-----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, K1Fam8YKQJhlPTR6yAmt2e29Ch6kyM5EguqioyxFF37IJob2uqoLR07LdBV9kHXD RpMaqomQq6Ggv0ZUkvZGvA== 0000928385-99-002980.txt : 19991018 0000928385-99-002980.hdr.sgml : 19991018 ACCESSION NUMBER: 0000928385-99-002980 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19991001 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: 99721582 BUSINESS ADDRESS: STREET 1: 9755 PATUXENT WOODS DR CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4103127100 MAIL ADDRESS: STREET 1: 9755 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 July 3, 1999 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 28, 1999, based on the closing price of such stock on the New York Stock Exchange on such date, was approximately $1.7 billion. The number of shares of the registrant's Common Stock, $.01 par value, outstanding on September 28, 1999 was 101,480,479. DOCUMENTS INCORPORATED BY REFERENCE Certain information in the Proxy Statement for the 1999 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........................................................... 12 Item 3. Legal Proceedings.................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.................. 13 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................................................. 14 Item 6. Selected Financial Data.............................................. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 18 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 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report and the information incorporated by reference in it include "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. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans, forecasted demographic and economic trends relating to our industry, our ability to complete acquisitions, to realize anticipated cost savings and other benefits from acquisitions and to recover acquisition-related costs and similar matters are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect" or "intend." We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Important factors that could cause our actual results to be materially different from our expectations include those discussed under the caption "Business--Risk Factors." We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. ii PART I Unless the context otherwise requires, references in this report to U.S. Foodservice are to U.S. Foodservice and its consolidated subsidiaries. In June 1999, the U.S. Foodservice Board of Directors approved a two-for- one stock split in the form of a stock dividend paid on August 4, 1999 to the stockholders of record on July 20, 1999. Information in this report with respect to common shares and common share prices reflects the stock split. Item 1. Business General U.S. Foodservice is one of the nation's largest broadline foodservice distributors based on our 1999 fiscal year net sales of $6.2 billion. We sell food and related products to restaurants and other institutional foodservice establishments through our national distribution network, which provides geographic access to more than 85% of the U.S. population. We market and distribute more than 43,000 national and proprietary brand items to over 130,000 foodservice customers, including restaurants, hotels, healthcare facilities, cafeterias and schools. This broad product line allows us to meet substantially all of the food and related supply needs of our diverse customer base of independent "street" and multi-unit "chain" businesses, which include Ruby Tuesday, Subway, Buffet's, Inc., Perkins Family Restaurants and Pizzeria Uno. We supplement our internal expansion with an active program of strategic acquisitions to take advantage of growth opportunities from ongoing consolidation in the fragmented foodservice distribution industry. We seek to increase penetration of our current markets through acquisitions of small, privately owned distributors which we fold into our existing operations and to expand into new markets through acquisitions of larger-sized distributors. On December 23, 1997, we acquired Rykoff-Sexton, Inc. by merger. At the time of the acquisition, Rykoff-Sexton was the nation's third largest broadline foodservice distributor based on net sales. Rykoff-Sexton, which is now called U.S. Foodservice, Inc., operates as our wholly owned subsidiary. In the merger, holders of Rykoff-Sexton common stock received U.S. Foodservice common stock representing approximately 50% of our outstanding common stock after the merger. We have accounted for our acquisition of Rykoff-Sexton as a pooling of interests in accordance with generally accepted accounting principles. On February 27, 1998, we changed our corporate name from JP Foodservice, Inc. to U.S. Foodservice to reflect our newly acquired nationwide distribution capabilities. The references to U.S. Foodservice in this report prior to February 27, 1998 are to JP Foodservice, Inc. U.S. Foodservice is a holding company that conducts its operations through wholly owned subsidiaries. U.S. Foodservice was organized in 1989 under the laws of the State of Delaware. Our principal executive offices are located at 9755 Patuxent Woods Drive, Columbia, Maryland 21046, and our telephone number at that address is (410) 312-7100. 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 are generally 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 1 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. Net sales for the foodservice industry were approximately $147 billion in 1998. For the period from 1985 to 1998, total net sales for the foodservice distribution industry increased at a compound annual rate of approximately 5%. Although the foodservice distribution industry is large and growing, it remains extremely fragmented, with over 3,000 companies in operation in 1998. Most of these companies are small, privately owned enterprises supplying a limited number of products within local or regional markets. In recent years, the industry has experienced substantial consolidation as larger distributors have acquired small and regional distributors and have used their superior competitive position to grow at the expense of smaller distributors. We believe that this growth resulted from factors that include the advantages of large-scale purchasing and distribution, warehousing efficiencies, industry consolidation, the desire of foodservice customers to use fewer vendors and heightened food safety concerns. U.S. Foodservice anticipates further consolidation in the industry as smaller specialty distributors confront increasingly difficult competitive challenges from broadline companies that have access to the significant capital needed to construct and equip large, efficient distribution centers, maintain a modern fleet of delivery vehicles and develop the sophisticated information systems required for cost-efficient operations. We believe that large, well-capitalized broadline distributors generally have benefited from continuing industry growth as well as from favorable demographic trends. In recent years, consumers have spent an increasing percentage of their food dollars on meals eaten away from home. This trend reflects such demographic factors as the aging of the "baby-boomer" segment of the population, the growth of single parent and dual-income households and consumers' increased desire for speed and convenience. In addition, forecasted expansion of many chain restaurants is anticipated to generate additional sales volume for broadline distributors that can satisfy the product and delivery requirements of this customer segment. We expect that these demographic trends and industry growth will continue into the foreseeable future. Products In fiscal 1999, we offered to the foodservice industry a single source of supply for more than 43,000 national and proprietary brand items. Food Products. Our 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 our product offerings feature "center-of-the-plate" entree selections, such as meat, poultry and seafood. Janitorial and Paper Products. U.S. Foodservice'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. 2 Equipment and Supplies. We distribute light restaurant equipment and supply items, including cookware, glassware, dinnerware and other commercial kitchen equipment. Contract and Design Services. U.S. Foodservice's contract and design services designs restaurants and eating establishments for approximately 1,000 organizations annually. The following table shows the product categories of the items sold by U.S. Foodservice and the percentage of our net sales generated by product category and by our contract and design services during fiscal 1999: Canned and dry products............. 27% Meats............................... 19% Other frozen foods.................. 17% Dairy products...................... 9% Poultry............................. 8% Paper products...................... 6% Seafood............................. 5% Perishable food products............ 4% Equipment and supplies.............. 2% Janitorial supplies................. 2% Contract and design services........ 1% --- 100% ===
National Brands. We supply more than 32,000 national brand items, which represented approximately 76% of our net sales in fiscal 1999. We believe that national brands are attractive to chain accounts and other customers seeking consistent product quality throughout their operations. Our national brand strategy has promoted closer relationships with many national suppliers, which provide important sales and marketing support to U.S. Foodservice. Proprietary Brands. Our proprietary brands enable us to offer our customers an exclusive and expanding line of product alternatives to comparable national brands across a wide range of prices. Proprietary brands typically carry higher margins than comparable national brand products and at the same time help to promote customer loyalty. Our two-tier proprietary brand strategy emphasizes our private brands as a direct alternative to national brand items and our signature brands as foodservice "concepts" and specialties, such as ethnic and gourmet product offerings. . Private Brands. We offer our customers an expanding line of products under our various private brands. We have developed the multi-tier quality system to meet the specific requirements of different market segments. We currently offer 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/TM/ Blue, U.S. Foodservice/TM/ Red, 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). . Signature Brands. We offer our customers an exclusive and expanding line of signature products which are comparable in quality to national brand items and priced competitively with such items. We market these products under the names Roseli(R) (Italian-style products), Hilltop Hearth(R) (bread and bakery products), Cross Valley Farms(R) (processed fruits and vegetables), Patuxent Farms(R) (processed meats), el Pasado Authentic Mexican Cuisine With A Touch of the Past(R) (Mexican-style 3 products), Rituals(R) (gourmet coffee), Pacific-Jade(R) (Oriental- style products), and Harbor Banks(R) (seafood products). We currently offer over 3,000 signature brand items. Our proprietary brand sales represented approximately 24% of our net sales in fiscal 1999. We historically have sold a significantly lower proportion of proprietary brand products than our primary competitors, whose proprietary brand sales have accounted for approximately 30% to over 60% of their sales volume. We believe there is a significant opportunity for growth of our proprietary brand sales. In 1999, U.S. Foodservice substantially completed its consolidation of the proprietary brands marketed by JP Foodservice and the proprietary brands offered by Rykoff-Sexton prior to its acquisition by JP Foodservice. Although we intend to continue to emphasize sales of national brand products, we plan to expand sales of our proprietary brand product lines through national and local advertising, promotional activities, and training of our sales force regarding the attributes of these products. Services To strengthen our customer relationships and increase account penetration, we offer the following types of value-added services: Management Support and Assistance. Our 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. We also provide on-site training of customer personnel. Specialized Market Services. We offer services and programs tailored to specialized markets. For example, through an integrated service program, we provide healthcare service providers with special nutritional plans, customized software packages such as directAdvantage/TM/, a variety of marketing services and on-site training of institutional personnel. To be eligible to participate in this program, healthcare institutions must maintain a specified minimum volume of purchases from U.S. Foodservice. Publications. We promote active customer use of our other products and services through the distribution of professionally printed publications, including our quarterly magazines, Quintessential/TM/ and Healthnext/TM/. Our publications highlight selected products, including proprietary brand items, present menu suggestions, provide nutritional information and include recipes using our products. Customers also may participate, at no cost, in our recipe program in which we furnish participants every two weeks with recipe cards that describe new menu concepts. Customers U.S. Foodservice's customer base of over 130,000 accounts encompasses a wide variety of foodservice establishments. The following table shows the segments of our customer base by type of customer and percentage of net sales generated by each type for fiscal 1999: Restaurants (limited and full menu)..... 65% Hotels and casinos...................... 8% Healthcare institutions................. 7% Schools and colleges.................... 6% Business and industry................... 5% Other................................... 9% --- 100% ===
4 Street Customers. U.S. Foodservice's street customers are independent restaurants, hotels, schools and other foodservice businesses. Street customers are serviced directly by our 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 60% of our net sales in fiscal 1999. We pursue 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 U.S. Foodservice'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. We have developed strong working relationships with many of our chain accounts, which have enabled these accounts, in conjunction with U.S. Foodservice, 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 U.S. Foodservice. 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 40% of our net sales in fiscal 1999. Our business strategy emphasizes supporting the growth of our existing chain accounts. Many of our current chain customers, primarily restaurants, are experiencing more rapid sales growth than other types of foodservice businesses. We also target new chain customers which we believe represent attractive growth opportunities. No single customer accounted for more than 5% of our net sales in fiscal 1999. Consistent with industry practice, we generally do not enter into contracts with our customers that may not be canceled by either party at its option. Sales and Marketing U.S. Foodservice's principal marketing activities at July 3, 1999 were conducted by approximately 2,500 street sales, 200 chain sales and 520 customer service representatives. Our 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, our sales representatives advise customers on menu selection, methods of preparing and serving food and other operating issues. We provide an in-house training program for our entry-level sales and service representatives, which includes seminars, on-the-job training and direct one-on-one supervision by experienced sales personnel. Our commission program is designed to reward account profitability and promote sales growth in our street accounts. Our strategy is to measure the profitability of each street account and product segment and to modify our incentive program accordingly. We maintain sales offices at each of our 37 full-service distribution centers and at 35 additional locations in 20 states. We employ sales and marketing staff at both the corporate and branch levels to solicit and manage relationships with multi-unit chain accounts. We supplement our market presence with advertising campaigns in national and regional trade publications, which typically focus on our services and our ability to service targeted industry segments. 5 We support this effort with a variety of promotional services and programs, including our quarterly magazines and recipe program. Distribution We distribute our products out of our 37 full-service distribution centers and extend this geographic coverage through remote distribution facilities. Our Targeted Specialty Services division warehouses and redistributes, out of two warehouses, to the distribution centers a full line of restaurant equipment and supplies, imported specialty food products and proprietary products. This division allows U.S. Foodservice's distribution centers to offer a more varied product mix while maintaining local inventories at efficient levels. Our customers generally are located within our principal geographic service areas, which we define as the areas within a 150-mile radius of each of our full- service distribution centers. Our distribution network enables us to serve customers outside of our principal service areas. Services to both street and chain customers are generally supported by the same distribution facilities and equipment. Our 37 full-service distribution centers have a total of approximately seven 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 administrative personnel. Products are delivered to U.S. Foodservice's distribution centers by manufacturers, common carriers and U.S. Foodservice's own fleet of trucks. We employ management information systems which enable us to lower our inbound transportation costs by making more efficient use of our 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 with service representatives at each of our branches. Some of our large customers place orders through a direct connection to our mainframe computer by means of a computer terminal, personal computer or touch tone telephone, or through Tranzmit/TM/, our 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. We deliver our products through our fleet of over 2,900 tractor-trailer and straight trucks, each of which is equipped with separate temperature-controlled compartments. In dispatching trucks, U.S. Foodservice employs a computerized routing system designed to optimize delivery efficiency and minimize drive time, wait time and excess mileage. The majority of our fleet utilizes on-board computer systems that monitor vehicle speeds, fuel efficiency, idle time and other vital statistical information. We collect and analyze such data in an effort to monitor and improve transportation efficiency and reduce costs. In some of our geographic markets, we utilize our remote redistribution facilities to achieve a higher level of customer service. We transport our products in large tractor-trailers or double trailers to 6 the redistribution facility, where the loads are then transferred to smaller equipment for delivery in the normal fashion. Suppliers At July 3, 1999, U.S. Foodservice employed approximately 450 purchasing agents with expertise in specific product lines to purchase products for U.S. Foodservice from approximately 7,000 suppliers located throughout the United States and in other countries. Substantially all types of products distributed by U.S. Foodservice are available from a variety of suppliers, and we are not dependent on any single source of supply. We do not purchase any material portion of our product requirements under long-term supply contracts. We manage our purchasing operations and negotiate all major vendor programs from our corporate headquarters in Columbia, Maryland. We seek to concentrate purchases with selected suppliers to ensure access to high-quality products on advantageous terms. We cooperate closely with these suppliers to promote new and existing products. The suppliers assist in training our sales force and customers regarding new products, new trends in the industry and new menu ideas, and collaborate with us in advertising and promoting these products both through printed advertisements and through annual branch-sponsored food shows and national trade shows. Before our acquisition of Rykoff-Sexton, we transacted a majority of our purchasing activities centrally at our corporate headquarters. At the former Rykoff-Sexton divisions, purchases were primarily transacted locally. We believe that centralized purchasing results in lower costs through greater ordering efficiency. As part of our restructuring plan for the businesses we acquired in the Rykoff-Sexton acquisition, we are progressively centralizing at our 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 the centralization of our management information systems, is currently expected to be substantially completed by the end of fiscal 2001. Through our purchasing department, we are able to monitor the quality of the products offered by various suppliers and ensure consistency of product quality across our distribution network. U.S. Foodservice maintains a comprehensive quality control and assurance program that, at July 3, 1999, 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 U.S. Foodservice's corporate offices and branch locations and through visits to growing fields, manufacturing facilities and storage operations. We generally require our suppliers and manufacturers to maintain specified levels of product liability insurance and to name U.S. Foodservice as an additional insured on the applicable insurance policies. Competition The foodservice distribution industry is extremely fragmented, with over 3,000 companies in operation in 1999. In recent years, the foodservice distribution industry has been characterized by significant consolidation and the emergence of larger competitors. We compete in each of our markets with at least one other large national distribution company, generally SYSCO Corporation 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. 