such Interest Period), reported on Telerate page 3750 as of 11:00 a.m. (London time) two (2) Business Days before the first day of such Interest Period. In the event no such offered rates appear on Telerate page 3750, "Eurodollar Rate" shall mean for the Interest Period for each Eurodollar Loan or Eurodollar Holder Advance comprising part of the same borrowing or advance (including without limitation conversions, extensions and renewals), a per annum interest rate equal to the per annum rate determined by the Agent on the basis of the offered rates for deposits in dollars for a period of time corresponding to such Interest Period (and commencing on the first day of such Interest Period), which appear on the Reuters Screen LIBO Appendix A-14 Page as of 11:00 a.m. (London time) two (2) Business Days before the first day of such Interest Period (provided that if at least two (2) such offered rates -------- appear on the Reuters Screen LIBO Page, the rate in respect of such Interest Period will be the arithmetic mean of such offered rates). As used herein, "Reuters Screen LIBO Page" means the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks) ("RMMRS"). In the event the RMMRS is not then quoting such ----- offered rates, "Eurodollar Rate" shall mean for the Interest Period for each Eurodollar Loan or Eurodollar Holder Advance comprising part of the same borrowing or advance (including without limitation conversions, extensions and renewals), the average (rounded upward to the nearest one-sixteenth (1/16) of one percent (1%)) per annum rate of interest determined by the office of the Agent (each such determination to be conclusive and binding) as of two (2) Business Days prior to the first day of such Interest Period, as the effective rate at which deposits in immediately available funds in U.S. dollars are being, have been, or would be offered or quoted by the Agent to major banks in the applicable interbank market for Eurodollar deposits at any time during the Business Day which is the second Business Day immediately preceding the first day of such Interest Period, for a term comparable to such Interest Period and in the amount of the requested Eurodollar Loan and/or Eurodollar Holder Advance. If no such offers or quotes are generally available for such amount, then the Agent shall be entitled to determine the Eurodollar Rate from another recognized service or interbank quotation, or by estimating in its reasonable judgment the per annum rate (as described above) that would be applicable if such quote or offers were generally available. "Event of Default" shall mean a Lease Event of Default, an Agency Agreement Event of Default or a Credit Agreement Event of Default. "Everett Facility" shall mean the facility owned by JPFDI on the date hereof in Everett, Massachusetts. "Excepted Payments" shall mean: (a) all indemnity payments (including without limitation indemnity payments made pursuant to Section 11 of the Participation Agreement), whether made by adjustment to Basic Rent or otherwise, to which the Owner Trustee, any Holder or any of their respective Affiliates, agents, officers, directors or employees is entitled; (b) any amounts (other than Basic Rent or Termination Value) payable under any Operative Agreement to reimburse the Owner Trustee, any Holder or any of their respective Affiliates (including without limitation the reasonable expenses of the Owner Trustee, the Trust Company and the Holders incurred in connection with any such payment) for performing or complying with any of the obligations of any Credit Party under and as permitted by any Operative Agreement; (c) any amount payable to a Holder by any transferee of such interest of a Holder as the purchase price of such Holder's interest in the Trust Estate (or a portion thereof); Appendix A-15 (d) any insurance proceeds (or payments with respect to risks self- insured or policy deductibles) under liability policies other than such proceeds or payments payable to the Agent or any Lender; (e) any insurance proceeds under policies maintained by the Owner Trustee or any Holder; (f) Transaction Expenses or other amounts, fees, disbursements or expenses paid or payable to or for the benefit of the Owner Trustee or any Holder; (g) all right, title and interest of any Holder or the Owner Trustee to any Property or any portion thereof or any other property to the extent any of the foregoing has been released from the Liens of the Security Documents and the Lease pursuant to the terms thereof; (h) upon termination of the Credit Agreement pursuant to the terms thereof, all remaining property covered by the Lease or Security Documents; (i) all payments in respect of the Holder Yield; (j) any payments in respect of interest to the extent attributable to payments referred to in clauses (a) through (i) above; and (k) any rights of either the Owner Trustee or the Trust Company to demand, collect, sue for or otherwise receive and enforce payment of any of the foregoing amounts, provided that such rights shall not include the -------- right to terminate the Lease. "Excess Proceeds" shall mean the excess, if any, of the aggregate of all awards, compensation or insurance proceeds payable in connection with a Casualty or Condemnation over the Termination Value paid by the Lessee pursuant to the Lease with respect to such Casualty or Condemnation. "Exculpated Persons" shall mean the Borrower, the Holders, the Lessor, their officers, directors, shareholders and partners. "Exempt Payments" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Expiration Date" shall mean the last day of the Term; provided, in no event -------- shall the Expiration Date be later than the fifth annual anniversary of the Initial Closing Date, unless, subject to Section 2.2 of the Lease Agreement, such later date has been expressly agreed to in writing by each of the Lessor, the Lessee, the Agent, the Lenders and the Holders. "Facility Fee" shall mean, collectively, the Holder Facility Fee and the Lender Facility Fee. Appendix A-16 "Facility Fee Payment Date" shall mean the last Business Day of each March, June, September and December. "Fair Market Sales Value" shall mean, with respect to any Property, the amount, which in any event, shall not be less than zero (0), that would be paid in cash in an arms-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, respectively, such Property. Fair Market Sales Value of any Property shall be determined based on the assumption that, except for purposes of Section 17 of the Lease, such Property is in the condition and state of repair required under Section 10.1 of the Lease and each Credit Party is in compliance with the other requirements of the Operative Agreements. "Federal Funds Effective Rate" shall have the meaning given to such term in the definition of ABR. "Financing Party" shall mean the Lessor, the Owner Trustee, in its trust capacity, the Agent, the Holders and the Lenders. "Five Year Credit Agreement" shall mean that certain Five Year Credit Agreement dated as of December 23, 1997 among JPFDI, U.S. Foodservice, Inc. (formerly Rykoff-Sexton, Inc.), the lenders that are parties thereto form time to time and NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities LLC (formerly NationsBank Montgomery Securities, Inc.) and Chase Securities, Inc., as Co-Arrangers, The Chase Manhattan Bank, as Syndication Agent, and Bank of America, NT & SA, as Documentation Agent, as such may hereafter be amended, modified, supplemented, restated and/or replaced from time to time. "Fixtures" shall mean all fixtures relating to the Improvements, including without limitation all components thereof, located in or on the Improvements, together with all replacements, modifications, alterations and additions thereto. "Force Majeure Event" shall mean any event beyond the control of the Construction Agent, including without limitation strikes, lockouts, adverse soil conditions, acts of God, adverse weather conditions, inability to obtain labor or materials, governmental activities, civil commotion and enemy action; but excluding any event, cause or condition that results from the acts or omissions of the Construction Agent or the Construction Agent's financial condition. "Form 1001" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Form 4224" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "GAAP" shall mean generally accepted accounting principles as from time to time set forth in the opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and in statements by the Financial Accounting Standards Board or in such Appendix A-17 opinions and statements of such other entities as shall be approved by a significant segment of the accounting profession in the United States of America. "Governmental Action" shall mean all permits, authorizations, registrations, consents, approvals, waivers, exceptions, variances, orders, judgments, written interpretations, decrees, licenses, exemptions, publications, filings, notices to and declarations of or with, or required by, any Governmental Authority, or required by any Legal Requirement, and shall include, without limitation, all environmental and operating permits and licenses that are required for the full use, occupancy, zoning and operating of the Property. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Ground Lease" shall mean a ground lease (in form and substance reasonably satisfactory to the Agent) respecting any Property (a) owned by any Credit Party (or a parent corporation or any Subsidiary of any Credit Party) and leased to the Lessor where such lease has at least a ninety-nine (99) year term and payments set at no more than $1.00 per year, or (b) where such lease is subject to such other terms and conditions as are reasonably satisfactory to the Agent. "Guarantors" shall mean the various parties to the Participation Agreement from time to time, as guarantors of the Construction Agent and the Lessee with respect to the Operative Agreements and the Properties. "Guaranty" shall mean, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise in any manner directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to (a) purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or (b) maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or (c) make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or non- furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. For purposes of all computations made under the Operative Agreements, the amount of any Guaranty shall be equal to the amount of the obligation guaranteed or, if not stated or determined, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. Appendix A-18 "Hard Costs" shall mean all costs and expenses payable for supplies, materials, labor and profit with respect to the Improvements under any Construction Contract. "Hazardous Substance" shall mean and include those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances" or "solid waste" in the Comprehensive Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. (S) 9601 et seq.), as amended -- --- by Superfund Amendments and Reauthorization Act of 1986 (Pub. L. (S) 99-499 100 Stat. 1613), the Resource Conversation and Recovery Act of 1976 (42 U.S.C. (S) 6901 et seq.) and the Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 -- --- et seq.) and in the regulations promulgated pursuant to said laws, all as - -- --- amended; and in any event shall include medical wastes, infectious wastes, asbestos, paint containing lead, and urea formaldehyde. "Hedging Agreement" shall mean any agreement entered into by a Person for protection against future fluctuations in interest rates, foreign exchange rates, commodities prices, or the like (including, but not limited to, interest rate and/or currency swap arrangements, interest rate, currency and/or commodities future or option contracts, and other similar agreements) and which creates a contingent obligation of such Person to make any payments (other than payments in respect of any fee or charge for contracting to provide the protection provided by such agreement) to the holder(s) thereof or counterparty(ies) thereunder upon the culmination or termination of such agreement or otherwise. "Holder Advance" shall mean any advance made by any Holder to the Owner Trustee pursuant to the terms of the Trust Agreement or the Participation Agreement. "Holder Amount" shall mean as of any date, the aggregate amount of Holder Advances made by each Holder to the Trust Estate pursuant to Section 2 of the Participation Agreement and Section 3.1 of the Trust Agreement less any payments of any Holder Advances received by the Holders pursuant to Section 3.4 of the Trust Agreement. "Holder Commitments" shall mean $1,800,000, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements; provided, if there shall be more than one (1) Holder, the Holder -------- Commitment of each Holder shall be as set forth in Schedule I to the Trust ---------- Agreement as such Schedule I may be amended and replaced from time to time. ---------- "Holder Construction Property Cost" shall mean, with respect to each Construction Period Property, at any date of determination, an amount equal to the outstanding Holder Advances made with respect thereto under the Trust Agreement. "Holder Facility Fee" shall have the meaning given to such term in Section 7.4 of the Participation Agreement. "Holder Overdue Rate" shall mean the lesser of (a) the then current rate of Holder Yield respecting the particular amount in question plus two percent (2%) and (b) the highest rate permitted by applicable law. Appendix A-19 "Holder Property Cost" shall mean with respect to a Property an amount equal to the outstanding Holder Advances with respect thereto. "Holder Yield" shall mean with respect to Holder Advances from time to time either the Eurodollar Rate plus the Applicable Percentage or the ABR as elected by the Owner Trustee from time to time with respect to such Holder Advances in accordance with the terms of the Trust Agreement; provided, however, (a) upon -------- ------- delivery of the notice described in Section 3.7(c) of the Trust Agreement, the outstanding Holder Advances of each Holder shall bear a yield at the ABR applicable from time to time from and after the dates and during the periods specified in Section 3.7(c) of the Trust Agreement, and (b) upon the delivery by a Holder of the notice described in Section 11.3(f) of the Participation Agreement, the Holder Advances of such Holder shall bear a yield at the ABR applicable from time to time after the dates and during the periods specified in Section 11.3(f) of the Participation Agreement. "Holders" shall mean First Union National Bank and shall include the other banks and financial institutions which may be from time to time holders of Certificates in connection with the USF Real Estate Trust 1998-1. "Impositions" shall mean any and all liabilities, losses, expenses, costs, charges and Liens of any kind whatsoever for fees, taxes, levies, imposts, duties, charges, assessments or withholdings ("Taxes") including but not limited ----- to (i) real and personal property taxes, including without limitation personal property taxes on any property covered by the Lease that is classified by Governmental Authorities as personal property, and real estate or ad valorem taxes in the nature of property taxes; (ii) sales taxes, use taxes and other similar taxes (including rent taxes and intangibles taxes); (iii) excise taxes; (iv) real estate transfer taxes, conveyance taxes, stamp taxes and documentary recording taxes and fees; (v) taxes that are or are in the nature of franchise, income, value added, privilege and doing business taxes, license and registration fees; (vi) assessments on any Property, including without limitation all assessments for public Improvements or benefits, whether or not such improvements are commenced or completed within the Term; and (vii) taxes, Liens, assessments or charges asserted, imposed or assessed by the PBGC or any governmental authority succeeding to or performing functions similar to, the PBGC; and in each case all interest, additions to tax and penalties thereon, which at any time prior to, during or with respect to the Term or in respect of any period for which the Lessee shall be obligated to pay Supplemental Rent, may be levied, assessed or imposed by any Governmental Authority upon or with respect to (a) any Property or any part thereof or interest therein; (b) the leasing, financing, refinancing, demolition, construction, substitution, subleasing, assignment, control, condition, occupancy, servicing, maintenance, repair, ownership, possession, activity conducted on, delivery, insuring, use, operation, improvement, sale, transfer of title, return or other disposition of such Property or any part thereof or interest therein; (c) the Notes, other indebtedness with respect to any Property, or the Certificates, or any part thereof or interest therein; (d) the rentals, receipts or earnings arising from any Property or any part thereof or interest therein; (e) the Operative Agreements, the performance thereof, or any payment made or accrued pursuant thereto; (f) the income or other proceeds received with respect to any Property or any part thereof or interest therein upon the sale or disposition thereof; (g) any contract (including the Agency Agreement) relating to the construction, acquisition or delivery of Appendix A-20 the Improvements or any part thereof or interest therein; (h) the issuance of the Notes or the Certificates; (i) the Owner Trustee, the Trust or the Trust Estate; or (j) otherwise in connection with the transactions contemplated by the Operative Agreements. "Improvements" shall mean, with respect to the construction, renovations and/or Modifications on any Land, all buildings, structures, Fixtures, and other improvements of every kind existing at any time and from time to time on or under the Land purchased or otherwise acquired using the proceeds of the Loans or the Holder Advances or which is subject to a Ground Lease, together with any and all appurtenances to such buildings, structures or improvements, including without limitation sidewalks, utility pipes, conduits and lines, parking areas and roadways, and including without limitation all Modifications and other additions to or changes in the Improvements at any time, including without limitation (a) any Improvements existing as of the Property Closing Date as such Improvements may be referenced on the applicable Requisition and (b) any Improvements made subsequent to such Property Closing Date. "Incorporated Covenants" shall have the meaning given to such term in Section 28.1 of the Lease. "Incorporated Representations and Warranties" shall have the meaning given to such term in Section 28.1 of the Lease. "Indemnified Person" shall mean the Lessor, the Owner Trustee, in its individual and its trust capacity, the Trust, the Trust Company, the Agent, the Holders, the Lenders and their respective successors, assigns, directors, shareholders, partners, officers, employees, agents and Affiliates. "Indemnity Provider" shall mean, respecting each Property, the Lessee. "Initial Closing Date" shall mean __________, 1998. "Initial Construction Advance" shall mean any initial Advance to pay for: (a) Property Costs for construction of any Improvements; and (b) the Property Costs of restoring or repairing any Property which is required to be restored or repaired in accordance with Section 15.1(e) of the Lease. "Instruments" shall have the meaning given to such term in Section 1 of the Security Agreement. "Insurance Requirements" shall mean all terms and conditions of any insurance policy either required by the Lease to be maintained by the Lessee or required by the Agency Agreement to be maintained by the Construction Agent, and all requirements of the issuer of any such policy and, regarding self insurance, any other requirements of the Lessee. "Interest Expense" shall mean, as applied to any Person, for any period, the sum of the following amounts for such Person: (a) the aggregate amount of all interest accrued (whether or not actually paid) during such period on Debt (including, without limitation, (i) imputed interest Appendix A-21 on Capital Lease Obligations and (ii) all imputed interest, whether in the form of "yield", "discount" or other similar item, that accrues in respect of the Permitted Receivables Financing Amount of any Permitted Receivables Financing entered into by such Person (or by any Subsidiary of such Person or any other Person "controlled" (as such term is defined in the Securities Act) by such Person), together with any fees payable thereunder, plus (b) amortization of ---- debt discount and expense during such period (excluding deferred financing amortization), plus (c) all fees and commissions payable in connection with any ---- letters of credit during such period. Unless otherwise specified, any reference to Interest Expense for any period is intended as a reference to the sum for such period of said amounts for U.S. Foodservice, Inc., JPFDI and their Restricted Subsidiaries on a consolidated basis in accordance with GAAP after eliminating all amounts properly attributable to outside minority interests in Restricted Subsidiaries. "Interest Period" shall mean (a) during the Commitment Period and thereafter as to any Eurodollar Loan or Eurodollar Holder Advance (i) with respect to the initial Interest Period, the period beginning on the date of the first Eurodollar Loan and Eurodollar Holder Advance and ending one (1) month, two (2) months, three (3) months or six (6) months thereafter, as selected by the Lessor (in the case of a Eurodollar Loan) or the Owner Trustee (in the case of a Eurodollar Holder Advance) in its applicable notice given with respect thereto and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan or Eurodollar Holder Advance and ending one (1) month, two (2) months, three (3) months or six (6) months thereafter, as selected by the Lessor by irrevocable notice to the Agent (in the case of a Eurodollar Loan) or by the Owner Trustee (in the case of a Eurodollar Holder Advance) in each case not less than three (3) Business Days prior to the last day of the then current Interest Period with respect thereto; provided, however, that all of the foregoing provisions relating to Interest - -------- ------- Periods are subject to the following: (A) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that with respect to any Eurodollar Loan or Eurodollar Holder Advance, where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (B) no Interest Period shall extend beyond the Maturity Date or the Expiration Date, as the case may be, and (C) where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall, subject to clause (A) above, end on the last Business Day of such calendar month. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended, together with the rules and regulations promulgated thereunder. "JPFDI" means JP Foodservice Distributors, Inc., a Delaware corporation. "Joinder Agreement" shall mean a joinder agreement, in the form of EXHIBIT J --------- to the Participation Agreement, executed from time to time between a Restricted Subsidiary and the Agent. "Land" shall mean a parcel of real property described on (a) the Requisition issued by the Construction Agent on the Property Closing Date relating to such parcel and (b) the schedules to Appendix A-22 each applicable Lease Supplement executed and delivered in accordance with the requirements of Section 2.4 of the Lease. "Law" shall mean any statute, law, ordinance, regulation, rule, directive, order, writ, injunction or decree of any Tribunal. "Lease" or "Lease Agreement" shall mean the Lease Agreement dated on or about the Initial Closing Date, between the Lessor and the Lessee, together with any Lease Supplements thereto. "Lease Default" shall mean any event or condition which, with the lapse of time or the giving of notice, or both, would constitute a Lease Event of Default. "Lease Event of Default" shall have the meaning specified in Section 17.1 of the Lease. "Lease Supplement" shall mean each Lease Supplement substantially in the form of Exhibit A to the Lease, together with all attachments and schedules thereto. --------- "Legal Requirements" shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Owner Trustee, any Holder, the Lessor, any Credit Party, the Agent, any Lender or any Property, Land, Improvement, Equipment or the taxation, demolition, construction, use or alteration of such Improvements, whether now or hereafter enacted and in force, including without limitation any that require repairs, modifications or alterations in or to any Property or in any way limit the use and enjoyment thereof (including without limitation all building, zoning and fire codes and the Americans with Disabilities Act of 1990, 42 U.S.C. (S) 12101 et. seq., and any other similar federal, state or local laws or ordinances and the regulations promulgated thereunder) and any that may relate to environmental requirements (including without limitation all Environmental Laws), and all permits, certificates of occupancy, licenses, authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments which are either of record or known to any Credit Party affecting any Property or the Appurtenant Rights. "Lender Commitments" shall mean $58,200,000, as such amount may be increased or reduced from time to time in accordance with the provisions of the Operative Agreements; provided, if there shall be more than one (1) Lender, the Lender -------- Commitment of each Lender shall be as set forth in Schedule 1.1 to the Credit ------------ Agreement as such Schedule 1.1 may be amended and replaced from time to time. ------------ "Lender Facility Fee" shall have the meaning given to such term in Section 7.4 of the Participation Agreement. "Lender Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdiction in order to procure a security interest in favor of the Agent in the Collateral subject to the Security Documents. Appendix A-23 "Lenders" shall mean First Union National Bank and shall include the other banks and financial institutions which may be from time to time party to the Participation Agreement and the Credit Agreement. "Lessee" shall have the meaning set forth in the Lease. "Lessee Credit Agreement" shall mean that certain 364-Day Credit Agreement dated as of December 23, 1997 among JPFDI, U.S. Foodservice, Inc. (formerly Rykoff-Sexton, Inc.), the lenders that are parties thereto from time to time and NationsBank, N.A., as Administrative Agent, NationsBanc Montgomery Securities LLC (formerly NationsBank Montgomery Securities, Inc.) and Chase Securities, Inc., as Co-Arrangers, The Chase Manhattan Bank, as Syndication Agent, and Bank of America, NT & SA, as Documentation Agent, as such may hereafter be amended, modified, supplemented, restated and/or replaced from time to time. "Lessee Credit Agreement Event of Default" shall mean an Event of Default as defined in Section 10.01 of the Lessee Credit Agreement (other than an Event of Default resulting from the failure to comply with the second sentence of Section 8.19 of the Lessee Credit Agreement or of the Five Year Credit Agreement). "Lessor" shall mean the Owner Trustee, not in its individual capacity, but as the Lessor under the Lease. "Lessor Basic Rent" shall mean the scheduled Holder Yield due on the Holder Advances on any Scheduled Interest Payment Date pursuant to the Trust Agreement (but not including interest on (a) any such scheduled Holder Yield due on the Holder Advances prior to the Rent Commencement Date with respect to the Property to which such Holder Advances relate or (b) overdue amounts under the Trust Agreement or otherwise). "Lessor Financing Statements" shall mean UCC financing statements and fixture filings appropriately completed and executed for filing in the applicable jurisdictions in order to protect the Lessor's interest under the Lease to the extent the Lease is a security agreement or a mortgage. "Lessor Lien" shall mean any Lien, true lease or sublease or disposition of title arising as a result of (a) any claim against the Lessor or the Trust Company, in its individual capacity, not resulting from the transactions contemplated by the Operative Agreements, (b) any act or omission of the Lessor or the Trust Company, in its individual capacity, which is not required by the Operative Agreements or is in violation of any of the terms of the Operative Agreements, (c) any claim against the Lessor or the Trust Company, in its individual capacity, with respect to Taxes or Transaction Expenses against which the Lessee is not required to indemnify the Lessor or the Trust Company, in its individual capacity, pursuant to Section 11 of the Participation Agreement or (d) any claim against the Lessor arising out of any transfer by the Lessor of all or any portion of the interest of the Lessor in the Properties, the Trust Estate or the Operative Agreements other than the transfer of title to or possession of any Properties by the Lessor pursuant to and in accordance with the Lease, the Credit Agreement, the Security Agreement or Appendix A-24 the Participation Agreement or pursuant to the exercise of the remedies set forth in Article XVII of the Lease. "Lien" shall mean, as to any Person, any mortgage, lien (statutory or other), pledge, assignment, hypothecation, adverse claim, charge, security interest or other encumbrance in or on, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale, trust receipt or other title retention agreement or Capital Lease with respect to, any property or asset of such Person, or the signing or filing of a financing statement which names such Person as debtor, or the signing of any security agreement authorizing any other party as the secured party thereunder to file any financing statement which names such Person as debtor. "Limited Recourse Amount" shall mean with respect to all the Properties on an aggregate basis, an amount equal to the sum of the Termination Values with respect to all the Properties on an aggregate basis on each Payment Date, less the Maximum Residual Guarantee Amount as of such date with respect to all the Properties on an aggregate basis. "Loan Basic Rent" shall mean the scheduled interest due on the Loans on any Scheduled Interest Payment Date pursuant to the Credit Agreement (but not including interest on (a) any such Loan due prior to the Rent Commencement Date with respect to the Property to which such Loan relates or (b) any overdue amounts under Section 2.8(c) of the Credit Agreement or otherwise). "Loan Property Cost" shall mean, with respect to each Property at any date of determination, an amount equal to (a) the aggregate principal amount of all Loans (including without limitation all Acquisition Loans and Construction Loans) made on or prior to such date with respect to such Property minus (b) the ----- aggregate amount of prepayments or repayments as the case may be of the Loans allocated to reduce the Loan Property Cost of such Property pursuant to Section 2.6(c) of the Credit Agreement. "Loans" shall mean the loans extended pursuant to the Credit Agreement and shall include both the Tranche A Loans and the Tranche B Loans. "Majority Holders" shall mean at any time, Holders whose Holder Advances outstanding represent at least fifty-one percent (51%) of (a) the aggregate Holder Advances outstanding or (b) to the extent there are no Holder Advances outstanding, the aggregate Holder Commitments. "Majority Lenders" shall mean at any time, Lenders whose Loans outstanding represent at least fifty-one percent (51%) of (a) the aggregate Loans outstanding or (b) to the extent there are no Loans outstanding, the aggregate of the Lender Commitments. "Majority Secured Parties" shall mean at any time, Lenders and Holders whose Loans and Holder Advances outstanding represent at least fifty-one percent (51%) of (a) the aggregate Advances outstanding or (b) to the extent there are no Advances outstanding, the sum of the aggregate Holder Commitments plus the aggregate Lender Commitments. Appendix A-25 "Margin Certificate" shall have the meaning given to such term in Section 8.3(l) of the Participation Agreement. "Marketing Period" shall mean, if the Lessee has given a Sale Notice in accordance with Section 20.1 of the Lease, the period commencing on the date such Sale Notice is given and ending on the Expiration Date. "Material Adverse Effect" shall, mean a material adverse effect on (a) the business, condition (financial or otherwise), assets, liabilities or operations of the Credit Parties (on a consolidated basis), (b) the ability of any Credit Party to perform its respective obligations under any Operative Agreement to which it is a party, (c) the validity or enforceability of any Operative Agreement or the rights and remedies of the Agent, the Lenders, the Holders, or the Lessor thereunder, (d) the validity, priority or enforceability of any Lien on any Property created by any of the Operative Agreements, or (e) the value, utility or useful life of any Property or the use, or ability of the Lessee to use, any Property for the purpose for which it was intended. "Maturity Date" shall mean the Expiration Date. "Maximum Residual Guarantee Amount" shall mean an amount equal to the product of the aggregate Property Cost for all of Properties times eighty-five percent (85%). "Merger Agreement" shall mean the Agreement and Plan of Merger, dated as of June 30, 1997, as amended as of September 3, 1997 and November 5, 1997, together with all exhibits and schedules thereto, by and among U.S. Foodservice, Hudson Acquisition Corp., a wholly owned subsidiary of U.S. Foodservice and U.S. Foodservice, Inc. (formerly Rykoff-Sexton, Inc.) "Merger Transaction" shall mean the transaction in which, among other things, (i) U.S. Foodservice, Inc. (formerly Rykoff-Sexton, Inc.) was merged with and into Hudson Acquisition Corp., a wholly owned subsidiary of U.S. Foodservice, and (ii) each issued and outstanding share of common stock of U.S. Foodservice, Inc. (formerly Rykoff-Sexton, Inc.), other than shares, if any, owned by U.S. Foodservice, Inc. (formerly Rykoff-Sexton, Inc.), U.S. Foodservice or Hudson Acquisition Corp., were converted into the right to receive 0.775 of a share of common stock of U.S. Foodservice, all upon the terms and conditions set forth in the Merger Agreement. "Modifications" shall have the meaning specified in Section 11.1(a) of the Lease. "Mortgage Instrument" shall mean any mortgage, deed of trust or any other instrument executed by the Owner Trustee and the Lessee (or regarding any Property subject to a Ground Lease, the applicable Affiliate of the Lessee) in favor of the Agent (for the benefit of the Lenders and the Holders) and evidencing a Lien on the Property, in form and substance reasonably acceptable to the Agent. "Multiemployer Plan" shall mean a plan described as such in Section 3(37) of ERISA to which any Credit Party or any of its Subsidiaries or ERISA Affiliates is making or incurring an obligation to make, or has made or incurred an obligation to make, contributions. Appendix A-26 "Multiple Employer Plan" shall mean a plan to which any Credit Party or any ERISA Affiliate, and at least one (1) employer other than a Credit Party or an ERISA Affiliate, is making or accruing an obligation to make contributions or has made or accrued an obligation to make contributions. "Net Receivables" shall mean, on any day, in respect of any Permitted Receivables Financing, the outstanding balance of accounts receivable sold, transferred, pledged or otherwise subject to Liens, in each case, to or in favor of a Receivables Financier in connection with such Permitted Receivables Financing, excluding any accounts receivable not included in the calculation of the Receivables Financier's percentage interest in the Transferred Assets (it being understood that only the percentage interest shall be included in this calculation) or borrowing base (such excluded accounts receivable may include, without limiting the foregoing in any manner, any such accounts receivable (x) not meeting the eligibility criteria under such Permitted Receivables Financing, (y) exceeding the applicable concentration limits set forth for such Permitted Receivables Financing, or (z) which are or become defaulted, delinquent, charged-off or otherwise cease to be creditworthy as set forth in, and as determined in accordance with, such Permitted Receivables Financing). "New Facility" shall have the meaning given to such term in Section 28.1 of the Lease. "Notes" shall mean those notes issued to the Lenders pursuant to the Credit Agreement and shall include both the Tranche A Notes and the Tranche B Notes. "Obligations" shall have the meaning given to such term in Section 1 of the Security Agreement. "Officer's Certificate" with respect to any person shall