7 We attribute our ability to compete effectively against smaller regional and local distributors in part to our wider product selection, the cost advantages resulting from our size and centralized purchasing operations and our ability to offer broad and consistent market coverage. We compete against other broadline distributors primarily by providing our customers with accurate and timely fulfillment of orders and an array of value-added services. U.S. Foodservice typically competes against other foodservice distribution companies and, to a lesser extent, financial investors for potential acquisitions. We believe that our financial resources and our ability to offer owners of acquisition targets an interest in the combined business through ownership of our common stock provide us with an advantage over many of our competitors. Government Regulation U.S. Foodservice'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. U.S. Foodservice's facilities generally are inspected at least annually by state or federal authorities. U.S. Foodservice'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. U.S. Foodservice 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 U.S. Foodservice. Some of U.S. Foodservice's distribution facilities have underground and aboveground 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 U.S. Foodservice. Intellectual Property As of July 3, 1999, U.S. Foodservice had proprietary rights to approximately 230 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. U.S. Foodservice either has registered or applied to register substantially all of its material trademarks with the U.S. Patent and Trademark Office. As of July 3, 1999, approximately 250 registrations, including multiple registrations of certain trademarks, were effective with respect to approximately 200 of U.S. Foodservice's trademarks. Of such registrations, approximately 150 registrations and approximately 100 registrations are effective for initial periods of ten or 20 years, respectively. The registrations are renewable for additional ten-year periods for as long as U.S. Foodservice continues to use the 8 trademarks. U.S. Foodservice has registered certain of its trademarks in foreign countries, although it does not currently conduct operations in those countries. U.S. Foodservice considers its trademarks to be of material importance to its business plans. Equipment and Machinery Equipment and machinery owned by U.S. Foodservice and used in our operations consist principally of electronic data processing equipment and product handling equipment. We also operate a fleet of over 2,900 vehicles, consisting of tractors, trailers and straight trucks, which are used for long hauls and local deliveries. At July 3, 1999, U.S. Foodservice owned approximately 29% of these vehicles and leased the remainder. We outsource our data center operations for approximately half of our distribution centers. In connection with the centralization of our management information systems, we plan to outsource these operations for additional distribution centers. As our business needs warrant, we can either increase or decrease the amount of computer capacity we purchase upon short notice to the vendor. We believe that this arrangement provides us with more reliable and flexible service at a lower cost than we could achieve by operating our own data center for this segment of our business. We regularly evaluate the capacity of our various facilities and equipment and make capital investments to expand capacity where necessary. In fiscal 1999, we spent $68.4 million on capital expenditures, primarily for facility expansion projects and continued upgrading our management information systems. We will continue to undertake expansion or replacement of our facilities as and when needed to accommodate our growth. Employees At the end of fiscal 1999, U.S. Foodservice had approximately 13,250 full- time employees, of whom approximately 400 were employed in corporate management and administration and approximately 7,400 of whom were hourly employees. Approximately 3,400 of our 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 1,000 of our employees will expire in fiscal 2000. We believe that our relations with our employees are satisfactory. Risk Factors U.S. Foodservice's business is subject to risks, including the following: Our business has low profit margins and is sensitive to national and regional economic conditions. Foodservice distribution companies like U.S. Foodservice purchase, store, market and transport food and related products to establishments that prepare and serve meals to be eaten away from home. Our industry is characterized by relatively high inventory turnover with relatively low profit margins. We sell a significant portion of our products at prices that are based on the cost of the products plus a percentage markup. As a result, our profit levels may be reduced during periods of food price deflation, even though our gross profit percentage may remain relatively constant. Such a reduction could have a material adverse effect on our business, operating results and financial condition. The foodservice distribution industry is sensitive to national and regional economic conditions. Economic downturns could have an adverse impact on the demand for our products. These downturns may reduce consumer spending at restaurants and other foodservice institutions we supply. 9 Our distribution and administrative expenses are relatively fixed in the short term. As a result, unexpected decreases in our net sales, such as those due to severe weather conditions, can have a significant short-term adverse impact on our operating income. Our operating results also may be adversely affected by difficulties we may encounter in collecting our account receivables and in maintaining our profit margins in times of unexpected increases in fuel costs. For a discussion of these factors and our operating results in our last three fiscal years, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations." We are subject to risk associated with our acquisitions of other foodservice businesses. Since we became a public company in November 1994, we have acquired a substantial number of foodservice businesses as part of our growth strategy of supplementing internal expansion with acquisitions. Our acquisitions may not improve our financial performance in the short or long-term as we expect. Acquisitions will enhance our earnings only if we can successfully integrate those businesses into our marketing programs, centralized purchasing operations, distribution network and information systems. Our ability to integrate acquired businesses may be adversely affected by factors that include customer resistance to our product brands and distribution system, our failure to retain management and sales personnel, difficulties in converting different information systems to our proprietary systems, the size of the acquired business and the allocation of limited management resources among various integration efforts. In addition, we may not eliminate as many redundant costs as we anticipated in selecting our acquisition candidates. One or more of our acquisition candidates also may have liabilities or adverse operating issues that we failed to discover prior to the acquisition. Difficulties in integrating acquired businesses, as well as liabilities or adverse operating issues relating to acquired businesses, could have a material adverse effect on our business, operating results and financial condition. Even if acquired companies eventually contribute to an increase in our profitability, the acquisitions may adversely affect our earnings in the short term. Our earnings may decrease as a result of transaction-related expenses we record for the quarter in which we complete an acquisition. Our earnings may be further reduced by the higher operating and administrative expenses we typically incur in the quarters immediately following an acquisition as we seek to integrate the acquired business into our own operations. The amortization of goodwill and depreciation resulting from acquisitions also may contribute to reduced earnings. A significant portion of the growth in our revenues in recent years has resulted from acquisitions. We may not be able to increase our revenues or earnings through new acquisitions at the same rates we have achieved through our past acquisitions. For example, we were able to triple our revenues directly as a result of our acquisition of Rykoff-Sexton in our 1998 fiscal year. As the foodservice distribution industry continues to consolidate, we may find it more difficult to identify suitable acquisition candidates than we did in the past. We may also find that the acquisition terms are not as favorable as those in our prior acquisitions. The way in which we pay for acquired businesses also involves risks. Many of our past acquisitions have been structured as stock-for-stock transactions. Continuing volatility in the U.S. securities markets and fluctuations in our stock price may increase the risk that our stock-for-stock acquisitions could dilute our earnings per share. We also pay cash for some businesses. In the past, we have obtained funds for some of our cash acquisitions through additional bank borrowing or by issuing common stock. If we increase our bank borrowings or issue debt securities to finance future acquisitions, we will increase our level of indebtedness and interest expense, while if we issue additional common stock, we may dilute the ownership of our stockholders. In addition, we may not be able to obtain the funds we need on acceptable terms. These risks in the way we finance acquisitions could have a material adverse effect on our business, operating results and financial condition. 10 The failure to attain Year 2000 compliance may have an adverse impact on our business. We and other companies we do business with rely on numerous computer programs in managing day-to-day operations. We have undertaken a program to address the Year 2000 issues, which is a general term used to describe the various problems that may result from the improper processing of dates and date- sensitive calculations by computer and other machinery as the year 2000 is approached and reached. Our failure to correct a Year 2000 problem could result in a material interruption in, or a material failure of, our normal business activities or operations. Our year 2000 program is focused on both our internal computer systems and third party computer systems, including the systems of some of our important suppliers and customers. We currently expect to continue to incur internal staff costs and other expenses of up to $0.5 million to complete our Year 2000-readiness work with respect to our major information systems. It is possible that as we conduct further testing of our remediated systems these costs could exceed this estimate. In addition, we may have to continue to replace or upgrade systems or equipment at a substantial cost. We cannot be sure that we will be able to resolve the Year 2000 issue in 1999. If we fail to resolve the Year 2000 issue, or if our important suppliers and customers fail to resolve their Year 2000 issues as they relate to U.S. Foodservice, the Year 2000 problem could have a material adverse effect on our business, operating results and financial condition. For a discussion of our Year 2000 program and the possible impact of the Year 2000 issue on U.S. Foodservice, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Information Systems and the Impact of the Year 2000 Issue." A labor dispute or work stoppage involving our employees, many of whom are union members, could adversely affect our business. As of July 3, 1999, approximately 3,400 of our employees were members of approximately 40 different local unions associated with the International Brotherhood of Teamsters and other labor organizations. These employees represented approximately 26% of our full-time employees and approximately 46% of the employees employed in our warehouse and distribution operations. In fiscal 2000, collective bargaining contracts covering approximately 1,000 of our employees will expire. A labor dispute or work stoppage resulting from our failure to conclude new collective bargaining agreements or from other factors could have a material adverse effect on our business, operating results and financial condition. The foodservice distribution industry is highly competitive. Our industry is extremely fragmented, with over 3,000 companies in operation in 1999. The number and diverse nature of these companies result in highly competitive conditions. Our competition includes not only other broadline distributors, which provide a comprehensive range of food and related products from a single source of supply, but also specialty distributors and system distributors. Specialty distributors generally supply one or two product categories, while system distributors typically supply a narrow range of products to a limited number of multi-unit businesses operating in a broad geographical area. We compete in each of our markets with at least one other large national distribution company, generally SYSCO Corporation or Alliant Foodservice, Inc., as well as with numerous regional and local distributors. In seeking acquisitions of other foodservice businesses, we compete against both other foodservice distribution companies and financial investors. Our failure to compete successfully could have a material adverse effect on our business, operating results and financial condition. See "-Foodservice Distribution Industry" for a discussion of the foodservice distribution industry and recent industry trends and "-Competition" for a discussion of competitive factors affecting our business. 11 We currently have significant indebtedness and may incur additional indebtedness in the future. At July 3, 1999, our ratio of total debt to total capitalization was approximately 40.5%. Our total capitalization is the sum of our total debt and capital lease obligations plus our stockholders' equity. Our ratio of total debt to total capitalization as of July 3, 1999 would have been approximately 52.5% if we included as debt the $353 million sold under our accounts receivable securitization arrangements. In accordance with generally accepted accounting principles, we do not account for these arrangements as debt on our balance sheet, but many lenders consider the arrangements in their credit decisions. We may incur additional indebtedness in the future, subject to limitations contained in the instruments governing our indebtedness, to finance capital expenditures or for other general cash flow at or above the levels required to service our indebtedness and meet our other cash needs. If our business fails to generate sufficient operating cash flow in the future, or if we fail to obtain cash from other sources such as asset sales or additional financings, we will be restricted in our ability to continue to make acquisitions for cash and to invest in expansion or replacement of our distribution facilities, information systems and equipment. Such a failure could have a material adverse effect on our business, operating results and financial condition. In addition, because a majority of our indebtedness bears interest at floating rates, a material increase in interest rates could adversely affect our ability to meet our liquidity requirements. For a discussion of our financial condition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Our success largely depends on our ability to retain our senior management. We largely depend for our success on the efforts of members of our senior management. Our key senior managers have many years of experience in broadline foodservice distribution with U.S. Foodservice and other companies, as well as in the acquisition and integration of foodservice businesses. They have developed and coordinated implementation of U.S. Foodservice's business strategy since our formation in 1989. If we were to lose the services of one or more of our key senior managers, our business, operating results and financial condition could be materially adversely affected. Product liability claims could have an adverse effect on our business. Like any other seller of food and processor of meats, we face an inherent risk of exposure to product liability claims if the products we sell cause injury or illness. We have obtained primary and excess umbrella liability insurance with respect to product liability claims. We cannot assure you, however, that this insurance will continue to be available at a reasonable cost or, if available, will be adequate to cover liabilities. We generally seek contractual indemnification from parties supplying our products, but any such indemnification is limited, as a practical matter, to the creditworthiness of the indemnifying party. If we do not have adequate insurance or contractual indemnification available, product liability claims relating to defective products could have a material adverse effect on our business, operating results and financial condition. Item 2. Properties U.S. Foodservice occupies corporate headquarters in Columbia, Maryland, which consists of a total of approximately 95,000 square feet of office space, under a lease which expires in June 2003. U.S. Foodservice's 37 full-service distribution centers contain a total of approximately seven 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 our restructuring plan for the businesses we acquired in the Rykoff-Sexton acquisition, we consolidated some overlapping distribution centers in fiscal 1998 and fiscal 1999, and presently plan to 12 close one additional facility in fiscal 2000. The following table lists the location of each of our full-service distribution centers: Arizona Massachusetts Oregon Phoenix* Everett Portland California Michigan Pennsylvania Union City* Taylor Allentown La Mirada Altoona Vista* Minnesota Pittston Plymouth Connecticut South Carolina South Windsor Nevada Fort Mill Yantic Las Vegas Reno* Tennessee Florida Alcoa Ormond Beach New Jersey Bridgeport Texas Georgia Englewood Austin* Austell* Kearny* Dallas* College Park Lubbock New York Mesquite Illinois Buffalo Glendale Heights Virginia Streator Ohio Salem Fairfield Indiana West Virginia Fort Wayne Oklahoma Hurricane Oklahoma City Maryland Baltimore Severn - ------------------ * Indicates facility leased by U.S. Foodservice, except for the Austin, Texas facility, which is partially leased and partially owned by U.S. Foodservice; all other facilities are wholly owned by U.S. Foodservice. Sofco, Inc., which was acquired by U.S. Foodservice on July 1, 1999, operates two primary distribution facilities in New York for its paper product and janitorial supply business, one of which is owned and one of which is leased. Sofco, Inc. owns five and leases 12 additional facilities that are also used in the operation of its business. U.S. Foodservice occupies 14 contract and design offices in 12 states. Of these offices, nine are located in distribution centers, four are leased and one is owned. U.S. Foodservice also leases one in-transit warehouse in Indiana and manages an in-transit warehouse out of a third-party facility in California. Item 3. Legal Proceedings From time to time, U.S. Foodservice is involved in litigation and proceedings arising out of the ordinary course of our business. There are no pending material legal proceedings or environmental investigations to which U.S. Foodservice is a party or to which any property of U.S. Foodservice is subject. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to U.S. Foodservice's security holders during the fourth quarter of fiscal 1999. 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock has been listed on the New York Stock Exchange since December 31, 1996. Our current symbol is "UFS." The table below shows, for the last two fiscal years, the high and low last Reported sale prices of our common stock on the New York Stock Exchange composite tape. All share prices have been retroactively adjusted to reflect the two-for-one split of our common stock effected on August 4, 1999.
High Low ------ ------ Fiscal Year Ended June 27, 1998 First Quarter $16.22 $14.35 Second Quarter 17.41 13.78 Third Quarter 18.60 16.16 Fourth Quarter 18.63 15.75 Fiscal Year Ended July 3, 1999 First Quarter $21.25 $16.44 Second Quarter 24.57 20.44 Third Quarter 26.25 20.47 Fourth Quarter 24.50 20.25
As of September 28, 1999, there were approximately 775 holders of record of our common stock. On September 28, 1999, the last reported sale price of our common stock on the New York Stock Exchange was $18.38 per share. We have never paid cash dividends on our common stock and we do not anticipate that we will pay cash dividends in the foreseeable future. The current policy of our board of directors is to retain all earnings to support our operations and to finance the expansion of our business. We may pay cash dividends only if we comply with financial tests and other restrictions contained in our credit facility agreements. In consideration of our acquisition of Sofco, Inc., which we completed effective July 1, 1999, we issued 2,106,924 shares of common stock valued at approximately $44.5 million to CEX Holdings, Inc. CEX Holdings was the sole shareholder of Sofco. See Note 4 to the financial statements appearing elsewhere in this report for additional information on this transaction. In connection with this issuance, U.S. Foodservice relied on the exemption from registration provided under Section 4(2) of the Securities Act. U.S. Foodservice did not engage in any advertising or general solicitation in connection with the offer and sale of the securities. In addition, U.S. Foodservice provided or made available information concerning U.S. Foodservice and the common stock, obtained investment representations from the selling stockholder and placed restrictive legends on the certificates evidencing the securities issued. 14 Item 6. Selected Financial Data The following table presents selected financial data of U.S. Foodservice as of July 1, 1995, June 29, 1996, June 28, 1997, June 27, 1998 and July 3, 1999 and for each of the years then ended. The selected financial data as of June 27, 1998 and July 3, 1999 and for each of the years in the three-year period ended July 3, 1999 are derived from the U.S. Foodservice's audited consolidated financial statements appearing elsewhere in this report. The selected financial data as and for the fiscal years ended 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 29, 1995, April 27, 1996 and June 28, 1997, respectively. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fiscal Years Ended -------------------------------------------------------------------- July, June 29, June 28, June 27, July 3, 1995 1996 1997 1998(2) 1999 ---------- ---------- ---------- ---------- ---------- Statements of Operations Data (1): Net sales............................................ $2,857,334 $3,238,781 $5,169,406 $5,506,949 $6,198,408 Cost of sales........................................ 2,262,819 2,586,096 4,166,332 4,465,281 5,052,068 ---------- ---------- ---------- ---------- ---------- Gross profit......................................... 594,515 652,685 1,003,074 1,041,668 1,146,340 Operating expenses................................... 526,871 590,446 845,901 876,170 917,094 Amortization of intangible assets.................... 2,792 4,244 15,349 15,354 17,080 Restructuring costs (reversal)....................... - (6,441) (4,000) 53,715 - Charge for impairment of long-lived assets........... - 29,700 - 35,530 - ---------- ---------- ---------- ---------- ---------- Income from operations............................... 64,852 34,736 145,824 60,899 212,166 Interest expense and other financing costs, net.......................................... 32,941 32,527 76,063 73,894 64,974 Nonrecurring charges................................. - 1,517 5,400 17,822 - ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes and extraordinary charge.............................................. 31,911 692 64,361 (30,817) 147,192 Provision for income taxes........................... 13,608 559 26,075 6,475 58,910 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before extraordinary charge......................... 18,303 133 38,286 (37,292) 88,282 Income from discontinued operations.................. 137 - - - - Gain on disposal of discontinued operations.......................................... 23,359 - - - -
15 Extraordinary charges, net of income taxes............ (4,590) - - (9,712) (5,048) ------------ ----------- ----------- ----------- ----------- Net income (loss)..................................... 37,209 133 38,286 (47,004) 83,234 Preference dividends.................................. (40) - - - - ------------ ----------- ----------- ----------- ----------- Net income (loss) applicable to common shareholders (3)..................................... $ 37,169 $ 133 $ 38,286 $ (47,004) $ 83,234 ============ =========== =========== =========== =========== Per Share Data (4): Net income (loss) per common share: Basic: Before extraordinary charge........................ $ 0.37 $ 0.00 $ 0.44 $ (0.41) $ 0.92 Net income (loss).................................. $ 0.76 $ 0.00 $ 0.44 $ (0.52) $ 0.87 Diluted: Before extraordinary charge........................ $ 0.37 $ 0.00 $ 0.43 $ (0.41) $ 0.91 Net income (loss).................................. $ 0.76 $ 0.00 $ 0.43 $ (0.52) $ 0.86 Weighted average common shares (4): Basic.............................................. 49,040 60,776 86,902 90,640 95,922 Diluted............................................ 49,134 61,030 88,126 90,640 97,190 Balance Sheet Data (at end of period): Working capital....................................... $ 270,942 $ 208,130 $ 234,803 $ 287,816 379,940 Total assets.......................................... 939,280 1,052,211 1,732,183 1,817,791 2,012,874 Long-term debt, excluding current maturities........................................... 306,702 303,728 655,246 680,625 558,540 Stockholders' equity.................................. 315,060 316,676 579,146 584,720 829,379
- ----------------------- 16 (1) U.S. Foodservice operates on a 52-53 week fiscal year ending on the Saturday closest to June 30. The fiscal year ended July 3, 1999 is a 53-week fiscal year, while all other periods presented are 52-week fiscal years. (2) In connection with the acquisition of Rykoff-Sexton, U.S. Foodservice incurred restructuring costs, asset impairment charges, nonrecurring charges 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 U.S. Foodservice's results for the fiscal year ended June 27, 1998. Excluding the impact of the acquisition related costs, U.S. Foodservice's net income before extraordinary charge was $62.6 million, or $0.68 per share, on a diluted basis. (3) U.S. Foodservice has no elements of comprehensive income (loss), other than net income (loss). Accordingly, comprehensive income (loss) is equal to net income (loss) for all periods presented. (4) Per share data have been retroactively adjusted to reflect the two-for-one stock split effected on August 4, 1999. 17 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 its distribution capabilities and increase penetration of its existing markets. With the acquisition of Rykoff-Sexton on December 23, 1997, U.S. Foodservice, formerly JP Foodservice, Inc., became one of the largest broadline foodservice distributors in the United States based on net sales. The acquisition of Rykoff-Sexton expanded U.S. Foodservice's distribution capabilities nationwide and strengthened its competitive position in several major markets. Acquisitions Fiscal 1999 Acquisitions. U.S. Foodservice 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 1999, U.S. Foodservice acquired J.H. Haar & Sons, L.L.C. ("Haar"), a New Jersey-based broadline foodservice distributor serving the metropolitan New York City market, and Joseph Webb Foods, Inc. ("Webb"), a broadline foodservice distributor serving the San Diego and other southern California markets. On July 1, 1999, U.S. Foodservice acquired Sofco, Inc. ("Sofco"), a paper products distributor serving the upper New York State market. These three acquisitions significantly expanded U.S. Foodservice's existing operations in those markets. U.S. Foodservice accounted for the acquisition of Haar under the pooling of interests method of accounting and the acquisitions of Webb and Sofco under the purchase method of accounting. The operating results of Haar were not material to U.S. Foodservice's reported results for periods prior to the acquisition and, accordingly, prior operating results of U.S. Foodservice have not been restated to incorporate the results of Haar prior to the acquisition. The operating results of Haar and Webb are included in U.S. Foodservice's consolidated statements of operations from the dates of those acquisitions. No results of operations for Sofco are included in U.S. Foodservice's consolidated statement of operations. Fiscal 1998 Acquisition of Rykoff-Sexton. On December 23, 1997, U.S. Foodservice acquired Rykoff-Sexton, the nation's third largest broadline foodservice distributor based on net sales. The acquisition was accounted for under the pooling of interests method of accounting. Accordingly, the consolidated financial statements for periods prior to the acquisition have been restated to include consolidated financial information for Rykoff-Sexton. In connection with the acquisition, U.S. Foodservice incurred restructuring costs of $56.7 million, asset impairment charges of $35.5 million, other operating charges included in cost of sales of $8.6 million and in operating expenses of $19.4 million, and nonrecurring charges of $17.8 million resulting from the integration of the two businesses (the "acquisition related costs"). The acquisition related costs aggregated approximately $138.0 million, of which $76.6 milllion consisted of non-cash charges. For more information about the acquisition related costs, see note 16 to the consolidated financial statements appearing elsewhere in this report. Under its integration plan for the combination of the two businesses, U.S. Foodservice believes operating costs and interest savings exceeded $20.0 million in fiscal 1998 and $38.0 million in fiscal 1999. U.S. Foodservice achieved operating cost savings through the consolidation and renegotiation of purchasing programs, consolidation and realignment of distribution facilities, consolidation of administrative functions and realization of interest savings through the refinancing of its senior debt. 18 Other Fiscal 1998 Acquisitions. In the second quarter of fiscal 1998, U.S. Foodservice acquired Outwest Meat Company ("Outwest"), located in Las Vegas, Nevada. In the third quarter of fiscal 1998, U.S. Foodservice acquired Westlund Provisions, Inc. ("Westlunds"), a foodservice distributor specializing in custom-cut meats located in Minneapolis, Minnesota. These two acquisitions complemented U.S. Foodservice's existing operations in those markets, while enabling U.S. Foodservice to enhance significantly its custom-cut meat offerings. Also in the third quarter of fiscal 1998, U.S. Foodservice expanded the scope of its distribution network in the northeastern United States by acquiring Sorrento Food Service, Inc. ("Sorrento"), a broadline distributor located in Buffalo, New York. U.S. Foodservice accounted for these acquisitions under the purchase method of accounting and, accordingly, the operating results of the acquired businesses are included in U.S. Foodservice's consolidated statements of operations from the dates of the acquisitions. Fiscal 1997 Acquisitions. In fiscal 1997, U.S. Foodservice acquired Valley Industries, Inc. ("Valley"), Arrow Paper and Supply Co. Inc. ("Arrow"), Squeri Food Service, Inc. ("Squeri") and Mazo-Lerch Company ("Mazo"), broadline distributors located in Las Vegas, Nevada, Norwich, Connecticut, Cincinnati, Ohio and Alexandria, Virginia, respectively. The acquisitions of Valley and Squeri were accounted for under the pooling of interests method of accounting and, accordingly, the operating results for periods prior to fiscal 1997 were restated. The acquisitions of Arrow and Mazo were accounted for under the purchase method of accounting and, accordingly, the operating results are included in U.S. Foodservice's consolidated statements of operations from the dates of those acquisitions. Results of Operations U.S. Foodservice 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. Inflation did not have a material impact on U.S. Foodservice's operating results in any of its three most recent fiscal years. 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 proprietary brand products than for national brand products of comparable quality. U.S. Foodservice, however, incurs additional advertising and other marketing costs in promoting its proprietary brand products. The principal components of expenses include cost of sales, which represents the amount paid to manufacturers and food processors for products sold, and operating expenses, which include labor-related and other selling 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. U.S. Foodservice's operating results historically have reflected modest seasonal variations. For summary financial data showing the effect of these seasonal variations in the last eight fiscal quarters, see "--Quarterly Results and Seasonality." Fiscal 1999 Compared to Fiscal 1998 Net Sales. Net sales increased 12.6% in fiscal 1999 to $6.2 billion from $5.5 billion for fiscal 1998. The acquisitions of Outwest in the second quarter of fiscal 1998, Sorrento and Westlund in the 19 third quarter of fiscal 1998, and Haar and Webb in the second quarter of fiscal 1999 accounted for net sales growth of approximately 4.9%. In addition, fiscal 1999 had 53 weeks, compared to 52 weeks for fiscal 1998. The additional week of operations in fiscal 1999 contributed net sales growth of approximately 2.1%. Growth in both chain account sales and street sales contributed to the remaining increase in sales. Chain account sales increased 17.7% for fiscal 1999. A significant portion of this increase was attributable to the expansion of sales to existing chain customers resulting from the national distribution capability created through the acquisition of Rykoff-Sexton. Street sales increased 9.1% for fiscal 1999 principally as a result of the growth of the street sales force and improved sales force productivity. Because chain sales grew at a faster rate than street sales, the street sales mix, or street sales as a percentage of total net sales, decreased to 59.7% in fiscal 1999 from 62.2% in fiscal 1998. Gross Profit. Gross profit margin decreased to 18.5% in fiscal 1999 from a gross profit margin, prior to the acquisition related costs, of 19.1% in fiscal 1998. The decrease was primarily attributable to the continuation of U.S. Foodservice's strategy to emphasize "center of the plate" entree product sales, which results in more gross profit per delivery than higher-margin, lower cost specialty products. This results in a lower gross margin but higher profitability. The gross profit margin was also adversely affected by an increase in chain sales as a percentage of net sales in fiscal 1999. Operating Expenses. Excluding the effects of the acquisition related costs in the prior year, operating expenses increased by 7.0%, or $60.3 million, in fiscal 1999 over fiscal 1998 and, as a percentage of net sales, decreased to 14.8% in fiscal 1999 from 15.6% in fiscal 1998. This decrease was primarily attributable to operating efficiencies resulting from the integration plan, cost reductions achieved through the consolidation of U.S. Foodservice's general and administrative functions, and an increase in the average size of customer deliveries resulting from the shifts in sales mix to increased chain account sales and in product mix towards "center-of-the-plate" entree products. Amortization of Intangible Assets. Amortization of goodwill and other intangible assets was $17.1 million in fiscal 1999 compared to $15.4 million in fiscal 1998. The increase resulted from the goodwill recorded in connection with the acquisitions of Sorrento, Westlund and Webb. Income from Operations. Excluding the acquisition related costs, income from operations was $212.2 million in fiscal 1999 compared to $178.1 million in fiscal 1998, representing an increase of 19.1%, or $34.1 million. The increase was attributable to the increase in net sales and the reduction of operating expenses as a percentage of net sales. Interest Expense and Other Financing Costs, Net. Interest expense and other financing costs, net, decreased $8.9 million, or 12.1%, for fiscal 1999 from fiscal 1998. The reduced interest expense was attributable to lower overall interest rates under the credit facility U.S. Foodservice established in connection with the Rykoff-Sexton acquisition. Provision for Income Taxes (Benefit). During fiscal 1999, U.S. Foodservice recognized income tax expense at an effective rate of 40.0% compared to an income tax benefit at an effective tax rate of (21.0)% for fiscal 1998. The rate for fiscal 1998 reflects the effect on the income tax provision of the non- deductibility of some of the acquisition related costs. U.S. Foodservice's effective tax rate for fiscal 1998 before the effect of the acquisition related costs was 39.9%. 20 Extraordinary Charge. During fiscal 1999, U.S. Foodservice incurred an extraordinary charge of $5.0 million, net of a $3.2 million income tax benefit, related to the redemption and retirement of the remaining $120.2 million principal amount of Rykoff-Sexton's 8 7/8% senior subordinated notes due 2003. The extraordinary charge consisted of a $6.1 million redemption premium paid to note holders and the write-off of $2.1 million of unamortized deferred financing costs. In fiscal 1998, U.S. Foodservice recorded an extraordinary charge of $9.7 million, net of a $6.3 million income tax benefit, related to the write-off of deferred financing costs and to additional payments to holders of U.S. Foodservice's senior notes due 2004, in accordance with the senior note terms. 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. Acquisitions of foodservice distributors other than Rykoff-Sexton accounted for net sales growth of 3.3%. An increase of 5.8% in chain account sales reflected the continued growth in sales to U.S. Foodservice'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 some high-margin items to higher turnover, lower-margin items, including "center-of-the-plate" entree products, in the former Rykoff-Sexton operations, as well as decreased margins at some of the operating units that were closed as part of the integration plan related to the Rykoff-Sexton acquisition. The decline in gross profit margins for fiscal 1998 also resulted from $8.6 million of acquisition related costs for writedowns of inventory at operating units undergoing consolidation or realignment. 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 proprietary brand product sales in fiscal 1998. Sales of proprietary brand products increased by 5.6% in fiscal 1998 over fiscal 1997. In addition, U.S. Foodservice estimates that it achieved approximately $9.0 million in savings from the consolidation and renegotiation of its purchasing programs. Operating Expenses. Excluding the acquisition related costs in fiscal 1998, operating expenses increased by 1.8%, or $14.9 million, in fiscal 1998 over fiscal 1997 and, as a percentage of net sales, declined to 15.6% in fiscal 1998 from 16.3% in fiscal 1997. The decrease was primarily attributable to operating efficiencies resulting from the integration plan related to the Rykoff-Sexton acquisition, an increase in the average size of customer deliveries, and cost reductions achieved through the consolidation of general and administrative functions. A $7.4 million curtailment gain was recognized in fiscal 1998 upon the suspension of all participation and benefit accruals under one of Rykoff- Sexton's defined benefit plans. Amortization of Other Intangible Assets. Amortization of goodwill and other intangible assets totaled $15.3 million in fiscal 1997 and $15.4 million in fiscal 1998. Restructuring Cost and Asset Impairment Charges. Restructuring costs of $53.7 million related to the Rykoff-Sexton acquisition consisted primarily of change in control payments made to former executives of Rykoff-Sexton and severance, idle facility and facility closure costs related to U.S. Foodservice's plan to consolidate and realign some operating units and consolidate various overhead functions. These costs were offset in part by a reversal of $3.0 million of unutilized reserves from a prior restructuring. The reversal related to activities for which the actual costs were overestimated or for which the contemplated restructuring plans were ultimately changed. 21 Asset impairment charges of $35.5 million consisted of writedowns to net realizable value of assets and facilities at operating units that were consolidated or realigned and assets related to management information systems which are being replaced and not currently utilized. Income from Operations. Excluding the impact of the acquisition related costs, income from operations increased 22.1% to $178.1 million in fiscal 1998 from $145.8 million in fiscal 1997. This increase resulted in an operating margin of 3.2% in fiscal 1998 compared to an operating margin of 2.8% in fiscal 1997 and was primarily attributable to reduced operating expenses and the cost reductions achieved in integrating the Rykoff-Sexton operations. Interest Expense and Other Financing Costs, Net. Interest expense and other financing costs, net, 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 indebtedness of U.S. Foodservice. U.S. Foodservice'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 Rykoff-Sexton acquisition. Nonrecurring Charges. Nonrecurring charges of $17.8 million principally related to fees for financial advisory, legal, accounting and other professional services incurred to consummate the Rykoff-Sexton acquisition. During fiscal 1997, U.S. Foodservice recorded nonrecurring charges of $5.4 million with respect to legal and other professional fees required to complete the acquisitions of Valley and Squeri. Provision for Income Taxes (Benefit). During fiscal 1998, U.S. Foodservice recognized an income tax benefit at an effective rate of (21.0)% compared to an income tax expense at an effective rate of 40.5% for fiscal 1997. The rate for fiscal 1998 reflects the effect on the income tax provision of the non- deductibility of some of the acquisition related costs. U.S. Foodservice's effective tax rate for fiscal 1998 before the effect of the acquisition related costs was 39.9%. Extraordinary Charge. In fiscal 1998, U.S. Foodservice recorded an extraordinary charge of $9.7 million, net of a $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 U.S. Foodservice's senior notes due 2004, in accordance with the senior note terms. Quarterly Results and Seasonality U.S. Foodservice's operating results historically have reflected modest seasonal variations. U.S. Foodservice generally experiences lower net sales and income from operations during its third quarter, which includes the winter months. Winter weather conditions in some regions of the country typically result in reduced patronage at restaurants and other foodservice establishments and contribute to higher distribution costs. In the second and third quarters of fiscal 1998, U.S. Foodservice incurred acquisition related costs totaling approximately $138.0 million, which significantly affected U.S. Foodservice's reported results for those quarters. See note 16 to the consolidated financial statements appearing elsewhere in this report for more information about these costs. 22 The following tables present selected statement of operations data for each of the last eight fiscal quarters:
(Dollars in thousands, except per share amounts) 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% Income (loss) before extraordinary charge........ $ 9,791 $ (70,622) $ (3,260) $ 26,799 Net income (loss) per common share (3): Basic: Before extraordinary charge.................. $ 0.11 $ (0.78) $ (0.04) $ 0.29 Net income (loss)............................ $ 0.11 $ (0.89) $ (0.04) $ 0.29 Diluted: Before extraordinary charge.................. $ 0.11 $ (0.78) $ (0.04) $ 0.29 Net income (loss)............................ $ 0.11 $ (0.89) $ (0.04) $ 0.29 Fiscal Year Ended July 3, 1999 ----------------------------------------------------------------------- 1st 2nd 3rd 4th -------------- ---------------- ---------------- ---------------- Quarter Quarter Quarter Quarter(4) -------------- ---------------- ---------------- ---------------- Net sales........................................ $1,478,370 $1,533,089 $1,471,076 $1,715,873 Gross profit..................................... 269,977 282,082 273,281 321,000 Income from operations........................... 45,039 51,249 43,586 72,292 Operating margin................................. 3.0% 3.3% 3.0% 4.2% Income before extraordinary charge............... $ 16,912 $ 20,608 $ 16,481 $ 34,281 Net income per common share (3): Basic: Before extraordinary charge.................. $ 0.18 $ 0.22 $ 0.17 $ 0.35 Net income................................... $ 0.18 $ 0.19 $ 0.17 $ 0.32 Diluted: Before extraordinary charge.................. $ 0.18 $ 0.21 $ 0.17 $ 0.34 Net income................................... $ 0.18 $ 0.19 $ 0.17 $ 0.32
(1) In the second quarter of fiscal 1998, U.S. Foodservice incurred $112.6 million of the total $138.0 million of acquisition related costs. Excluding these charges, gross profit would have been $262.5 million, income from operations would have been $42.0 million, the operating margin would have been 3.1%, income before extraordinary charge would have been $12.8 million and diluted earnings per common share, before extraordinary charge, would have been $.14 per share. (2) In the third quarter of fiscal 1998, U.S. Foodservice incurred $25.4 million of the total $138.0 million of acquisition related costs. Excluding these charges, gross profit would have been $250.6 million, income from operations would have been $38.1 million, the operating margin would have been 2.8%, income before extraordinary charge would have been $13.3 million and diluted earnings per common share, before extraordinary charge, would have been $.15 per share. (3) Per share data have been retroactively adjusted to reflect the two-for-one stock split effected on August 4, 1999. (4) Represents a 14-week period compared to 13 weeks for all other periods. 23 Liquidity and Capital Resources U.S. Foodservice historically has financed its operations and growth primarily with cash flow from operations, equity offerings, borrowings under its credit facilities, and operating and capital leases. Cash Flows from Operating Activities. Net cash flows provided by operating activities were $172.0 million in fiscal 1999, $70.7 million in fiscal 1998 and $116.1 million in fiscal 1997. The $101.5 million increase in net cash flow from operations in fiscal 1999 primarily reflected $83.2 million of net income and a $57.6 million deferred gain on the sale of manufacturing assets recorded in fiscal 1999 as well as $100 million of proceeds from the additional sale of accounts receivable under U.S. Foodservice's accounts receivable securitization arrangements. These amounts were offset in part by a $59.4 million increase in inventories and a $37.9 million decrease in accounts payable and accrued expenses. U.S. Foodservice's net working capital requirements generally average between 5.0% and 6.0% of annual sales. U.S. Foodservice's working capital balance, excluding the current portion of long-term debt, of $386.8 million at July 3, 1999 increased by $91.4 million from the balance at June 27, 1998. The higher working capital balances were primarily attributable to increased net sales and acquisitions. Cash Flows from Investing Activities. Net cash used in investing activities was $49.4 million in fiscal 1999, $102.3 million in fiscal 1998 and $106.8 million in fiscal 1997. Net cash flows used in investing activities in fiscal 1999 included $68.4 million of capital expenditures. U.S. Foodservice's capital expenditures were for facility expansion projects and upgrading of management information systems. Cash flows required for capital expenditures were offset in part by proceeds of $36.9 million received from the sale of manufacturing division assets and the sale of idle facilities acquired in the Rykoff-Sexton acquisition. Net cash flows used for investing activities in fiscal 1999 also included $18.1 million of costs related to the acquisitions of Webb and Sofco. U.S. Foodservice currently expects to make net capital expenditures of approximately $50.3 million in fiscal 2000, including approximately $34.9 million to upgrade and expand its existing facilities. Cash Flows from Financing Activities. Net cash flows provided by (used in) financing activities were ($100.7) million in fiscal 1999, $15.0 million in fiscal 1998 and $30.8 million in fiscal 1997. Net cash flows used in financing activities in fiscal 1999 included $120.2 million used to redeem and retire Rykoff-Sexton's 8 7/8% senior subordinated notes due 2003 and $41.6 million of principal payments on long-term debt. These amounts were offset in part by $43.2 million received from the sale of common stock in a public offering and proceeds of $19.7 million from employee stock purchases. U.S. Foodservice has a bank credit facility which provides for a $550.0 million five-year revolving credit facility and a $200.0 million term facility (the "credit facility"). Borrowings under the credit facility bear interest at U.S. Foodservice's option at a rate equal to the sum of (a) the London Interbank Offered Rate (LIBOR), a specified prime rate, 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 U.S. Foodservice's ratio of debt to cash flow. Annual facility fees are based on the same formula and vary between .055% and .2%. At July 3, 1999, borrowing rates were based on LIBOR plus an applicable margin of between .35% and .375% and averaged 5.54%, excluding the amortization of deferred financing costs. The credit facility includes a $75.0 million facility for standby and commercial letters of credit and a $50.0 million swing-line facility for same-day borrowings. At July 3, 1999, $506.0 million of borrowings and $36.9 million of letters of credit were 24 outstanding under the credit facility and an additional $207.1 million remained available to finance U.S. Foodservice's working capital needs and to meet its other liquidity requirements. The credit facility includes a number of covenants which require U.S. Foodservice to maintain financial ratios and restrict U.S. Foodservice's ability to incur additional indebtedness and pay cash dividends. U.S. Foodservice has entered into accounts receivable securitization arrangements to sell accounts receivables on a revolving basis. In the third quarter of fiscal 1999, U.S. Foodservice increased the maximum amount of receivables eligible for sale under these arrangements from $250 million to $353 million, thereby increasing its borrowing capacity by $103 million. At July 3, 1999, U.S. Foodservice was utilizing $353 million of the existing capacity. As of July 3, 1999, U.S. Foodservice's long-term indebtedness, including current portion, totaled $565.4 million, with an overall weighted average interest rate of 6.3%, excluding deferred financing costs. From time to time, U.S. Foodservice acquires other foodservice businesses. U.S. Foodservice may acquire any such business for cash, common stock 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 debt or equity securities. U.S. Foodservice believes that the combination of cash flow generated by its operations, additional capital leasing activity, sales of duplicate assets, sales of accounts receivable under its securitization arrangements and borrowings under the 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. U.S. Foodservice's Program. U.S. Foodservice has undertaken a program to address the Year 2000 issue with respect to the following: . U.S. Foodservice's information technology and operating systems, including its billing, accounting and financial reporting systems; . U.S. Foodservice's non-information technology systems, such as buildings, plant, equipment, telephone systems and other infrastructure systems that may contain embedded microcontroller technology; . selected systems of U.S. Foodservice's major vendors and significant service providers, insofar as these systems relate to U.S. Foodservice's business activities with such parties; and . U.S. Foodservice's significant customers, insofar as the Year 2000 issue relates to U.S. Foodservice's ability to provide services to these customers. 25 As described below, U.S. Foodservice's Year 2000 program involves: . an assessment of the Year 2000 problems that may affect U.S. Foodservice; . the development and testing of remedies to address the problems discovered in the assessment phase; and . the preparation of contingency plans to deal with worst case scenarios. Assessment Phase. U.S. Foodservice has completed the evaluation of its own internal systems, which include the various information systems used at U.S. Foodservice's 37 full-service distribution centers, two specialty products, equipment and supply warehouses, and corporate headquarters to process transactions and meet financial reporting needs. In addition, U.S. Foodservice has completed the process of sending letters to its major vendors and significant service providers requesting them to provide U.S. Foodservice with detailed, written information concerning existing or anticipated Year 2000 compliance by their systems insofar as the systems relate to these parties' business activities with U.S. Foodservice. U.S. Foodservice has received responses from approximately 60% of the vendors from which it has requested this information. U.S. Foodservice is continuing to evaluate responses on Year 2000 compliance from the third parties that have responded to U.S. Foodservice's inquiries. Remediation and Testing Phase. The activities conducted during the remediation and testing phase are intended to address potential Year 2000 problems in internally-developed computer software and in U.S. Foodservice's other information technology systems. During fiscal 1999, among other activities, U.S. Foodservice replaced information processing systems, consisting of hardware and software, at five distribution centers, completed software remediation efforts at the remaining distribution centers, and installed a new payroll and human resources information system at 35 distribution centers and its corporate headquarters. As of the date of this report, U.S. Foodservice has completed the remediation, testing and implementation of the Year 2000 ready programs for the mission-critical systems at 36 of U.S. Foodservice's 37 full-service distribution centers, two specialty products, equipment and supply warehouses, and corporate headquarters. U.S. Foodservice plans to convert the remaining distribution center by year-end to a Year 2000 ready system that is in use at other distribution centers. U.S. Foodservice is continuing to conduct enterprise-wide testing for the purpose of demonstrating functional integrated systems operation. U.S. Foodservice is also addressing potential Year 2000 compliance issues with non-information technology equipment, including telephone systems, heating and air conditioning. Contingency Plans. U.S. Foodservice is continuing to develop contingency plans to address its most reasonably likely worst case scenarios, which it has not yet fully identified. U.S. Foodservice expects to continue to develop contingency plans through the end of calendar 1999. Costs Related to the Year 2000 Issue. As of July 3, 1999, U.S. Foodservice had incurred approximately $2.5 million in costs for its Year 2000 program. These costs do not include internal staff costs, consisting principally of payroll costs, incurred on Year 2000 matters, because U.S. Foodservice does not separately track these internal staff costs. As of July 3, 1999, U.S. Foodservice also had made approximately $16.7 million of capital expenditures on new information processing systems that are already Year 2000 compliant. U.S. Foodservice currently estimates that it will incur additional costs, which are not expected to exceed $0.5 million, excluding internal staff costs, to complete its Year 2000 compliance work with respect to U.S. Foodservice's major information systems. All of these additional costs are expected to be incurred during fiscal 2000. These costs will 26 be expensed as incurred. Actual costs may vary from the foregoing estimates based on U.S. Foodservice's evaluation of responses to its third-party inquiries and on the results of its remaining remediation and testing activities. U.S. Foodservice expects to fund its Year 2000 remediation costs out of the cash flows generated by its operations. U.S. Foodservice has not deferred any of its material information technology projects to date as a result of the Year 2000 issue. U.S. Foodservice 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. Risks Related to the Year 2000 Issue. Although U.S. Foodservice's Year 2000 efforts are intended to minimize the adverse effects of the Year 2000 issue on its business and operations, the actual effects of the issue and the success or failure of U.S. Foodservice's efforts described above cannot be known until the year 2000. Failure by U.S. Foodservice and its major vendors and significant service providers and customers to address adequately their respective Year 2000 issues in a timely manner, insofar as these issues relate to U.S. Foodservice's business, could have a material adverse effect on U.S. Foodservice's business, results of operations and financial condition. Changes in Accounting Standards During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activity. 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. In accordance with the pronouncement, U.S. Foodservice will adopt SFAS No. 133, as amended, in fiscal 2001. U.S. Foodservice 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 this Statement of Position, as of the beginning of the fiscal year in which it is adopted, be reported as a cumulative effect of a change in accounting principle. U.S. Foodservice expects to adopt SOP 98-5 in fiscal 2000. U.S. Foodservice does not expect the cumulative effect of adoption to be material. Item 7A. Quantitative and Qualitative Disclosures About Market Risk U.S. Foodservice's major market risk exposure is to changing interest rates. U.S. Foodservice's policy is to manage interest rates through the use of a combination of fixed and floating rate debt. U.S. Foodservice uses interest rate swap, cap and collar contracts to manage its exposure to fluctuations in interest rates on floating long-term debt. U.S. Foodservice has implemented management monitoring processes designed to minimize the impact of sudden and sustained changes in interest rates. As of July 3, 1999, U.S. Foodservice had effectively fixed its interest rate exposure at 5.97% on approximately $70 million of its floating rate debt through March 2000. In addition, as of the same date, U.S. Foodservice had fixed its interest exposure on an additional $129 million of floating rate debt at 8.875% through November 1, 2003. U.S. Foodservice would have incurred a loss of approximately $0.6 million if it had terminated each of its interest rate contracts as of July 3, 1999. 27 U.S. Foodservice sells accounts receivable on a revolving basis under accounts receivable securitization arrangements. In the third quarter of fiscal 1999, U.S. Foodservice increased the maximum amount of receivables eligible for sale under these arrangements from $250 million to $353 million. The proceeds received from sales of receivables under these arrangements, which is accounted for under SFAS No. 125, is based to a large extent on LIBOR. For information about U.S. Foodservice's accounts receivable securitization arrangements, see note 8 to the consolidated financial statements appearing elsewhere in this report. U.S. Foodservice also uses fixed-rate capital leases to finance some of its trucks and trailers. 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 Acounting and Financial Disclosure Not Applicable. 28 PART III Item 10. Director and Executive Officers of the Registrant Information responsive to this Item is incorporated herein by reference to U.S. Foodservice's definitive proxy statement for the 1999 Annual Meeting of Stockholders. Item 11. Executive Compensation Information responsive to this Item is incorporated herein by reference to U.S. Foodservice's definitive proxy statement for the 1999 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 U.S. Foodservice's definitive proxy statement for the 1999 annual meeting of stockholders. Item 13. Certain Relationships and Related Transactions Information responsive to this Item is incorporated herein by reference to U.S. Foodservice's definitive proxy statement for the 1999 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 Accountants' Report. Report of Independent Public Accountants. Consolidated Balance Sheets as of June 27, 1998 and July 3, 1999. Consolidated Statements of Operations for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999. Consolidated Statements of Stockholders' Equity for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999. Consolidated Statements of Cash Flows for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999. 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 SEC are not required under the related instructions or are inapplicable and therefore have been omitted. 30 3. Exhibits 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 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1999 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"). 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. 4.2.6 Amendment No. 5 to the Rights Agreement, dated as of March 25, 1999 Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on March 26, 1999 and incorporated herein by reference. 