mean a certificate executed on behalf of such person by a Responsible Officer who has made or caused to be made such examination or investigation as is necessary to enable such Responsible Officer to express an informed opinion with respect to the subject matter of such Officer's Certificate. "Officer's Compliance Certificate" shall have the meaning given to such term in Section 8.3(l) of the Participation Agreement. "Operating Cash Flow" shall mean, for any period, (a) the net income (or deficit) of U.S. Foodservice, Inc., JPFDI and their Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP after eliminating all non-cash or nonrecurring items (whether cash or non-cash and whether or not deemed extraordinary in accordance with GAAP) for such period; plus (b) the sum ---- of the following amounts, in each case to the extent deducted in arriving at such amount determined in accordance with the foregoing subdivision (a): (i) Interest Expense, (ii) provisions for taxes imposed on or measured by income or excess profits, and Appendix A-27 (iii) provisions for depreciation and amortization, plus (c) the sum (without duplication) of the following items to the extent not - ---- included in the amounts determined pursuant to subdivisions (a) and (b) above (such sum being herein called the "Acquired Unit Adjustment"): ------------------------ (i) the net income (or net deficit) for such period of each Person which shall have become a Restricted Subsidiary during such period (an "Acquired Subsidiary") after eliminating all non-cash or nonrecurring items -------------------- (whether cash or non-cash and whether or not deemed extraordinary in accordance with GAAP), (ii) the net income (or net deficit) derived during such period from any operating assets acquired by U.S. Foodservice, Inc., JPFDI or a Restricted Subsidiary during such period ("Acquired Assets"), and --------------- (iii) the sum (without duplication) of the following items to the extent deducted in determining net income of any Acquired Subsidiary or derived from any Acquired Assets for such period: (A) Interest Expense of such Acquired Subsidiary or associated with such Acquired Assets, (B) provisions for taxes imposed on or measured by income or excess profits of such Acquired Subsidiary or associated with such Acquired Assets, and (C) provisions for depreciation and amortization of such Acquired Subsidiary or associated with such Acquired Assets; minus (d) the sum of the following items to the extent included in the amounts - ----- determined pursuant to subdivisions (a), (b) and (c) above (such sum being herein called the "Disposed Unit Adjustment"): ------------------------ (i) the net income (or net deficit) for such period of each Person which shall have ceased to be a Restricted Subsidiary during such period (a "Disposed Subsidiary") after eliminating all non-cash or nonrecurring items ------------------- (whether cash or non-cash and whether or not deemed extraordinary in accordance with GAAP), (ii) the net income (or net deficit) derived during such period from any assets which were sold or otherwise disposed of by U.S. Foodservice, Inc., JPFDI or a Restricted Subsidiary during such period ("Disposed -------- Assets"), and (iii) the sum (without duplication) of the following items to the extent deducted in determining net income of any Disposed Subsidiary or derived from any Disposed Assets for such period: (A) Interest Expense of such Disposed Subsidiary or associated with such Disposed Assets, (B) provisions for taxes imposed on or measured by income or excess profits of such Disposed Subsidiary or associated with such Disposed Assets for such period, and (C) provisions for depreciation and amortization of such Disposed Subsidiary or associated with such Disposed Assets; provided, however, that (1) for purposes of determining Operating Cash Flow for - -------- ------- any period, the Acquired Unit Adjustment and the Disposed Unit Adjustment shall be determined by JPFDI in Appendix A-28 accordance with sound financial practice (and on the basis, to the extent available, of appropriate financial statements and tax returns for such period) and shall be set forth in a certificate of the principal financial officer of JPFDI accompanied by calculations in reasonable detail showing the manner of determination thereof, which certificate shall be furnished to the Agent, each of the Lenders and each of the Holders not later than the certificate required to be furnished by JPFDI in respect of such period pursuant to Section 8.3(l) of the Participation Agreement, and (2) no amount shall in any event be includable in Operating Cash Flow pursuant to subdivision (c) of this definition for any period in respect of any Acquired Unit Adjustment unless the amount and calculation thereof, as set forth in the certificate for such period required by the foregoing clause (1), shall be reasonably acceptable to the Majority Secured Parties; and provided further, however, that in determining the net income (or -------- ------- ------- deficit) of U.S. Foodservice, Inc., JPFDI and their Restricted Subsidiaries pursuant to the foregoing subdivision (a) for any period during which JPFDI shall have sold or otherwise disposed of the Everett Facility, losses from such sale or other disposition shall be disregarded to the extent the aggregate amount of all such losses (computed without regard to Closing Date Intangibles attributable to such facility) does not exceed $3,300,000 on an after tax basis. "Operative Agreements" shall mean the following: the Participation Agreement, the Agency Agreement, the Trust Agreement, the Certificates, the Credit Agreement, the Notes, the Lease, the Lease Supplements (and memoranda of the Lease and each Lease Supplement in a form reasonably acceptable to the Agent), the Joinder Agreements, the Security Agreement, the Mortgage Instruments, the other Security Documents, the Ground Leases, the Deeds and the Bills of Sale and any and all other agreements, documents and instruments executed in connection with any of the foregoing. "Original Executed Counterpart" shall have the meaning given to such term in Section 5 of EXHIBIT A to the Lease. --------- "Overdue Interest" shall mean any interest payable pursuant to Section 2.8(b) of the Credit Agreement. "Overdue Rate" shall mean (a) with respect to the Loan Basic Rent, and any other amount owed under or with respect to the Credit Agreement or the Security Documents, the rate specified in Section 2.8(b) of the Credit Agreement, (b) with respect to the Lessor Basic Rent, the Holder Yield and any other amount owed under or with respect to the Trust Agreement, the Holder Overdue Rate, and (c) with respect to any other amount, a per annum rate 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then 2% greater than the ABR). "Owner Trustee," "Borrower" or "Lessor" shall mean First Security Bank, National Association, not individually, except as expressly stated in the various Operative Agreements, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, and any successor, replacement and/or additional Owner Trustee expressly permitted under the Operative Agreements. Appendix A-29 "Participant" shall have the meaning given to such term in Section 9.7 of the Credit Agreement. "Participation Agreement" shall mean the Participation Agreement dated on or about the Initial Closing Date, among the Lessee, the Guarantors, the Owner Trustee, not in its individual capacity except as expressly stated therein, the Holders, the Lenders and the Agent. "Payment Date" shall mean any Scheduled Interest Payment Date and any date on which interest or Holder Yield in connection with a prepayment of principal on the Loans or of the Holder Advances is due under the Credit Agreement or the Trust Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "Pension Plan" shall mean a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than a Multiemployer Plan), and to which any Credit Party or any ERISA Affiliate may have any liability, including without limitation any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five (5) years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Permitted Facility" shall mean a warehouse, office building or other property of the type and size customarily used and operated by the Lessee, or which the Lessee intends to use in its ordinary course of business. "Permitted Liens" shall mean: (a) the respective rights and interests of the parties to the Operative Agreements as provided in the Operative Agreements; (b) the rights of any sublessee or assignee under a sublease or an assignment expressly permitted by the terms of the Lease for no longer than the duration of the Lease; (c) Liens (other than Liens created or imposed under ERISA) for Taxes that either are not yet due or are being contested in accordance with the provisions of Section 13.1 of the Lease; (d) statutory Liens of materialmen, mechanics, carriers, warehousemen and other similar Persons relating to the construction of the Improvements or in connection with any Modifications or arising in the ordinary course of business for amounts that either are not yet due or are being diligently contested in good faith by appropriate proceedings, so long as such proceedings satisfy the conditions for the continuation of proceedings to contest Taxes set forth in Section 13.1 of the Lease; Appendix A-30 (e) Liens of any of the types referred to in clause (d) above that have been bonded for not less than the full amount in dispute (or as to which other security arrangements satisfactory to the Lessor and the Agent have been made), which bonding (or arrangements) shall comply with applicable Legal Requirements, and shall have effectively stayed any execution or enforcement of such Liens; (f) any attachment, judgment or other similar Lien arising in connection with court proceedings, so long as (i) the execution or other enforcement of such Lien is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings diligently conducted and effective to prevent the forfeiture or sale of any property of U.S. Foodservice, Inc., JPFDI or any Restricted Subsidiary or any interference with the ordinary use thereof by U.S. Foodservice, Inc., JPFDI or any Restricted Subsidiary, and (ii) such reserve or other appropriate provision, if any, in the amount and of the type as shall be required by GAAP shall be maintained therefor; and (g) Liens in favor of municipalities to the extent agreed to by the Lessor. "Permitted Receivables Financing" shall mean any transaction involving one or more sales, contributions or other conveyances by U.S. Foodservice, Inc., JPFDI and/or any Restricted Subsidiary of any accounts receivable (together with certain related property relating thereto and the right to collections thereon, being the "Transferred Assets") to a Subsidiary (including a Subsidiary which is ------------------ a Restricted Subsidiary) or Affiliate of U.S. Foodservice, Inc. or JPFDI (with respect to any such transaction, the "Receivables Financing SPC"), which ------------------------- Receivables Financing SPC then either (x) sells (as determined in accordance with GAAP) such Transferred Assets (or undivided interests therein) to any Person that is not a Subsidiary or Affiliate of U.S. Foodservice, Inc. or JPFDI (with respect to any such transaction, the "Receivables Financier"), (y) borrows --------------------- from such Receivables Financier and secures such borrowings by a pledge of such Transferred Assets and/or (z) otherwise finances its acquisition of such Transferred Assets and, in connection therewith, conveys an interest in such Transferred Assets to the Receivables Financier, provided that (i) such -------- receivables financing shall not involve any recourse to U.S. Foodservice, Inc., JPFDI or any Restricted Subsidiary (other than the Receivables Financing SPC) for any reason other than (A) repurchases of non-eligible receivables, (B) indemnifications for losses (including any adjustments for dilutions), other than credit losses related to the receivables transferred in such financing, and (C) payment of costs, fees, expenses and indemnities relating to such receivables financing, (ii) such receivables financing shall not include any Guaranty by U.S. Foodservice Inc., JPFDI or any Restricted Subsidiary, it being understood that payment by U.S. Foodservice, Inc., JPFDI or any Restricted Subsidiary of any amount of the type described in the immediately preceding clause (i) which is owing by it to the Receivables Financing SPC shall not be deemed to be a Guaranty notwithstanding that an identical amount may be owing by the Receivables Financing SPC to the Receivables Financier, (iii) the Agent shall be reasonably satisfied with the structure of and documentation for any such transaction and the terms of such transaction, including any applicable discount at which receivables are sold to the Receivables Financier and any termination events, shall be (in the good faith understanding of the Agent) consistent with those prevailing in the market for similar transactions involving receivables and originators of similar credit quality and a receivables pool Appendix A-31 of similar characteristics or shall otherwise be reasonably acceptable to the Agent, and (iv) the documentation for such transaction shall not be amended or modified, to permit the acquisition of interests in the Transferred Assets by the Receivables Financier in excess of the Permitted Receivables Financing Over- Collateralization Amount, to change or modify any provision of any Subordinated Intercompany Revolving Note or any provision of any agreement relating to the calculation of any amount due or to become due in respect thereof, or in any other manner which, in the reasonable judgment of the Agent, is materially inconsistent with the terms and provisions hereof (and/or any other amendment which deals with the requirements for a Permitted Receivables Financing) (other than, in each case, for the requirement that any such amendment or modification (or any of the relevant documents affected thereby) satisfy the requirements set forth in the immediately preceding clause (iii)) without the prior written approval of the Agent (which approval shall not be unreasonably withheld). Each of the Pre-Existing Receivables Financings constitutes a Permitted Receivables Financing. "Permitted Receivables Financing Amount" shall mean at any time with respect to any Permitted Receivables Financing, the aggregate balance of all cash received by the Receivables Financing SPC from the Receivables Financier in respect of purchase proceeds or principal under such financing minus the aggregate amount of all payments received by the Receivables Financier and applied to the repayments of such amounts; it being understood and agreed that any amounts previously applied as aforesaid which are subsequently required to be repaid, disgorged or otherwise returned by the Receivables Financier shall be deemed to have never been received and applied by the Receivables Financier. "Permitted Receivables Financing Over-Collateralization Amount" shall mean, with respect to any Permitted Receivables Financing, the excess from time to time of (x) the outstanding face amount of the Net Receivables subject to the Receivables Financier's interest in connection with such financing (it being understood that if such interest is a percentage interest only that percentage of such Net Receivables shall be included in this calculation) over (y) the Permitted Receivables Financing Amount of such Permitted Receivables Financing. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, governmental authority or any other entity. "Plans and Specifications" shall mean, with respect to Improvements, the plans and specifications for such Improvements to be constructed or already existing, as such Plans and Specifications may be amended, modified or supplemented from time to time in accordance with the terms of the Operative Agreements. "Predominantly Owned Restricted Subsidiary" shall mean any Restricted Subsidiary at least 80% of all of the equity interests of each class of which and at least 80% of the voting interests of which shall at the time be owned by JPFDI or U.S. Foodservice, Inc. either directly or through one or more other Predominantly Owned Restricted Subsidiaries. "Pre-Existing Receivables Financings" shall mean the transactions provided for in the Receivables Purchase Agreement dated as of May 30, 1996 among JPFDI, Illinois Fruit & Appendix A-32 Produce Corp., Sky Bros., Inc., JPFD Funding Company and U.S. Foodservice (formerly JP Foodservice, Inc.) and the Transfer and Administration Agreement dated as of May 30, 1996 among Enterprise Funding Corporation, JPFD Funding Company, JPFDI, NationsBank, N.A. and certain other financial institution investors, and the transactions contemplated in the Rykoff-Sexton Receivables Master Trust Pooling Agreement dated as of November 15, 1996 (the "Rykoff-Sexton ------------- Pooling Agreement") among RF Funding, Inc., U.S.F. Distributors, Inc. (formerly - ----------------- US Foodservice, Inc.) and The Chase Manhattan Bank, as supplemented by the Series 1996-1 Supplement thereto dated as of November 15, 1996, including all fundings, financings, facilities and purchases of accounts receivable outstanding under such agreements as of the Initial Closing Date and any subsequent increases or extensions of such fundings, financings, facilities or purchases (including, in the case of the Rykoff-Sexton Pooling Agreement, the issuance of additional certificates). "Prime Lending Rate" shall have the meaning given to such term in the definition of ABR. "Property" shall mean, with respect to each Permitted Facility that is (or is to be) acquired, constructed and/or renovated pursuant to the terms of the Operative Agreements, the Land and each item of Equipment and the various Improvements, in each case located on such Land, including without limitation each Construction Period Property, each Property subject to a Ground Lease and each Property for which the Term has commenced. "Property Acquisition Cost" shall mean the cost to the Lessor to purchase a Property on a Property Closing Date. "Property Closing Date" shall mean the date on which the Lessor purchases a Property or, with respect to the first Advance, the date on which the Lessor seeks reimbursement for Property previously purchased by the Lessor. "Property Cost" shall mean with respect to a Property the aggregate amount (and/or the various items and occurrences giving rise to such amounts) of the Loan Property Cost plus the Holder Property Cost for such Property (as such amounts shall be increased equally among all Properties respecting the Holder Advances and the Loans extended from time to time to pay for the Transaction Expenses, fees, expenses and other disbursements referenced in Sections 7.1(a) and 7.1(b) of the Participation Agreement). "Purchase Option" shall have the meaning given to such term in Section 20.1 of the Lease. "Purchasing Lender" shall have the meaning given to such term in Section 9.8(a) of the Credit Agreement. "PYA" shall mean PYA/Monarch, Inc., a Delaware corporation. "PYA's Note" shall mean that certain promissory note of PYA, dated March 10, 1989, in the original principal amount of $110,000,000, and payable to JPFDI, which bears interest at Appendix A-33 rates between 10.35% and 10.8% per annum, as such note shall be in effect on the Initial Closing Date. "Receivables Financier" shall have the meaning assigned to such term in the definition of "Permitted Receivables Financing" set forth in this Appendix A. ---------- "Receivables Financing SPC" shall have the meaning assigned to such term in the definition of "Permitted Receivables Financing" set forth in this Appendix -------- A. - - "Register" shall have the meaning given to such term in Section 9.9(a) of the Credit Agreement. "Regulation D" shall mean Regulation D of the Board, as the same may be modified and supplemented and in effect from time to time. "Release" shall mean any release, pumping, pouring, emptying, injecting, escaping, leaching, dumping, seepage, spill, leak, flow, discharge, disposal or emission of a Hazardous Substance. "Rent" shall mean, collectively, the Basic Rent and the Supplemental Rent, in each case payable under the Lease. "Rent Commencement Date" shall mean, regarding each Property, the Completion Date. "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder. "Requested Funds" shall mean any funds requested by the Lessee or the Construction Agent, as applicable, in accordance with Section 5 of the Participation Agreement. "Requisition" shall have the meaning specified in Section 4.2 of the Participation Agreement. "Responsible Officer" shall mean any officer of JPFDI who shall be permitted to sign an Officers' Certificate (as provided in the definition of that term set forth in this Section) and any other officer of JPFDI who shall at any time hereafter perform substantially the same duties as are performed on the date hereof by and any such officer permitted to sign an Officers' Certificate, except that when used with respect to the Trust Company or the Owner Trustee, "Responsible Officer" shall also include the Cashier, any Assistant Cashier, any Trust Officer or Assistant Trust Officer, the Controller and any Assistant Controller or any other officer of the Trust Company or the Owner 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. Appendix A-34 "Restricted Subsidiary" shall mean each Subsidiary existing on the date hereof which is not designated as an Unrestricted Subsidiary on EXHIBIT N to the --------- Participation Agreement, each other Subsidiary which is not hereafter designated by the Board of Directors as an Unrestricted Subsidiary, and each Unrestricted Subsidiary which is hereafter designated by the Board of Directors as a Restricted Subsidiary; provided, however, that (a) any Restricted Subsidiary may -------- ------- be redesignated an Unrestricted Subsidiary as and to the extent provided in the definition of "Unrestricted Subsidiary" set forth in this Appendix A; (b) any ---------- Subsidiary which shall be an Unrestricted Subsidiary at the commencement of any period of 30 consecutive months and which shall have been redesignated a Restricted Subsidiary during such period may, following such redesignation, be further redesignated an Unrestricted Subsidiary during such period but may not, following such further redesignation, again be redesignated a Restricted Subsidiary during such period; and (c) notwithstanding any provision hereof to the contrary, no Person which hereafter becomes a Subsidiary may be designated a Restricted Subsidiary and no Subsidiary which is designated an Unrestricted Subsidiary may be redesignated a Restricted Subsidiary unless: (i) immediately after giving effect to such designation or redesignation, no Default or Event of Default shall have occurred and be continuing, (ii) in the case of any such redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, no property or assets of such Subsidiary shall at the time of such redesignation be subject to any Liens which would not have been permitted to be created by such Subsidiary pursuant to the terms of the Incorporated Covenants, and (iii) such Subsidiary shall have become, in compliance with Section 5.8 of the Participation Agreement, a Guarantor under and within the meaning of the Participation Agreement. "RSI" shall mean, prior to the effective time of the Merger Transaction, Rykoff-Sexton, Inc., a Delaware corporation incorporated in 1961, and from and after the effective time of the Merger Transaction, the successor to such corporation in the Merger Transaction whose corporate name has changed to Rykoff-Sexton, Inc. in connection with consummation of the Merger Transaction, and subsequently has changed to U.S. Foodservice, Inc. "Sale Date" shall have the meaning given to such term in Section 20.3(a) of the Lease. "Sale Notice" shall mean a notice given to the Lessor in connection with the election by the Lessee of its Sale Option. "Sale Option" shall have the meaning given to such term in Section 20.1 of the Lease. "Sale Proceeds Shortfall" shall mean the amount by which the proceeds of a sale described in Section 22.1 of the Lease are less than the Limited Recourse Amount with respect to the Properties if it has been determined that the Fair Market Sales Value of the Properties at the expiration of the term of the Lease has been impaired by greater than ordinary wear and tear during the Term of the Lease. Appendix A-35 "Sara Lee" shall mean Sara Lee Corporation, a Maryland corporation. "Sara Lee Note" shall mean that certain promissory note of JPFDI, dated August 19, 1989, issued in the original principal amount of $112,000,000 and payable to PYA, which bears interest at the rate of 11% per annum, as such note shall be in effect on the Initial Closing Date. "Sara Lee Offset Agreement" shall mean the Amended and Restated Note Offset Agreement, dated as of July 3, 1989, by and between PYA and JPFDI, providing, among other things, for the settlement of maturities of principal and accrued interest under the Sara Lee Note, on the one hand, and under PYA's Note, on the other hand, by offsetting the respective amounts due thereunder. "Scheduled Interest Payment Date" shall mean (a) as to any Eurodollar Loan or Eurodollar Holder Advance, the last day of the Interest Period applicable to such Eurodollar Loan or Eurodollar Holder Advance, (b) as to any ABR Loan or any ABR Holder Advance, the fifteenth day of each month and (c) as to all Loans and Holder Advances, the date of any voluntary or involuntary payment, prepayment, return or redemption, and the Maturity Date or the Expiration Date, as the case may be. "Secured Parties" shall have the meaning given to such term in the Security Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Security Agreement" shall mean the Security Agreement dated on or about the Initial Closing Date between the Lessor and the Agent, for the benefit of the Secured Parties. "Security Documents" shall mean the collective reference to the Security Agreement, the Mortgage Instruments (to the extent the Lease is construed as a security instrument), the Lease and all other security documents hereafter delivered to the Agent granting a lien on any asset or assets of any Person to secure the obligations and liabilities of the Lessor under the Credit Agreement and/or under any of the other Credit Documents or to secure any guarantee of any such obligations and liabilities. "Soft Costs" shall mean all costs which are ordinarily and reasonably incurred in relation to the acquisition, development, installation, construction, improvement and testing of the Properties other than Hard Costs, including without limitation structuring fees, administrative fees, legal fees, upfront fees, fees and expenses related to appraisals, title examinations, title insurance, document recordation, surveys, environmental site assessments, geotechnical soil investigations and similar costs and professional fees customarily associated with a real estate closing, the Lender Facility Fee, the Holder Facility Fee, fees and expenses of the Owner Trustee payable or reimbursable under the Operative Agreements and costs and expenses incurred pursuant to Sections 7.3(a) and 7.3(b) of the Participation Agreement. Appendix A-36 "Subordinated Intercompany Revolving Note" shall mean, with respect to any Permitted Receivables Financing, any note issued by a Receivables Financing SPC in favor of U.S. Foodservice, Inc., JPFDI or any of their Restricted Subsidiaries in connection therewith. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which more than 50% of the Voting Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation, partnership or other entity is at the time, directly or indirectly, owned by, or the management is otherwise controlled by, such Person and/or one or more of its other Subsidiaries. Unless otherwise specified, any reference to a Subsidiary is intended as a reference to a Subsidiary of JPFDI or U.S. Foodservice, Inc. "Supplemental Amounts" shall have the meaning given to such term in Section 9.18 of the Credit Agreement. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which the Lessee assumes or agrees to pay to the Lessor, the Trust Company, the Holders, the Agent, the Lenders or any other Person under the Lease or under any of the other Operative Agreements including without limitation payments of the Termination Value and the Maximum Residual Guarantee Amount and all indemnification amounts, liabilities and obligations. "Taxes" shall have the meaning specified in the definition of "Impositions". "Term" shall have the meaning specified in Section 2.2 of the Lease. "Termination Date" shall have the meaning specified in Section 16.2(a) of the Lease. "Termination Event" shall mean (a) with respect to any Pension Plan, the occurrence of a Reportable Event or an event described in Section 4062(e) of ERISA, (b) the withdrawal of any Credit Party or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan, (c) the distribution of a notice of intent to terminate a Plan or Multiemployer Plan pursuant to Section 4041(a)(2) or 4041A of ERISA, (d) the institution of proceedings to terminate a Plan or Multiemployer Plan by the PBGC under Section 4042 of ERISA, (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (f) the complete or partial withdrawal of any Credit Party or any ERISA Affiliate from a Multiemployer Plan. "Termination Notice" shall have the meaning specified in Section 16.1 of the Lease. "Termination Value" shall mean the sum of (a) either (i) with respect to all Properties, an amount equal to the aggregate outstanding Property Cost for all the Properties, in each case as of the last occurring Payment Date, or (ii) with respect to a particular Property, an amount equal to the Property Cost allocable to such Property, plus (b) respecting the amounts described in each of the foregoing subclause (i) or (ii), as applicable, any and all accrued but unpaid interest on the Appendix A-37 Loans and any and all accrued but unpaid Holder Yield on the Holder Advances related to the applicable Property Cost, plus (c) to the extent the same is not duplicative of the amounts payable under clause (b) above, all other Rent and other amounts then due and payable or accrued under the Agency Agreement, Lease and/or under any other Operative Agreement (including without limitation amounts under Sections 11.1 and 11.2 of the Participation Agreement and all costs and expenses referred to in clause FIRST of Section 22.2 of the Lease). ----- "Total Debt" shall mean, as of any date, the aggregate amount of all Debt of USF and its Restricted Subsidiaries outstanding on such date, determined on a consolidated basis. "Total Debt Ratio" shall mean, for U.S. Foodservice, Inc., JPFDI and their Restricted Subsidiaries as of any date, the number obtained by dividing (a) Total Debt as of such date by (b) Operating Cash Flow for the period ("Cash Flow --------- Period") of four consecutive fiscal quarters ended on such date or most recently - ------ prior to such date. "Tranche A Commitments" shall mean the obligation of the Tranche A Lenders to make the Tranche A Loans to the Lessor in an aggregate principal amount at any one (1) time outstanding not to exceed the aggregate of the amounts set forth opposite each Tranche A Lender's name on Schedule 1.1 to the Credit Agreement, ------------ as such amount may be reduced from time to time in accordance with the provisions of the Operative Agreements; provided, no Tranche A Lender shall be -------- obligated to make Tranche A Loans in excess of such Tranche A Lender's share of the Tranche A Commitments as set forth adjacent to such Tranche A Lender's name on Schedule 1.1 to Credit Agreement. ------------ "Tranche A Lenders" shall mean First Union National Bank and shall include the several banks and other financial institutions from time to time party to the Credit Agreement that commit to make the Tranche A Loans. "Tranche A Loans" shall mean the Loans made pursuant to the Tranche A Commitments. "Tranche A Note" shall have the meaning given to such term in Section 2.2 of the Credit Agreement. "Tranche B Commitments" shall mean the obligation of the Tranche B Lenders to make the Tranche B Loans to the Lessor in an aggregate principal amount at any one (1) time outstanding not to exceed the aggregate of the amounts set forth opposite each Tranche B Lender's name on Schedule 1.1 to the Credit Agreement, ------------ as such amount may be reduced from time to time in accordance with the provisions of the Operative Agreements; provided, no Tranche B Lender shall be -------- obligated to make Tranche B Loans in excess of such Tranche B Lender's share of the Tranche B Commitments as set forth adjacent to such Tranche B Lender's name on Schedule 1.1 to Credit Agreement. ------------ "Tranche B Lenders" shall mean First Union National Bank and shall include the several banks and other financial institutions from time to time party to the Credit Agreement that commit to make the Tranche B Loans. Appendix A-38 "Tranche B Loan" shall mean the Loans made pursuant to the Tranche B Commitments. "Tranche B Note" shall have the meaning given to such term in Section 2.2 of the Credit Agreement. "Transaction Expenses" shall mean all Soft Costs and all other costs and expenses incurred in connection with the preparation, execution and delivery of the Operative Agreements and the transactions contemplated by the Operative Agreements including without limitation all costs and expenses described in Section 7.1 of the Participation Agreement and the following: (a) the reasonable fees, out-of-pocket expenses and disbursements of counsel in negotiating the terms of the Operative Agreements and the other transaction documents, preparing for the closings under, and rendering opinions in connection with, such transactions and in rendering other services customary for counsel representing parties to transactions of the types involved in the transactions contemplated by the Operative Agreements; (b) the reasonable fees, out-of-pocket expenses and disbursements of accountants for any Credit Party in connection with the transactions contemplated by the Operative Agreements; (c) any and all other reasonable fees, charges or other amounts payable to the Lenders, the Agent, the Holders, the Owner Trustee or any broker which arises under any of the Operative Agreements; (d) any other reasonable fees, out-of-pocket expenses, disbursements or costs of any party to the Operative Agreements or any of the other transaction documents; and (e) any and all Taxes and fees incurred in recording or filing any Operative Agreement or any other transaction document, any deed, declaration, mortgage, security agreement, notice or financing statement with any public office, registry or governmental agency in connection with the transactions contemplated by the Operative Agreement. "Transferred Assets" shall have the meaning assigned to such term in the definition of "Permitted Receivables Financing" set forth in this Appendix A. ---------- "Tribunal" shall mean any state, commonwealth, federal, foreign, territorial, or other court or government body, subdivision agency, department, commission, board, bureau or instrumentality of a governmental body. "Trust" shall mean the USF Real Estate Trust 1998-1. "Trust Agreement" shall mean the Trust Agreement dated on or about the Initial Closing Date between the Holders and the Owner Trustee. Appendix A-39 "Trust Company" shall mean First Security Bank, National Association, in its individual capacity, and any successor owner trustee under the Trust Agreement in its individual capacity. "Trust Estate" shall have the meaning specified in Section 2.2 of the Trust Agreement. "Type" shall mean, as to any Loan, whether it is an ABR Loan or a Eurodollar Loan. "UCC Financing Statements" shall mean collectively the Lender Financing Statements and the Lessor Financing Statements. "Unanimous Vote Matters" shall have the meaning given it in Section 12.4 of the Participation Agreement. "Unfunded Amount" shall have the meaning specified in Section 3.2(a) of the Agency Agreement. "Unfunded Liability" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of the Company or any member of the Controlled Group to the PBGC or such Plan under Title IV of ERISA. "Uniform Commercial Code" and "UCC" shall mean the Uniform Commercial Code as in effect in any applicable jurisdiction. "United States Bankruptcy Code" shall mean Title 11 of the United States Code. "Unrestricted Subsidiary" shall mean each Subsidiary designated as an Unrestricted Subsidiary in EXHIBIT N to the Participation Agreement and each --------- other Subsidiary which is hereafter designated by the Board of Directors as an Unrestricted Subsidiary; provided, however, that (a) any Unrestricted Subsidiary -------- ------- may be redesignated a Restricted Subsidiary as and to the extent provided in the definition of "Restricted Subsidiary" set forth in this Appendix A; (b) any ---------- Subsidiary which shall be a Restricted Subsidiary at the commencement of any period of 30 consecutive months and which shall have been redesignated an Unrestricted Subsidiary during such period may, following such redesignation, be further redesignated a Restricted Subsidiary during such period but may not, following such further redesignation, again be redesignated an Unrestricted Subsidiary during such period; and (c) notwithstanding any provision hereof to the contrary, no Subsidiary which is a Restricted Subsidiary may be redesignated an Unrestricted Subsidiary unless (i) immediately after giving effect to such redesignation, no Default or Event of Default shall have occurred and be continuing, and (ii) such Subsidiary does not own (directly or through its Subsidiaries) any shares of stock or Appendix A-40 other securities of (or warrants, rights or options to acquire stock or other securities of) any Restricted Subsidiary or hold any Debt of JPFDI, U.S. Foodservice Inc. or any Restricted Subsidiary and, at the time of such redesignation, all Debt and shares of stock of such Subsidiary which are owned by JPFDI, U.S. Foodservice, Inc. and their Restricted Subsidiaries could be sold in compliance with the Incorporated Covenants (in which case, such redesignation shall be deemed a disposition of assets for purposes of the Incorporated Covenants). Any Subsidiary of any Person which shall at any time be an Unrestricted Subsidiary shall itself be an Unrestricted Subsidiary for so long as such Person shall remain an Unrestricted Subsidiary (and thereafter for so long as such Subsidiary shall not have been redesignated as a Restricted Subsidiary in compliance with the definition herein of that term). "USF" shall mean U.S. Foodservice, a Delaware corporation, and its successors and permitted assigns. "USF Real Estate Trust 1998-1" shall mean the grantor trust created pursuant to the terms and conditions of the Trust Agreement. "U.S. Person" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "U.S. Taxes" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Voting Stock" shall mean capital stock of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or persons performing similar functions) of such corporation. "Withholdings" shall have the meaning specified in Section 11.2(e) of the Participation Agreement. "Work" shall mean the furnishing of labor, materials, components, furniture, furnishings, fixtures, appliances, machinery, equipment, tools, power, water, fuel, lubricants, supplies, goods and/or services with respect to any Property. "Year 2000" shall mean the calendar year beginning January 1, 2000 and ending December 31, 2000. Appendix A-41 EX-10.35 7 CREDIT AGREEMENT DATED JUNE 29, 1998 EXHIBIT 10.35 - -------------------------------------------------------------------------------- CREDIT AGREEMENT Dated as of June 29, 1998 among First Security Bank, National Association, not individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as the Borrower, The Several Lenders from Time to Time Parties Hereto, and FIRST UNION NATIONAL BANK, as the Agent - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS.................................................... 1 1.1 Definitions...................................................... 