4.2.7 Amendment No. 6 to Rights Agreement, dated as of April 22, 1999 Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 22, 1999 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 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. 10.3 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. 10.4 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. 10.5 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. *10.6 Employment Agreement, dated as of June 24, 1999, between the Company and George T. Megas. 10.7 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 31 Report on Form 10-K for the fiscal year ended June 29, 1996 and incorporated herein by reference. 10.8 1994 Stock Incentive Plan, as amended, of U.S. Foodservice. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 1998 and incorporated herein by reference. *10.9 Stock Option Plan for Outside Directors, as amended, of U.S. Foodservice. *10.10 U.S. Foodservice Supplemental Executive Retirement Plan, as amended. *10.11 U.S. Foodservice Restricted Stock Unit Plan, as amended. *10.12 U.S. Foodservice 1998 Stock Option and Incentive Plan, as amended. 10.13 Description of material terms for payment of annual executive compensation. Filed as Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter ended March 27, 1999 and incorporated herein by reference. 10.14 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. 10.15 Non-Employee Director Voluntary Deferred Compensation Plan. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1998 and incorporated herein by reference. 10.16 Rykoff-Sexton, Inc. 1993 Director Stock Option Plan, as amended. Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 and incorporated herein by reference. 10.17.1 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. 10.17.2 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. 10.18.1 364-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 32 Quarterly Report on Form 10-Q for the quarterly period ended December 27, 1997 and incorporated herein by reference. 10.18.2 364-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. *10.19.1 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"). 10.19.2 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. 10.19.3 Guaranty, dated as of December 23, 1997, of the Company 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. 10.20.1 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) (Commission File No. 0-8105). 10.20.2 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). (Commission File No. 0-8105). 10.20.3 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). (Commission File No. 0-8105). 10.20.4 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). (Commission File No. 0-8105). 33 10.20.5 Series 1998-1 Supplement, dated as of December 31, 1998, to Pooling Agreement, dated as of November 15, 1996, among RS Funding Inc., U.S. Foodservice, Inc. and The Chase Manhattan Bank, as Trustee. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1998 and incorporated herein by reference. 10.20.6 SPC Receivables Sale Agreement, dated as of December 31, 1998, among JPFD Funding Company and RS Funding Inc. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1998 and incorporated herein by reference. 10.20.7 Additional Seller/Servicer Supplement, dated December 31, 1998, to (i) Receivables Sale Agreement, dated as of November 15, 1996 (as amended, supplemented or otherwise modified from time to time), among the Sellers from time to time party thereto, U.S. Foodservice, Inc. and RS Funding Inc. and (ii) Servicing Agreement, dated as of November 15, 1996 (as amended, supplemented or otherwise modified from time to time), among U.S. Foodservice, Inc., RS Funding Inc., the SubServicers from time to time party thereto and The Chase Manhattan Bank, as Trustee. Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 26, 1998 and incorporated herein by reference. 10.21 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). (Commission File No. 0-8105). 10.22 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). (Commission File No. 0-8105). 10.23.1 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). (Commission File No. 0-8105). 10.23.2 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 fiscal quarter ended December 27, 1997 and incorporated herein by reference. 10.24.1 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)). 10.24.2 Amendment Number One to BRB Holdings Commitment Agreement, dated as of September 27, 1995, by Sara Lee Corporation and BRB Holdings, Inc. 34 and guaranteed by US Foodservice Inc. (incorporated by reference from Rykoff-Sexton, Inc.'s Registration Statement on Form S-4 (No. 333-02715)). 10.25.1 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)). 10.25.2 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)). 10.26 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 as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 and incorporated herein by reference. 10.27 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 as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 and incorporated herein by reference. 10.28 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 as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 and incorporated herein by reference. 10.29 First Amendment to Certain Operative Agreements dated as of January 21, 1999 by and among JP Foodservice Distributors, Inc., the Guarantors referenced therein, 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 as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 1999 and incorporated herein by reference. *+10.30 Information Technology Services Agreement, dated May 7, 1999, between U.S. Foodservice and Lockheed Martin Corporation. *21 Subsidiaries of the Company. *23.1 Consent of KPMG LLP, independent public accountants. *23.2 Consent of Arthur Andersen LLP, independent public accountants. 35 *27 Financial Data Schedule. --------------------- * Filed herewith. + Confidential treatment has been requested for portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act. The copy filed as an exhibit to this report omits the information subject to the confidential treatment request. (b) Reports on Form 8-K. The following reports on Form 8-K were filed by the Company in the fourth quarter of fiscal 1999:
Date of Report Item Reported -------------- ------------- April 22, 1999 Item 5. (Amendment No. 6 to Rights Agreement). June 25, 1999 Item 5. (Cautionary Statements/Risk Factors). June 30, 1999 Item 5. (Two-for-one Stock Split).
36 U.S. FOODSERVICE AND SUBSIDIARIES Index to Consolidated Financial Statements
Page Consolidated Financial Statements Independent Accountants' Report........................................ F-2 Report of Independent Public Accountants............................... F-3 Consolidated Balance Sheets as of June 27, 1998 and July 3, 1999....... F-4 Consolidated Statements of Operations for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999......................... F-5 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999............. F-6 Consolidated Statements of Cash Flows for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999........................ F-7 Notes to Consolidated Financial Statements............................. F-9
37 U.S. FOODSERVICE AND SUBSIDIARIES Index to Consolidated Financial Statements
Page Consolidated Financial Statements Independent Accountants' Report........................................ F-2 Report of Independent Public Accountants............................... F-3 Consolidated Balance Sheets as of June 27, 1998 and July 3, 1999....... F-4 Consolidated Statements of Operations for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999......................... F-5 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999............. F-6 Consolidated Statements of Cash Flows for the fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999........................ F-7 Notes to Consolidated Financial Statements............................. F-9
F-1 INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors and Stockholders U.S. Foodservice: We have audited the accompanying consolidated balance sheets of U.S. Foodservice and subsidiaries as of June 27, 1998 and July 3, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended July 3, 1999. 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. for the year ended June 28, 1997, which consolidated financial statements reflect 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 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 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 other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Foodservice and subsidiaries as of June 27, 1998 and July 3, 1999, and the results of their operations and their cash flows for each of the years in the three year period ended July 3, 1999 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. /s/ KPMG LLP Baltimore, Maryland August 16, 1999 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rykoff-Sexton, Inc.: We have audited the consolidated statements of operations, shareholders' equity and cash flows of Rykoff-Sexton, Inc. (a Delaware Corporation) and subsidiaries for the fiscal year ended June 28, 1997. 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 audit. 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 assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of Rykoff-Sexton, Inc. and subsidiaries' operations and their cash flows for the fiscal year ended June 28, 1997 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Philadelphia, PA August 14, 1997 F-3 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except share amounts)
- ----------------------------------------------------------------------------------------------------- June 27, July 3, 1998 1999 - ----------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 57,817 $ 79,660 Receivables, net 215,459 234,107 Residual interest in accounts receivable sold 106,581 102,369 Inventories 349,583 428,193 Other current assets 28,548 31,949 Deferred income taxes 39,294 18,853 - ----------------------------------------------------------------------------------------------------- Total current assets 797,282 895,131 Property and equipment, net 437,265 454,033 Goodwill, net of accumulated amortization of $45,960 and $64,617 561,695 637,107 Other noncurrent assets 21,549 26,603 - ----------------------------------------------------------------------------------------------------- Total assets $ 1,817,791 $ 2,012,874 - ----------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 604 $ 698 Current obligations under capital leases 6,933 6,206 Accounts payable 381,151 393,597 Accrued expenses 120,778 114,690 - ----------------------------------------------------------------------------------------------------- Total current liabilities 509,466 515,191 Long-term debt 650,679 533,869 Obligations under capital leases 29,946 24,671 Deferred income taxes 6,064 13,051 Other noncurrent liabilities 36,916 96,713 - ----------------------------------------------------------------------------------------------------- Total liabilities 1,233,071 1,183,495 - ----------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 150,000,000 shares authorized, 92,669,632 and 101,238,290 shares outstanding 926 1,012 Additional paid-in-capital 579,074 740,413 Retained earnings 4,720 87,954 - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 584,720 829,379 - ----------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (notes 9 and 17) - ----------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,817,791 $ 2,012,874 - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Operations (Dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ---------------------------------- June 28, June 27, July 3, 1997 1998 1999 - -------------------------------------------------------------------------------------------------- Net sales $ 5,169,406 $ 5,506,949 $ 6,198,408 Cost of sales 4,166,332 4,465,281 5,052,068 - -------------------------------------------------------------------------------------------------- Gross profit 1,003,074 1,041,668 1,146,340 Operating expenses 845,901 876,170 917,094 Amortization of intangible assets 15,349 15,354 17,080 Restructuring costs (reversal) (4,000) 53,715 -- Charge for impairment of long-lived assets -- 35,530 -- - -------------------------------------------------------------------------------------------------- Income from operations 145,824 60,899 212,166 Interest expense and other financing costs, net 76,063 73,894 64,974 Nonrecurring charges 5,400 17,822 -- - -------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary charge 64,361 (30,817) 147,192 Provision for income taxes 26,075 6,475 58,910 - -------------------------------------------------------------------------------------------------- Income (loss) before extraordinary charge 38,286 (37,292) 88,282 Extraordinary charge on early extinguishment of debt, (net of income tax benefit of $6,325 and $3,227) -- (9,712) (5,048) - -------------------------------------------------------------------------------------------------- Net and comprehensive income (loss) $ 38,286 $ (47,004) $ 83,234 - -------------------------------------------------------------------------------------------------- Net income (loss) per common share: Basic: Before extraordinary charge $ 0.44 $ (0.41) $ 0.92 Extraordinary charge -- (0.11) (0.05) - -------------------------------------------------------------------------------------------------- Net income (loss) per common share $ 0.44 $ (0.52) $ 0.87 - -------------------------------------------------------------------------------------------------- Diluted: Before extraordinary charge $ 0.43 $ (0.41) $ 0.91 Extraordinary charge -- (0.11) (0.05) - -------------------------------------------------------------------------------------------------- Net income (loss) per common share $ 0.43 $ (0.52) $ 0.86 - -------------------------------------------------------------------------------------------------- Weighted average common shares: Basic 86,902 90,640 95,922 Diluted 88,126 90,640 97,190 - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 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 June 29, 1996 $ 808 $ 486,745 $ 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 62 65,913 -- -- 65,975 Stock issued in connection with business acquisitions 8 9,750 -- -- 9,758 Dividends to stockholders of acquired companies -- -- (1,670) -- (1,670) Stock options exercised, including related tax benefit 6 3,689 -- -- 3,695 Treasury stock purchased and canceled -- (12) -- -- (12) Stock compensation -- 554 -- -- 554 Employee stock purchases -- 837 -- -- 837 Contributions to 401(k) plan 2 1,553 -- -- 1,555 Adjustments with respect to acquisitions -- 2,450 (2,503) -- (53) - ------------------------------------------------------------------------------------------------------------------ Balance June 28, 1997 886 526,536 51,724 -- 579,146 Net loss -- -- (47,004) -- (47,004) Stock issued in connection with business acquisitions 10 17,588 -- -- 17,598 Stock options exercised, including related tax benefit 26 31,996 -- -- 32,022 Treasury stock purchased and canceled (8) (12,409) -- -- (12,417) Stock compensation 10 12,207 -- -- 12,217 Employee stock purchases -- 1,197 -- -- 1,197 Contributions to 401(k) plan 2 1,959 -- -- 1,961 - ------------------------------------------------------------------------------------------------------------------ Balance June 27, 1998 926 579,074 4,720 -- 584,720 Net income -- -- 83,234 -- 83,234 Public stock offering 24 43,159 -- -- 43,183 Stock issued in connection with business acquisitions 41 88,475 -- -- 88,516 Stock options exercised, including related tax benefit 12 14,176 -- -- 14,188 Warrants exercised -- 2,098 -- -- 2,098 Employee stock purchases 2 3,406 -- -- 3,408 Adjustments with respect to acquisitions 7 10,025 -- -- 10,032 - ------------------------------------------------------------------------------------------------------------------ Balance July 3, 1999 $ 1,012 $ 740,413 $ 87,954 $ -- $ 829,379 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-6 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands)
- -------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ---------------------------------- June 28, June 27, July 3, 1997 1998 1999 - -------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 38,286 $ (47,004) $ 83,234 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of property and equipment 41,834 44,475 39,662 Amortization of intangible assets 15,349 15,354 17,080 Gains on disposals of business assets (1,649) (1,670) (257) Write-off of deferred financing costs -- 9,172 2,092 Non-cash restructuring charge -- 13,110 -- Charge for impairment of long-lived assets -- 35,530 -- Deferred income taxes 8,848 9,379 36,377 Deferred gain on outsourcing of manufacturing division -- -- 57,635 Changes in operating assets and liabilities, net of effects from purchase acquisitions: (Increase) decrease in receivables and residual interest in accounts receivable sold 22,990 (39,765) 36,894 (Increase) decrease in inventories 12,952 (22,109) (59,402) (Increase) decrease in other current assets 10,623 1,905 (2,803) Increase (decrease) in accounts payable and accrued expenses (33,819) 45,985 (37,859) Other 732 6,298 (692) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 116,146 70,660 171,961 - -------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (88,436) (95,511) (68,413) Costs of businesses acquired, net of cash acquired (35,964) (38,742) (18,061) Proceeds from disposals of business assets 10,321 32,086 36,897 Other 7,316 (123) 129 - -------------------------------------------------------------------------------------------------- Net cash used in investing activities (106,763) (102,290) (49,448) - -------------------------------------------------------------------------------------------------- (Continued)
F-7 U.S. FOODSERVICE AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Dollars in thousands)
- -------------------------------------------------------------------------------------------------- Fiscal Years Ended (Notes 3 and 4) ---------------------------------- June 28, June 27, July 3, 1997 1998 1999 - -------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in borrowings under revolving lines of credit $ 47,700 $ 438,500 $ 3,800 Proceeds from issuance of long-term debt 25,953 -- -- Principal payments on long-term debt (105,614) (439,843) (161,805) Payments of obligations under capital lease (5,957) (6,184) (6,213) Net proceeds from public offerings of common stock 65,975 -- 43,183 Proceeds from other issuances of common stock 5,086 33,219 19,694 Dividends paid by Rykoff-Sexton, Inc. (1,670) -- -- Purchases of treasury stock (12) (12,417) -- Other (681) 1,740 671 - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 30,780 15,015 (100,670) - -------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 40,163 (16,615) 21,843 Cash and cash equivalents: Beginning of period 34,269 74,432 57,817 - -------------------------------------------------------------------------------------------------- End of period $ 74,432 $ 57,817 $ 79,660 - -------------------------------------------------------------------------------------------------- Supplemental disclosure of cash paid during the year for: Interest $ 59,035 $ 54,454 $ 46,905 Income taxes $ 15,777 $ 851 $ 15,781 - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-8 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 one of the largest broadline foodservice distributors 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 and encompass both independent "street" and multi-unit "chain" businesses. No single customer accounts for more than 10% of the Company's customer accounts receivable 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 (see note 3). 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. Fiscal Year The Company operates on a 52-53 week fiscal calendar with its fiscal year ending on the Saturday closest to June 30. The fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999 are referred to as "fiscal 1997," "fiscal 1998" and "fiscal 1999," respectively. Fiscal 1997 and 1998 are 52-week years and fiscal 1999 is a 53-week year. C. Cash Equivalents For purposes of consolidated 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. F-9 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements D. Fair Value of Financial Instruments 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 approximates carrying value. Fair values of other financial instruments, such as receivables and payables, approximate carrying values because of the short-term nature of these items. E. 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 upon the sale of the product, while allowances and credits associated with the Company's merchandising activities are recognized as the services are performed. F. 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. G. 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 statements of operations. The Company capitalizes the costs of computer software developed or obtained for internal use. Such costs are amortized over a period of five to seven years after the assets are placed into service. 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 F-10 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consoldiated Financial Statements H. 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. I. Other Noncurrent Assets Other noncurrent assets consist principally of deferred financing costs, noncompete agreements, and other assets. 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. J. 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. K. 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. L. Net Income (Loss) Per Common Share Basic net income (loss) per common share is based on the weighted 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, warrants and obligations convertible into common stock. In June 1999, the Company's Board of Directors approved a two-for-one stock split in the form of a stock dividend paid on August 4, 1999 to stockholders of record on July 20, 1999. Earnings per share, weighted average shares outstanding and stock option information included in the accompanying consolidated financial statements and related notes have been adjusted to reflect this stock split. M. Derivative Instruments F-11 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. N. Accounting for Stock-Based Compensation The Company applies the intrinsic value method to account for stock-based compensation to employees and directors. O. Comprehensive Income On June 28, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS), No. 130, Reporting Comprehensive Income. Adoption had no impact on the Company's consolidated financial statements, as comprehensive income (loss) and net income (loss) were the same for fiscal 1997, 1998 and 1999. P. 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. Q. Recently Enacted Accounting Pronouncements Statement of Financial Accounting Standards - During 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity. 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. 133, as amended, during fiscal 2001, 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. F-12 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements R. Reclassifications Certain amounts in the fiscal 1997 and fiscal 1998 consolidated financial statements have been reclassified to conform to the fiscal 1999 presentation. NOTE 3 - 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 45,314,996 shares of common stock with an approximate value of $782.0 million. Each outstanding share of common stock of Rykoff-Sexton was exchanged for 1.55 shares of JP Foodservice common stock (the "Exchange Ratio"). The transaction was accounted for under the pooling of interests method of accounting. Accordingly, the consolidated financial statements for fiscal 1997 have been restated to include consolidated financial information for Rykoff-Sexton. See note 16 for information about restructuring and other charges recorded in fiscal 1998 with respect to the acquisition. Net sales of $1,691,913 and $3,477,493 and net income of $22,248 and $16,038 previously reported by JP Foodservice and Rykoff-Sexton, respectively, were combined and are presented in the accompanying consolidated statements of operations for fiscal 1997. NOTE 4 - OTHER ACQUISITIONS Acquisition Accounted For As Pooling of Interests Haar Acquisition - Effective September 27, 1998, the Company completed the acquisition of J.H. Haar & Sons, L.L.C. ("Haar"), a broadline foodservice distributor serving the New York City metropolitan market. Under the terms of the acquisition, the Company acquired all of the membership interests in Haar in exchange for 1,101,086 shares of the Company's common stock. The transaction was accounted for as a pooling of interests. Due to the fact that Haar's total assets, net assets and the results of operations were not material to the Company for any of the fiscal years presented, the transaction was recorded as of September 27, 1998. Results of Haar for the period from September 27, 1998 to July 3, 1999 are included in the Company's fiscal 1999 consolidated statement of operations. F-13 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements Acquisitions Accounted for as a Purchase Sofco Acquisition - On July 1, 1999, the Company completed the acquisition of Sofco, Inc. ("Sofco"), a paper product distributor located in Scotia, New York. Under the terms of the acquisition, the Company acquired all of the outstanding stock and assumed or discharged certain liabilities in exchange for 2,106,924 shares of the Company's common stock. The excess of the purchase price over the fair value of the net tangible assets of approximately $33.4 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. No results of Sofco were included in the Company's fiscal 1999 consolidated statement of operations. Webb Acquisition - Effective November 1, 1998, the Company completed the acquisition of Joseph Webb Foods, Inc. ("Webb"), a broadline foodservice distributor located in Vista, California. Under the terms of the acquisition, the Company acquired all of the outstanding stock of Webb in exchange for 1,792,114 shares of the Company's common stock and $8.0 million in cash, including transaction costs. In addition, the agreement includes a provision for additional stock issuance based on achievement of future sales performance targets. The excess of the purchase price over net tangible assets acquired of approximately $52.6 million has been allocated to goodwill and is being amortized using the straight-line method over 40 years. Results of Webb for the period November 1, 1998 to July 3, 1999 are included in the Company's fiscal 1999 consolidated statement of operations. Westlund Acquisition - On March 20, 1998, the Company completed the acquisition of Westlund Provisions, Inc. ("Westlund"), a foodservice distributor specializing in 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 458,140 shares of the Company's common stock. The excess of the purchase price over the fair value of the net tangible 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 are 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 the outstanding common stock and assumed or discharged certain liabilities of Sorrento and paid cash consideration of approximately $39.0 million. The excess of the purchase price over the fair value of the net tangible 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 are included in the Company's fiscal 1998 consolidated statement of operations. F-14 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 745,834 shares of the Company's common stock. The excess of the purchase price over the fair value of the net tangible 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 are included in the Company's fiscal 1998 consolidated statement of operations. Pro Forma Information - The tables below set forth unaudited pro forma information for fiscal 1998 and 1999, giving effect to the acquisitions of Haar, Sofco, Webb, Westlund, Sorrento and Outwest as if such acquisitions had been consummated as of June 29, 1997 (in thousands):
- ----------------------------------------------------------------------------------------------------- Fiscal 1998 Fiscal 1999 - ----------------------------------------------------------------------------------------------------- Net sales $ 6,025,161 $ 6,447,152 Income (loss) before income taxes and extraordinary item $ (31,313) $ 91,049 Net income (loss) $ (41,025) $ 86,001 Income (loss) per common share before extraordinary item: Basic $ (0.33) $ 0.93 Diluted $ (0.33) $ 0.92 Net income (loss) per common share: Basic $ (0.43) $ 0.88 Diluted $ (0.43) $ 0.87 - -----------------------------------------------------------------------------------------------------
Mazo-Lerch Acquisition - On June 19, 1997, the Company completed the acquisition of Mazo-Lerch Company, Inc. ("Mazo-Lerch"), a broadline foodservice distributor located in Alexandria, Virginia. Under the terms of the acquisition, the Company acquired all of the outstanding common stock of Mazo-Lerch in exchange for 558,536 shares of 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 Company's fiscal 1997 consolidated statement of operations. Arrow Acquisition - On August 31, 1996, the Company 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, the Company 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 147,954 shares of 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 Company's fiscal 1997 consolidated statement of operations. F-15 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consoidated Financial Statements NOTE 5 - RECEIVABLES Receivables are composed of the following (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- June 27, July 3, 1998 1999 - -------------------------------------------------------------------------------------------------------------------------- Customer accounts and notes $ 121,491 $ 96,702 Less allowance for doubtful accounts (15,818) (15,162) - -------------------------------------------------------------------------------------------------------------------------- Net customer 105,673 81,540 Income tax receivable - 11,479 Other receivables, principally from suppliers 109,786 141,088 - -------------------------------------------------------------------------------------------------------------------------- $ 215,459 $ 234,107 - --------------------------------------------------------------------------------------------------------------------------
The Company sells customer accounts receivable under its $353.0 million securitization arrangements (see note 8). NOTE 6 - PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- June 27, July 3, 1998 1999 - -------------------------------------------------------------------------------------------------------------------------- Land, buildings and improvements $ 363,117 $ 392,645 Machinery and equipment 269,846 258,043 Assets held under capital leases (note 9) 62,396 62,250 - -------------------------------------------------------------------------------------------------------------------------- 695,359 712,938 Accumulated depreciation (258,094) (258,905) - -------------------------------------------------------------------------------------------------------------------------- $ 437,265 $ 454,033 - --------------------------------------------------------------------------------------------------------------------------
The Company capitalizes interest costs as part of major asset construction projects. Capitalized interest was $1.1 million, $3.1 million and $1.1 million in fiscal 1997, 1998 and 1999, respectively. As of July 3, 1999, land and buildings for seven closed distribution facilities with a carrying value of approximately $17.3 million are held for sale. Each of the properties is currently listed for sale and the Company expects to dispose of such properties over the next two years. The effect of suspending depreciation on such properties was not material. F-16 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 - LONG-TERM DEBT Long-term debt is composed of the following (in thousands):
- -------------------------------------------------------------------------------- June 27, July 3, 1998 1999 - -------------------------------------------------------------------------------- Revolving line of credit $ 502,200 $ 506,000 Industrial development revenue bonds 25,900 25,900 8.875% Senior subordinated notes 120,163 - Other 3,020 2,667 - -------------------------------------------------------------------------------- Total long-term debt 651,283 534,567 Less current maturities of long-term debt 604 698 - -------------------------------------------------------------------------------- $ 650,679 $ 533,869 - --------------------------------------------------------------------------------
Revolving Line of Credit - The Company has a bank credit facility, which provides for a $550.0 million five-year revolving credit facility and a $200.0 million term facility (the "credit facility"). 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, 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. At July 3, 1999, interest rates on outstanding borrowings averaged 5.54% based on LIBOR plus an applicable margin between .35% and .375%. Annual facility fees are based on the same formula and will vary from .055% to .2%. The revolving credit facility includes a $75.0 million facility for standby and commercial letters of credit and a $50.0 million swing-line facility for same day borrowings. At July 3, 1999, borrowings of $506.0 million and letters of credit of $36.9 were outstanding and the Company had available borrowings of $207.1 million 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. Industrial Development Revenue Bonds -- These bonds are secured by a letter of credit issued on behalf of Rykoff-Sexton and 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 .8% (6% at July 3, 1999). Extraordinary Items - During fiscal 1999, the Company recorded an extraordinary charge of $5.0 million (net of a $3.2 million income tax benefit) related to the redemption and retirement of the Rykoff-Sexton 8 7/8% senior subordinated notes due 2003. The extraordinary charge consisted of a $6.1 million redemption premium paid to note holders and the write-off of $2.1 million of unamortized deferred financing costs. During fiscal 1998, in connection with the consummation of the credit facility described above, the Company recorded an extraordinary charge of $9.7 million (net of $6.3 million income tax benefit). The F-17 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 due 2004, which were retired in full. 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 July 3, 1999, the Company had effectively fixed its interest rate exposure at 5.97% on approximately $70.0 million of its floating rate debt through March 2000. In addition, as of the same date, the Company had effectively fixed its interest rate exposure on an additional $129.0 million of floating rate debt at 8.875% through November 1, 2003. If the Company had terminated each of the contracts on July 3, 1999, it would have had a loss of approximately $0.6 million. Interest Expense -- Interest expense and other financing costs were $76.1 million, $73.9 million and $65.0 million in fiscal 1997, 1998 and 1999, respectively. Interest expense included amortization of deferred financing costs of $2.7 million, $1.9 million and $1.4 million, respectively. Other financing costs of $16.0 million, $14.2 million and $15.9 million in fiscal 1997, 1998 and 1999, respectively, represent costs associated with the Company's trade accounts receivable securitization arrangements (see note 8). Debt Maturities -- The Company's aggregate annual principal payments applicable to long-term debt are as follows:
- -------------------------------------------------------------------------------- Fiscal Years - -------------------------------------------------------------------------------- 2000 $ 698 2001 414 2002 294 2003 506,243 2004 158 Thereafter 26,760 - -------------------------------------------------------------------------------- Total minimum lease payments $ 534,567 - --------------------------------------------------------------------------------
NOTE 8 - TRADE ACCOUNTS RECEIVABLE SECURITIZATION ARRANGEMENTS At December 31, 1998, the Company increased the capacity of its existing $250.0 million revolving securitization arrangements for accounts receivable to $353.0 million. Under these arrangements, 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 $353.0 million third-party interest. The Company effectively retains credit risk and is responsible for collection and administration activities. The Company's interest in the master trust has been included in the accompanying consolidated balance sheets as residual interest in accounts receivable sold. The Company accounts for the retained interest in accounts receivable at fair value. The net realizable value of the receivable portfolio approximates fair value due to the rapid collection of accounts sold. F-18 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 9 - LEASES The Company leases its corporate office facilities and certain distribution facilities and equipment under operating leases. The Company leases the majority of its delivery fleet under operating and capital leases. Charges to operations for all operating leases were $50.7 million, $50.5 million and $51.4 million in fiscal 1997, 1998 and 1999, 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 leases leases - -------------------------------------------------------------------------------- 2000 $ 40,939 $ 7,147 2001 33,905 6,545 2002 30,994 3,598 2003 25,179 4,132 2004 18,765 1,914 Thereafter 38,934 9,558 - -------------------------------------------------------------------------------- Total minimum lease payments 188,716 32,894 Less interest portion 2,017 - -------------------------------------------------------------------------------- Obligations under capital leases 30,877 Less current obligations 6,206 - -------------------------------------------------------------------------------- $ 24,671 - --------------------------------------------------------------------------------
During fiscal 1997, 1998 and 1999, the Company's additions to property and equipment of $6.0 million, $3.0 million and $0.2 million, respectively, were financed through capital lease obligations. F-19 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 10 - INCOME TAXES The components of income taxes with respect to income (loss) before extraordinary charge are as follows:
- -------------------------------------------------------------------------------- Fiscal 1997 Fiscal 1998 Fiscal 1999 - -------------------------------------------------------------------------------- Current tax expense (benefit): Federal $ 14,224 $ (1,857) $ 20,385 State and local 3,003 (1,047) 2,148 - -------------------------------------------------------------------------------- Total current 17,227 (2,904) 22,533 - -------------------------------------------------------------------------------- Deferred tax expense (benefit): Federal 10,354 7,216 32,987 State and local (1,506) 2,163 3,390 - -------------------------------------------------------------------------------- Total deferred 8,848 9,379 36,377 - -------------------------------------------------------------------------------- $ 26,075 $ 6,475 $ 58,910 - --------------------------------------------------------------------------------
In addition, in fiscal 1998 and 1999, the Company recognized current federal and state income tax benefits of $5.2 million and $1.1 million, respectively, and $2.9 million and $0.3 million, respectively, with respect to the losses on early extinguishment of debt. Temporary differences and the resulting deferred income tax assets and liabilities are as follows (in thousands):
- -------------------------------------------------------------------------------- June 27, 1998 July 3, 1999 - -------------------------------------------------------------------------------- Deferred tax assets (liabilities): Loss carryforwards $ 24,906 $ 14,905 Restructuring reserves and asset impairment 45,821 24,887 Accounts receivable 674 (935) Capital leases 5,196 5,573 Accrued expenses 13,751 9,671 Property and equipment (34,075) (30,124) Intangible assets (5,823) (4,315) Other, net (16,572) (13,570) Valuation allowance (648) (290) - -------------------------------------------------------------------------------- Net deferred tax asset $ 33,230 $ 5,802 - --------------------------------------------------------------------------------
Gross deferred tax assets (net of valuation allowances) were $91.2 million and $60.3 million at June 27, 1998 and July 3, 1999, respectively. Gross deferred tax liabilities were $58.0 million and $54.5 million at June 27, 1998 and July 3, 1999, respectively. Included in the Company's temporary differences is $8.9 million related F-20 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements to an increase in the tax basis of certain assets resulting from the acquisition of Haar. The establishment of the deferred tax asset has been recorded as a credit to additional paid-in capital. The Company believes it is more likely than not that the deferred tax assets, net of valuation allowances, at July 3, 1999, 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 (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------- Fiscal 1997 Fiscal 1998 Fiscal 1999 - ----------------------------------------------------------------------------------------------------------------------------- Computed statutory expense (benefit) $ 22,526 35.0% $ (10,786) (35.0)% $ 51,517 35.0% State and local income tax, net of federal tax benefit 973 1.5 725 2.4 1,407 1.0 Permanent differences 4,853 7.5 17,448 56.6 5,490 3.7 Reversal of valuation allowance (2,800) (4.4) (750) (2.4) (358) (0.2) Other 523 0.8 (162) (0.6) 854 0.5 - ----------------------------------------------------------------------------------------------------------------------------- $ 26,075 40.4% $ 6,475 21.0% $ 58,910 40.0% - -----------------------------------------------------------------------------------------------------------------------------