1 1.2 Interpretation................................................... 1 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS................................ 1 2.1 Commitments...................................................... 1 2.2 Notes............................................................ 2 2.3 Procedure for Borrowing.......................................... 2 2.4 Lender Facility Fees............................................. 3 2.5 Termination or Reduction of Commitments.......................... 3 2.6 Prepayments and Payments......................................... 4 2.7 Conversion and Continuation Options.............................. 5 2.8 Interest Rates and Payment Dates................................. 5 2.9 Computation of Interest.......................................... 6 2.10 Pro Rata Treatment and Payments.................................. 7 2.11 Notice of Amounts Payable; Mandatory Assignment.................. 7 SECTION 3. REPRESENTATIONS AND WARRANTIES................................. 8 SECTION 4. CONDITIONS PRECEDENT........................................... 8 4.1 Conditions to Effectiveness...................................... 8 4.2 Conditions to Each Loan.......................................... 9 SECTION 5. COVENANTS...................................................... 9 5.1 Other Activities................................................. 9 5.2 Ownership of Properties, Debt.................................... 9 5.3 Disposition of Assets............................................ 9 5.4 Compliance with Operative Agreements............................. 9 5.5 Further Assurances............................................... 10 5.6 Notices.......................................................... 10 5.7 Discharge of Liens............................................... 10 5.8 Trust Agreement.................................................. 10 SECTION 6. EVENTS OF DEFAULT.............................................. 10 SECTION 7. THE AGENT...................................................... 13 7.1 Appointment...................................................... 13 7.2 Delegation of Duties............................................. 14 7.3 Exculpatory Provisions........................................... 14 7.4 Reliance by the Agent............................................ 14 7.5 Notice of Default................................................ 15 7.6 Non-Reliance on the Agent and Other Lenders...................... 15 7.7 Indemnification.................................................. 16 7.8 The Agent in Its Individual Capacity............................. 16
i 7.9 Successor Agent.................................................. 16 7.10 Actions of the Agent on Behalf of Holders........................ 17 7.11 The Agent's Duty of Care......................................... 17 SECTION 8. MATTERS RELATING TO PAYMENT AND COLLATERAL..................... 17 8.1 Collection and Allocation of Payments and Other Amounts.......... 17 8.2 Certain Remedial Matters......................................... 17 8.3 Excepted Payments................................................ 18 SECTION 9 MISCELLANEOUS................................................... 18 9.1 Amendments and Waivers........................................... 18 9.2 Notices.......................................................... 18 9.3 No Waiver; Cumulative Remedies................................... 18 9.4 Survival of Representations and Warranties....................... 18 9.5 Payment of Expenses and Taxes.................................... 19 9.6 Successors and Assigns; Participations and Assignments........... 19 9.7 Participations................................................... 19 9.8 Assignments...................................................... 20 9.9 The Register; Disclosure; Pledges to Federal Reserve Banks....... 22 9.10 Adjustments; Set-off............................................. 22 9.11 Counterparts..................................................... 23 9.12 Severability..................................................... 23 9.13 Integration...................................................... 23 9.14 GOVERNING LAW.................................................... 24 9.15 SUBMISSION TO JURISDICTION; VENUE; ARBITRATION................... 24 9.16 Acknowledgments.................................................. 24 9.17 WAIVERS OF JURY TRIAL............................................ 24 9.18 Nonrecourse...................................................... 24 9.19 USURY SAVINGS PROVISION.......................................... 25
SCHEDULES Schedule 1.1 Commitments and Addresses of Lenders EXHIBITS Exhibit A-1 Form of Tranche A Note Exhibit A-2 Form of Tranche B Note Exhibit B Form of Assignment and Acceptance ii CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of June 29, 1998 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, the "Agreement"), is among FIRST SECURITY BANK, NATIONAL ASSOCIATION, not - ---------- individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 (the "Owner Trustee" or the "Borrower"), ------------- -------- the several banks and other financial institutions from time to time parties to this Agreement (the "Lenders"), and FIRST UNION NATIONAL BANK, a national ------- banking association, as a Lender and as the agent for the Lenders (the "Agent"). ----- The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Definitions. ----------- For purposes of this Agreement, capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in Appendix A to that certain Participation Agreement dated as of June 29, 1998 (as - ---------- amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof, the "Participation ------------- Agreement") among JP Foodservice Distributors, Inc., the various parties thereto - --------- from time to time, as the Guarantors, the Borrower, the various banks and other lending institutions which are parties thereto from time to time, as the Holders, the various banks and other lending institutions which are parties thereto from time to time, as the Lenders, and First Union National Bank, as agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests. Unless otherwise indicated, references in this Agreement to articles, sections, paragraphs, clauses, appendices, schedules and exhibits are to the same contained in this Agreement. 1.2 Interpretation. -------------- The rules of usage set forth in Appendix A to the Participation Agreement ---------- shall apply to this Agreement. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Commitments. ----------- (a) Subject to the terms and conditions hereof, each of the Lenders severally agrees to make the portion of the Tranche A Loans and the Tranche B Loans to the Borrower from time to time during the Commitment Period in an amount up to such Lender's Commitment as is set forth adjacent to such Lender's name in Schedule 1.1 hereto (as the commitment ------------ amount of such Lender may be amended from time to time in connection with an assignment pursuant to Section 9.8 hereof) for the purpose of enabling the Borrower to purchase the Properties and to pay Property Acquisition Costs, Property Costs and Transaction Expenses, provided, that the aggregate principal -------- amount at any one (1) time outstanding with respect to each of the Tranche A Loans and the Tranche B Loans shall not exceed the amount of the Tranche A Commitments and the Tranche B Commitments respectively. Any prepayments of the Loans, whether mandatory or at the Borrower's election, shall not be subject to reborrowing except as set forth in Section 5.2(d) of the Participation Agreement. (b) The Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans, or (iii) a combination thereof, as determined by the Borrower and notified to the Agent in accordance with Sections 2.3 and 2.7. In the event the Borrower fails to provide notice pursuant to Section 2.3, the Loan shall be an ABR Loan. Further, any Loans by the Lenders on a given date in an aggregate amount less than $100,000 shall be ABR Loans, unless the remaining Available Commitment for the Lenders in the aggregate is less than $100,000, in which case, the Borrower may elect a Eurodollar Loan for such remaining amount. (c) The Commitment of each Lender to make Tranche A Loans and Tranche B Loans shall be pro rata. 2.2 Notes. ----- The Loans made by each Lender shall, consistent with Section 5.2(c) of the Participation Agreement, be evidenced by promissory notes of the Borrower, substantially in the form of Exhibit A-1 in the case of the Tranche A Loans ----------- (each, a "Tranche A Note") or Exhibit A-2 in the case of the Tranche B Loans -------------- ----------- (each, a "Tranche B Note," and with the Tranche A Notes, the "Notes"), with -------------- ----- appropriate insertions as to payee, date and principal amount, payable to the order of such Lender and in a principal amount equal to the Tranche A Commitment or Tranche B Commitment, as the case may be, of such Lender. Each Lender is hereby authorized to record the date, Type and amount of each Loan made by such Lender, each continuation thereof, each conversion of all or a portion thereof to another Type, and the date and amount of each payment or prepayment of principal thereof on the schedule annexed to and constituting a part of its Note, and any such recordation shall constitute prima facie evidence of the ----- ----- accuracy of the information so recorded, provided, that the failure to make any -------- such recordation or any error in such recordation shall not affect the Borrower's obligations hereunder or under such Note. Each Note shall (i) be dated the Initial Closing Date, (ii) be stated to mature on the Maturity Date and (iii) provide for the payment of principal in accordance with Section 2.6(d) and the payment of interest in accordance with Section 2.8. 2.3 Procedure for Borrowing. ----------------------- (a) The Borrower may borrow under the Commitments during the Commitment Period on any Business Day that an Advance may be requested pursuant to the terms of Section 5.2 of the Participation Agreement, provided, that the Borrower -------- shall give the Agent irrevocable notice (which must be received by the Agent prior to 12:00 Noon, Charlotte, North Carolina 2 time, at least three (3) Business Days prior to the requested Borrowing Date specifying (i) the amount to be borrowed (which on any date shall not be in excess of the then Available Commitments), (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a combination thereof, (iv) if the borrowing is to be a combination of Eurodollar Loans and ABR Loans, the respective amounts of each Type of Loan and (v) the Interest Period applicable to each Eurodollar Loan. Pursuant to the terms of the Participation Agreement, the Borrower shall be deemed to have delivered such notice upon the delivery of a notice by the Construction Agent or the Lessee containing such required information. Upon receipt of any such notice from the Borrower (or the Construction Agent or the Lessee, as the case may be), the Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Agent for the account of the Borrower at the office of the Agent specified in Section 12.2 of the Participation Agreement (or such other address as may be identified by the Agent from time to time) prior to 12:00 Noon, Charlotte, North Carolina time, on the Borrowing Date requested by the Borrower in funds immediately available to the Agent. Such borrowing will then be made available to the Borrower by the Agent crediting an account designated, subject to Section 9.1 of the Participation Agreement, by the Borrower on the books of such office with the aggregate of the amounts made available to the Agent by the Lenders and in like funds as received by the Agent. No amount of any Loan which is repaid or prepaid by the Borrower may be reborrowed hereunder, except as set forth in Section 5.2(d) of the Participation Agreement. (b) Interest accruing on each Loan during the Construction Period with respect to any Property shall, subject to the limitations set forth in Section 5.1(b) of the Participation Agreement, be added to the principal amount of such Loan on the relevant Scheduled Interest Payment Date. On each such Scheduled Interest Payment Date, the Construction Loan Property Cost shall be increased by the amount of interest added to the Loans. 2.4 Lender Facility Fees. -------------------- Promptly after receipt from the Lessee of the payment of the Lender Facility Fee payable pursuant to Section 7.4 of the Participation Agreement, the Agent shall distribute such payments to the Lenders pro rata in accordance with their respective Commitments. 2.5 Termination or Reduction of Commitments. --------------------------------------- (a) The Borrower shall have the right, upon not less than three (3) Business Days' written notice to the Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments, provided, that -------- (i) after giving effect to such reduction, the aggregate outstanding principal amount of the Loans shall not exceed the aggregate Commitments and (ii) such notice shall be accompanied by a certificate of the Construction Agent stating that the amount equal to ninety-seven percent (97%) of aggregate Budgeted Total Property Costs as of the date of such reduction does not exceed the aggregate amount of Available Commitments as of such date after giving effect to such reduction. Any such reduction (A) shall be in an amount equal to the lesser of (1) $1,000,000 (or an even multiple thereof) or (2) the remaining Available Commitments, (B) shall reduce permanently the 3 Commitments then in effect and (C) shall be pro rata for the Commitments of all Lenders and pro rata between the Tranche A Loans and the Tranche B Loans. (b) The Commitments respecting any particular Property shall automatically be reduced to zero (0) upon the occurrence of the Rent Commencement Date respecting such Property. On any date on which the Commitments shall automatically be reduced to zero (0) pursuant to Section 6, the Borrower shall prepay all outstanding Loans, together with accrued unpaid interest thereon and all other amounts owing thereunder. 2.6 Prepayments and Payments. ------------------------ (a) Subject to Sections 11.2(e), 11.3 and 11.4 of the Participation Agreement, the Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty, upon at least three (3) Business Days' irrevocable notice to the Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, ABR Loans or a combination thereof, and, if a combination thereof, the amount allocable to each. Upon receipt of any such notice the Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Amounts prepaid may not be reborrowed, and shall reduce the Commitments and the Available Commitments, except in each case as set forth in Section 5.2(d) of the Participation Agreement. (b) If on any date the Agent or the Lessor shall receive any payment in respect of (i) any Casualty, Condemnation or Environmental Violation pursuant to Sections 15.1(a) or 15.1(g) or Article XVI of the Lease (excluding any payments in respect thereof which are payable to the Lessee in accordance with the Lease), or (ii) the Termination Value of any Property in connection with the delivery of a Termination Notice pursuant to Article XVI of the Lease, or (iii) the Termination Value of any Property in connection with the exercise of the Purchase Option pursuant to Section 20.1 of the Lease or the exercise of the option of the Lessor to transfer the Properties to the Lessee pursuant to Section 20.3 of the Lease, or (iv) any payment required to be made or elected to be made by the Construction Agent to the Lessor pursuant to the terms of the Agency Agreement, then in each case, the Borrower shall pay such amounts to the Agent and the Agent shall be required to pay such amounts received in accordance with the provisions of Section 8.7(b)(ii) of the Participation Agreement. (c) Each prepayment of the Loans pursuant to Section 2.6(a) shall be allocated to reduce the respective Loan Property Costs of all Properties pro --- rata according to the Loan Property Costs of such Properties immediately before - ---- giving effect to such prepayment. Each prepayment of the Loans pursuant to Section 2.6(b) shall be allocated to reduce the Loan Property Cost of the Property or Properties subject to the respective Casualty, Condemnation, Environmental Violation, termination, purchase, transfer or other circumstance giving rise to such prepayment. Any amounts applied to reduce the Loan Property Cost of any Construction Period Property pursuant to this Section 2.6(c) shall also be applied to reduce the Construction Loan Property Cost of such Property until such Construction Loan Property Cost has been reduced to zero (0). 4 (d) The outstanding principal balance of the Loans and all other amounts then due and owing under this Agreement or otherwise with respect to the Loans shall be due and payable in full on the Maturity Date. 2.7 Conversion and Continuation Options. ----------------------------------- (a) The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Agent at least three (3) Business Days' prior irrevocable notice of such election, provided, that any such conversion of -------- Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto, and provided, further, to the extent an Event of Default has -------- ------- occurred and is continuing on the last day of any such Interest Period, the applicable Eurodollar Loan shall automatically be converted to an ABR Loan on such last day. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Agent at least three (3) Business Days' prior irrevocable notice of such election. Upon receipt of any such notice, the Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans or ABR Loans may be converted as provided herein, provided, -------- that (i) no ABR Loan may be converted into a Eurodollar Loan after the date that is one (1) month prior to the Maturity Date and (ii) such notice of conversion regarding any Eurodollar Loan shall contain an election by the Borrower of an Interest Period for such Eurodollar Loan to be created by such conversion and such Interest Period shall be in accordance with the terms of the definition of the term "Interest Period" including without limitation subparagraphs (A) through (C) thereof. (b) Subject to the restrictions set forth in Section 2.3, any Eurodollar Loan may be continued as such upon the expiration of the current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Agent, in accordance with the applicable notice provision for the conversion of ABR Loans to Eurodollar Loans set forth herein, of the length of the next Interest Period to be applicable to such Loan, provided, that no Eurodollar Loan may be -------- continued as such after the date that is one (1) month prior to the Maturity Date, provided, further, no Eurodollar Loans may be continued as such if an -------- ------- Event of Default has occurred and is continuing as of the last day of the Interest Period for such Eurodollar Loan, and provided, further, that if the -------- ------- Borrower shall fail to give any required notice as described above or otherwise herein, or if such continuation is not permitted pursuant to the proceeding proviso, such Loan shall automatically be converted to an ABR Loan on the last day of such then expiring Interest Period. 2.8 Interest Rates and Payment Dates. -------------------------------- (a) The Loans outstanding hereunder from time to time shall bear interest at a rate per annum equal to either (i) with respect to a Eurodollar Loan, the Eurodollar Rate determined for the applicable Interest Period plus the Applicable Percentage or (ii) with respect to an ABR Loan, the ABR, as selected by the Borrower in accordance with the provisions hereof; provided, however, (A) -------- ------- upon delivery by the Agent of the notice described in Section 2.9(c), the Loans of each of the Lenders shall bear interest at the ABR applicable from time to time from and after the dates and during the periods specified in Section 2.9(c), (B) upon the delivery by a Lender of the notice described in Section 11.3(f) of the Participation Agreement, the Loans of such Lender 5 shall bear interest at the ABR applicable from time to time from and after the dates and during the periods specified in Section 11.3(f) of the Participation Agreement and (C) in such other circumstances as expressly provided herein, the Loans shall bear interest at the ABR. (b) If all or a portion of (i) the principal amount of any Loan, (ii) any interest payable thereon or (iii) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum which is the lesser of (x) the then current rate of interest respecting such payment plus two percent (2%) and (y) the highest interest rate permitted by applicable law, in each case from the date of such non-payment until such amount is paid in full (whether after or before judgment). (c) Interest shall be payable in arrears on the applicable Scheduled Interest Payment Date, provided, that (i) interest accruing pursuant to Section -------- 2.8(b) shall be payable from time to time on demand and (ii) each prepayment of the Loans shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid. 2.9 COMPUTATION OF INTEREST. ----------------------- (a) Whenever it is calculated on the basis of the Prime Lending Rate, interest shall be calculated on the basis of a year of three hundred sixty-five (365) days (or three hundred sixty-six (366) days, as the case may be) for the actual days elapsed; and, otherwise, interest shall be calculated on the basis of a year of three hundred sixty (360) days for the actual days elapsed. The Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the day on which such change becomes effective. The Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of error. (c) If the Eurodollar Rate cannot be determined by the Agent in the manner specified in the definition of the term "Eurodollar Rate", the Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. Commencing on the Scheduled Interest Payment Date next occurring after the delivery of such notice and continuing until such time as the Eurodollar Rate can be determined by the Agent in the manner specified in the definition of such term, all outstanding Loans shall bear a yield at the ABR. Until such time as the Eurodollar Rate can be determined by the Agent in the manner specified in the definition of such term, no further Eurodollar Loans shall be made or shall be continued as such at the end of the then current Interest Period nor shall the Borrower have the right to convert ABR Loans to Eurodollar Loans. 6 2.10 PRO RATA TREATMENT AND PAYMENTS. ------------------------------- (a) Each borrowing by the Borrower from the Lenders hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to their respective Commitments. Subject to the provisions of Section 8.7 of the Participation Agreement and Section 2.11(b), each payment (including without limitation each prepayment) by the Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts on the Loans then held by the Lenders. All payments (including without limitation prepayments) to be made by the Borrower hereunder and under the Notes, whether on account of principal, interest or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, Charlotte, North Carolina time, on the due date thereof to the Agent, for the account of the Lenders, at the Agent's office specified in Section 12.2 of the Participation Agreement, in Dollars and in immediately available funds. The Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day; provided, however, if such -------- ------- payment includes an amount of interest calculated with reference to the Eurodollar Rate and the result of such extension would be to extend such payment into another calendar month, then such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two (2) sentences, interest thereon shall be payable at the then applicable rate during such extension. (b) Unless the Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make its share of such borrowing available to the Agent, the Agent may assume that such Lender is making such amount available to the Agent, and the Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Agent. A certificate of the Agent submitted to any Lender with respect to any amounts owing under this Section 2.10(b) shall be conclusive in the absence of error. If such Lender's share of such borrowing is not made available to the Agent by such Lender within three (3) Business Days of such Borrowing Date, the Agent shall also be entitled to recover such amount with interest thereon at the rate as set forth above on demand from the Borrower. 2.11 NOTICE OF AMOUNTS PAYABLE; MANDATORY ASSIGNMENT. ----------------------------------------------- (a) In the event that any Lender becomes aware that any amounts are or will be owed to it pursuant to Sections 11.2(e), 11.3 or 11.4 of the Participation Agreement or that it is unable to make Eurodollar Loans, then it shall promptly notify the Borrower, the Lessee and the Agent thereof and, as soon as possible thereafter, such Lender shall submit to the Borrower (with a copy to the Agent and the Lessee) a certificate indicating the amount owing to it and the calculation thereof. The amounts set forth in such certificate shall be prima facie evidence of the obligations of the Borrower hereunder. 7 (b) In the event that any Lender delivers to the Borrower a certificate in accordance with Section 2.11(a) in connection with amounts payable pursuant to Sections 11.2(e), 11.3 or 11.4 of the Participation Agreement or such Lender is required to make Loans as ABR Loans in accordance with Section 11.3(f) of the Participation Agreement then, subject to Section 9.1(e) of the Participation Agreement, the Borrower may, at its own expense (provided, such amounts shall be -------- reimbursed or paid entirely (as elected by the Borrower) by the Lessee, as Supplemental Rent) and in the reasonable discretion of the Borrower, (i) require such Lender to transfer or assign, in whole or (with such Lender's consent which shall not be unreasonably withheld) in part, without recourse (in accordance with Section 9.8), all or (with such Lender's consent which shall not be unreasonably withheld) part of its interests, rights (except for rights to be indemnified for actions taken while a party hereunder) and obligations under this Agreement to a replacement bank or institution if the Borrower (subject to Section 9.1(g) of the Participation Agreement), with the full cooperation of such Lender, can identify a Person who is ready, willing and able to be such replacement bank or institution with respect thereto and such replacement bank or institution (which may be another Lender) shall assume such assigned obligations, or (ii) during such time as no Default or Event of Default has occurred and is continuing, terminate the Commitment of such Lender and prepay all outstanding Loans of such Lender; provided, however, that (x) subject to -------- ------- Section 9.1(g) of the Participation Agreement, the Borrower or such replacement bank or institution, as the case may be, shall have paid to such Lender in immediately available funds the principal of and interest accrued to the date of such payment on the Loans made by it hereunder and all other amounts owed to it hereunder (and, if such Lender is also a Holder, all Holder Advances and Holder Yield accrued and unpaid thereon), (y) any termination of Commitments shall be subject to the terms of Section 2.5(a) and (z) such assignment or termination of the Commitment of such Lender and prepayment of Loans does not conflict with any law, rule or regulation or order of any court or Governmental Authority. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Agent and the Lenders to enter into this Agreement and to make the Loans, each of the Trust Company and the Owner Trustee hereby makes and affirms the representations and warranties set forth in Section 6.1 of the Participation Agreement to the same extent as if such representations and warranties were set forth in this Agreement in their entirety. SECTION 4. CONDITIONS PRECEDENT 4.1 CONDITIONS TO EFFECTIVENESS. --------------------------- The effectiveness of this Agreement is subject to the satisfaction of all conditions precedent set forth in Section 5.3 of the Participation Agreement required by said Section to be satisfied on or prior to the Initial Closing Date. 8 4.2 CONDITIONS TO EACH LOAN. ----------------------- The agreement of each Lender to make any Loan requested to be made by it on any date is subject to the satisfaction of all conditions precedent set forth in Section 5.3 and 5.4 of the Participation Agreement required by said Sections to be satisfied on or prior to the date of the applicable Loan. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such Loan that the conditions contained in this Section 4.2, as applicable, have been satisfied. SECTION 5. COVENANTS So long as any Loan or Note remains outstanding and unpaid or any other amount is owing to any Lender or the Agent hereunder: 5.1 OTHER ACTIVITIES. ---------------- The Borrower shall not conduct, transact or otherwise engage in, or commit to transact, conduct or otherwise engage in, any business or operations other than the entry into, and exercise of rights and performance of obligations in respect of, the Operative Agreements and other activities incidental or related to the foregoing. 5.2 OWNERSHIP OF PROPERTIES, DEBT. ----------------------------- The Borrower shall not own, lease, manage or otherwise operate any properties or assets other than in connection with the activities described in Section 5.1, or incur, create, assume or suffer to exist any Debt or other consensual liabilities or financial obligations other than as may be incurred, created or assumed or as may exist in connection with the activities described in Section 5.1 (including without limitation the Loans and other obligations incurred by the Borrower hereunder). 5.3 DISPOSITION OF ASSETS. --------------------- The Borrower shall not convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets, whether now owned or hereafter acquired, except to the extent expressly contemplated by the Operative Agreements. 5.4 COMPLIANCE WITH OPERATIVE AGREEMENTS. ------------------------------------ The Borrower shall at all times (a) observe and perform all of the covenants, conditions and obligations required to be performed by it (whether in its capacity as the Lessor, the Owner Trustee or otherwise) under each Operative Agreement to which it is a party and (b) observe and perform, or cause to be observed and performed, all of the covenants, conditions and obligations 9 of the Lessor under the Lease, even in the event that the Lease is terminated at stated expiration following a Lease Event of Default or otherwise. 5.5 FURTHER ASSURANCES. ------------------ At any time and from time to time, upon the written request of the Agent, and at the expense of the Borrower (provided, such amounts shall be reimbursed -------- or paid entirely (as elected by the Borrower) by the Lessee, as Supplemental Rent), the Borrower will promptly and duly execute and deliver such further instruments and documents and take such further action as the Agent or the Majority Lenders may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and the other Operative Agreements and of the rights and powers herein or therein granted. 5.6 NOTICES. ------- If on any date, a Responsible Officer of the Borrower shall obtain actual knowledge of the occurrence of a Default or Event of Default, the Borrower will give written notice thereof to the Agent within five (5) Business Days after such date. 5.7 DISCHARGE OF LIENS. ------------------ Neither the Borrower nor the Trust Company will create or permit to exist at any time, and will, at its own expense, promptly take such action as may be necessary duly to discharge, or cause to be discharged, all Lessor Liens attributable to it, provided, that the Borrower and the Trust Company shall not -------- be required to discharge any Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not involve any material danger of impairment of any of the Liens contemplated by the Security Documents or of the sale, forfeiture or loss of, and shall not materially interfere with the disposition of, any Property or title thereto or any interest therein or the payment of Rent. 5.8 TRUST AGREEMENT. --------------- Without prejudice to any right under the Trust Agreement of the Owner Trustee to resign, the Owner Trustee (a) agrees not to terminate or revoke the trust created by the Trust Agreement except as permitted by Article VIII of the Trust Agreement, (b) agrees not to amend, supplement, terminate, revoke or otherwise modify any provision of the Trust Agreement in any manner which could reasonably be expected to have an adverse effect on the rights or interests of the Agent or the Lenders hereunder or under the other Operative Agreements and (c) agrees to comply with all of the terms of the Trust Agreement. SECTION 6. EVENTS OF DEFAULT Upon the occurrence of any of the following specified events (each an "Event of Default"): - ----------------- 10 (a) Except as provided in Sections 6(c), the Borrower shall default in the payment when due of any principal on the Loans or default in the payment when due of any interest on the Loans, and in either case, such default shall continue for five (5) or more Business Days; or (b) Except as provided in Sections 6(a) and 6(c), the Borrower shall default, and such default shall continue for five (5) or more Business Days, in the payment of any amount owing under any Credit Document; or (c) (i) The Borrower shall default in the payment of any amount due on the Maturity Date owing under any Credit Document or (ii) the Borrower shall default in the payment when due of any principal or interest on the Loans payable with regard to any obligation of Lessee to pay Termination Value when due or to pay Basic Rent or Supplemental Rent at such time as any Termination Value is due; or (d) The Borrower shall default in the due performance or observance by it of any term, covenant or agreement contained in any Credit Document to which it is a party (other than those referred to in paragraphs (a), (b) and (c) above), provided, that in the case of any such default under Sections 5.4, 5.5 or - -------- 5.8(c), such default shall have continued unremedied for a period of at least thirty (30) days after notice to the Borrower by the Agent or the Majority Lenders, provided, further, if any such default under Sections 5.4, 5.5 or -------- ------- 5.8(c) is not capable of remedy within such thirty (30) day period but may be remedied with further diligence and if the Borrower has and continues to pursue diligently such remedy, then the Borrower shall be granted additional time to pursue such remedy but in no event more than an additional thirty (30) days. (e) Any representation or warranty made by the Borrower herein or in any other Credit Document or by the Borrower or the Lessee in the Participation Agreement, or in any statement or certificate delivered pursuant hereto or thereto, shall be false or inaccurate in any material way when made; or (f) (i) Any Lease Event of Default shall have occurred and be continuing and shall not have been waived, or (ii) the Owner Trustee shall default in the due performance or observance by it of any term, covenant or agreement contained in the Participation Agreement or in the Trust Agreement to or for the benefit of the Agent or a Lender, provided, that in the case of this clause (ii) such -------- default shall have continued unremedied for a period of at least thirty (30) days after notice to the Owner Trustee and Lessee by the Agent or the Majority Lenders, provided, further, that in the case of this clause (ii), such default -------- ------- is not capable of remedy within such thirty (30) day period but may be remedied with further diligence and if the Borrower has and continues to pursue diligently such remedy, then the Borrower shall be granted additional time to pursue such remedy but in no event more than an additional thirty (30) days; or (g) The Borrower shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) become insolvent or be generally unable to or shall generally fail or admit in writing its inability to pay its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary 11 case under the Bankruptcy Code (as now or hereafter in effect), (v) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors' rights generally, (vi) acquiesce in writing to, or fail to controvert in a timely or appropriate manner, any petition filed against it in an involuntary case under such Bankruptcy Code, (vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing, or (viii) take any corporate action in furtherance of any of the foregoing; or a proceeding or case shall be commenced in respect of the Borrower, without its application or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of 45 days, or an order for relief shall be entered in an involuntary case under the Bankruptcy Code (as now or hereafter in effect) against the Borrower or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to the Borrower and shall continue undismissed, or unstayed and in effect, for a period of 45 days; (h) Any Security Document shall cease to be in full force and effect, or shall cease to give the Agent the Liens, rights, powers and privileges purported to be created thereby (including without limitation a first priority perfected security interest in, and Lien on, all of the Properties), in favor of the Agent on behalf of the Lenders and the Holders, superior to and prior to the rights of all third Persons and subject to no other Liens (except in each case to the extent expressly permitted herein or in any Operative Agreement) other than any Ground Lease; or (i) The Lease shall cease to be enforceable against the Lessee; or (j) A final judgment or decree for the payment of money shall be rendered by a court of competent jurisdiction against the Borrower which, either alone or together with other outstanding judgments or decrees against the Borrower, shall aggregate more than $100,000, and the Borrower shall not discharge the same or provide for its discharge in accordance with its terms within sixty (60) days from the date of entry thereof, or within such longer period (including, without limitation, any period during which the Borrower shall be contesting a denial of coverage of its liability in respect of such judgment by a reputable insurance carrier) during which the execution of such judgment shall have been stayed, then, and in any such event, (A) if such event is an Event of Default specified in paragraph (g) above with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Lenders, the Agent may, or upon the request of the Majority Lenders, the Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the 12 Majority Lenders, the Agent may, or upon the request of the Majority Lenders, the Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable (any of the foregoing occurrences or actions referred to in clause (A) or (B) above, an "Acceleration"). Except as expressly provided ------------ above in this Section 6, presentment, demand, protest and all other notices of any kind are hereby expressly waived. Upon the occurrence of any Event of Default and at any time thereafter so long as any Event of Default shall be continuing, the Agent shall, upon the written instructions of the Majority Secured Parties, exercise any or all of the rights and powers and pursue any and all of the remedies available to it hereunder and (subject to the terms thereof) under the other Credit Documents, the Lease and the other Operative Agreements and shall have any and all rights and remedies available under the Uniform Commercial Code or any provision of law. Upon the occurrence of any Event of Default and at any time thereafter so long as any Event of Default shall be continuing, the Agent may, and upon request of the Majority Secured Parties shall, proceed to protect and enforce this Agreement, the Notes, the other Credit Documents and the Lease by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted, or for foreclosure hereunder, or for the appointment of a receiver or receivers for the Property or for the recovery of judgment for the indebtedness secured thereby or for the enforcement of any other proper, legal or equitable remedy available under applicable laws. The Borrower shall be liable for any and all accrued and unpaid amounts due hereunder before, after or during the exercise of any of the foregoing remedies, including without limitation all reasonable legal fees and other reasonable costs and expenses incurred by the Agent or any Lender by reason of the occurrence of any Event of Default or the exercise of remedies with respect thereto. SECTION 7. THE AGENT 7.1 APPOINTMENT. ----------- Each Lender hereby irrevocably designates and appoints the Agent as the agent of such Lender under this Agreement and the other Operative Agreements, and each such Lender irrevocably authorizes the Agent, in such capacity, to execute the Operative Agreements as agent for and on behalf of such Lender, to take such action on behalf of such Lender under the provisions of this Agreement and the other Operative Agreements and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and other Operative Agreements, together with such other powers as are reasonably incidental thereto. Without limiting the generality of the foregoing, each of the Lenders hereby specifically acknowledges the terms and provisions of the Participation Agreement and directs the Agent to exercise such powers, make such decisions and otherwise perform such duties as are delegated to 13 the Agent thereunder without being required to obtain any specific consent with respect thereto from any Lender, unless the matter under consideration is a Unanimous Vote Matter or otherwise requires the consent of the Majority Lenders and/or the Majority Secured Parties. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Operative Agreement or otherwise exist against the Agent. 7.2 DELEGATION OF DUTIES. -------------------- The Agent may execute any of its duties under this Agreement and the other Operative Agreements by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 7.3 EXCULPATORY PROVISIONS. ---------------------- Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Operative Agreement (except for its or such Person's own gross negligence or willful misconduct) or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or the Lessee or any officer thereof contained in this Agreement or any other Operative Agreement or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Operative Agreement or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Operative Agreement or for any failure of the Borrower or the Lessee to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Operative Agreement, or to inspect the properties, books or records of the Borrower or the Lessee. 7.4 RELIANCE BY THE AGENT. --------------------- The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including without limitation counsel to the Borrower or the Lessee), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Operative Agreement unless it shall first receive such advice or concurrence of the 14 Majority Lenders, the Majority Secured Parties or all Secured Parties, as the case may be, as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Operative Agreements in accordance with a request of the Majority Lenders, the Majority Secured Parties or all Secured Parties, as the case may be, and such and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes (or all Secured Parties, as the case may be). 7.5 NOTICE OF DEFAULT. ----------------- The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Majority Secured Parties; provided, that unless and until the -------- Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Secured Parties; provided, further, the foregoing shall not -------- ------- limit (a) the rights of the Majority Secured Parties to elect remedies as set forth in Section 6 and/or (b) the rights of the Majority Secured Parties or all Secured Parties, as the case may be, as described in the Participation Agreement (including without limitation Sections 8.2(h) and 8.6 of the Participation Agreement). 7.6 NON-RELIANCE ON THE AGENT AND OTHER LENDERS. ------------------------------------------- Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including without limitation any review of the affairs of the Borrower or the Lessee, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and the Lessee and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Operative Agreements, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and the Lessee. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness 15 of the Borrower or the Lessee which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 7.7 INDEMNIFICATION. --------------- The Lenders agree to indemnify the Agent, in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages in effect on the date on which indemnification is sought under this Section 7.7 (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with their Commitment Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Notes) be imposed on, incurred by or asserted against any of them in any way relating to or arising out of, the Commitments, this Agreement, any of the other Operative Agreements or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by any of them under or in connection with any of the foregoing; provided, that no Lender shall -------- be liable for the payment of any portion of such liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the gross negligence or willful misconduct of the Agent. The agreements in this Section 7.7 shall survive the payment of the Notes and all other amounts payable hereunder. 7.8 THE AGENT IN ITS INDIVIDUAL CAPACITY. ------------------------------------ The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower or the Lessee as though the Agent were not the Agent hereunder and under the other Operative Agreements. With respect to its Loans made or renewed by it and any Note issued to it, the Agent shall have the same rights and powers under this Agreement and the other Operative Agreements as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 7.9 SUCCESSOR AGENT. --------------- The Agent may resign at any time as the Agent upon thirty (30) days' notice to the Lenders, the Borrower and, so long as no Lease Event of Default shall have occurred and be continuing, the Lessee. If the Agent shall resign as the Agent under this Agreement, the Majority Lenders shall appoint from among the Lenders a successor Agent which successor Agent shall be subject to the approval of the Borrower and, so long as no Lease Event of Default shall have occurred and be continuing, the Lessee, such approval not to be unreasonably withheld or delayed. If no successor Agent is appointed prior to the effective date of the resignation of the resigning Agent, the Agent may appoint, after consulting with the Lenders and subject to the approval of the Borrower and, so long as no Lease Event of Default shall have occurred and be continuing, the Lessee, such approval not to be unreasonably withheld or delayed, a successor Agent from among the Lenders. If no successor Agent has accepted appointment as the Agent by 16 the date which is thirty (30) days following a retiring Agent's notice of resignation, the retiring Agent's notice of resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent until such time, if any, as the Majority Lenders appoint a successor Agent, as provided for above. Upon the effective date of such resignation, only such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's rights, powers and duties in such capacity shall be terminated. After any retiring Agent resigns hereunder as the Agent, the provisions of this Article VII and Section 9.5 shall inure to their respective benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement. 7.10 ACTIONS OF THE AGENT ON BEHALF OF HOLDERS. ----------------------------------------- The parties hereto specifically acknowledge and consent to the Agent's acting on behalf of the Holders as provided in the Participation Agreement, and, in any such case, the Lenders acknowledge that the Holders shall be entitled to vote as "Secured Parties" hereunder to the extent required or permitted by the Operative Agreements (including without limitation Sections 8.2(h) and 8.6 of the Participation Agreement). 7.11 THE AGENT'S DUTY OF CARE. ------------------------ Other than the exercise of reasonable care to assure the safe custody of the Collateral while being held by the Agent hereunder or under any other Operative Agreement, the Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that the Lessee shall be responsible for preservation of all rights in the Collateral, and the Agent shall be relieved of all responsibility for the Collateral upon surrendering it or tendering the surrender of it to the Lessee. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Agent accords its own property, which shall be no less than the treatment employed by a reasonable and prudent agent in the industry, it being understood that the Agent shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to any of the Collateral. SECTION 8. MATTERS RELATING TO PAYMENT AND COLLATERAL 8.1 COLLECTION AND ALLOCATION OF PAYMENTS AND OTHER AMOUNTS. ------------------------------------------------------- The Lessee, the Construction Agent, the Agent, the Lenders, the Holders and the Borrower have agreed pursuant to the terms of Section 8.7 of the Participation Agreement to a procedure for the allocation and distribution of certain payments and distributions, including without limitation the proceeds of Collateral. 8.2 CERTAIN REMEDIAL MATTERS. ------------------------ Notwithstanding any other provision of this Agreement or any other Credit Document: 17 (a) the Borrower shall at all times retain to the exclusion of all other parties, all rights to Excepted Payments payable to it and to demand, collect or commence an action at law to obtain such payments and to enforce any judgment with respect thereto; and (b) the Borrower and each Holder shall at all times retain the right, but not to the exclusion of the Agent, (i) to retain all rights with respect to insurance that Article XIV of the Lease specifically confers upon the "Lessor", (ii) to provide such insurance as the Lessee shall have failed to maintain or as the Borrower or any Holder may desire, and (iii) to enforce compliance by the Lessee with the provisions of Articles VIII, IX, X, XI, XIV and XVII of the Lease. 8.3 EXCEPTED PAYMENTS. ----------------- Notwithstanding any other provision of this Agreement or the Security Documents, any Excepted Payment received at any time by the Agent shall be distributed promptly to the Person entitled to receive such Excepted Payment. SECTION 9 MISCELLANEOUS 9.1 AMENDMENTS AND WAIVERS. ---------------------- None of the terms or provisions of this Agreement may be terminated, amended, supplemented, waived or modified except in accordance with the terms of Section 12.4 of the Participation Agreement. 9.2 NOTICES. ------- All notices required or permitted to be given under this Agreement shall be given in accordance with Section 12.2 of the Participation Agreement. 9.3 NO WAIVER; CUMULATIVE REMEDIES. ------------------------------ No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Credit Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. ------------------------------------------ All representations and warranties made by the Borrower under the Operative Agreements shall survive the execution and delivery of this Agreement and the Notes and the making of the Loans hereunder. 18 9.5 PAYMENT OF EXPENSES AND TAXES. ----------------------------- The Borrower agrees to (with funds provided by the Lessee as Supplemental Rent): (a) pay all reasonable out-of-pocket costs and expenses of (i) the Agent whether or not the transactions herein contemplated are consummated, in connection with the negotiation, preparation, execution and delivery of the Operative Agreements and the documents and instruments referred to therein (including without limitation the reasonable fees and disbursements of Moore & Van Allen, PLLC) and any amendment, waiver or consent relating thereto (including without limitation the reasonable fees and disbursements of counsel to the Agent) and (ii) the Agent and each of the Lenders in connection with the enforcement of the Operative Agreements and the documents and instruments referred to therein (including without limitation the reasonable fees and disbursements of counsel for the Agent and for each of the Lenders) and (b) pay and hold each of the Lenders harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Lenders harmless from and against any all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes. 9.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. ------------------------------------------------------ This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. 9.7 PARTICIPATIONS. -------------- Subject to and in accordance with Section 10.1 of the Participation Agreement, any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one (1) or more banks, financial institutions or other entities (each, a "Participant") participating ----------- interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Operative Agreements; provided, that any such sale of a -------- participating interest shall be in a principal amount of at least $2,000,000 or such lesser amount constituting such Lender's entire interest in this Agreement and the Notes. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement and the Notes, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the Notes. In no event shall any Participant have any right to approve any amendment or waiver of any provision of this Agreement or any other Operative Agreement, or any consent to any departure by the Borrower or any other Person therefrom, except to the extent that such amendment, waiver or consent would (a) reduce the principal of, or interest on, any Loan or Note, or postpone the date of the final maturity of any Loan or Note, or reduce the amount of any Lender Facility Fee, in each case to the extent subject to such participation or (b) release all or substantially all of the Collateral. The Borrower agrees that, 19 while an Event of Default shall have occurred and be continuing, if amounts outstanding under this Agreement and the Notes are due or unpaid, or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interests in amounts owing directly to it as a Lender under this Agreement or any Note, provided, -------- that in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 9.10(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 11.2(e), 11.3 and 11.4 of the Participation Agreement with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided, that such Participant shall have complied with -------- the requirements of said Sections and provided, further, that no Participant -------- ------- shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. 9.8 ASSIGNMENTS. ----------- (a) Subject to and in accordance with Section 10.1 of the Participation Agreement, any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate of any Lender or, with the consent, subject to Section 9.1(g) of the Participation Agreement, of the Borrower and the Agent (which in each case shall not be unreasonably withheld or delayed and which consent of the Borrower shall not be required during the continuation of any Event of Default), to an additional bank, financial institution or other entity that is either organized under the laws of the United States or any state thereof or is a foreign bank that operates a branch office in the United States, (each, a "Purchasing Lender") all or any part of its rights and obligations under this - ------------------ Agreement and the other Operative Agreements pursuant to an Assignment and Acceptance, substantially in the form of Exhibit B, executed by such Purchasing --------- Lender, such assigning Lender (and, in the case of a Purchasing Lender that is not a Lender or an affiliate thereof, subject to Section 9.1(g) of the Participation Agreement, by the Borrower and the Agent) and delivered to the Agent for its acceptance and recording in the Register; provided, that no such -------- assignment to a Purchasing Lender (other than any Lender or any affiliate thereof) shall be in an aggregate principal amount less than $5,000,000 (other than in the case of an assignment of all of a Lender's interests under this Agreement and the Notes). Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding anything to the contrary in this Agreement, the consent of the Borrower shall not be required, and, unless requested by the relevant Purchasing Lender and/or assigning Lender, new Notes shall not be required to be 20 executed and delivered by the Borrower, for any assignment which occurs at any time when any of the events described in Section 6(g) shall have occurred and be continuing. (b) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and a Purchasing Lender (and, in the case of a Purchasing Lender that is not a Lender or an affiliate thereof, by the Borrower and the Agent) together with payment to the Agent of a registration and processing fee of $2,500 (which shall not be payable by the Borrower or the Lessee, except as otherwise provided in connection with an assignment requested in accordance with Section 2.11(b)), the Agent shall (i) promptly accept such Assignment and Acceptance and (ii) promptly after the effective date determined pursuant thereto, record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. On or prior to such effective date, the Borrower, at its own expense, shall execute and deliver to the Agent new Notes (in exchange for the Notes of the assigning Lender), each in an amount equal to the Commitment assumed or Loans purchased by the relevant Purchasing Lender pursuant to such Assignment and Acceptance, and, if the assigning Lender has retained a Commitment or any Loan hereunder, new Notes to the order of the assigning Lender, each in an amount equal to the Commitment or Loans retained by it hereunder. Such new Notes shall be dated the effective date of the applicable Assignment and Acceptance and shall otherwise be in the form of the Notes replaced thereby. (c) Each Purchasing Lender (other than any Lender organized and existing under the laws of the U.S. or any political subdivision in or of the U.S.), by executing and delivering an Assignment and Acceptance, (i) agrees to execute and deliver to the Agent, as promptly as practicable, four (4) signed copies (two (2) for the Agent and two (2) for delivery by the Agent to the Borrower) of Form 1001 or Form 4224 (or any successor form or comparable form) (it being understood that if the applicable form is not so delivered, payments under or in respect of this Agreement may be subject to withholding and deduction); (ii) represents and warrants to the Borrower and the Agent that the form so delivered is true and accurate and that, as of the effective date of the applicable Assignment and Acceptance, each of such Purchasing Lender's lending offices is entitled to receive payments of principal and interest under or in respect of this Agreement without withholding or deduction for or on account of any taxes imposed by the U.S. Federal government; (iii) agrees to annually hereafter deliver to each of the Borrower and the Agent not later than December 31 of the year preceding the year to which it will apply, two (2) further properly completed signed copies of Form 1001 or Form 4224 (or any successor form or comparable form), as appropriate, unless an event has occurred which renders the relevant form inapplicable (it being understood that if the applicable form is not so delivered, payments under or in respect of this Agreement may be subject to withholding and deduction); (iv) agrees to promptly notify the Borrower and the Agent in writing if it ceases to be entitled to receive payments of principal and interest under or in respect of this Agreement without withholding or deduction for or on account of any taxes imposed by the U.S. 21 or any political subdivision in or of the U.S. (it being understood that payments under or in respect of this Agreement may be subject to withholding and deduction in such event); (v) acknowledges that in the event it ceases to be exempt from withholding and/or deduction of such taxes, the Agent may withhold and/or deduct the applicable amount from any payments to which such assignee Lender would otherwise be entitled, without any liability to such assignee Lender therefor; and (vi) agrees to indemnify the Borrower and the Agent from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs or expenses that result from such assignee Lender's breach of any such representation, warranty or agreement. (d) Any Lender party to this Agreement may, from time to time and without the consent of the Borrower or any other Person, pledge or assign for security purposes any portion of its Loans or any other interests in this Agreement and the other Credit Documents to any Federal Reserve Bank. 9.9 THE REGISTER; DISCLOSURE; PLEDGES TO FEDERAL RESERVE BANKS. ---------------------------------------------------------- (a) The Agent shall maintain for the benefit of the Lenders at its address referred to in Section 9.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names -------- and addresses of the Lenders, the Commitments of the Lenders, and the principal amount of the Loans owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable notice. (b) Nothing herein shall prohibit any Lender from pledging or assigning any Note to any Federal Reserve Bank in accordance with applicable law. 9.10 ADJUSTMENTS; SET-OFF. -------------------- (a) Except as otherwise expressly provided in Section 8.1 hereof and Section 8.7 of the Participation Agreement where, and to the extent, one (1) Lender is entitled to payments prior to other Lenders, if any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its - ------------------ Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 6(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably 22 with each of the Lenders; provided, however, that if all or any portion of such -------- ------- excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the event of such recovery, but without interest. (b) In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, the Agent and each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Debt at any time held or owing by the Agent or such Lender (including without limitation by branches and agencies of the Agent or such Lender wherever located) to or for the credit or the account of the Borrower against and on account of the obligations and liabilities of the Borrower to the Agent or such Lender under this Agreement or under any of the other Operative Agreements, including without limitation all interests in obligations of the Borrower purchased by any such Lender pursuant to Section 9.10(a), and all other claims of any nature or description arising out of or connected with this Agreement or any other Operative Agreement, irrespective or whether or not the Agent or such Lender shall have made any demand and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. 9.11 COUNTERPARTS. ------------ This Agreement may be executed by one (1) or more of the parties to this Agreement on any number of separate counterparts (including without limitation by telecopy), each of which when so executed and delivered shall be an original, but all such counterparts taken together shall be deemed to constitute one (1) and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Agent. 9.12 SEVERABILITY. ------------ Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.13 INTEGRATION. ----------- This Agreement and the other Credit Documents represent the agreement of the Borrower, the Agent, and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Credit Documents. 23 9.14 GOVERNING LAW. ------------- THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NORTH CAROLINA. 9.15 SUBMISSION TO JURISDICTION; VENUE; ARBITRATION. ---------------------------------------------- THE PROVISIONS OF THE PARTICIPATION AGREEMENT RELATING TO SUBMISSION TO JURISDICTION, VENUE AND ARBITRATION ARE HEREBY INCORPORATED BY REFERENCE HEREIN, MUTATIS MUTANDIS. - ---------------- 9.16 ACKNOWLEDGMENTS. --------------- The Borrower hereby acknowledges that: (a) neither the Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Credit Documents, and the relationship between the Agent and the Lenders, on one (1) hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (b) no joint venture is created hereby or by the other Credit Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 9.17 WAIVERS OF JURY TRIAL. --------------------- THE BORROWER, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 9.18 NONRECOURSE. ----------- Subject to Section 12.16 of the Participation Agreement, anything to the contrary contained in this Agreement or in any other Operative Agreement notwithstanding (except for such Section 12.16 of the Participation Agreement), no Exculpated Person shall be personally liable in any respect for any liability or obligation hereunder or under any other Operative Agreement including without limitation the payment of the principal of, or interest on, the Notes, or for monetary damages for the breach of performance of any of the covenants contained in this Agreement, the Notes or any of the other Operative Agreements. The Agent and the Lenders agree that, in the event any of them pursues any remedies available to them under this Agreement, the Notes or any other Operative Agreement, neither the Agent nor the Lenders shall 24 have any recourse against the Borrower, nor any other Exculpated Person, for any deficiency, loss or claim for monetary damages or otherwise resulting therefrom and recourse shall be had solely and exclusively against the Trust Estate and the Lessee; but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Trust Estate in respect of any and all liabilities, obligations and undertakings contained in this Agreement, the Notes or any other Operative Agreement. The Agent and the Lenders further agree that the Borrower shall not be responsible for the payment of any amounts owing hereunder (excluding principal and interest (other than Overdue Interest) in respect of the Loans) (such non-excluded amounts, "Supplemental ------------ Amounts") except to the extent that payments of Supplemental Rent designated - ------- by the Lessee for application to such Supplemental Amounts shall have been paid by the Lessee pursuant to the Lease (it being understood that the failure by the Lessee for any reason to pay any Supplemental Rent in respect of such Supplemental Amounts shall nevertheless be deemed to constitute a default by the Borrower for the purposes of Section 6). Notwithstanding the foregoing provisions of this Section 9.18, nothing in this Agreement or any other Operative Agreement shall (a) constitute a waiver, release or discharge of any obligation evidenced or secured by this Agreement or any other Credit Document, (b) limit the right of the Agent or any Lender to name the Borrower as a party defendant in any action or suit for judicial foreclosure and sale under any Security Document, or (c) affect in any way the validity or enforceability of any guaranty (whether of payment and/or performance) given to the Lessor, the Agent or the Lenders, or of any indemnity agreement given by the Borrower, in connection with the Loans made hereunder. 9.19 USURY SAVINGS PROVISION. ----------------------- IT IS THE INTENT OF THE PARTIES HERETO TO CONFORM TO AND CONTRACT IN STRICT COMPLIANCE WITH APPLICABLE USURY LAW FROM TIME TO TIME IN EFFECT AND THAT N.C. GEN. STAT. (S) 24-9 SHALL APPLY WITH RESPECT TO THIS AGREEMENT. TO THE EXTENT N.C. GEN. STAT. (S) 24-9 IS HEREAFTER DEEMED NOT TO APPLY BY A COURT OF COMPETENT JURISDICTION AND ANY PAYMENTS HEREUNDER ARE HEREINAFTER CHARACTERIZED BY ANY COURT OF COMPETENT JURISDICTION AS THE REPAYMENT OF PRINCIPAL AND INTEREST THEREON, THE FOLLOWING PROVISIONS OF THIS SECTION 9.19 SHALL APPLY. ANY SUCH PAYMENTS SO CHARACTERIZED AS INTEREST MAY BE REFERRED TO HEREIN AS "INTEREST." ALL AGREEMENTS AMONG THE PARTIES HERETO ARE HEREBY LIMITED BY THE PROVISIONS OF THIS PARAGRAPH WHICH SHALL OVERRIDE AND CONTROL ALL SUCH AGREEMENTS, WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER WRITTEN OR ORAL. IN NO WAY, NOR IN ANY EVENT OR CONTINGENCY (INCLUDING WITHOUT LIMITATION PREPAYMENT OR ACCELERATION OF THE MATURITY OF ANY OBLIGATION), SHALL ANY INTEREST TAKEN, RESERVED, CONTRACTED FOR, CHARGED, OR RECEIVED UNDER THIS AGREEMENT OR OTHERWISE, EXCEED THE MAXIMUM NONUSURIOUS AMOUNT PERMISSIBLE UNDER APPLICABLE LAW. IF, FROM ANY POSSIBLE CONSTRUCTION OF ANY OF THE OPERATIVE AGREEMENTS OR ANY OTHER DOCUMENT OR AGREEMENT, INTEREST WOULD OTHERWISE BE PAYABLE IN EXCESS OF THE MAXIMUM NONUSURIOUS AMOUNT, ANY SUCH CONSTRUCTION SHALL BE SUBJECT TO THE PROVISIONS OF THIS PARAGRAPH 25 AND SUCH AMOUNTS UNDER SUCH DOCUMENTS OR AGREEMENTS SHALL BE AUTOMATICALLY REDUCED TO THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED UNDER APPLICABLE LAW, WITHOUT THE NECESSITY OF EXECUTION OF ANY AMENDMENT OR NEW DOCUMENT OR AGREEMENT. IF THE AGENT OR ANY LENDER SHALL EVER RECEIVE ANYTHING OF VALUE WHICH IS CHARACTERIZED AS INTEREST WITH RESPECT TO THE OBLIGATIONS OWED HEREUNDER OR UNDER APPLICABLE LAW AND WHICH WOULD, APART FROM THIS PROVISION, BE IN EXCESS OF THE MAXIMUM LAWFUL AMOUNT, AN AMOUNT EQUAL TO THE AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE INTEREST SHALL, WITHOUT PENALTY, BE APPLIED TO THE REDUCTION OF THE COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL AND NOT TO THE PAYMENT OF INTEREST, OR REFUNDED TO THE BORROWER OR ANY OTHER PAYOR THEREOF, IF AND TO THE EXTENT SUCH AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE EXCEEDS THE COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL. THE RIGHT TO DEMAND PAYMENT OF ANY AMOUNTS EVIDENCED BY ANY OF THE OPERATIVE AGREEMENTS DOES NOT INCLUDE THE RIGHT TO RECEIVE ANY INTEREST WHICH HAS NOT OTHERWISE ACCRUED ON THE DATE OF SUCH DEMAND, AND NEITHER THE AGENT NOR ANY LENDER INTENDS TO CHARGE OR RECEIVE ANY UNEARNED INTEREST IN THE EVENT OF SUCH DEMAND. ALL INTEREST PAID OR AGREED TO BE PAID TO THE AGENT OR ANY LENDER SHALL, TO THE EXTENT PERMITTED BY APPLICABLE LAW, BE AMORTIZED, PRORATED, ALLOCATED, AND SPREAD THROUGHOUT THE FULL STATED TERM (INCLUDING WITHOUT LIMITATION ANY RENEWAL OR EXTENSION) OF THIS AGREEMENT SO THAT THE AMOUNT OF INTEREST ON ACCOUNT OF SUCH PAYMENTS DOES NOT EXCEED THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED BY APPLICABLE LAW. [signature pages follow] 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: /s/ C. Scott Nielsen --------------------------------------------- Name: C. Scott Nielsen ------------------------------------------- Title: Vice President ------------------------------------------ FIRST UNION NATIONAL BANK, as the Agent and a Lender By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, except as expressly stated herein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ FIRST UNION NATIONAL BANK, as the Agent and a Lender By: /s/ Lucy C. Campbell --------------------------------------------- Name: Lucy C. Campbell ------------------------------------------- Title: Vice President ------------------------------------------ Schedule 1.1 ------------