Federal net operating loss carryforwards as of July 3, 1999 approximate $21.0 million and expire in various amounts through 2011. Included in such amounts are net operating losses incurred prior to Rykoff-Sexton's acquisition of U.S. Foodservice, Inc. 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. 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 Issuances of Common Stock - In March 1999, the Company sold 2,342,748 shares of common stock in a public offering for net proceeds of $43.2 million. The net proceeds of the offering were used to redeem and retire a portion of the Rykoff- Sexton 8 7/8% senior subordinated notes due 2003, as discussed in note 7. 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 $44.9 million of distributions in excess of net book value of continuing stockholder's interest as a reduction to additional paid-in-capital. F-21 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 the Company. 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 77,804 shares, 65,660 shares and 188,880 shares during fiscal 1997, 1998 and 1999, respectively. An aggregate of 2,543,616 shares of common stock remain available to be issued and purchased under the plan. Warrant - At July 3, 1999, the Company had a warrant outstanding to purchase 142,194 shares of common stock at $6.52 per share. The warrant expires on September 30, 2005. 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"). The Rights entitle the registered holders of common stock to purchase from the Company, upon the occurrence of the specified triggering events, one one-hundredth of a share 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 two employee stock incentive plans and an outside director stock option plan. The employee plans authorize the grant, at the discretion of the Company's Board of Directors or an authorized committee thereof, 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 plans generally have a life of ten years and generally vest over a three-year period. The outside director plan provides for an initial award of 5,000 options and an annual award of 4,000 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 plans and the outside director plan approximately 13,100,000 and 250,000 shares of common stock, respectively. Rykoff-Sexton sponsored several stock option plans for employees and directors. In connection with the Company's acquisition of Rykoff-Sexton, 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-22 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements The aggregate number of shares reserved for the issuance of common stock under these plans was approximately 3,700,000 at July 3, 1999. 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 exercise Stock price options per share - -------------------------------------------------------------------------------------------------------------------------- Balance June 29, 1996 4,811,878 $ 8.31 Options granted 1,363,090 10.90 Options cancelled (147,390) 8.05 Options exercised (499,696) 6.43 - -------------------------------------------------------------------------------------------------------------------------- Balance June 28, 1997 5,527,882 9.10 Options granted 1,387,428 16.23 Options cancelled (462,502) 13.69 Options exercised (2,662,658) 9.56 - -------------------------------------------------------------------------------------------------------------------------- Balance June 27, 1998 3,790,150 11.25 Options granted 2,200,900 19.47 Options cancelled (385,780) 14.36 Options exercised (1,228,332) 8.99 - -------------------------------------------------------------------------------------------------------------------------- Balance July 3, 1999 4,376,938 $ 15.74 - --------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at July 3, 1999:
- -------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number average average Number average Range of outstanding remaining exercise exercisable exercise exercise prices July 3, 1999 contractual life price July 3, 1999 price - -------------------------------------------------------------------------------------------------------------------------- $ 0.07-$ 0.07 9,812 3.17 $ 0.07 9,812 $ 0.07 $ 5.25-$ 7.23 349,820 5.00 $ 6.34 349,820 $ 6.34 $ 7.72-$11.88 923,368 6.76 $ 10.38 536,057 $ 9.99 $13.78-$19.25 2,621,568 8.63 $ 17.70 340,699 $ 16.28 $20.88-$25.38 472,370 6.90 $ 22.64 11,106 $ 23.87 ------------- ------------ ---------- --------------- --------------- 4,376,938 7.74 $ 15.74 1,247,494 $ 10.73 ------------- ---------------
F-23 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 1997 Fiscal 1998 Fiscal 1999 - ------------------------------------------------------------------------------------- Net income (loss): As reported $ 38,286 $ (47,004) $ 83,234 Pro forma $ 36,479 $ (51,609) $ 74,312 - ------------------------------------------------------------------------------------- Basic earnings (loss) per share: As reported $ 0.44 $ (0.52) $ 0.87 Pro forma $ 0.39 $ (0.62) $ 0.77 - ------------------------------------------------------------------------------------- Diluted earnings (loss) per share: As reported $ 0.44 $ (0.52) $ 0.86 Pro forma $ 0.39 $ (0.62) $ 0.76 - -------------------------------------------------------------------------------------
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 1997, 1998 and 1999: dividend yield of 0%; expected volatility of 45.44%, 41.02% and 37.72% for fiscal 1997, 1998 and 1999, respectively; risk-free interest rate of 6.36%, 6.10% and 5.19% for fiscal 1997, 1998 and 1999, respectively; and expected lives of five years, five years and four years for fiscal 1997, 1998 and 1999, respectively. The weighted average fair value of options granted during fiscal 1997, 1998 and 1999 was $5.61, $6.94 and $6.93, respectively. Pro forma net income (loss) only reflects compensation costs for options granted in fiscal years since July 2, 1995. Compensation cost is reflected over the options' vesting period of three 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 $3.9 million, $4.5 million and $2.4 million in fiscal 1997, 1998 and 1999, respectively. F-24 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 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 $8.5 million, $9.2 million and $8.0 million in fiscal 1997, 1998 and 1999, respectively. Defined Benefit Plans - The Company maintains five 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 two of the plans are frozen at July 3, 1999. Projected benefit obligations of plans for which benefits were not frozen at July 3, 1999 were $9.0 million. 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. F-25 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements Summarized financial information about the pension plans is presented below (in thousands):
- -------------------------------------------------------------------------------------- Fiscal 1998 Fiscal 1999 - -------------------------------------------------------------------------------------- Change in benefit obligation: Projected benefit obligation at beginning of year $ 80,534 $ 87,374 Service cost 3,061 400 Interest cost 5,911 6,238 Plan amendments -- 1,573 Curtailments (7,390) (169) Benefits paid (2,764) (3,546) Actuarial loss (gain) 8,022 (776) - -------------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 87,374 $ 91,094 - -------------------------------------------------------------------------------------- Accumulated benefit obligation at end of year $ 87,374 $ 91,094 - -------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year $ 88,784 $ 95,487 Actual return on plan assets 8,556 20,425 Employer contributions 611 79 Benefits paid (2,764) (3,546) - -------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 95,187 $ 112,445 - -------------------------------------------------------------------------------------- Funded status: Funded status at end of year $ 7,813 $ 24,295 Unrecognized actuarial loss (gain) (10,292) (26,382) Unrecognized transition obligation (asset) 95 101 Unrecognized prior service cost 126 1,604 - -------------------------------------------------------------------------------------- Net amount recognized at end of year $ (2,258) $ (382) - -------------------------------------------------------------------------------------- Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 1,631 $ 1,113 Accrued benefit liability (3,889) (1,495) - -------------------------------------------------------------------------------------- Net amount recognized at end of year $ (2,258) $ (382) - --------------------------------------------------------------------------------------
F-26 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------- Fiscal 1998 Fiscal 1999 - --------------------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 3,061 $ 400 Interest cost 5,911 6,238 Expected return on plan assets (7,963) (8,578) Amortization of prior year service cost 3 105 Amortization of transition amount 182 7 Recognized actuarial gain (1,315) (494) Other (7,390) - - --------------------------------------------------------------------------------- Net periodic benefit cost $ (7,511) $ (2,322) - --------------------------------------------------------------------------------
Weighted-average assumptions for fiscal 1998 and 1999 included discount rates of 6.75% and 7.50% respectively, and expected long-term rate of return on plan assets of 9.00%. 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 and $2.1 million at June 27, 1998 and July 3, 1999, respectively, and is included in other noncurrent liabilities in the accompanying consolidated balance sheets. Other Deferred Compensation Plans - During fiscal 1999, the Company adopted three executive retirement plans and a non-employee director deferred compensation plan. Generally, the executive retirement plans provide for participants to earn a percentage of their annual earnings through cash contributions to the plans and restricted unit grants. Each restricted unit represents a conditional right to receive a share of common stock in the future which are subject to certain restrictions and risk of forfeiture. The awards vest over periods of five to ten years. Shares for these plans are issued from shares authorized under one of the stock incentive plans discussed above. As of July 3, 1999, 354,200 restricted units have been granted. The non-employee director deferred compensation plan allows for the Company's directors to defer all or a portion of their annual retainer and meeting fees. The plan provides for Company matching credits of 25%. All deferrals and credits are deemed to be invested in the Company's common stock. Distributions are in the form of common stock and can either be made in a lump sum or in up to five annual installments. Total compensation expense recognized for these plans for fiscal 1999 was $1.1 million, which is included in other noncurrent liabilities at July 3, 1999 in the accompanying consolidated balance sheet. F-27 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 14 - EARNINGS PER SHARE The following table reconciles the Company's basic and diluted weighted average share amounts used in computations of earnings per share ("EPS") (in thousands):
- ------------------------------------------------------------------------------- Fiscal 1997 Fiscal 1998 Fiscal 1999 - ------------------------------------------------------------------------------- Basic EPS-Weighted average shares outstanding 86,902 90,640 95,922 Effect of Dilutive Securities: Warrants -- -- 116 Stock Options 1,224 -- 1,065 Other stock-based compensation arrangemenets -- -- 87 Diluted EPS-Weighted average shares outstanding 88,126 90,640 97,190 - -------------------------------------------------------------------------------
The effect of stock options outstanding during fiscal 1998 was not included in the computation of diluted EPS because the effect would have been anti-dilutive. NOTE 15 - OUTSOURCING OF THE MANUFACTURING DIVISION On August 28, 1998, the Company sold the inventory and fixed assets of its manufacturing division to a third party. In connection with the sale, the Company entered into a six-year supply agreement. Under the terms of the sale and supply agreements, the Company received $85.0 million in cash and a $16.0 million subordinated note from the buyer bearing interest at 13% and payable in August 2006. Interest on the note is payable in additional notes through August 2005 and thereafter in cash. The assets transferred had a net book value of approximately $20.0 million, including $10.8 million in inventories. Costs to complete the transaction were approximately $1.5 million. The net gain on the sale of assets and proceeds from entering into the supply agreement aggregated approximately $78.0 million. The supply agreement establishes minimum purchase obligations by the Company for each of the next six years. First year minimum purchase obligations are based on purchase levels prior to the sale, with the succeeding years' purchase obligations increasing at a rate of 6% per year. Based on current product prices, the supply agreement obligates the Company to purchase in excess of $750.0 million of products over the six years following the sale. The Company may incur substantial penalties if it does not purchase the minimum product quantities specified in the agreement. F-28 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the Company's significant continuing involvement in the manufacturing business, $63.5 million of the gain was deferred and is being recognized over the life of the supply agreement as goods are purchased from the manufacturing business and sold to the Company's foodservice customers. In fiscal 1999, the Company recognized approximately $7.0 million of the gain in their consolidated statement of operations. The balance of the gain, including interest attributable to the subordinated note receivable, will not be recognized until such time as the buyer has sufficient cash flows to demonstrate its ability to make payment of the principal and interest. NOTE 16 - RESTRUCTURING AND RELATED COSTS In connection with the acquisition described in note 3, management of the combined companies developed and implemented a restructuring plan that included the consolidation of duplicative distribution centers and the centralization of certain general and administrative functions. The Company has closed or is closing thirteen distribution centers located in California, Florida, Iowa, Maryland, Massachusetts, Minnesota, Missouri, Nevada, Ohio, Pennsylvania and Virginia. Operations from such facilities are being consolidated with facilities in the same geographic region. In addition, virtually all of Rykoff-Sexton's corporate overhead functions, most of which were managed in Wilkes-Barre, Pennsylvania, were consolidated with such facilities in Columbia, Maryland. Twelve of the facility consolidations were completed by July 3, 1999, with the remaining location to be completed in fiscal 2000. To date, the Company has experienced no significant changes in the restructuring plan. As a result, the Company incurred restructuring costs, asset impairment charges, other operating charges and nonrecurring expenses from the integration of the two businesses during fiscal 1998. Restructuring Costs - Restructuring costs of $56.7 million (of which $13.1 million were non-cash charges) consisted primarily of $26.8 million for change in control payments made to former executives of Rykoff-Sexton, which were generally triggered upon the acquisition, and the decision to close the Wilkes-Barre, Pennsylvania headquarters; $12.2 million for severance and benefits payable to approximately 800 sales, warehouse and clerical personnel under a one-time termination plan instituted at the closed distribution centers and 50 individuals in corporate positions; $10.8 million for lease payments expected to be made after the date of closure for four leased distribution facilities and the Wilkes-Barre office facility; and $6.9 for idle facility and facility closure costs, including costs associated with cleaning closed facilities and maintaining the closed facilities until they are sold or subleased, including costs such as property taxes, utilities, security and groundskeeping charges. 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. Asset Impairment Charge - The non-cash asset impairment charge of $35.5 million consisted of $7.6 million related to write-down to net realizable value of buildings and improvements of nine owned facilities being closed; $3.1 million related to write-down to net realizable value of buildings which were held for sale at the date of the merger, $12.0 million related to costs deferred for a new management F-29 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements information system which is not being placed in service as a result of the merger and $12.7 million related to other long-term assets at facilities being closed. Other Operating Charges - Other operating charges consisted of $8.6 million to cost of goods sold and $19.4 million to operating expenses for write-downs of inventory, receivables and other current assets resulting from operating unit consolidation and realignment during fiscal 1998. The charges related principally to receivable write-offs resulting from the rationalization of customer and vendor relationships and inventory write-downs resulting from the reductions in the number of products distributed by the combined company following the merger, particularly at divisions being closed and consolidated. Nonrecurring Charges - Nonrecurring charges of $17.8 million consisted of merger costs and expenses (consisting primarily of legal and other professional fees) required to complete the transaction. Rykoff-Sexton Restructuring - In connection with, Rykoff-Sexton's acquisition of US Foodservice, Inc. in May 1996, Rykoff-Sexton recorded a restructuring charge of $57.6 million ($35.7 million after tax) in the nine-week fiscal transition period ended June 29, 1996. 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. In fiscal 1997, Rykoff- Sexton reversed $4.0 million into income for severance costs accrued for employees who voluntarily terminated their employment during fiscal 1997, thereby forfeiting rights. In fiscal 1998, the Company reversed $3.0 million of unutilized reserves against restructuring costs for which actual costs were overestimated or for which contemplated restructuring plans ultimately changed. The following table summarizes the status of the Company's restructuring accruals (in thousands):
- -------------------------------------------------------------------------------------------------------- Change in Severence Lease Idle Facility Control and benefits Commitments Costs Totals - -------------------------------------------------------------------------------------------------------- Balance July 28, 1997 $ - $ 2,200 $ 17,500 $ 5,800 $ 25,500 Fiscal 1998 accruals 26,800 12,200 10,800 6,900 56,700 Fiscal 1998 utilization (24,800) (8,100) (5,400) (4,500) (42,800) ------- ------ ------ ------ ------- Balance June 27, 1998 2,000 6,300 22,900 8,200 39,400 Fiscal 1999 utilization (2,000) (4,100) (3,900) (4,700) (14,700) ------- ------ ------ ------ ------- Balance July 3, 1999 $ - $ 2,200 $ 19,000 $ 3,500 $ 24,700 - --------------------------------------------------------------------------------------------------------
Management anticipates that $6.3 million of the reserves will be paid in fiscal 2000. The balance relates primarily to remaining lease commitments that are being paid in various amounts through fiscal 2008. F-30 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 17 - 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 to satisfy medical worker's compensation self-insurance security deposit requirements. These letters of credit are irrevocable and have one-year renewable terms. NOTE 18 - INDUSTRY SEGMENT INFORMATION During fiscal 1999, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 131 requires the presentation of descriptive financial information about its reportable operating segments, which is consistent with that made available to the management of the Company to assess performance. The Company has two reportable segments: broadline foodservice distribution ("Broadline"), and other services ("Other Services"). Broadline, consisting of approximately 40 operating locations, distributes over 43,000 food and non-food related products to over 130,000 foodservice customers, including restaurants, hotels, casinos, healthcare institutions and schools. Other Services represents manufacturing operations and contract and design services (C&D). In August 1998, the Company outsourced its manufacturing division by selling the assets of the Rykoff-Sexton Manufacturing Division to a third party. (See note 15). C&D designs restaurants and eating establishments for approximately 1,000 organizations annually. F-31 U.S. FOODSERVICE AND SUBSIDIARIES Notes to Consolidated Financial Statements The accounting policies of the two business segments are the same as those described in the summary of significant accounting policies in note 2.