Tranche A Tranche B Commitment Commitment --------------------- --------------------- Name and Address of Lenders Amount / Percentage Amount / Percentage - --------------------------------------- --------------------- --------------------- First Union National Bank $ 51,000,000 100% $ 7,200,000 100% c/o First Union Capital Markets Group DC-6 301 South College Street Charlotte, North Carolina 28288-0166 Attention: Ms. Donna Hemingway Capital Markets Services Telephone: (704) 383-8763 Telecopy: (704) 383-7989 TOTAL $ 51,000,000 100% $ 7,200,000 100%
EXHIBIT A-1 ----------- TRANCHE A NOTE (USF Real Estate Trust 1998-1) ___________, ____ FOR VALUE RECEIVED, the undersigned, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 (the "Borrower"), hereby unconditionally -------- promises to pay to the order of [LENDER] (the "Lender"), at the office of First ------ Union National Bank, located at c/o First Union Capital Markets Group, DC-6, 301 South College Street, Charlotte, North Carolina 28288-0166 or at such other address as may be specified by First Union National Bank, in lawful money of the United States of America and in immediately available funds, on the Maturity Date, the aggregate unpaid principal amount of all Tranche A Loans made by the Lender to the Borrower pursuant to Section 2.1 of the Credit Agreement (as defined below). The Borrower agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 2.8 of the Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of each Tranche A Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof and each conversion of all or a portion thereof to another Type. Each such endorsement shall constitute prima facie evidence of the accuracy of the ----- ----- information endorsed. The failure to make any such endorsement or any error in such endorsement shall not affect the obligations of the Borrower in respect of such Loan. This Note (a) is one (1) of the Notes referred to in the Credit Agreement dated as of __________, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the ---------------- Lender, the other banks and financial institutions from time to time parties thereto and First Union National Bank, as the Agent, (b) is subject to the provisions of the Credit Agreement (including without limitation Section 9.18 thereof) and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. Reference is hereby made to the Credit Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one (1) or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. A1-1 All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NORTH CAROLINA. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ A1-2 EXHIBIT A-2 ----------- TRANCHE B NOTE (USF Real Estate Trust 1998-1) _________, ____ FOR VALUE RECEIVED, the undersigned, FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 (the "Borrower"), hereby unconditionally -------- promises to pay to the order of [LENDER] (the "Lender") at the office of First ------ Union National Bank located at c/o First Union Capital Markets Group, DC-6, 301 South College Street, Charlotte, North Carolina 28288-0166 or at such other address as may be specified by First Union National Bank, in lawful money of the United States of America and in immediately available funds, on the Maturity Date, the aggregate unpaid principal amount of all Tranche B Loans made by the Lender to the Borrower pursuant to Section 2.1 of the Credit Agreement (as defined below). The Borrower agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 2.8 of the Credit Agreement. The holder of this Note is authorized to endorse on the schedules annexed hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of each Tranche B Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof and each conversion of all or a portion thereof to another Type. Each such endorsement shall constitute prima facie evidence of the accuracy of the ----- ----- information endorsed. The failure to make any such endorsement or any error in such endorsement shall not affect the obligations of the Borrower in respect of such Loan. This Note (a) is one (1) of the Notes referred to in the Credit Agreement dated as of __________, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the ---------------- Lender, the other banks and financial institutions from time to time parties thereto and First Union National Bank, as the Agent, (b) is subject to the provisions of the Credit Agreement (including without limitation Section 9.18 thereof) and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement. Reference is hereby made to the Credit Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security and the guarantees, the terms and conditions upon which the security interests and each guarantee were granted and the rights of the holder of this Note in respect thereof. Upon the occurrence of any one (1) or more of the Events of Default, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided in the Credit Agreement. A2-1 All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NORTH CAROLINA. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ A2-2 EXHIBIT B --------- ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement, dated as of __________, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among FIRST SECURITY BANK, NATIONAL ASSOCIATION, not - ----------------- individually, except as expressly stated therein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 (the "Owner Trustee" or the ------------- "Borrower"), the Lenders named therein and FIRST UNION NATIONAL BANK, as the - --------- Agent. Unless otherwise defined herein, terms defined in the Credit Agreement (or pursuant to Section 1 of the Credit Agreement, defined in other agreements) and used herein shall have the meanings given to them in or pursuant to the Credit Agreement. ____________________ (the "Assignor") and _______________ (the -------- "Assignee") agree as follows: -------- 1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date (as defined below), a ___% interest (the "Assigned Interest") in ----------------- and to the Assignor's rights and obligations under the Credit Agreement with respect to the credit facility contained in the Credit Agreement as are set forth on Schedule 1 hereto (the "Assigned Facility"), in a principal amount for ---------- ----------------- the Assigned Facility as set forth on Schedule 1. ---------- 2. The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other Operative Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Operative Agreement or any other instrument or document furnished pursuant thereto, other than that it has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, or any other obligor or the performance or observance by the Borrower, or any other obligor of any of their respective obligations under the Credit Agreement or any other Operative Agreement or any other instrument or document furnished pursuant hereto or thereto; and (c) attaches the Note held by it evidencing the Assigned Facility and requests that the Agent exchange such Note for a new Note payable to the Assignor and (if the Assignor has retained any interest in the Assigned Facility) a new Note payable to the Assignee in the respective amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). 3. The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (b) confirms that it has received copies of the Operative Agreements, and such other documents and information as it has deemed appropriate to make its B-1 own credit analysis and decision to enter into this Assignment and Acceptance; (c) agrees that it will, independently and without reliance upon the Assignor, the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, the other Operative Agreements or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement, the other Operative Agreements or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Credit Agreement and the other Operative Agreements to which Assignee is a party and will perform in accordance herewith all the obligations which by the terms of the Credit Agreement and the other Operative Agreements to which Assignee is a party are required to be performed by it as a Lender including without limitation, if it is organized under the laws of a jurisdiction outside the U.S., its obligation pursuant to Section 11.2(e) of the Participation Agreement. 4. The effective date of this Assignment and Acceptance shall be ________, ____ (the "Effective Date"). Following the execution of this -------------- Assignment and Acceptance, it will be delivered to the Agent for acceptance by it and recording by the Agent pursuant to Section 9.9 of the Credit Agreement, effective as of the Effective Date (which shall not, unless otherwise agreed to by the Agent, be earlier than five (5) Business Days after the date of such acceptance and recording by the Agent). 5. Upon such acceptance and recording, from and after the Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including without limitation payments of principal, interest, fees and other amounts) to the Assignee whether such amounts have accrued prior to the Effective Date or accrue subsequent to the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. 6. From and after the Effective Date, (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the other Operative Agreements and shall be bound by the provisions thereof and (b) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement and the other Operative Agreements. 7. This Assignment and Acceptance shall be governed by, and construed, INTERPRETED AND ENFORCED in accordance with the laws of the State of NORTH CAROLINA. B-2 IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. ---------- [Name of Assignor] By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ [Name of Assignee] By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ Consented To: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ FIRST UNION NATIONAL BANK, as the Agent By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ JP FOODSERVICE DISTRIBUTORS, INC. By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ B-3 [consents required only to the extent expressly provided in Section 9.8 of the Credit Agreement] B-4 SCHEDULE 1 TO ASSIGNMENT AND ACCEPTANCE RELATING TO THE CREDIT AGREEMENT, DATED AS OF __________, 1998, AMONG FIRST SECURITY BANK, NATIONAL ASSOCIATION NOT INDIVIDUALLY, EXCEPT AS EXPRESSLY STATED THEREIN, BUT SOLELY AS THE OWNER TRUSTEE, THE LENDERS NAMED THEREIN AND FIRST UNION NATIONAL BANK, AS THE AGENT FOR THE LENDERS (IN SUCH CAPACITY, THE "AGENT") ----- Name of Assignor: ----------------------------------- Name of Assignee: ----------------------------------- Effective Date of Assignment: ----------------------- Credit Principal Commitment Facility Assigned Amount Assigned Percentage Assigned ----------------- --------------- ------------------- _________________ $____________ ____________% [Name of Assignor] By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ [Name of Assignee] By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ B-5 EX-10.36 8 LEASE AGREEMENT DATED JUNE 29, 1998 EXHIBIT 10.36 - -------------------------------------------------------------------------------- LEASE AGREEMENT Dated as of June 29, 1998 between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as Lessor and JP FOODSERVICE DISTRIBUTORS, INC., as Lessee - -------------------------------------------------------------------------------- This Lease Agreement is subject to a security interest in favor of First Union National Bank, as the agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests (the "Agent") under a Security Agreement dated as of June 29, 1998 ----- between First Security Bank, National Association, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 and the Agent, as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof. This Lease Agreement has been executed in several counterparts. To the extent, if any, that this Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Agreement may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on the signature page hereof. TABLE OF CONTENTS
ARTICLE I.............................................................. 1 1.1 Definitions................................................... 1 1.2 Interpretation................................................ 2 ARTICLE II............................................................. 2 2.1 Property...................................................... 2 2.2 Lease Term.................................................... 2 2.3 Title......................................................... 3 2.4 Lease Supplements............................................. 3 ARTICLE III............................................................ 3 3.1 Rent.......................................................... 3 3.2 Payment of Basic Rent......................................... 4 3.3 Supplemental Rent............................................. 4 3.4 Performance on a Non-Business Day............................. 4 3.5 Rent Payment Provisions....................................... 4 ARTICLE IV............................................................. 5 4.1 Taxes; Utility Charges........................................ 5 ARTICLE V.............................................................. 5 5.1 Quiet Enjoyment............................................... 5 ARTICLE VI............................................................. 5 6.1 Net Lease..................................................... 5 6.2 No Termination or Abatement................................... 6 ARTICLE VII............................................................ 7 7.1 Ownership of the Properties................................... 7 ARTICLE VIII........................................................... 8 8.1 Condition of the Properties................................... 8 8.2 Possession and Use of the Properties.......................... 9 8.3 Integrated Properties.........................................10 ARTICLE IX.............................................................10 9.1 Compliance With Legal Requirements, Insurance Requirements and Manufacturer's Specifications and Standards...................10 ARTICLE X..............................................................11 10.1 Maintenance and Repair; Return...............................11 10.2 Environmental Inspection.....................................12 ARTICLE XI.............................................................12 11.1 Modifications................................................12 ARTICLE XII............................................................13 12.1 Warranty of Title............................................13 ARTICLE XIII...........................................................14 13.1 Permitted Contests Other Than in Respect of Indemnities......14 13.2 Impositions, Utility Charges, Other Matters; Compliance with Legal Requirements................................................15 ARTICLE XIV............................................................15 14.1 Public Liability and Workers' Compensation Insurance.........15 14.2 Permanent Hazard and Other Insurance.........................15
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14.3 Coverage.....................................................16 ARTICLE XV.............................................................17 15.1 Casualty and Condemnation....................................17 15.2 Environmental Matters........................................19 15.3 Notice of Environmental Matters..............................20 ARTICLE XVI............................................................20 16.1 Termination Upon Certain Events..............................20 16.2 Procedures...................................................20 ARTICLE XVII...........................................................21 17.1 Lease Events of Default......................................21 17.2 Surrender of Possession......................................24 17.3 Reletting....................................................24 17.4 Damages......................................................25 17.5 Power of Sale................................................25 17.6 Final Liquidated Damages.....................................26 17.7 Environmental Costs..........................................26 17.8 Waiver of Certain Rights.....................................26 17.9 Assignment of Rights Under Contracts.........................27 17.10 Remedies Cumulative.........................................27 ARTICLE XVIII..........................................................27 18.1 Lessor's Right to Cure Lessee's Lease Defaults...............27 ARTICLE XIX............................................................28 19.1 Provisions Relating to Lessee's Exercise of its Purchase Option............................................................28 19.2 No Purchase or Termination With Respect to Less than All of a Property........................................................28 ARTICLE XX.............................................................28 20.1 Purchase Option, Sale Option, Extension Option - General Provisions........................................................28 20.2 Lessee Purchase Option.......................................29 20.3 Third Party Sale Option......................................30 ARTICLE XXI............................................................31 21.1 [Intentionally Omitted]......................................31 ARTICLE XXII...........................................................31 22.1 Sale Procedure...............................................31 22.2 Application of Proceeds of Sale..............................34 22.3 Indemnity for Excessive Wear.................................34 22.4 Appraisal Procedure..........................................34 22.5 Certain Obligations Continue................................35 ARTICLE XXIII..........................................................35 23.1 Holding Over.................................................35 ARTICLE XXIV...........................................................36 24.1 Risk of Loss.................................................36 ARTICLE XXV............................................................36 25.1 Assignment...................................................36 25.2 Subleases....................................................36 ARTICLE XXVI...........................................................37 26.1 No Waiver....................................................37
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ARTICLE XXVII..........................................................37 27.1 Acceptance of Surrender......................................37 27.2 No Merger of Title...........................................37 ARTICLE XXVIII.........................................................37 28.1 Incorporation of Covenants...................................37 ARTICLE XXIX...........................................................38 29.1 Notices......................................................38 ARTICLE XXX............................................................39 30.1 Miscellaneous................................................39 30.2 Amendments and Modifications.................................39 30.3 Successors and Assigns.......................................39 30.4 Headings and Table of Contents...............................39 30.5 Counterparts.................................................39 30.6 GOVERNING LAW................................................39 30.7 Calculation of Rent..........................................39 30.8 Memoranda of Lease and Lease Supplements.....................40 30.9 Allocations between the Lenders and the Holders..............40 30.10 Limitations on Recourse.....................................40 30.11 WAIVERS OF JURY TRIAL.......................................40 30.12 Exercise of Lessor Rights...................................40 30.13 SUBMISSION TO JURISDICTION; VENUE; ARBITRATION..............41 30.14 USURY SAVINGS PROVISION.....................................41
EXHIBITS - -------- EXHIBIT A - Lease Supplement No. ____ EXHIBIT B - Memorandum of Lease and Lease Supplement No. ____ iii LEASE AGREEMENT --------------- THIS LEASE AGREEMENT dated as of June 29, 1998 (as amended, modified, extended, supplemented, restated and/or replaced from time to time, this "Lease") is between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national ----- banking association, having its principal office at 79 South Main Street, Salt Lake City, Utah 84111, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as lessor (the "Lessor"), and JP FOODSERVICE ------ DISTRIBUTORS, INC., a Delaware corporation, having its principal place of business at 9830 Patuxent Woods Drive, Columbia, Maryland, as lessee (the "Lessee"). - ------- W I T N E S S E T H: - - - - - - - - - - A. WHEREAS, subject to the terms and conditions of the Participation Agreement and the Agency Agreement, Lessor will (i) purchase or ground lease various parcels of real property, some of which will (or may) have existing Improvements thereon, from one (1) or more third parties designated by Lessee and (ii) fund the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties by the Construction Agent; and B. WHEREAS, the Term shall commence with respect to each Property upon the Property Closing Date with respect thereto; provided, Basic Rent with -------- respect thereto shall not be payable until the applicable Rent Commencement Date; and C. WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to lease from Lessor, each Property; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I 1.1 DEFINITIONS. ----------- For purposes of this Lease, capitalized terms used in this Lease and not otherwise defined herein shall have the meanings assigned to them in Appendix A ---------- to that certain Participation Agreement dated as of June 29, 1998 (as amended, modified, extended, supplemented, restated and/or replaced from time to time in accordance with the applicable provisions thereof, the "Participation ------------- Agreement") among Lessee, the various parties thereto from time to time, as the - --------- Guarantors, Lessor, the various banks and other lending institutions which are parties thereto from time to time, as the Holders, the various banks and other lending institutions which are parties thereto from time to time, as the Lenders, and First Union National Bank, as agent for the Lenders and respecting the Security Documents, as the agent for the Lenders and the Holders, to the extent of their interests. Unless otherwise indicated, references in this Lease to articles, sections, paragraphs, clauses, appendices, schedules and exhibits are to the same contained in this Lease. 1.2 INTERPRETATION. -------------- The rules of usage set forth in Appendix A to the Participation Agreement ---------- shall apply to this Lease. ARTICLE II 2.1 PROPERTY. -------- Subject to the terms and conditions hereinafter set forth and contained in the respective Lease Supplement relating to each Property, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, each Property. 2.2 LEASE TERM. ---------- The term of this Lease with respect to each Property (the "Term") shall ---- begin upon the Property Closing Date for such Property (in each case the "Commencement Date") and shall end on the fifth annual anniversary of the ----------------- Initial Closing Date, unless the Term is earlier terminated or extended pursuant to the next paragraph. Notwithstanding the foregoing, Lessee shall not be obligated to pay Basic Rent until the Rent Commencement Date with respect to such Property. Lessee may, not less than sixty (60) days and no more than two hundred forty (240) days prior to the Expiration Date, by irrevocable notice to Lessor, the Lenders, the Holders and the Agent make written request to extend the Expiration Date for all, but not less than all, the Properties for an additional period of one year. Lessor, each Lender, each Holder and the Agent shall each make a determination, in the absolute and sole discretion of each such party, not later than thirty (30) days prior to the Expiration Date as to whether or not such party will agree to extend the Expiration Date as requested; provided, -------- however, that failure by any such party to make a timely response to Lessee's - ------- request for extension of the Expiration Date shall be deemed to constitute a refusal by such party to extension of the Expiration Date. In response to a request for an extension of the Expiration Date, if (a) Lessor, each Lender, each Holder and the Agent shall agree to the requested extension, then the Term shall be extended and shall expire on the date one (1) year after the then current Expiration Date or (b) Lessor, any Lender, any Holder or the Agent shall refuse (or be deemed to have refused) to agree to the requested extension, then the Term shall not be extended and shall expire on the then current Expiration Date. 2 2.3 TITLE. ----- Except for Lessor's representations and warranties that each Property is free of Lessor Liens, each Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession (if any), the existing state of title (including without limitation the Permitted Liens) and all applicable Legal Requirements. Lessee shall in no event have any recourse against Lessor for any defect in Lessor's title to any Property or any interest of Lessee therein other than for Lessor Liens. 2.4 LEASE SUPPLEMENTS. ----------------- On or prior to each Commencement Date, Lessee and Lessor shall each execute and deliver a Lease Supplement for the Property to be leased effective as of such Commencement Date in substantially the form of EXHIBIT A HERETO. --------- ARTICLE III 3.1 RENT. ---- (a) Lessee shall pay Basic Rent in arrears on each Payment Date, and on any date on which this Lease shall terminate with respect to any or all Properties during the Term; provided, however, with respect to -------- ------- each individual Property Lessee shall have no obligation to pay Basic Rent with respect to such Property until the Rent Commencement Date with respect to such Property (notwithstanding that Basic Rent for such Property shall accrue from and including the Scheduled Interest Payment Date immediately preceding such Rent Commencement Date). (b) Basic Rent shall be due and payable in lawful money of the United States and shall be paid by wire transfer of immediately available funds on the due date therefor (or within the applicable grace period) to such account or accounts at such bank or banks as Lessor shall from time to time direct. (c) Lessee's inability or failure to take possession of all or any portion of any Property when delivered by Lessor, whether or not attributable to any act or omission of the Construction Agent, Lessee or any other Person other than Lessor or for any other reason whatsoever, shall not delay or otherwise affect Lessee's obligation to pay Rent for such Property in accordance with the terms of this Lease. (d) Lessee shall make all payments of Rent prior to 12:00 Noon, Charlotte, North Carolina time, on the applicable date for payment of such amount. 3 3.2 PAYMENT OF BASIC RENT. --------------------- Basic Rent shall be paid absolutely net to Lessor or its designee, so that this Lease shall yield to Lessor the full amount thereof, without setoff, deduction or reduction. 3.3 SUPPLEMENTAL RENT. ----------------- Lessee shall pay to the Person entitled thereto any and all Supplemental Rent when and as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent within three (3) days after the same is due, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. All such payments of Supplemental Rent shall be in the full amount thereof, without setoff, deduction or reduction. Lessee shall pay to the appropriate Person, as Supplemental Rent due and owing to such Person, among other things, on demand, (a) any and all payment obligations (except for amounts payable as Basic Rent) owing from time to time under the Operative Agreements by Lessee to the Agent, any Lender, any Holder or any other Person, (b) interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due (subject to the applicable grace period) for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by the appropriate Person (subject to any applicable grace period) for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid and (c) amounts referenced as Supplemental Rent obligations pursuant to Section 8.3 of the Participation Agreement. It shall be an additional Supplemental Rent obligation of Lessee to pay to the appropriate Person all rent and other amounts when such become due and owing from time to time under each Ground Lease and without the necessity of any notice from Lessor with regard thereto. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. 3.4 PERFORMANCE ON A NON-BUSINESS DAY. --------------------------------- If any Basic Rent is required hereunder on a day that is not a Business Day, then such Basic Rent shall be due on the corresponding Scheduled Interest Payment Date. If any Supplemental Rent is required hereunder on a day that is not a Business Day, then such Supplemental Rent shall be due on the next succeeding Business Day. 3.5 RENT PAYMENT PROVISIONS. ----------------------- Lessee shall make payment of all Basic Rent and Supplemental Rent when due (subject to the applicable grace periods) regardless of whether any of the Operative Agreements pursuant to which same is calculated and is owing shall have been rejected, avoided or disavowed in any bankruptcy or insolvency proceeding involving any of the parties to any of the 4 Operative Agreements. Such provisions of such Operative Agreements and their related definitions are incorporated herein by reference and shall survive any termination, amendment or rejection of any such Operative Agreements. ARTICLE IV 4.1 TAXES; UTILITY CHARGES. ---------------------- Lessee shall pay or cause to be paid all Impositions with respect to the Properties and/or the use, occupancy, operation, repair, access, maintenance or operation thereof and all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents, utilities and operating expenses of any kind or type used in or on any Property during the Term. Upon Lessor's request, Lessee shall provide from time to time Lessor with evidence of all such payments referenced in the foregoing sentence. Lessee shall be entitled to receive any credit or refund with respect to any Imposition or utility charge paid by Lessee. Unless an Event of Default shall have occurred and be continuing, the amount of any credit or refund received by Lessor on account of any Imposition or utility charge paid by Lessee, net of the reasonable costs and expenses incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. All charges for Impositions or utilities imposed with respect to any Property for a period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between Lessor and Lessee, and each party shall pay or reimburse the other for such party's pro rata share thereof. ARTICLE V 5.1 QUIET ENJOYMENT. --------------- Subject to the rights of Lessor contained in Sections 17.2, 17.3 and 20.3 and the other terms of this Lease and the other Operative Agreements and so long as no Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy each Property for the applicable Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor (other than Lessee) with respect to any matters arising from and after the applicable Commencement Date. ARTICLE VI 6.1 NET LEASE. --------- This Lease shall constitute a net lease, and the obligations of Lessee hereunder are absolute and unconditional. Lessee shall pay all operating expenses arising out of the use, operation and/or occupancy of each Property. Any present or future law to the contrary notwithstanding, this Lease shall not terminate, nor shall Lessee be entitled to any abatement, 5 suspension, deferment,reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall the obligations of Lessee hereunder be affected (except as expressly herein permitted and by performance of the obligations in connection therewith) for any reason whatsoever, including without limitation by reason of: (a) any damage to or destruction of any Property or any part thereof; (b) any taking of any Property or any part thereof or interest therein by Condemnation or otherwise; (c) any prohibition, limitation, restriction or prevention of Lessee's use, occupancy or enjoyment of any Property or any part thereof, or any interference with such use, occupancy or enjoyment by any Person or for any other reason; (d) any title defect, Lien or any matter affecting title to any Property; (e) any eviction by paramount title or otherwise; (f) any default by Lessor hereunder; (g) any action for bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding relating to or affecting the Agent, any Lender, Lessor, Lessee, any Holder or any Governmental Authority; (h) the impossibility or illegality of performance by Lessor, Lessee or both; (i) any action of any Governmental Authority or any other Person; (j) Lessee's acquisition of ownership of all or part of any Property; (k) breach of any warranty or representation with respect to any Property or any Operative Agreement; (l) any defect in the condition, quality or fitness for use of any Property or any part thereof; or (m) any other cause or circumstance whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. The parties intend that the obligations of Lessee hereunder shall be covenants, agreements and obligations that are separate and independent from any obligations of Lessor hereunder and shall continue unaffected unless such covenants, agreements and obligations shall have been modified or terminated in accordance with an express provision of this Lease. Lessor and Lessee acknowledge and agree that the provisions of this Section 6.1 have been specifically reviewed and subject to negotiation. 6.2 NO TERMINATION OR ABATEMENT. --------------------------- Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting any Person or any Governmental Authority, or any action with respect to this Lease or any Operative Agreement which may be taken by any trustee, receiver or liquidator of any Person or any Governmental Authority or by any court with respect to any Person, or any Governmental Authority. Lessee hereby waives all right (a) to terminate or surrender this Lease (except as permitted under the terms of the Operative Agreements) or (b) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. 6 ARTICLE VII 7.1 OWNERSHIP OF THE PROPERTIES. --------------------------- (a) Lessor and Lessee intend that (i) for financial accounting purposes with respect to Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, (B) Lessor will be treated as the owner and lessor of each Property and (C) Lessee will be treated as the lessee of each Property, but (ii) for federal and all state and local income tax purposes, bankruptcy purposes and bank regulatory purposes (A) this Lease will be treated as a financing arrangement and (B) Lessee will be treated as the owner of the Properties and will be entitled to all tax benefits ordinarily available to owners of property similar to the Properties for such tax purposes. Notwithstanding the foregoing, neither party hereto has made, or shall be deemed to have made, any representation or warranty as to the availability of any of the foregoing treatments under applicable accounting rules, tax, bankruptcy, regulatory, commercial or real estate law or under any other set of rules. Lessee shall claim the cost recovery deductions associated with each Property, and Lessor shall not, to the extent not prohibited by Law, take on its tax return a position inconsistent with Lessee's claim of such deductions. (b) For all purposes other than as set forth in Section 7.1(a)(i), Lessor and Lessee intend this Lease to constitute a finance lease and not a true lease. In order to secure the obligations of Lessee now existing or hereafter arising under any and all Operative Agreements, Lessee hereby conveys, grants, assigns, transfers, hypothecates, mortgages and sets over to Lessor, for the benefit of all Financing Parties, a first priority security interest (but subject to the security interest in the assets granted by Lessee in favor of the Agent in accordance with the Security Documents) in and lien on all right, title and interest of Lessee (now owned or hereafter acquired) in and to all Properties, to the extent such is personal property and irrevocably grants and conveys a lien, deed of trust and mortgage on all right, title and interest of Lessee (now owned or hereafter acquired) in and to all Properties to the extent such is real property. Lessor and Lessee further intend and agree that, for the purpose of securing the obligations of Lessee and/or the Construction Agent now existing or hereafter arising under the Operative Agreements, (i) this Lease shall be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code respecting each of the Properties and all proceeds (including without limitation insurance proceeds thereof) to the extent such is personal property and an irrevocable grant and conveyance of a lien, deed of trust and mortgage on each of the Properties and all proceeds (including without limitation insurance proceeds thereof) to the extent such is real property; (ii) the acquisition of title (or to the extent applicable, a leasehold interest pursuant to a Ground Lease) in each Property referenced in Article II constitutes a grant by Lessee to Lessor of a security interest, lien, deed of trust and mortgage in all of Lessee's right, title and interest in and to each Property and all proceeds (including without limitation insurance proceeds thereof) of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, 7 securities or other property, and an assignment of all rents, profits and income produced by each Property; and (iii) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such lien, security interest, mortgage lien and deed of trust under applicable law. Lessee shall promptly take such actions as Lessor may reasonably request (including without limitation the filing of Uniform Commercial Code Financing Statements, Uniform Commercial Code Fixture Filings and memoranda (or short forms) of this Lease and the various Lease Supplements) to ensure that the lien, security interest, lien, mortgage lien and deed of trust in each Property and the other items referenced above will be deemed to be a perfected lien, security interest, mortgage lien and deed of trust of first priority under applicable law and will be maintained as such throughout the Term. ARTICLE VIII 8.1 CONDITION OF THE PROPERTIES. --------------------------- LESSEE ACKNOWLEDGES AND AGREES THAT IT IS LEASING EACH PROPERTY "AS-IS, WHERE-IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR (EXCEPT THAT LESSOR SHALL KEEP EACH PROPERTY FREE AND CLEAR OF LESSOR LIENS) AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF (IF ANY), (C) ANY STATE OF FACTS REGARDING ITS PHYSICAL CONDITION OR WHICH AN ACCURATE SURVEY MIGHT SHOW, (D) ALL APPLICABLE LEGAL REQUIREMENTS AND (E) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF AND/OR THE DATE OF THE APPLICABLE LEASE SUPPLEMENT. NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) (EXCEPT THAT LESSOR SHALL KEEP EACH PROPERTY FREE AND CLEAR OF LESSOR LIENS) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART THEREOF), AND NEITHER LESSOR NOR THE AGENT NOR ANY LENDER NOR ANY HOLDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREON OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. LESSEE HAS OR PRIOR TO THE BASIC TERM COMMENCEMENT DATE WILL HAVE BEEN AFFORDED FULL OPPORTUNITY TO INSPECT EACH PROPERTY AND THE IMPROVEMENTS THEREON (IF ANY), IS OR WILL BE (INSOFAR AS LESSOR, THE AGENT, EACH LENDER AND EACH HOLDER ARE 8 CONCERNED) SATISFIED WITH THE RESULTS OF ITS INSPECTIONS AND IS ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE RESULTS OF ITS OWN INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED IN THE PRECEDING SENTENCE, AS BETWEEN LESSOR, THE AGENT, THE LENDERS AND THE HOLDERS, ON THE ONE (1) HAND, AND LESSEE, ON THE OTHER HAND, ARE TO BE BORNE BY LESSEE. 8.2 POSSESSION AND USE OF THE PROPERTIES. ------------------------------------ (a) At all times during the Term with respect to each Property, such Property shall be a Permitted Facility and shall be used by Lessee in the ordinary course of its business. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Properties as contemplated by this Lease. Lessee shall not commit or permit any waste of the Properties or any part thereof. (b) The principal place of business and chief executive office of Lessee (as such terms are used in Section 9-103(3) of the Uniform Commercial Code of any applicable jurisdiction) is 9830 Patuxent Woods Drive, Columbia, Maryland, and Lessee will provide Lessor with prior written notice of any change of location of its principal place of business or chief executive office. Regarding a particular Property, each Lease Supplement correctly identifies the initial location of the related Equipment (if any) and Improvements (if any) and contains an accurate legal description for the related parcel of Land or a copy of the Ground Lease (if any). The Equipment and Improvements respecting each particular Property will be located only at the location identified in the applicable Lease Supplement. (c) Lessee will not attach or incorporate any item of Equipment to or in any other item of equipment or personal property or to or in any real property in a manner that could give rise to the assertion of any Lien by a third party on such item of Equipment by reason of such attachment, or the assertion of a claim that such item of Equipment has become a fixture and is subject to a Lien in favor of a third party, that is prior to the Liens thereon created by the Operative Agreements. (d) On the Commencement Date for each Property, Lessor and Lessee shall execute a Lease Supplement in regard to such Property which shall contain an Equipment Schedule that has a general description of the Equipment which shall comprise the Property, an Improvement Schedule that has a general description of the Improvements which shall comprise the Property and a legal description of the Land to be leased hereunder (or, in the case of any Property subject to a Ground Lease, to be subleased hereunder) as of such date. Each Property subject to a Ground Lease shall be deemed to be ground subleased from Lessor to Lessee as of the Commencement Date, and such ground sublease shall be in effect until this Lease is terminated or expires, in each case in accordance with the terms and provisions hereof. Lessee shall satisfy and perform all obligations imposed on Lessor under each Ground Lease. Simultaneously with the execution and delivery of each Lease Supplement, such Equipment, Improvements, Land, 9 ground subleasehold interest, all additional Equipment and all additional Improvements which are financed under the Operative Agreements after the Commencement Date and the remainder of such Property shall be deemed to have been accepted by Lessee for all purposes of this Lease and to be subject to this Lease. (e) At all times during the Term with respect to each Property, Lessee will comply with all obligations under and (to the extent no Event of Default exists and provided that such exercise will not impair the value, utility or remaining useful life of such Property) shall be permitted to exercise all rights and remedies under, all operation and easement agreements and related or similar agreements applicable to such Property. 8.3 INTEGRATED PROPERTIES. --------------------- On the Rent Commencement Date for each Property, Lessee shall, at its sole cost and expense, cause such Property and the applicable property subject to a Ground Lease to constitute (and for the duration of the Term shall continue to constitute) all of the equipment, facilities, rights, other personal property and other real property necessary or appropriate to operate, utilize, maintain and control a Permitted Facility in a commercially reasonable manner. ARTICLE IX 9.1 COMPLIANCE WITH LEGAL REQUIREMENTS, INSURANCE REQUIREMENTS AND -------------------------------------------------------------- MANUFACTURER'S SPECIFICATIONS AND STANDARDS. ------------------------------------------- Subject to the terms of Article XIII relating to permitted contests, Lessee, at its sole cost and expense, shall (a) comply with all applicable Legal Requirements (including without limitation all Environmental Laws) and all Insurance Requirements relating to the Properties, (b) procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties, and (c) comply with all manufacturer's specifications and standards, including without limitation the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties, whether or not compliance therewith shall require structural or extraordinary changes in any Property or interfere with the use and enjoyment of any Property unless the failure to procure, maintain and comply with such items identified in subparagraphs (b) and (c), individually or in the aggregate, shall not and could not reasonably be expected to have a Material Adverse Effect. Lessor agrees to take such actions as may be reasonably requested by Lessee in connection with the compliance by Lessee of its obligations under this Section 9.1. 10 ARTICLE X 10.1 MAINTENANCE AND REPAIR; RETURN. ------------------------------ (a) Lessee, at its sole cost and expense, shall maintain each Property in good condition, repair and working order (ordinary wear and tear excepted) and in the repair and condition as when originally delivered to Lessor and make all necessary repairs thereto and replacements thereof, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by Section 9.1 and on a basis consistent with the operation and maintenance of properties or equipment comparable in type and function to the applicable Property, such that such Property is capable of being immediately utilized by a third party and in compliance with standard industry practice subject, however, to the provisions of Article XV with respect to Casualty and Condemnation. (b) Lessee shall not use or locate any component of any Property outside of the Approved State therefor. Lessee shall not move or relocate any component of any Property beyond the boundaries of the Land (comprising part of such Property) described in the applicable Lease Supplement, except for the temporary removal of Equipment and other personal property for repair or replacement. (c) If any component of any Property becomes worn out, lost, destroyed, damaged beyond repair or otherwise permanently rendered unfit for use, Lessee, at its own expense, will within a reasonable time replace such component with a replacement component which is free and clear of all Liens (other than Permitted Liens and Lessor Liens) and has a value, utility and useful life at least equal to the component replaced (assuming the component replaced had been maintained and repaired in accordance with the requirements of this Lease). All components which are added to any Property shall immediately become the property of (and title thereto shall vest in) Lessor and shall be deemed incorporated in such Property and subject to the terms of this Lease as if originally leased hereunder. (d) Upon reasonable advance notice, Lessor and its agents shall have the right to inspect each Property and all maintenance records with respect thereto at any reasonable time during normal business hours but shall not, in the absence of an Event of Default, materially disrupt the business of Lessee. (e) If, at any time, the aggregate appraised value of Properties then subject to this Lease for which the Agent has received an Appraisal pursuant to the terms of Section 5.3 of the Participation Agreement is less than the lesser of (i) $12,000,000 or (ii) the aggregate Property Cost at such time (the "Base Amount"), then Lessee will cause an additional Appraisal or Appraisals to be immediately delivered to Lessor in an amount sufficient to cause such aggregate appraised value to equal or exceed the Base Amount. In addition, Lessee shall cause to be delivered to Lessor (at Lessee's sole expense) one (1) or more additional Appraisals (or reappraisals of Property) as Lessor may request if 11 any one (1) of Lessor, the Agent, the Trust Company, any Lender or any Holder is required pursuant to any applicable Legal Requirement to obtain such Appraisals (or reappraisals) and upon the occurrence of any Event of Default. (f) Lessor shall under no circumstances be required to build any improvements or install any equipment on any Property, make any repairs, replacements, alterations or renewals of any nature or description to any Property, make any expenditure whatsoever in connection with this Lease or maintain any Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of any Property, and Lessee waives the right to (i) require Lessor to maintain, repair, or rebuild all or any part of any Property, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenant, condition or restriction at any time in effect. (g) Lessee shall, upon the expiration or earlier termination of this Lease with respect to a Property, if Lessee shall not have exercised its Purchase Option with respect to such Property and purchased such Property, surrender such Property (i) to Lessor pursuant to the exercise of the applicable remedies upon the occurrence of a Lease Event of Default or (ii) pursuant to the second paragraph of Section 22.1(a) hereof, to Lessor or the third party purchaser, as the case may be, subject to Lessee's obligations under this Lease (including without limitation the obligations of Lessee at the time of such surrender under Sections 9.1, 10.1(a) through (f), 10.2, 11.1, 12.1, 22.1 and 23.1). 10.2 ENVIRONMENTAL INSPECTION. ------------------------ If Lessee has not given notice of exercise of its Purchase Option on the Expiration Date pursuant to Section 20.1 or for whatever reason Lessee does not purchase a Property in accordance with the terms of this Lease, then not more than one hundred twenty (120) days nor less than sixty (60) days prior to the Expiration Date, Lessee at its expense shall cause to be delivered to Lessor a Phase I environmental site assessment recently prepared (no more than thirty (30) days prior to the date of delivery) by an independent recognized professional reasonably acceptable to Lessor, prepared in accordance with standard industry practice and reasonably satisfactory to Lessor. ARTICLE XI 11.1 MODIFICATIONS. ------------- (a) Lessee at its sole cost and expense, at any time and from time to time without the consent of Lessor, may make modifications, alterations, renovations, improvements and additions to any Property or any part thereof and substitutions and replacements therefor (collectively, "Modifications"), and Lessee shall make any and all Modifications required to be made pursuant to all Legal Requirements, Insurance Requirements and manufacturer's specifications and standards; provided, that: (i) no 12 Modification shall materially impair the value or utility of any Property from that which existed immediately prior to such Modification; (ii) each Modification shall be done expeditiously and in a good and workmanlike manner; (iii) no Modification shall adversely affect the structural integrity of any Property; (iv) to the extent required by Section 14.2(a), Lessee shall maintain builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Article XIII relating to permitted contests, Lessee shall pay all costs and expenses and discharge any Liens (other than Permitted Liens) arising with respect to any Modification; (vi) each Modification shall comply with the requirements of this Lease (including without limitation Sections 8.2 and 10.1); and (vii) no Improvement shall be demolished or otherwise rendered unfit for use unless Lessee shall finance the proposed replacement Modification outside of this lease facility; provided, further, Lessee shall not make any Modification (unless required by any Legal Requirement) to the extent any such Modification, individually or in the aggregate, shall or could reasonably be expected to have a Material Adverse Effect. All Modifications shall immediately and without further action upon their incorporation into the applicable Property (1) become property of Lessor, (2) be subject to this Lease and (3) be titled in the name of Lessor. Lessee shall not remove or attempt to remove any Modification from any Property. Each Ground Lease for a Property shall expressly provide for the provisions of the foregoing sentence. Lessee, at its own cost and expense, will pay for the repairs of any damage to any Property caused by the removal or attempted removal of any Modification. (b) The construction process provided for in the Agency Agreement is acknowledged by Lessor to be consistent with and in compliance with the terms and provisions of this Article XI. ARTICLE XII 12.1 WARRANTY OF TITLE. ----------------- (a) Lessee hereby acknowledges and shall cause title in each Property (including without limitation all Equipment, all Improvements, all replacement components to each Property and all Modifications) immediately and without further action to vest in and become the property of Lessor and to be subject to the terms of this Lease (provided, respecting each Property subject to a Ground Lease, Lessor's interest therein is acknowledged to be a leasehold interest pursuant to such Ground Lease) from and after the date hereof or such date of incorporation into any Property. Lessee agrees that, subject to the terms of Article XIII relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon any Property, any component thereof or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by Lessor, the Agent, any Lender or any Holder pursuant to any Operative Agreement, other than Permitted Liens and Lessor Liens. Lessee shall promptly notify Lessor in the event it receives actual knowledge that a Lien other than a Permitted Lien or Lessor Lien has 13 occurred with respect to a Property, the Rent or any other such amounts, and Lessee represents and warrants to, and covenants with, Lessor that the Liens in favor of Lessor and/or the Agent created by the Operative Agreements are (and until the financing parties under the Operative Agreements have been paid in full shall remain) first priority perfected Liens subject only to Permitted Liens and Lessor Liens. At all times subsequent to the Commencement Date respecting a Property, Lessee shall (i) cause a valid, perfected, first priority Lien on each applicable Property to be in place in favor of the Agent (for the benefit of the Lenders and the Holders) and (ii) file, or cause to be filed, all necessary documents under the applicable real property law and Article 9 of the Uniform Commercial Code to perfect such title and Liens. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to any Property or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING A PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY PROPERTY OTHER THAN PERMITTED LIENS. ARTICLE XIII 13.1 PERMITTED CONTESTS OTHER THAN IN RESPECT OF INDEMNITIES. ------------------------------------------------------- Except to the extent otherwise provided for in Section 11 of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement, Imposition or utility charge payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided, that (a) the -------- commencement and continuation of such proceedings shall suspend the collection of any such contested amount from, and suspend the enforcement thereof against, the applicable Properties, Lessor, each Holder, the Agent and each Lender; (b) there shall not be imposed a Lien (other than Permitted Liens and Lessor Liens) on any Property and no part of any Property nor any Rent would be in any danger of being sold, forfeited, lost or deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or material civil liability on Lessor, any Holder, the Agent or any Lender for failure to comply therewith; and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the end of the Term, then Lessee shall deliver to Lessor an Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee 14 such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. 13.2 IMPOSITIONS, UTILITY CHARGES, OTHER MATTERS; COMPLIANCE WITH ------------------------------------------------------------ LEGAL REQUIREMENTS. ------------------ Except with respect to Impositions, Legal Requirements, utility charges and such other matters referenced in Section 13.1 which are the subject of ongoing proceedings contesting the same in a manner consistent with the requirements of Section 13.1, Lessee shall cause (a) all Impositions, utility charges and such other matters to be timely paid, settled or compromised, as appropriate, with respect to each Property and (b) each Property to comply with all applicable Legal Requirements. ARTICLE XIV 14.1 PUBLIC LIABILITY AND WORKERS' COMPENSATION INSURANCE. ---------------------------------------------------- During the Term for each Property, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability and umbrella liability insurance for claims for injuries or death sustained by persons or damage to property while on such Property or respecting the Equipment and such other public liability coverages as are then customarily carried by similarly situated companies conducting business similar to that conducted by Lessee. Such insurance shall be on terms and in amounts that are no less favorable than insurance maintained by Lessee with respect to similar properties and equipment that it owns and are then carried by similarly situated companies conducting business similar to that conducted by Lessee, and in no event shall have a minimum combined single limit per occurrence coverage (i) for commercial general liability of less than $1,000,000 and (ii) for umbrella liability of less than $15,000,000. The policies shall name Lessee as the insured and shall be endorsed to name Lessor, the Holders, the Agent and the Lenders as additional insureds. The policies shall also specifically provide that such policies shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor, any Holder, the Agent or any Lender may have in force. In the operation of the Properties, Lessee shall comply with applicable workers' compensation laws and protect Lessor, each Holder, the Agent and each Lender against any liability under such laws. 14.2 PERMANENT HAZARD AND OTHER INSURANCE. ------------------------------------ (a) During the Term for each Property, Lessee shall keep such Property insured against all risk of physical loss or damage by fire and other risks and shall maintain builders' risk insurance during construction of any Improvements or Modifications in each case in amounts no less than the Property Cost of such Property from time to time and on terms that (i) are no less favorable than insurance covering other similar properties owned by Lessee and (ii) are then carried by similarly situated 15 companies conducting business similar to that conducted by Lessee. The policies shall name Lessee as the insured and shall be endorsed to name Lessor and the Agent (on behalf of the Lenders and the Holders) as a named additional insured and loss payee, to the extent of their respective interests; provided, so long as no Event of Default exists, any loss -------- payable under the insurance policies required by this Section for losses up to $1,000,000 will be paid to Lessee. (b) If, during the Term with respect to a Property the area in which such Property is located is designated a "flood-prone" area pursuant to the Flood Disaster Protection Act of 1973, or any amendments or supplements thereto or is in a zone designated A or V, then Lessee shall comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973. In addition, Lessee will fully comply with the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be amended from time to time, and with any other Legal Requirement, concerning flood insurance to the extent that it applies to any such Property. During the Term, Lessee shall, in the operation and use of each Property, maintain workers' compensation insurance consistent with that carried by similarly situated companies conducting business similar to that conducted by Lessee and containing minimum liability limits of no less than $100,000. In the operation of each Property, Lessee shall comply with workers' compensation laws applicable to Lessee, and protect Lessor, each Holder, the Agent and each Lender against any liability under such laws. 14.3 COVERAGE. -------- (a) As of the date of this Lease and annually thereafter during the Term, Lessee shall furnish the Agent (on behalf of Lessor and the other beneficiaries of such insurance coverage) with certificates prepared by the insurers or insurance broker of Lessee showing the insurance required under Sections 14.1 and 14.2 to be in effect, naming (to the extent of their respective interests) Lessor, the Holders, the Agent and the Lenders as additional insureds and loss payees and evidencing the other requirements of this Article XIV. All such insurance shall be at the cost and expense of Lessee and provided by nationally recognized, financially sound insurance companies having an A or better rating by A.M. Best's Key Rating Guide. Lessee shall cause such certificates to include a provision for thirty (30) days' advance written notice by the insurer to the Agent (on behalf of Lessor and the other beneficiaries of such insurance coverage) in the event of cancellation or material alteration of such insurance. If an Event of Default has occurred and is continuing and the Agent (on behalf of Lessor and the other beneficiaries of such insurance coverage) so requests, Lessee shall deliver to the Agent (on behalf of Lessor and the other beneficiaries of such insurance coverage) copies of all insurance policies required by Sections 14.1 and 14.2. (b) Lessee agrees that the insurance policy or policies required by Sections 14.1, 14.2(a) and 14.2(b) shall include an appropriate clause pursuant to which any such policy shall provide that it will not be invalidated should Lessee or any Contractor, as the 16 case may be, waive, at any time, any or all rights of recovery against any party for losses covered by such policy or due to any breach of warranty, fraud, action, inaction or misrepresentation by Lessee or any Person acting on behalf of Lessee. Lessee hereby waives any and all such rights against Lessor, the Hold ers, the Agent and the Lenders to the extent of payments made to any such Person under any such policy. (c) Neither Lessor nor Lessee shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Article XIV, except that Lessor may carry separate liability insurance at Lessor's sole cost so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance Lessor may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy will not cause Lessee's insurance required under this Article XIV to be subject to a coinsurance exception of any kind. (d) Lessee shall pay as they become due all premiums for the insurance required by Section 14.1 and Section 14.2, shall renew or replace each policy prior to the expiration date thereof or otherwise maintain the coverage required by such Sections without any lapse in coverage. ARTICLE XV 15.1 CASUALTY AND CONDEMNATION. ------------------------- (a) Subject to the provisions of the Agency Agreement and this Article XV and Article XVI (in the event Lessee delivers, or is obligated to deliver or is deemed to have delivered, a Termination Notice), and prior to the occurrence and continuation of a Default or an Event of Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest in) any condemnation proceeds, award, compensation or insurance proceeds under Sections 14.2(a) or 14.2(b) hereof to which Lessee or Lessor may become entitled by reason of their respective interests in a Property (i) if all or a portion of such Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to such Property or any part thereof is the subject of a Condemnation; provided, however, if a -------- ------- Default or an Event of Default shall have occurred and be continuing or if such award, compensation or insurance proceeds shall exceed $1,000,000, then such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor and held in accordance with the terms of this Section 15.1(a). All amounts held by Lessor hereunder on account of any award, compensation or insurance proceeds either paid directly to Lessor or turned over to Lessor shall be held as security for the performance of Lessee's obligations hereunder and under the other Operative Agreements and when all such obligations of Lessee with respect to such matters (and all other obligations of 17 Lessee which should have been satisfied pursuant to the Operative Agreements as of such date) have been satisfied, all amounts so held by Lessor shall be paid over to Lessee. (b) Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. (c) If Lessee shall receive notice of a Casualty or a Condemnation of a Property or any interest therein where damage to the affected Property is estimated to equal or exceed twenty-five percent (25%) of the Property Cost of such Property, Lessee shall give notice thereof to Lessor promptly after Lessee's receipt of such notice. In the event such a Casualty or Condemnation occurs (regardless of whether Lessee gives notice thereof), then Lessee shall be deemed to have delivered a Termination Notice to Lessor and the provisions of Sections 16.1 and 16.2 shall apply. (d) In the event of a Casualty or a Condemnation (regardless of whether notice thereof must be given pursuant to Section 15.1(c)), this Lease shall terminate with respect to the applicable Property in accordance with Section 16.1 if Lessee, within thirty (30) days after such occurrence, delivers to Lessor a notice to such effect. (e) If pursuant to this Section 15.1 this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the affected Property, Lessee shall, at its sole cost and expense (subject to reimbursement in accordance with Section 15.1(a)) promptly and diligently repair any damage to the applicable Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1, using the as-built Plans and Specifications or manufacturer's specifications for the applicable Improvements, Equipment or other components of the applicable Property (as modified to give effect to any subsequent Modifications, any Condemnation affecting the applicable Property and all applicable Legal Requirements), so as to restore the applicable Property to the same or a greater remaining economic value, useful life, utility, condition, operation and function as existed immediately prior to such Casualty or Condemnation (assuming all maintenance and repair standards have been satisfied). In such event, title to the applicable Property shall remain with Lessor. (f) In no event shall a Casualty or Condemnation affect Lessee's obligations to pay Rent pursuant to Article III. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term with respect to a Property a Casualty occurs with respect to such Property or Lessee receives notice of a Condemnation with respect to such Property, and following such Casualty or Condemnation, the applicable Property cannot 18 reasonably be restored, repaired or replaced on or before the day one hundred eighty (180) days prior to the Expiration Date or the date nine (9) months after the occurrence of such Casualty or Condemnation (if such Casualty or Condemnation o c curs during the Term) to the same or a greater remaining economic value, useful life, utility, condition, operation and function as existed immediately prior to such Casualty or Condemnation (assuming all maintenance and repair standards have been satisfied) or on or before such day such Property is not in fact so restored, repaired or replaced, then Lessee shall be required to exercise its Purchase Option for such Property on the next Payment Date (notwithstanding the limits on such exercise contained in Section 20.2) and pay Lessor the Termination Value for such Property; provided, if any Default or Event of Default has -------- occurred and is continuing, Lessee shall also promptly (and in any event within three (3) Business Days) pay Lessor any award, compensation or insurance proceeds received on account of any Casualty or Condemnation with respect to any Property; provided, further, that if no Default or Event of -------- ------- Default has occurred and is continuing, any Excess Proceeds shall be paid to Lessee. If a Default or an Event of Default has occurred and is continuing and any Loans, Holder Advances or other amounts are owing with respect thereto, then any Excess Proceeds (to the extent of any such Loans, Holder Advances or other amounts owing with respect thereto) shall be paid to Lessor, held as security for the performance of Lessee's obligations hereunder and under the other Operative Agreements and applied to such obligations upon the exercise of remedies in connection with the occurrence of an Event of Default, with the remainder of such Excess Proceeds in excess of such Loans, Holder Advances and other amounts owing with respect thereto being distributed to the Lessee. 15.2 ENVIRONMENTAL MATTERS. --------------------- Promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of any Property or Properties in concentrations and conditions that constitute an Environmental Violation and which, in the reasonable opinion of Lessee, the cost to undertake any legally required response, clean up, remedial or other action will or might result in a cost to Lessee of more than $15,000, Lessee shall notify Lessor in writing of such condition. In the event of any Environmental Violation (regardless of whether notice thereof must be given), Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor a Termination Notice with respect to the applicable Property or Properties pursuant to Section 16.1, if applicable, or, at Lessee's sole cost and expense, promptly and diligently undertake and diligently complete any response, clean up, remedial or other action (including without limitation the pursuit by Lessee of appropriate action against any off-site or third party source for contamination) necessary to remove, cleanup or remediate the Environmental Violation in accordance with all Environmental Laws. Any such undertaking shall be timely completed in accordance with prudent industry standards. If Lessee does not deliver a Termination Notice with respect to such Property pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause to be prepared by a reputable environmental consultant acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in full 19 compliance with applicable Environmental Law. Not less than sixty (60) days prior to any time that Lessee elects to cease operations with respect to any Property or to remarket any Property pursuant to Section 20.1 hereof or any other provision of any Operative Agreement, Lessee at its expense shall cause to be delivered to Lessor a Phase I environmental site assessment respecting such Property recently prepared (no more than thirty (30) days prior to the date of delivery) by an independent recognized professional reasonably acceptable to Lessor in its reasonable discretion and prepared in accordance with standard industry practice and satisfactory to Lessor in its reasonable discretion. Notwithstanding any other provision of any Operative Agreement, if Lessee fails to provide a Phase I environmental site assessment as set forth herein, Lessee shall be obligated to purchase such Property for its Termination Value and shall not be permitted to exercise (and Lessor shall have no obligation to honor any such exercise) any rights under any Operative Agreement regarding a sale of such Property to a Person other than Lessee or any Affiliate of Lessee. 15.3 NOTICE OF ENVIRONMENTAL MATTERS. ------------------------------- Promptly, but in any event within five (5) Business Days from the date Lessee has actual knowledge thereof, Lessee shall provide to Lessor written notice of any pending or threatened claim, action or proceeding involving any Environmental Law or any Release on or in connection with any Property or Properties. All such notices shall describe in reasonable detail the nature of the claim, action or proceeding and Lessee's proposed response thereto. In addition, Lessee shall provide to Lessor, within five (5) Business Days of receipt, copies of all material written communications with any Governmental Authority relating to any Environmental Law in connection with any Property. Lessee shall also promptly provide such detailed reports of any such material environmental claims as may reasonably be requested by Lessor. ARTICLE XVI 16.1 TERMINATION UPON CERTAIN EVENTS. ------------------------------- If Lessee has delivered, or is deemed to have delivered, written notice of a termination of this Lease with respect to the applicable Property to Lessor in the form described in Section 16.2(a) (a "Termination Notice") ------------------ pursuant to the provisions of this Lease, then following the applicable Casualty, Condemnation or Environmental Violation, this Lease shall terminate with respect to the affected Property on the applicable Termination Date. 16.2 PROCEDURES. ---------- (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the affected Property on a Payment Date not more than sixty (60) days after Lessor's receipt of such Termination Notice (the "Termination Date"); and (ii) a binding and ---------------- irrevocable agreement of Lessee to pay the Termination Value for the applicable Property and purchase such Property on such Termination Date. 20 (b) On each Termination Date, Lessee shall pay to Lessor the Termination Value for the applicable Property, and Lessor shall convey such Property or the remaining portion thereof, if any, to Lessee (or Lessee's designee), all in accordance with Section 20.2. ARTICLE XVII 17.1 LEASE EVENTS OF DEFAULT. ----------------------- If any one (1) or more of the following events (each a "Lease Event of Default") shall occur: ---------------------- (a) Lessee shall fail to make payment of (i) any Basic Rent (except as set forth in clause (ii)) within five (5) Business Days after the same has become due and payable or (ii) any Termination Value, on the date any such payment is due and payable, or any payment of Basic Rent or Supplemental Rent due on the due date of any such payment of Termination Value, or any amount due on the Expiration Date; (b) Lessee shall fail to make payment of any Supplemental Rent (other than Supplemental Rent referred to in Section 17.1(a)(ii)) or any other Credit Party shall fail to make any payment of any amount under any Operative Agreement which has become due and payable within five (5) Business Days after receipt of notice that such payment is due; (c) Lessee shall fail to maintain insurance as required by Article XIV of this Lease or to deliver any requisite annual certificate with respect thereto within ten (10) days of the date such certificate is due under the terms hereof; (d) (i) Lessee shall fail to observe or perform any term, covenant, obligation or condition of Lessee under this Lease (including without limitation the Incorporated Covenants (other than failure to comply with the second sentence of Section 8.19 of the Lessee Credit Agreement)) or any other Operative Agreement to which Lessee is a party other than those set forth in Sections 17.1(a), (b) or (c) hereof, or any other Credit Party shall fail to observe or perform any term, covenant, obligation or condition of such Credit Party under any Operative Agreement other than those set forth in Section 17.1(b) hereof and such failure shall continue for thirty (30) days (or with respect to the Incorporated Covenants, the grace period, if any, applicable thereto provided, that references to -------- Incorporated Covenants in this Section 17.1(d) shall not be deemed to apply to a failure to comply with the second sentence of Section 8.19 of the Lessee Credit Agreement) after notice thereof to the Lessee or such Credit Party, or (ii) any representation or warranty made by Lessee or any other Credit Party set forth in this Lease (including without limitation the Incorporated Representation and Warranties) or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any 21 document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way when made; (e) An Agency Agreement Event of Default shall have occurred and be continuing and shall not have been waived; (f) Any Credit Party or any Subsidiary of any Credit Party shall default (beyond applicable periods of grace and/or notice and cure) in the payment when due of any principal of or interest on any Debt having an outstanding principal amount of at least $15,000,000; or any other event or condition shall occur which enables the holder of any such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) become insolvent or be generally unable to or shall generally fail or admit in writing its inability to pay its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Bankruptcy Code (as now or hereafter in effect), (v) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors' rights generally, (vi) acquiesce in writing to, or fail to controvert in a timely or appropriate manner, any petition filed against it in an involuntary case under such Bankruptcy Code, (vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing, or (viii) take any corporate action in furtherance of any of the foregoing; or (h) A proceeding or case shall be commenced in respect of JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary, without its application or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of 45 days, or an order for relief shall be entered in an involuntary case under the Bankruptcy Code (as now or hereafter in effect) against JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary and shall continue undismissed, or unstayed and in effect, for a period of 45 days; (i) [INTENTIONALLY OMITTED]; (j) [INTENTIONALLY OMITTED]; (k) [INTENTIONALLY OMITTED]; 22 (l) Any Lessee Credit Agreement Event of Default shall have occurred and be continuing and shall not have been waived; (m) A final judgment or decree for the payment of money shall be rendered by a court of competent jurisdiction against JPFDI, U.S. Foodservice, Inc. or any Restricted Subsidiary which, either alone or together with other outstanding judgments or decrees against JPFDI, U.S. Foodservice, Inc. or any one or more Restricted Subsidiaries, shall aggregate more than $15,000,000, and JPFDI, U.S. Foodservice, Inc. or such Subsidiary, as the case may be, shall not discharge the same or provide for its discharge in accordance with its terms within 60 days from the date of entry thereof or within such longer period (including, without limitation, any period during which JPFDI, U.S. Foodservice, Inc. or such Subsidiary shall be contesting a denial of coverage of its liability in respect of such judgment by a reputable insurance carrier) during which execution of such judgment shall have been stayed; or (n) Any Credit Party or any member of the Controlled Group shall fail to pay when due any amount which it shall have become liable to pay to the PBGC or to a Pension Plan or Multiemployer Plan under Title IV of ERISA; (ii) any Credit Party or any member of the Controlled Group shall withdraw from a Multiple Employer Plan during a plan year in which it is a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or shall be treated as having so withdrawn under Section 4062(e) of ERISA, or any Multiple Employer Plan shall be terminated; (iii) notice of intent to terminate any Pension Plan or Multiemployer Plan shall be filed under Title IV of ERISA by any Credit Party or any member of the Controlled Group, any plan administrator or any combination of the foregoing; (iv) the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Pension Plan or Multiemployer Plan; (v) any Credit Party or any member of the Controlled Group shall withdraw from any Multiemployer Plan ; (vi) any Plan shall have an Unfunded Liability; or (vii) any prohibited transaction (as defined in Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which may subject any Credit Party or any member of the Controlled Group to any liability under Section 406, 409, 502(i) or 502(l) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which such Credit Party or any member of the Controlled Group has agreed or is required to indemnify any Person against any such liability; and there shall result from any such event or events referred to in the foregoing subdivisions (n)(i) through (n)(vii) a material risk of incurring a liability in excess of $5,000,000; or (o) A Change of Control shall occur; or (p) Any Operative Agreement shall cease to be in full force and effect; (q) Except as to any Credit Party which is released in connection with the Operative Agreements, the guaranty given by any Guarantor under the Participation 23 Agreement or any material provision thereof shall cease to be in full force and effect, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under such guaranty; then, in any such event, Lessor may, in addition to the other rights and remedies provided for in this Article XVII and in Section 18.1, terminate this Lease by giving Lessee five (5) days notice of such termination (provided, notwithstanding the foregoing, this Lease shall be deemed to be automatically terminated without the giving of notice upon the occurrence of a Lease Event of Default under Sections 17.1(g) or (h)) and this Lease shall terminate, and all rights of Lessee under this Lease shall cease. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor or any other Financing Party, including without limitation reasonable fees and expenses of counsel, as a result of any Lease Event of Default hereunder. A POWER OF SALE HAS BEEN GRANTED IN THIS LEASE. A POWER OF SALE MAY ALLOW LESSOR TO TAKE THE PROPERTIES AND SELL THE PROPERTIES WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON THE OCCURRENCE OF A LEASE EVENT OF DEFAULT. 17.2 SURRENDER OF POSSESSION. ----------------------- If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to Lessor possession of the Properties. Lessor may enter upon and repossess the Properties by such means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personalty and severable Modifications from the Properties. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. Upon the written demand of Lessor, Lessee shall return the Properties promptly to Lessor, in the manner and condition required by, and otherwise in accordance with the provisions of, Section 22.1(c) hereof. 17.3 RELETTING. --------- If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet any or all of the Properties, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may determine, and Lessor may collect, receive and retain the rents resulting from such reletting. Lessor shall not be liable to Lessee for any failure to relet any Property or for any failure to collect any rent due upon such reletting. 24 17.4 DAMAGES. ------- Neither (a) the termination of this Lease as to all or any of the Properties pursuant to Section 17.1; (b) the repossession of all or any of the Properties; nor (c) the failure of Lessor to relet all or any of the Properties, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any such reletting, shall relieve Lessee of its liabilities and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Rent and other sums due and payable hereunder to and including without limitation the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term hereof or what would have been the Term in the absence of such termination, Lessee shall pay Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by Lessee hereunder if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of any Property or any portion thereof; provided, that Lessee's obligation to make payments of Basic Rent and - -------- Supplemental Rent under this Section 17.4 shall continue only so long as Lessor shall not have received the amounts specified in Section 17.6. In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's, any Holder's, the Agent's and any Lender's reasonable expenses in connection therewith, including without limitation repossession costs, brokerage or sales commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.4, such amounts shall be regarded as amounts paid on account of Rent. Lessee specifically acknowledges and agrees that its obligations under this Section 17.4 shall be absolute and unconditional under any and all circumstances and shall be paid and/or performed, as the case may be, without notice or demand and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. 17.5 POWER OF SALE. ------------- Without limiting any other remedies set forth in this Lease, in the event that a court of competent jurisdiction rules that this Lease constitutes a mortgage, deed of trust or other secured financing as is the intent of the parties, then Lessor and Lessee agree that Lessee has granted, pursuant to Section 7.1(b) hereof and each Lease Supplement, a Lien against the Properties WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default, Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Properties. 25 17.6 FINAL LIQUIDATED DAMAGES. ------------------------ If a Lease Event of Default shall have occurred and be continuing, whether or not this Lease shall have been terminated pursuant to Section 17.1 and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.4, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 11 of the Participation Agreement (which, if requested, shall be paid concurrently), and in lieu of all current liquidated damages beyond the date of such demand (it being agreed that it would be impossible accurately to determine actual damages) the Termination Value. Upon payment of the amount specified pursuant to the first sentence of this Section 17.6, Lessee shall be entitled to receive from Lessor, either at Lessee's request or upon Lessor's election, in either case at Lessee's cost, an assignment of Lessor's entire right, title and interest in and to the Properties, Improvements, Fixtures, Modifications, Equipment and all components thereof, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of this Lease (including without limitation the release of any memoranda of Lease and/or the Lease Supplement recorded in connection therewith) and any Lessor Liens. The Properties shall be conveyed to Lessee "AS-IS, WHERE- IS" and in their then present physical condition. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; provided, however, Lessee shall not be entitled to -------- ------- receive an assignment of Lessor's interest in the Properties, the Improvements, Fixtures, Modifications, Equipment or the components thereof unless Lessee shall have paid in full the Termination Value. Lessee specifically acknowledges and agrees that its obligations under this Section 17.6 shall be absolute and unconditional under any and all circumstances and shall be paid and/or performed, as the case may be, without notice or demand and without any abatement, reduction, diminution, setoff, defense, counterclaim or recoupment whatsoever. 17.7 ENVIRONMENTAL COSTS. ------------------- If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall pay directly to any third party (or at Lessor's election, reimburse Lessor) for the cost of any environmental testing and/or remediation work undertaken respecting any Property, as such testing or work is deemed appropriate in the reasonable judgment of Lessor. Lessee shall pay all amounts referenced in the immediately preceding sentence within ten (10) days of any request by Lessor for such payment. The provisions of this Section 17.7 shall not limit the obligations of Lessee under any Operative Agreement regarding indemnification obligations, environmental testing, remediation and/or work. 17.8 WAIVER OF CERTAIN RIGHTS. ------------------------ If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by Law, (a) any notice of re- entry or the institution of legal proceedings to obtain re-entry or possession; (b) any right of redemption, re-entry or possession; (c) the 26 benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Article XVII. 17.9 ASSIGNMENT OF RIGHTS UNDER CONTRACTS. ------------------------------------ If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor, if permissible pursuant to the terms thereof, all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties (including without limitation all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the acquisition, installation, testing, use, development, construction, operation, maintenance, repair, refurbishment and restoration of the Properties or any of them. 17.10 REMEDIES CUMULATIVE. ------------------- The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise, including without limitation any mortgage foreclosure remedies. ARTICLE XVIII 18.1 LESSOR'S RIGHT TO CURE LESSEE'S LEASE DEFAULTS. ---------------------------------------------- Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including without limitation the failure by Lessee to maintain the insurance required by Article XIV, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any Property, and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of any lessee. All out-of- pocket costs and expenses so incurred (including without limitation reasonable fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand. 27 ARTICLE XIX 19.1 PROVISIONS RELATING TO LESSEE'S EXERCISE OF ITS PURCHASE OPTION. --------------------------------------------------------------- Subject to Section 19.2, in connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option, upon the date on which this Lease is to terminate with respect to any Property, and upon tender by Lessee of the amounts set forth in Sections 16.2(b) or 20.2, as applicable, Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense an assignment (by deed or other appropriate instrument) of Lessor's entire interest in such Property, in each case in recordable form and otherwise in conformity with local custom and free and clear of any Lessor Liens attributable to Lessor but without any other warranties (of title or otherwise) from Lessor. Such Property shall be conveyed to Lessee "AS-IS, "WHERE-IS" and in then present physical condition. 19.2 NO PURCHASE OR TERMINATION WITH RESPECT TO LESS THAN ALL OF A ------------------------------------------------------------- PROPERTY. - -------- Lessee shall not be entitled to exercise its Purchase Option or the Sale Option separately with respect to a portion of any Property consisting of Land, Equipment, Improvements and/or any interest pursuant to a Ground Lease but shall be required to exercise its Purchase Option or the Sale Option with respect to an entire Property. ARTICLE XX 20.1 PURCHASE OPTION, SALE OPTION, EXTENSION OPTION - GENERAL PROVISIONS. ------------------------------------------------------------------- Not less than one hundred eighty (180) days (or respecting the Purchase Option only, not less than sixty (60) days) and no more than two hundred forty (240) days prior to the Expiration Date or, respecting the Purchase Option only, any Payment Date (such Expiration Date or, respecting the Purchase Option only, any such Payment Date being hereinafter referred to as the "Election Date"), ------------- Lessee may give Lessor irrevocable written notice (the "Election Notice") that --------------- Lessee is electing to exercise (a) with respect to an Election Notice given in connection with any Payment Date prior to the Expiration Date only, the option to purchase one or more Properties; provided, Lessee may not make the election under this Section 20.1(a) unless (i) with respect to an election to purchase less than all the Properties, no Default or Event of Default shall have occurred and be continuing, either at the date any such election is made or at the applicable Election Date (other than those that will be cured by the payment of the Termination Value for all the Properties), (ii) the aggregate Property Cost of all remaining Properties after the purchase by Lessee on the applicable Election Date is equal to or exceeds $15,000,000, and (iii) except as otherwise agreed in writing by all of the Lenders and Holders, the Lessee provides one or more Appraisals indicating that the aggregate fair market value of all remaining Properties after the purchase by the Lessee on the applicable Election Date is at least four (4) times the sum of (A) the aggregate of all amounts outstanding under the Tranche B Notes and (B) the aggregate of all amounts outstanding under the Holder Certificates, in each 28 case after giving effect to the prepayment under such Tranche B Notes and Holder Certificates in connection with the purchase by Lessee on the applicable Election Date, (b) with respect to an Election Notice given in connection with the Expiration Date only, the option to purchase all, but not less than all, the Properties on the Expiration Date (the election or option to purchase one or more Properties, the "Purchase Option"), (c) with respect to an Election Notice given in connection with the Expiration Date only, the option to remarket all, but not less than all, the Properties to a Person other than Lessee or any Affiliate of Lessee and cause a sale of such Properties to occur on the Expiration Date pursuant to the terms of Section 22.1 (the "Sale Option") or (d) ----------- with respect to an Election Notice given in connection with the Expiration Date only, the option to renew the Term for all, but not less than all, the Properties for an additional period of one year pursuant to the terms of Section 2.2 (the "Extension Option"). If Lessee does not give an Election ---------------- an Notice indicating the Purchase Option, the Sale Option or the Extension Option within the allotted period of time prior to the Expiration Date specified above in this Section 20.1, or if the requirements set forth in Section 2.2 of this Lease are not fully satisfied regarding the Extension Option, then Lessee shall be deemed to have elected for the Purchase Option to apply on the Expiration Date. With respect to any such election by Lessee to exercise its Purchase Option for one or more Properties prior to the Expiration Date, Lessee shall pay to Lessor on the applicable Election Date an amount equal to the Termination Value for all Properties Lessee has designated for purchase in its election. Lessee may assign its rights and obligations under the Purchase Option with respect to any Property or Properties to a third party or parties; provided, that Lessee shall remain directly and primarily liable to perform ------- the Purchase Option pursuant to the terms of the Operative Agreements in the event any such assignee fails to do so. Notwithstanding the foregoing, with respect to the continuing obligations under the Operative Agreements (including without limitation indemnification obligations) pertaining to each Property purchased by Lessee or its designee or sold to any other Person, Lessee shall remain directly and primarily liable under the Lease and the other Operative Agreements. If Lessee shall either (i) elect (or be deemed to have elected) to exercise the Purchase Option on the Expiration Date or (ii) elect the Sale Option on the Expiration Date and fail to cause all, but not less than all, the Properties to be sold in accordance with the terms of Section 22.1, then on the Expiration Date Lessee shall pay to Lessor on the date on which such purchase or sale is scheduled to occur an amount equal to the Termination Value for all, but not less than all, the Properties. In connection with the matters set forth in each of the two preceding sentences, Lessee shall comply with the terms and provisions of Section 22.1(c) to the same extent as if Lessor had exercised its option to retain one (1) or more Properties pursuant to Section 22.1(a) and, upon receipt of such amounts and satisfaction of such obligations, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to all, but not less than all, the Properties in accordance with Section 20.2. 20.2 LESSEE PURCHASE OPTION. ---------------------- Provided, with respect to clause (y) below, no Default or Event of Default -------- shall have occurred and be continuing (other than those that will be cured by the payment of the Termination Value for all the Properties) and provided, that -------- the Election Notice has been appropriately given specifying the Purchase Option, Lessee shall purchase (x) (in the case of Lessee's election of the Purchase Option on a date prior to the Expiration Date) the Properties 29 designated for purchase in such election and (y) (in the case of Lessee's election of the Purchase Option on the Expiration Date) all the Properties on the Expiration Date at a price equal to the Termination Value for all the Properties to be purchased. Subject to Section 19.2, in connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option, upon the date on which this Lease is to terminate with respect to a Property or all of the Properties, and upon tender by Lessee of the amounts set forth in Section 16.2(b) or this Section 20.2, as applicable, Lessor shall execute, acknowledge (where required) and deliver to Lessee, at Lessee's cost and expense, each of the following: (a) a termination or assignment (as requested by the Lessee) of each applicable Ground Lease and special or limited warranty Deeds conveying each Property (to the extent it is real property not subject to a Ground Lease) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (b) a Bill of Sale conveying each Property (to the extent it is personal property) to Lessee free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (c) any real estate tax affidavit or other document required by law to be executed and filed in order to record the applicable Deed and/or the applicable Ground Lease termination; and (d) FIRPTA affidavits. All of the foregoing documentation must be in form and substance reasonably satisfactory to Lessor. The applicable Property shall be conveyed to Lessee "AS-IS, WHERE-IS" and in then present physical condition. If any Property is the subject of remediation efforts respecting Hazardous Substances at the applicable Election Date which could materially and adversely impact the Fair Market Sales Value of such Property (with materiality determined in Lessor's reasonable discretion), then Lessee shall be obligated to repurchase each such Property pursuant to Section 20.2. On the applicable Election Date on which Lessee has elected to exercise its Purchase Option, Lessee shall pay (or cause to be paid) to Lessor, the Agent and all other parties, as appropriate, the sum of all costs and expenses incurred by any such party in connection with the election by Lessee to exercise its Purchase Option and all Rent and all other amounts then due and payable or accrued under this Lease and/or any other Operative Agreement. 20.3 THIRD PARTY SALE OPTION. ----------------------- (a) Provided, that (i) no Default or Event of Default shall have -------- occurred and be continuing and (ii) the Election Notice has been appropriately given specifying the Sale Option, Lessee shall undertake to cause a sale of the Properties on the applicable Election Date (all as specified in the Election Notice), in accordance with the provisions of Section 22.1. Such Election Date on which a sale is required may be hereafter referred to as the "Sale Date." --------- (b) In the event Lessee exercises the Sale Option then, as soon as practicable and in all events not less than sixty (60) days prior to the Sale Date, Lessee at its expense shall cause to be delivered to Lessor a Phase I environmental site assessment for each of 30 the Properties recently prepared (no more than thirty (30) days old prior to the Sale Date) by an independent recognized professional reasonably acceptable to Lessor, prepared in accordance with standard industry practice and reasonably satisfactory to Lessor. In the event that Lessor shall not have received such environmental site assessment by the date sixty (60) days prior to the Sale Date or in the event that such environmental assessment shall reveal the existence of any material violation of Environmental Laws, other material Environmental Violation or potential material Environmental Violation (with materiality determined in each case by Lessor in its reasonable discretion), then Lessee on the Sale Date shall pay to Lessor an amount equal to the Termination Value for all the Properties and any and all other amounts due and owing hereunder. Upon receipt of such payment and all other amounts due under the Operative Agreements, Lessor shall transfer to Lessee all of Lessor's right, title and interest in and to all the Properties in accordance with Section 19.1. ARTICLE XXI 21.1 [INTENTIONALLY OMITTED]. ARTICLE XXII 22.1 SALE PROCEDURE. -------------- (a) During the Marketing Period, Lessee, on behalf of Lessor, shall obtain bids for the cash purchase of all the Properties in connection with a sale to one (1) or more third party purchasers to be consummated on the Sale Date for the highest price available, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for each such Property and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may reasonably request from time to time. All such prospective purchasers must be Persons other than Lessee or any Affiliate of Lessee. On the Sale Date, Lessee shall pay (or cause to be paid) to Lessor and all other parties, as appropriate, the sum of all costs and expenses incurred by Lessor and/or the Agent (as the case may be) in connection with such sale of one or more Properties, all Rent and all other amounts then due and payable or accrued under this Lease and/or any other Operative Agreement. Lessor may reject any and all bids and may solicit and obtain bids by giving Lessee written notice to that effect; provided, however, -------- ------- that notwithstanding the foregoing, Lessor may not reject the bids submitted by Lessee if such bids, in the aggregate, are greater than or equal to the sum of the Limited Recourse Amount for all the Properties, and represent bona fide offers from one (1) or more third party purchasers. If the highest price which a prospective purchaser or the prospective purchasers shall have offered to pay for all the Properties on the Sale Date is less than the sum of the 31 Limited Recourse Amount for all the Properties or if such bids do not represent bona fide offers from one (1) or more third parties or if there are no bids, Lessor may elect to retain one or more of the Properties by giving Lessee prior written notice of Lessor's election to retain the same, and promptly upon receipt of such notice, Lessee shall surrender, or cause to be surrendered, each of the Properties specified in such notice in accordance with the terms and conditions of Section 10.1. Upon acceptance of any bid, Lessor agrees, at Lessee's request and expense, to execute a contract of sale with respect to such sale, so long as the same is consistent with the terms of this Article 22 and provides by its terms that it is nonrecourse to Lessor. Unless Lessor shall have elected to retain one or more of the Properties pursuant to the provisions of the preceding paragraph, Lessee shall arrange for Lessor to sell all the Properties free and clear of the Lien of this Lease and any Lessor Liens attributable to Lessor, without recourse or warranty (of title or otherwise), for cash on the Sale Date to the purchaser or purchasers offering the highest cash sales price, as identified by Lessee or Lessor, as the case may be; provided, however, -------- ------- solely as to Lessor or the Trust Company, in its individual capacity, any Lessor Lien shall not constitute a Lessor Lien so long as Lessor or the Trust Company, in its individual capacity, is diligently and in good faith contesting, at the cost and expense of Lessor or the Trust Company, in its individual capacity, such Lessor Lien by appropriate proceedings in which event the applicable Sale Date, all without penalty or cost to Lessee, shall be delayed for the period of such contest; provided, further, that in -------- ------- no event shall such contest materially and adversely affect the rights of the Lessee hereunder and the other Operative Agreements or materially interfere with the disposition of the Properties as set forth herein. To effect such transfer and assignment, Lessor shall execute, acknowledge (where required) and deliver to the appropriate purchaser each of the following: (a) special or limited warranty Deeds conveying each such Property (to the extent it is real property titled to Lessor) and an assignment of the Ground Lease conveying the leasehold interest of Lessor in each such Property (to the extent it is real property and subject to a Ground Lease) to the appropriate purchaser free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (b) a Bill of Sale conveying each such Property (to the extent it is personal property) titled to Lessor to the appropriate purchaser free and clear of the Lien of this Lease, the Lien of the Credit Documents and any Lessor Liens; (c) any real estate tax affidavit or other document required by law to be executed and filed in order to record each Deed and/or each Ground Lease assignment; and (d) FIRPTA affidavits, as appropriate. All of the foregoing documentation must be in form and substance reasonably satisfactory to Lessor. Lessee shall surrender the Properties so sold or subject to such documents to each purchaser in the condition specified in Section 10.1, or in such other condition as may be agreed between Lessee and such purchaser. Lessee shall not take or fail to take any action which would have the effect of unreasonably discouraging bona fide third party bids for any Property. If each of the Properties is not either (i) sold on the Sale Date in accordance with the terms of this Section 22.1, or (ii) retained by Lessor pursuant to an affirmative election made by Lessor pursuant to the second sentence of the second paragraph of this Section 22.1(a), then (x) Lessee shall be obligated to pay Lessor on the Sale Date an amount equal to the aggregate Termination 32 Value for all the Properties less any sales proceeds received, and (y) Lessor shall transfer each applicable Property to Lessee in accordance with Section 20.2. (b) If the Properties are sold on a Sale Date to one (1) or more third party purchasers in accordance with the terms of Section 22.1(a) and the aggregate purchase price paid for all the Properties is less than the sum of the aggregate Property Cost for all the Properties (hereinafter such difference shall be referred to as the "Deficiency Balance"), then Lessee ------------------ hereby unconditionally promises to pay to Lessor on the Sale Date the lesser of (i) the Deficiency Balance, or (ii) the Maximum Residual Guarantee Amount for all the Properties. On a Sale Date if (x) Lessor receives the aggregate Termination Value for all the Properties from one (1) or more third party purchasers, (y) Lessor and such other parties receive all other amounts specified in the last sentence of the first paragraph of Section 22.1(a) and (z) the aggregate purchase price paid for all the Properties on such date exceeds the sum of the aggregate Property Cost for all the Properties, then Lessee may retain such excess. If one or more of the Properties are retained by Lessor pursuant to an affirmative election made by Lessor pursuant to the provisions of Section 22.1(a), then Lessee hereby unconditionally promises to pay to Lessor on the Sale Date an amount equal to the Maximum Residual Guarantee Amount for the Properties so retained. Any payment of the foregoing amounts described in this Section 22.1(b) shall be made together with a payment of all other amounts referenced in the last sentence of the first paragraph of Section 22.1(a). (c) In the event that all the Properties are either sold to one (1) or more third party purchasers on the Sale Date or retained by Lessor in connection with an affirmative election made by Lessor pursuant to the provisions of Section 22.1(a), then in either case on the applicable Sale Date Lessee shall provide Lessor or such third party purchaser (unless otherwise agreed by such third party purchaser) with (i) all permits, certificates of occupancy, governmental licenses and authorizations necessary to use, operate, repair, access and maintain each such Property for the purpose it is being used by Lessee, and (ii) such manuals, permits, easements, licenses, intellectual property, know-how, rights-of-way and other rights and privileges in the nature of an easement as are reasonably necessary or desirable in connection with the use, operation, repair, access to or maintenance of each such Property for its intended purpose or otherwise as Lessor or such third party purchaser(s) shall reasonably request (and a royalty-free license or similar agreement to effectuate the foregoing on terms reasonably agreeable to Lessor or such third party purchaser(s), as applicable). All assignments, licenses, easements, agreements and other deliveries required by clauses (i) and (ii) of this paragraph (c) shall be in form reasonably satisfactory to Lessor or such third party purchaser(s), as applicable, and shall be fully assignable (including without limitation both primary assignments and assignments given in the nature of security) without payment of any fee, cost or other charge. Lessee shall also execute any documentation requested by Lessor or such third party purchaser(s), as applicable, evidencing the continuation or assignment of each Ground Lease. 33 22.2 APPLICATION OF PROCEEDS OF SALE. ------------------------------- Lessor shall apply the proceeds of sale of any Property in the following order of priority: (a) FIRST, to pay or to reimburse Lessor (and/or the Agent, as ----- the case may be) for the payment of all reasonable costs and expenses incurred by Lessor (and/or the Agent, as the case may be) in connection with the sale (to the extent Lessee has not satisfied its obligation to pay such costs and expenses); (b) SECOND, so long as the Credit Agreement is in effect and any ------ Loans or Holder Advances or any amount is owing to the Financing Parties under any Operative Agreement, to the Agent to be applied pursuant to intercreditor provisions among Lessor, the Lenders and the Holders contained in the Operative Agreements; and (c) THIRD, to Lessee. ----- 22.3 INDEMNITY FOR EXCESSIVE WEAR. ---------------------------- If the proceeds of the sale described in Section 22.1 with respect to the Properties shall be less than the Limited Recourse Amount with respect to the Properties, and at the time of such sale it shall have been reasonably determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the Properties shall have been impaired by greater than expected wear and tear during the term of the Lease, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure or (ii) the amount of the Sale Proceeds Shortfall, whichever amount is less. 22.4 APPRAISAL PROCEDURE. ------------------- For determining the Fair Market Sales Value of the Properties or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor and Lessee shall ------------------- endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure under the applicable section of the Lease, and if they cannot agree within ten (10) days, then two (2) qualified appraisers, one (1) chosen by Lessee and one (1) chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two (2) appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two (2) appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three (3) appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two (2) shall be discarded and such average shall be binding on Lessor and Lessee; provided, that if the -------- 34 highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of the appraiser appointed by Lessee shall be paid by Lessee; the fees and expenses of the appraiser appointed by Lessor shall be paid by Lessor (such fees and expenses not being indemnified pursuant to Section 13 of the Participation Agreement); and the fees and expenses of the third appraiser shall be divided equally between Lessee and Lessor. 22.5 CERTAIN OBLIGATIONS CONTINUE. ---------------------------- During the Marketing Period, the obligation of Lessee to pay Rent with respect to the Properties (including without limitation the installment of Basic Rent due on the Sale Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, if any, the Maximum Residual Guarantee Amount, the amount due under Section 22.3, if any, and all other amounts due to Lessor or any other Person with respect to all Properties or any Operative Agreement. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Article XXII. ARTICLE XXIII 23.1 HOLDING OVER. ------------ If Lessee shall for any reason remain in possession of a Property after the expiration or earlier termination of this Lease as to such Property (unless such Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to such Property and Lessee shall continue to pay Basic Rent at the lesser of the highest lawful rate and one hundred ten percent (110%) of the last payment of Basic Rent due with respect to such Property prior to such expiration or earlier termination of this Lease. Such Basic Rent shall be payable from time to time upon demand by Lessor and such additional amount of Basic Rent shall be applied by Lessor ratably to the Lenders and the Holders based on their relative amounts of the then outstanding aggregate Property Cost for all Properties. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenants at sufferance, to continue their occupancy and use of such Property. Nothing contained in this Article XXIII shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any Property (unless such Property is conveyed to Lessee) and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of such Property or exercising any other remedy available to Lessor at law or in equity. 35 ARTICLE XXIV 24.1 RISK OF LOSS. ------------ During the Term, unless Lessee shall not be in actual possession of any Property in question solely by reason of Lessor's exercise of its remedies of dispossession under Article XVII, the risk of loss or decrease in the enjoyment and beneficial use of such Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor. ARTICLE XXV 25.1 ASSIGNMENT. ---------- (a) Lessee may not assign this Lease or any of its rights or obligations hereunder or with respect to any Property in whole or in part to any Person without the prior written consent of the Agent, the Lenders, the Holders and Lessor. (b) No assignment by Lessee (referenced in this Section 25.1 or otherwise) or other relinquishment of possession to any Property shall in any way discharge or diminish any of the obligations of Lessee to Lessor hereunder and Lessee shall remain directly and primarily liable under the Operative Agreements as to any rights or obligations assigned by Lessee or regarding any Property in which rights or obligations have been assigned or otherwise transferred. 25.2 SUBLEASES. --------- (a) Promptly, but in any event within five (5) Business Days, following the execution and delivery of any sublease permitted by this Article XXV, Lessee shall notify Lessor of the execution of such sublease. As of the date of each Lease Supplement, Lessee shall lease the respective Properties described in such Lease Supplement from Lessor, and any existing tenant respecting such Property shall automatically be deemed to be a subtenant of Lessee and not a tenant of Lessor. (b) Without the prior written consent of the Agent, any Lender, any Holder or Lessor and subject to the other provisions of this Section 25.2, Lessee may sublet any Property or portion thereof to any wholly-owned Subsidiary of Lessee. Except as referenced in the immediately preceding sentence, no other subleases shall be permitted unless consented to in writing by Lessor. All subleasing shall be done on market terms and shall in no way diminish the fair market value or useful life of any applicable Property. 36 (c) No sublease (referenced in this Section 25.2 or otherwise) or other relinquishment of possession to any Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to such Property, or portion thereof, so sublet. The term of any such sublease shall not extend beyond the Term. Each sublease shall be expressly subject and subordinate to this Lease. ARTICLE XXVI 26.1 NO WAIVER. --------- No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. ARTICLE XXVII 27.1 ACCEPTANCE OF SURRENDER. ----------------------- No surrender to Lessor of this Lease or of all or any portion of any Property or of any part of any thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. 27.2 NO MERGER OF TITLE. ------------------ There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) any right, title or interest in any Property, (c) any Notes, or (d) a beneficial interest in Lessor. ARTICLE XXVIII 28.1 INCORPORATION OF COVENANTS. -------------------------- Reference is made to the Lessee Credit Agreement and the representations and warranties of Lessee contained in Article IX of the Lessee Credit Agreement (hereinafter referred 37 to as the "Incorporated Representations and Warranties")and the covenants ------------------------------------------- contained in Article VIII the Lessee Credit Agreement (hereinafter referred to as the "Incorporated Covenants"). Lessee agrees with Lessor that the ------------------------ Incorporated Representations and Warranties and the Incorporated Covenants (and all other relevant provisions of the Lessee Credit Agreement related thereto, including without limitation the defined terms contained in Article I thereof which are used in the Incorporated Representations and Warranties and the Incorporated Covenants, hereinafter referred to as the "Additional Incorporated ----------------------- Terms") are hereby incorporated are hereby incorporated by reference into this - ----- Lease to the same extent and with the same effect as if set forth fully herein and shall inure to the benefit of Lessor, without giving effect to any waiver, amendment, modification or replacement of the Lessee Credit Agreement or any term or provision of the Incorporated Representations and Warranties or the Incorporated Covenants occurring subsequent to the date of this Lease, except to the extent otherwise specifically provided in the following provisions of this paragraph. In the event a waiver is granted under the Lessee Credit Agreement or an amendment or modification is executed with respect to the Lessee Credit Agreement, and such waiver, amendment and/or modification affects the Incorporated Representations and Warranties, the Incorporated Covenants or the Additional Incorporated Terms, then such waiver, amendment or modification shall be effective with respect to the Incorporated Representations and Warranties, the Incorporated Covenants and the Additional Incorporated Terms as incorporated by reference into this Lease only if consented to in writing by the Agent (acting upon the direction of the Majority Secured Parties). In the event of any replacement of the Lessee Credit Agreement with a similar credit facility (the "New Facility"), the representations and warranties, covenants and additional ------------ terms contained in the New Facility which correspond to the representations and warranties, covenants contained in Article I and Article VIII, respectively, and such additional terms (each of the foregoing contained in the Lessee Credit Agreement) shall become the Incorporated Representations and Warranties, the Incorporated Covenants and the Additional Incorporated Terms only if consented to in writing by the Agent (acting upon the direction of the Majority Secured Parties) and, if such consent is not granted or if the Lessee Credit Agreement is terminated and not replaced, then the representations and warranties and covenants contained in Article I and Article VIII, respectively, and such additional terms (each of the foregoing contained in the Lessee Credit Agreement (together with any modifications or amendments approved in accordance with this paragraph)) shall continue to be the Incorporated Representations and Warranties, the Incorporated Covenants and the Additional Incorporated Terms hereunder. ARTICLE XXIX 29.1 NOTICES. ------- All notices required or permitted to be given under this Lease shall be in writing and delivered as provided in the Participation Agreement. 38 ARTICLE XXX 30.1 MISCELLANEOUS. ------------- Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any provision of this Lease shall be held to be unenforceable in any jurisdiction, such unenforceability shall not affect the enforceability of any other provision of this Lease and such jurisdiction or of such provision or of any other provision hereof in any other jurisdiction. 30.2 AMENDMENTS AND MODIFICATIONS. ---------------------------- Neither this Lease nor any Lease Supplement may be amended, waived, discharged or terminated except in accordance with the provisions of Section 12.4 of the Participation Agreement. 30.3 SUCCESSORS AND ASSIGNS. ---------------------- All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 30.4 HEADINGS AND TABLE OF CONTENTS. ------------------------------ The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 30.5 COUNTERPARTS. ------------ This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one (1) and the same instrument. 30.6 GOVERNING LAW. ------------- THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, EXCEPT TO THE EXTENT THE LAWS OF THE STATE WHERE A PARTICULAR PROPERTY IS LOCATED ARE REQUIRED TO APPLY. 30.7 CALCULATION OF RENT. ------------------- All calculation of Rent payable hereunder shall be computed based on the actual number of days elapsed over a year of three hundred sixty (360) days or, to the extent such Rent is based on the Prime Lending Rate, three hundred sixty-five (365) (or three hundred sixty-six (366), as applicable) days. 39 30.8 MEMORANDA OF LEASE AND LEASE SUPPLEMENTS. ---------------------------------------- This Lease shall not be recorded; provided, Lessor and Lessee -------- shall to the extent required and in accordance with Section 8.9 of the Participation Agreement, promptly record a memorandum of this Lease and the applicable Lease Supplement (in substantially the form of EXHIBIT B ATTACHED --------- HERETO) OR A SHORT FORM LEASE (IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO LESSOR) REGARDING EACH PROPERTY IN THE LOCAL FILING OFFICE WITH RESPECT THERETO, IN ALL CASES AT LESSEE'S COST AND EXPENSE. 30.9 ALLOCATIONS BETWEEN THE LENDERS AND THE HOLDERS. ----------------------------------------------- Notwithstanding any other term or provision of this Lease to the contrary, the allocations of the proceeds of the Properties and any and all other Rent and other amounts received hereunder shall be subject to the inter- creditor provisions between the Lenders and the Holders contained in the Operative Agreements (or as otherwise agreed among the Lenders and the Holders from time to time). 30.10 LIMITATIONS ON RECOURSE. ----------------------- Notwithstanding anything contained in this Lease to the contrary, Lessee agrees to look solely to Lessor's estate and interest in the Properties (and in no circumstance to the Agent, the Lenders, the Holders or otherwise to Lessor) for the collection of any judgment requiring the payment of money by Lessor in the event of liability by Lessor, and no other property or assets of Lessor or any shareholder, owner or partner (direct or indirect) in or of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of the foregoing shall be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Lessee under or with respect to this Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the Properties or any other liability of Lessor to Lessee. Nothing in this Section shall be interpreted so as to limit the terms of Sections 6.1 or 6.2 or the provisions of Section 12.9 of the Participation Agreement. 30.11 WAIVERS OF JURY TRIAL. --------------------- EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY, TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LEASE AND FOR ANY COUNTERCLAIM THEREIN. 30.12 EXERCISE OF LESSOR RIGHTS. ------------------------- Lessee hereby acknowledges and agrees that the rights and powers of Lessor under this Lease have been assigned to the Agent pursuant to the terms of the Security Agreement and the other Operative Agreements. Lessor and Lessee hereby acknowledge and agree that (a) the Agent shall, in its discretion, direct and/or act on behalf of Lessor pursuant to 40 the provisions of Sections 8.2(h) and 8.6 of the Participation Agreement, (b) all notices to be given to Lessor shall be given to the Agent and (c) all notices to be given by Lessor may be given by the Agent, at its election. 30.13 SUBMISSION TO JURISDICTION; VENUE; ARBITRATION. ---------------------------------------------- THE PROVISIONS OF THE PARTICIPATION AGREEMENT RELATING TO SUBMISSION TO JURISDICTION, VENUE AND ARBITRATION ARE HEREBY INCORPORATED BY REFERENCE HEREIN, MUTATIS MUTANDIS. ------- -------- 30.14 USURY SAVINGS PROVISION. ----------------------- IT IS THE INTENT OF THE PARTIES HERETO TO CONFORM TO AND CONTRACT IN STRICT COMPLIANCE WITH APPLICABLE USURY LAW FROM TIME TO TIME IN EFFECT. TO THE EXTENT ANY RENT OR PAYMENTS HEREUNDER ARE HEREINAFTER CHARACTERIZED BY ANY COURT OF COMPETENT JURISDICTION AS THE REPAYMENT OF PRINCIPAL AND INTEREST THEREON, THIS SECTION 30.14 SHALL APPLY. ANY SUCH RENT OR PAYMENTS SO CHARACTERIZED AS INTEREST MAY BE REFERRED TO HEREIN AS "INTEREST." ALL AGREEMENTS AMONG THE PARTIES HERETO ARE HEREBY LIMITED BY THE PROVISIONS OF THIS PARAGRAPH WHICH SHALL OVERRIDE AND CONTROL ALL SUCH AGREEMENTS, WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER WRITTEN OR ORAL. IN NO WAY, NOR IN ANY EVENT OR CONTINGENCY (INCLUDING WITHOUT LIMITATION PREPAYMENT OR ACCELERATION OF THE MATURITY OF ANY OBLIGATION), SHALL ANY INTEREST TAKEN, RESERVED, CONTRACTED FOR, CHARGED, OR RECEIVED UNDER THIS LEASE OR OTHERWISE, EXCEED THE MAXIMUM NONUSURIOUS AMOUNT PERMISSIBLE UNDER APPLICABLE LAW. IF, FROM ANY POSSIBLE CONSTRUCTION OF ANY OF THE OPERATIVE AGREEMENTS OR ANY OTHER DOCUMENT OR AGREEMENT, INTEREST WOULD OTHERWISE BE PAYABLE IN EXCESS OF THE MAXIMUM NONUSURIOUS AMOUNT, ANY SUCH CONSTRUCTION SHALL BE SUBJECT TO THE PROVISIONS OF THIS PARAGRAPH AND SUCH AMOUNTS UNDER SUCH DOCUMENTS OR AGREEMENTS SHALL BE AUTOMATICALLY REDUCED TO THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED UNDER APPLICABLE LAW, WITHOUT THE NECESSITY OF EXECUTION OF ANY AMENDMENT OR NEW DOCUMENT OR AGREEMENT. IF LESSOR SHALL EVER RECEIVE ANYTHING OF VALUE WHICH IS CHARACTERIZED AS INTEREST WITH RESPECT TO THE OBLIGATIONS OWED HEREUNDER OR UNDER APPLICABLE LAW AND WHICH WOULD, APART FROM THIS PROVISION, BE IN EXCESS OF THE MAXIMUM LAWFUL AMOUNT, AN AMOUNT EQUAL TO THE AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE INTEREST SHALL, WITHOUT PENALTY, BE APPLIED TO THE REDUCTION OF THE COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL AND NOT TO THE PAYMENT OF INTEREST, OR 41 REFUNDED TO LESSEE OR ANY OTHER PAYOR THEREOF, IF AND TO THE EXTENT SUCH AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE EXCEEDS THE COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL. THE RIGHT TO DEMAND PAYMENT OF ANY AMOUNTS EVIDENCED BY ANY OF THE OPERATIVE AGREEMENTS DOES NOT INCLUDE THE RIGHT TO RECEIVE ANY INTEREST WHICH HAS NOT OTHERWISE ACCRUED ON THE DATE OF SUCH DEMAND, AND LESSOR DOES NOT INTEND TO CHARGE OR RECEIVE ANY UNEARNED INTEREST IN THE EVENT OF SUCH DEMAND. ALL INTEREST PAID OR AGREED TO BE PAID TO LESSOR SHALL, TO THE EXTENT PERMITTED BY APPLICABLE LAW, BE AMORTIZED, PRORATED, ALLOCATED, AND SPREAD THROUGHOUT THE FULL STATED TERM (INCLUDING WITHOUT LIMITATION ANY RENEWAL OR EXTENSION) OF THIS LEASE SO THAT THE AMOUNT OF INTEREST ON ACCOUNT OF SUCH PAYMENTS DOES NOT EXCEED THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED BY APPLICABLE LAW. [signature pages follow] 42 IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as Lessor By: /s/ C. Scott Nielsen ---------------------------------- Name: C. Scott Nielsen -------------------------------- Title: Vice President ------------------------------- JP FOODSERVICE DISTRIBUTORS, INC., as Lessee By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof FIRST UNION NATIONAL BANK, as the Agent By: ---------------------------- Name: --------------------------- Title: -------------------------- IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as Lessor By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- JP FOODSERVICE DISTRIBUTORS, INC., as Lessee By: /s/ David M. Abramson ---------------------------------- Name: David M. Abramson -------------------------------- Title: Vice President & Secretary ------------------------------- Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof FIRST UNION NATIONAL BANK, as the Agent By: ---------------------------- Name: --------------------------- Title: -------------------------- IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed and delivered as of the date first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as Lessor By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- JP FOODSERVICE DISTRIBUTORS, INC., as Lessee By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Receipt of this original counterpart of the foregoing Lease is hereby acknowledged as the date hereof FIRST UNION NATIONAL BANK, as the Agent By: /s/ Lucy C. Campbell ---------------------------- Name: Lucy C. Campbell --------------------------- Title: Vice President -------------------------- EXHIBIT A TO THE LEASE ---------------------- LEASE SUPPLEMENT NO. ___ THIS LEASE SUPPLEMENT NO. ___ (this "Lease Supplement") dated as of ---------------- [________________] between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as lessor (the "Lessor"), and JP FOODSERVICE ------ DISTRIBUTORS, INC., a Delaware corporation, as lessee (the "Lessee"). ------ WHEREAS, Lessor is the owner or will be the owner of the Property described on Schedule 1 hereto (the "Leased Property") and wishes to lease the same to ---------- --------------- Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS; RULES OF USAGE. For purposes of this Lease Supplement, capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in Appendix A to the Participation Agreement, ---------- dated as of __________, 1998, among Lessee, Lessor, not individually, except as expressly stated therein, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, the various banks and other lending institutions which are parties thereto from time to time, as the Holders, the various banks and other lending institutions which are parties thereto from time to time, as the Lenders, and First Union National Bank, as the Agent for the Lenders and respecting the Security Documents, as the Agent for the Lenders and Holders, to the extent of their interests, as such may be amended, modified, extended, supplemented, restated and/or replaced from time to time. SECTION 2. THE PROPERTIES. Attached hereto as Schedule 1 is the ---------- description of the Leased Property, with an Equipment Schedule attached hereto as Schedule 1-A, an Improvement Schedule attached hereto as Schedule 1-B and [A ------------ ------------ LEGAL DESCRIPTION OF THE LAND / A COPY OF THE GROUND LEASE] attached hereto as Schedule 1-C. Effective upon the execution and delivery of this Lease - ------------ Supplement by Lessor and Lessee, the Leased Property shall be subject to the terms and provisions of the Lease. Without further action, any and all additional Equipment funded under the Operative Agreements and any and all additional Improvements made to the Land shall be deemed to be titled to the Lessor and subject to the terms and conditions of the Lease and this Lease Supplement. SECTION 3. USE OF PROPERTY. At all times during the Term with respect to each Property, Lessee will comply with all obligations under and (to the extent no Event of Default exists and provided, that such exercise will not impair the -------- value of such Property) shall be permitted to exercise all rights and remedies under, all operation and easement agreements and related or similar agreements applicable to such Property. A-1 SECTION 4. RATIFICATION; INCORPORATION BY REFERENCE. Except as specifically modified hereby, the terms and provisions of the Lease and the Operative Agreements are hereby ratified and confirmed and remain in full force and effect. The Lease is hereby incorporated herein by reference as though restated herein in its entirety. SECTION 5. ORIGINAL LEASE SUPPLEMENT. The single executed original of this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the original executed counterpart of this Lease Supplement (the "Original Executed ----------------- Counterpart"). To the extent that this Lease Supplement constitutes chattel - ----------- paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. SECTION 6. GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED TO AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF NORTH CAROLINA, EXCEPT TO THE EXTENT THE LAWS OF THE STATE WHERE A PARTICULAR PROPERTY IS LOCATED ARE REQUIRED TO APPLY. SECTION 7. MORTGAGE; POWER OF SALE. Without limiting any other remedies set forth in the Lease, in the event that a court of competent jurisdiction rules that the Lease constitutes a mortgage, deed of trust or other secured financing, then Lessor and Lessee agree that Lessee hereby grants a Lien against the Leased Property WITH POWER OF SALE, and that, upon the occurrence of any Lease Event of Default, Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Leased Property. SECTION 8. COUNTERPART EXECUTION. This Lease Supplement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one (1) and the same instrument. [The remainder of this page has been intentionally left blank.] A-2 IN WITNESS WHEREOF, each of the parties hereto has caused this Lease Supplement to be duly executed by an officer thereunto duly authorized as of the date and year first above written. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, as Lessor By: --------------------------- Name: ------------------------- Title: ------------------------ JP FOODSERVICE DISTRIBUTORS, INC., as Lessee By: --------------------------- Name: ------------------------- Title: ------------------------ Receipt of this original counterpart of the foregoing Lease Supplement is hereby acknowledged as the date hereof. FIRST UNION NATIONAL BANK, as the Agent By: --------------------------- Name: ------------------------- Title: ------------------------ A-3 [CONFORM TO STATE LAW REQUIREMENTS] STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ____________, by ________________, as __________________ of FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, on behalf of the Owner Trustee. [Notarial Seal] ----------------------------- Notary Public My commission expires:____________ STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ______________, by ________________, as __________________ of JP FOODSERVICE DISTRIBUTORS, INC., a DELAWARE corporation, on behalf of the corporation. [Notarial Seal] ----------------------------- Notary Public My commission expires:____________ STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Lease Supplement was acknowledged before me, the undersigned Notary Public, in the County of ________________ this ____ day of ___________, by _____________, as __________________ of FIRST UNION NATIONAL BANK, a national banking association, as the Agent. [Notarial Seal] ----------------------------- Notary Public My commission expires:____________ A-4 SCHEDULE 1 TO LEASE SUPPLEMENT NO. ____ (Description of the Leased Property) A-5 SCHEDULE 1-A TO LEASE SUPPLEMENT NO. ____ (Equipment) A-6 SCHEDULE 1-B TO LEASE SUPPLEMENT NO. ____ (Improvements) A-7 SCHEDULE 1-C TO LEASE SUPPLEMENT NO. ____ [(LAND)/ (GROUND LEASE)] A-8 EXHIBIT B TO THE LEASE ---------------------- [MODIFY OR SUBSTITUTE SHORT FORM LEASE AS NECESSARY FOR LOCAL LAW REQUIREMENTS] Recordation requested by: Moore & Van Allen, PLLC After recordation return to: Moore & Van Allen, PLLC (LSJ) 100 North Tryon Street, Floor 47 Charlotte, NC 28202-4003 Space above this line for Recorder's use - ------------------------------------------------------------------------------- MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. ____ THIS MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO. ____ ("Memorandum"), dated as of _____________, 1998, is by and between FIRST - ------------ SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, with an office at 79 South Main Street, Salt Lake City, Utah 84111 (hereinafter referred to as "Lessor"), and JP FOODSERVICE DISTRIBUTORS, INC., a ------ Delaware corporation, with an office at 9830 Patuxent Woods Drive, Columbia, Maryland (hereinafter referred to as "Lessee"). ------ WITNESSETH: That for value received, Lessor and Lessee do hereby covenant, promise and agree as follows: 1. DEMISED PREMISES AND DATE OF LEASE. Lessor has leased to Lessee, ---------------------------------- and Lessee has leased from Lessor, for the Term (as hereinafter defined), certain real property and other property located in ________________, which is described in the attached Schedule 1 (the "Property"), pursuant to the terms of ---------- -------- a Lease Agreement between Lessor and Lessee dated as of __________, 1998 (as such may be amended, modified, extended, supplemented, restated and/or B-1 replaced from time to time, "Lease") and a Lease Supplement No. ___ between Lessor and-----Lessee dated as of ______________ (the "Lease Supplement"). ---------------- 2. TERM, RENEWAL, EXTENSION AND PURCHASE OPTION. The term of the -------------------------------------------- Lease for the Property ("Term") commenced as of __________, 1998 and shall end ---- as of ___________, unless the Term is extended or earlier terminated in accordance with the provisions of the Lease. The Lease contains provisions for renewal and extension. The tenant has a purchase option under the Lease. 3. TAX PAYER NUMBERS. ----------------- Lessor's tax payer number: ------------------. Lessee's tax payer number: ------------------. 4. MORTGAGE; POWER OF SALE. Without limiting any other remedies set ----------------------- forth in the Lease, in the event that a court of competent jurisdiction rules that the Lease constitutes a mortgage, deed of trust or other secured financing, then Lessor and Lessee agree that Lessee has granted, pursuant to the terms of the Lease and the Lease Supplement, a Lien against the Property WITH POWER OF SALE, and that, upon the occurrence and during the continuance of any Lease Event of Default, Lessor shall have the power and authority, to the extent provided by law, after prior notice and lapse of such time as may be required by law, to foreclose its interest (or cause such interest to be foreclosed) in all or any part of the Property. 5. EFFECT OF MEMORANDUM. The purpose of this instrument is to give -------------------- notice of the Lease and the Lease Supplement and their respective terms, covenants and conditions to the same extent as if the Lease and the Lease Supplement were fully set forth herein. This Memorandum shall not modify in any manner the terms, conditions or intent of the Lease or the Lease Supplement and the parties agree that this Memorandum is not intended nor shall it be used to interpret the Lease or the Lease Supplement or determine the intent of the parties under the Lease or the Lease Supplement. [The remainder of this page has been intentionally left blank.] B-2 IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first written. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1 By: ------------------------------ Name: ---------------------------- Title: --------------------------- LESSEE: JP FOODSERVICE DISTRIBUTORS, INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- B-3 SCHEDULE 1 ---------- (Description of Property) B-4 [CONFORM TO STATE LAW REQUIREMENTS] STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Memorandum of Lease Agreement and Lease Supplement No. ____ was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ______________, by ________________, as __________________ of FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not individually, but solely as the Owner Trustee under the USF Real Estate Trust 1998-1, on behalf of the Owner Trustee. [Notarial Seal] ----------------------------------- Notary Public My commission expires:____________ STATE OF _______________ ) ) ss: COUNTY OF ______________ ) The foregoing Memorandum of Lease Agreement and Lease Supplement No. ____ was acknowledged before me, the undersigned Notary Public, in the County of _________________ this _____ day of ______________, by ________________, as __________________ of JP FOODSERVICE DISTRIBUTORS, INC., a Delaware corporation, on behalf of the corporation. [Notarial Seal] ---------------------------------- Notary Public My commission expires:____________ B-5 EX-21 9 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT ---------------------------------- (Direct and Indirect)
Name of Subsidiary Jurisdiction of Incorporation ------------------ ----------------------------- U.S. Foodservice, Inc. Delaware JP Foodservice Distributors, Inc. Delaware JPFD Funding Company Delaware Illinois Fruit & Produce Corp. Illinois Westlund Provisions, Inc. Minnesota Squeri Cash & Carry, Inc. Ohio Squeri Food Service, Inc. Ohio E&H Distributing Co. Nevada Nevada Baking Company, Inc. Nevada Harrison's Prime Meats & Provisions, Inc. Nevada Outwest Meat Company Nevada Sorrento Food Service, Inc. New York RS Funding, Inc. Nevada Targeted Specialty Services, Inc. Delaware BRB Holdings, Inc. Delaware White Swan, Inc. Delaware U.S. Systems Distribution, Inc. Texas Biggers Brothers, Inc. Delaware King's Foodservice, Inc. Kentucky U.S. Foodservice of Atlanta, Inc. Delaware Roanoke Restaurant Service, Inc. Virginia F.H. Bevevino & Company, Inc. Pennsylvania John Sexton & Co. Delaware U.S. Foodservice of Illinois, Inc. Delaware Duke Associates (Partnership) (1)
________________________ (1) 97% owned by John Sexton & Co.; 3% owned by U.S. Foodservice, Inc. EX-23.1 10 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33-81011, 333-37359, 333-43185, and 333-47759) and Form S-3 (No. 333-59785) of JP Foodservice, Inc. of our report dated August 2, 1996, except as to Note 16, which is as of September 10, 1996 and except as to the pooling of interests with Valley Industries, Inc. and with Squeri Food Service, Inc., which is as of November 14, 1996, which appears on page F-5 of U.S. Foodservice (formerly JP Foodservice, Inc.) on Form 10-K for the year ended June 27, 1998. PRICEWATERHOUSECOOPERS LLP Linthicum, Maryland September 21, 1998 EX-23.2 11 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors U.S. Foodservice: We hereby consent to the incorporation by reference in the registration statements on Form S-3 (333-597850) and Form S-8 (Nos. 33-88140, 33-88142, 33- 88144, 33-88146, 33-81011, 333-37359, 333-43185 and 333-47759) of U.S. Foodservice of our report, dated August 14, 1998, with respect to the consolidated balance sheets of U.S. Foodservice and Subsidiaries as of June 28, 1997 and June 27, 1998 and the related consolidated statements of operations, stockholders' equity, cash flows and schedules for each of the years then ended, which report appears in the Form 10-K for the year ended June 27, 1998. KPMG Peat Marwick LLP Baltimore, Maryland September 22, 1998 EX-23.3 12 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.3 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Valley Industries, Inc. and Z Leasing Company: We hereby consent to the inclusion of our report, dated June 17, 1996, with respect to the combined statements of earnings, stockholders' and partners' equity, and cash flows of Valley Industries, Inc. and subsidiaries and Z Leasing Company (A General Partnership) for the year ended January 31, 1996, in the Form 10-K for the year ended June 27, 1998 of U.S. Foodservice. We also consent to the incorporation by reference of such report in the registration statements on Form S-3 (333-59785) and Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33-81011, 333-37359, 333-43185 and 333-47759) of U.S. Foodservice. KPMG Peat Marwick LLP Baltimore, Maryland September 22, 1998 EX-23.4 13 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.4 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated August 14, 1997, originally included in Rykoff-Sexton, Inc.'s Form 10-K, as amended by Form 10-K/A, for the fiscal year ended June 28, 1997, and subsequently included in this Form 10-K dated September 24, 1998, into U.S. Foodservice's (formerly JP Foodservices, Inc.) previously filed Registration Statements on Form S-8 (File Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33- 81011, 333-37359, 333-43185, 333-47759) and Form S-3 (File No. 333-59785). Arthur Andersen LLP Philadelphia, PA September 24, 1998 EX-27 14 FDS
5 YEAR YEAR JUN-28-1997 JUN-27-1998 JUN-30-1996 JUN-29-1997 JUN-28-1997 JUN-27-1998 74,432 57,817 0 0 278,509 339,022 (16,792) (16,982) 314,897 349,583 709,909 797,282 674,538 695,359 236,802 258,094 1,732,183 1,817,791 475,106 509,466 0 0 0 0 0 0 443 465 578,703 584,255 1,732,183 1,817,791 5,169,406 5,506,949 5,169,406 5,506,949 4,166,332 4,465,281 857,250 980,769 81,463 91,716 7,854 12,336 76,063 73,894 64,361 (30,817) 26,075 6,475 38,286 (37,292) 0 0 0 (9,712) 0 0 38,286 (47,004) 0.88 (1.04) 0.87 (1.04)
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