- ----------------------------------------------------------------------------------------------- Corporate Other and Broadline Services Eliminations Consolidated - ----------------------------------------------------------------------------------------------- 1997 Net sales $5,128,558 $231,294 ($190,446) $5,169,406 Depreciation and amortization 53,759 3,424 - 57,183 Income (loss) from operations 179,802 12,694 (46,672) 145,824 Interest expense and other financing costs, net 74,928 1,135 - 76,063 Income (loss) before income taxes and extraordinary charge 101,325 9,708 (46,672) 64,361 Total assets 1,635,083 97,100 - 1,732,183 Capital expenditures 85,917 2,519 - 88,436 - ----------------------------------------------------------------------------------------------- 1998 Net sales $5,410,840 $307,555 ($211,446) $5,506,949 Depreciation and amortization 56,722 3,107 - 59,829 Income (loss) from operations 93,296 13,700 (46,097) 60,899 Interest expense and other financing costs, net 73,892 2 - 73,894 Income (loss) before income taxes and extraordinary charge 5,529 9,751 (46,097) (30,817) Total assets 1,727,715 90,076 - 1,817,791 Capital expenditures 93,390 2,121 - 95,511 - ----------------------------------------------------------------------------------------------- 1999 Net sales $6,122,516 $265,903 ($190,011) $6,198,408 Depreciation and amortization 55,939 803 - 56,742 Income (loss) from operations 249,322 10,038 (47,194) 212,166 Interest expense and other financing costs, net 65,010 (36) - 64,974 Income (loss) before income taxes and extraordinary charge 184,312 10,074 (47,194) 147,192 Total assets 1,812,602 200,272 - 2,012,874 Capital expenditures 68,093 320 - 68,413 - -----------------------------------------------------------------------------------------------
Corporate and eliminations consist of inter-segment sales and inter-company accounts. F-32 SCHEDULE I Page 1 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT The following are the condensed balance sheets, statements of operations and cash flows for U.S. Foodservice and subsidiaries accounted for under the equity method:
June 28, July 3, Condensed Balance Sheets 1998 1999 - ---------------------------------------------------------------- (IN THOUSANDS) Assets - ------ Cash and cash equivalents $ 125 $ - Other current assets 1 - Intra-company receivables 135,072 296,623 Investments in subsidiaries 449,522 532,756 --------- --------- Total assets $ 584,720 $ 829,379 ========= ========= Stockholders' Equity Common stock 926 1,012 Additional paid-in-capital 579,074 740,413 Retained earnings 4,720 87,954 --------- --------- Total stockholders' equity $ 584,720 $ 829,379 ========= =========
F-33 SCHEDULE I Page 2 of 3 U.S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
FISCAL YEARS ENDED ----------------------------------------- JUNE 28, JUNE 27, JULY 3, Condensed Statements of Operations 1997 1998 1999 - ----------------------------------------------------------------------------------- (IN THOUSANDS) Operating expenses $ (29) $ (15) $ - Net income (loss) of unconsolidated subsidiaries 38,315 (46,989) 83,234 ----------- ----------- ----------- Net income (loss) $ 38,286 $ (47,004) $ 83,234 =========== =========== ===========
F-34 SCHEDULE I Page 3 of 3 U. S. FOODSERVICE CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
FISCAL YEARS ENDED ---------------------------------------------------- JUNE 28, JUNE 27, JULY 3, Condensed Statements of the Cash Flows 1997 1998 1999 - --------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss) $ 38,286 $ (47,004) $ 83,234 Adjustments to reconcile net income (loss) to net cash used in operating activities Net (income) loss of unconsolidated subsidiaries (38,315) 46,989 (83,234) Non-cash restructuring charge - 12,217 0 Increase (decrease) in other current assets (6) 124 1 Increase in other assets (68,817) (35,090) (63,003) Other - 1,961 - ------------ ------------ ------------ Net cash used in operating activities: (68,852) (20,803) (63,002) ------------ ------------ ------------ Cash flows from financing activities: Net proceeds from public offerings of common stock 65,975 - 43,183 Purchases of treasury stock - (12,417) - Proceeds from other issuances of common stock - 33,219 19,694 Proceeds from employee stock purchase 2,869 - - ------------ ------------ ------------ Net cash provided by financing activities 68,844 20,802 62,877 ------------ ------------ ------------ Net decrease in cash and cash equivalents (8) (1) (125) Cash and cash equivalents, at beginning of period 134 126 125 ------------ ------------ ------------ Cash and cash equivalents, at end of period $ 126 $ 125 $ - ============ ============ ============
F-35 U.S. FOODSERVICE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS -------------------------------- BALANCE AT CHARGES CHARGED AMOUNTS BALANCE BEGINNING TO COSTS AND TO OTHER CHARGED OFF AT END OF Description OF PERIOD EXPENSES ACCOUNTS TO RECOVERIES PERIOD (3) - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED JUNE 28, 1997 Allowance for doubtful accounts $ 7,948 $ 7,854 $ 10,608 (2) $ 10,445 $ 15,965 YEAR ENDED JUNE 27, 1998 Allowance for doubtful accounts $ 15,965 $ 12,254 $ 480 (1) $ 12,581 $ 16,118 YEAR ENDED JULY 3, 1999 Allowance for doubtful accounts $ 16,118 $ 10,709 $ 2,236 (1) $ 13,601 $ 15,462
(1) Other charges consist of reserves acquired through purchase acquisitions. (2) 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. (3) Includes $255, $300 and $300 with respect to supplier receivables at June 28, 1997, June 27, 1998 and July 3, 1999, 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 Date:September 30, 1999 /s/ James L. Miller ----------------------------------- James L. Miller President and Chief Executive Officer (Duly Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Chairman of the Board, President and /s/ James L. Miller __________________________ Chief Executive Officer September 30, 1999 James L. Miller (Principal Executive Officer) /s/ George T. Megas Senior Vice President and __________________________ Chief Financial Officer September 30, 1999 George T. Megas (Principal Financial Officer) /s/ Robert A. Soule Vice President and __________________________ Chief Accounting Officer September 30, 1999 Robert A. Soule (Principal Accounting Officer) /s/ Lewis Hay, III __________________________ Director September 30, 1999 Lewis Hay, III /s/ David M. Abramson __________________________ Director September 30, 1999 David M. Abramson /s/ Mark P. Kaiser __________________________ Director September 30, 1999 Mark P. Kaiser /s/ Michael J. Drabb __________________________ Director September 30, 1999 Michael J. Drabb
Signature Title Date --------- ----- ---- /s/ Eric E. Glass Director September 30, 1999 - ------------------------- Eric E. Glass /s/ Paul I. Latta, Jr. Director September 30, 1999 - ------------------------- Paul I. Latta, Jr. /s/ Dean R. Silverman Director September 30, 1999 - ------------------------- Dean R. Silverman /s/ Jeffrey D. Serkes Director September 30, 1999 - ------------------------- Jeffrey D. Serkes /s/ James P. Miscoll Director September 30, 1999 - ------------------------- James P. Miscoll /s/ Bernard Sweet Director September 30, 1999 - ------------------------- Bernard Sweet
EX-10.6 2 EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is dated as of June 24, 1999 (the "Agreement"), effective as of April 22, 1999 (the "Effective Date"), by and between U.S. Foodservice, Inc., a Delaware corporation with its principal place of business at 9755 Patuxent Woods Drive, Columbia, Maryland 21046 (the "Company") and George T. Megas, residing at 5902 Mosswood Lane, McLean, Virginia 22101 (the "Executive"). WITNESSETH: ----------- WHEREAS, the Company has agreed to employ the Executive as Senior Vice President and Chief Financial Officer and the Executive has agreed to be employed by the Company, in accordance with the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows: 1. Term. The Company hereby employs the Executive, and the Executive ---- hereby accepts such employment, for a term commencing as of the date hereof and ending at the close of business on June 30, 2002, unless sooner terminated in accordance with the provisions of Section 4. The period described in the immediately preceding sentence shall hereinafter be referred to as the "Initial Term." On June 30, 2000, and on each subsequent anniversary of such date (each such date being referred to herein as a "Renewal Date"), the term of this Agreement shall automatically be extended for successive one-year periods (an "Extension Period") unless either of the parties hereto provides written notice to the other on or before the applicable Renewal Date of such party's intention to terminate this Agreement at the end of the Initial Term or Extension Period, as applicable (or at such earlier date as may be permitted pursuant to Section 4.3 or 4.4) (i.e., on June 30, 2000, the last day of the Term shall be extended from June 30, 2002 to June 30, 2003, on June 30, 2001, the last day of the Term shall be extended from June 30, 2003 to June 30, 2004, and so on). The Initial Term and any applicable Extension Period(s) shall hereinafter be referred to collectively as the "Term." Except as explicitly set forth herein, neither party may terminate the Executive's employment during the Term. 2. Duties. The Executive, in his capacity as Senior Vice President and ------ Chief Financial Officer, shall perform diligently and to the best of his ability for the Company the duties of such office and all such other duties as assigned from time to time to the Executive by the Company. The Executive shall devote substantially all of his time and effort to the performance of his duties hereunder. 3. Compensation. ------------ 3.1 Salary. The Company shall pay the Executive during the Initial ------ Term a minimum base salary at the rate of $225,000 per annum (the "Base Salary"), payable in accordance with the Company's payroll procedure in effect or as hereinafter amended from time to time, less deductions as shall be required to be withheld by applicable law and regulations. During the Term, the Executive's Base Salary shall be reviewed at least annually, shall not be decreased after any increase and shall be in such amount as the Company and the Executive shall agree upon from time to time. 3.2 Bonus. In addition to Base Salary, the Executive shall be ----- provided, for each fiscal year ending during the Term, an annual bonus opportunity in cash and stock-based incentives at least equal to 80% of the Executive's Base Salary (the "Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. Notwithstanding the foregoing, with respect to the fiscal year of the Company ending July 3, 1999, the Annual Bonus opportunity shall be a blended rate of 60% (the target bonus opportunity available to the Executive for the portion of such fiscal year prior to the Effective Date) and 80%, based on the portion of such fiscal year with respect to which each such percentage was in effect during the fiscal year. 3.3 Benefits. -------- (a) Savings and Retirement Plans. During the Term, the Executive ---------------------------- shall be entitled to participate in all savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its subsidiaries, but after the Change Date, in no event shall such plans, practices, policies and programs provide the Executive with savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its subsidiaries for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Change Date or if more favorable to the Executive, those provided generally at any time after the Change Date to other peer executives of the Company and its subsidiaries. (b) Welfare Benefit Plans. During the Term, the Executive and/or the --------------------- Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its subsidiaries (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its subsidiaries, but, after the Change Date, in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Change Date or, if more favorable to the Executive, those provided generally at any time after the Change Date to other peer executives of the Company and its subsidiaries. (c) Expenses. During the Term, the Executive shall be entitled to -------- receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies, practices and procedures of the Company. (d) Fringe Benefits. During the Term, the Executive shall be entitled --------------- to fringe 2 benefits, including, without limitation, tax and financial planning services, payment of club dues, use of an automobile and payment of related expenses, as generally provided to other peer executives of the Company, provided that after the Change Date such benefits shall be in accordance with the most favorable plans, practices, programs and policies of the Company and its subsidiaries in effect for the Executive at any time during the 120-day period immediately preceding the Change Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its subsidiaries. Without limiting the generality of the foregoing, and notwithstanding anything herein to the contrary, the Company shall, during the Term, pay all of the Executives dues and membership assessments of one (1) country club in the geographical vicinity of the Company's headquarters as mutually selected by the Executive and the Company from time to time, and such other club memberships as are determined by the Executive and the Company to be useful in connection with the Executive's duties on behalf of the Company. The Company shall also reimburse the Executive for all reasonable expenses incurred at such club(s) on behalf of the Company. In addition, without limiting the generality of the foregoing, and notwithstanding anything herein to the contrary, the Executive shall be entitled, during the Term, at the Company's expense, to the full use of a new car (including adequate insurance for the Executive, automobile and occupants and full maintenance and operating costs necessary and appropriate to maintain such car in prime and safe operating condition). In the event the Executive's employment with the Company terminates for any reason other than for Cause (as defined in Section 4.2), the Executive shall furthermore be offered the option to acquire the car at the lesser of the book value of the car at the time of the Executive's termination of employment or the lease purchase price provided for in any car lease between the Company and any third party lessor at the time of the Executive's termination of employment. The option to purchase after termination as provided for herein shall be exercised by the Executive no later than 90 days after termination of employment. (e) Vacation. During the Term, the Executive shall be entitled to at -------- least four weeks of paid vacation per calendar year. The Executive shall have the right to accrue and carry forward unused vacation. 4. Termination. ----------- 4.1 Termination Upon Death or Disability. If the Executive dies ------------------------------------ during the Term, this Agreement shall terminate as of the date of the Executive's death. If the Executive by virtue of ill health or other disability is unable to perform substantially and continuously the duties assigned to him for a period in excess of six (6) consecutive or non-consecutive months out of any consecutive twelve (12) month period, the Company shall have the right, on not less than thirty (30) days notice, to terminate the employment of the Executive upon notice in writing to the Executive. During the term of ill health or disability, the Executive shall be compensated only as provided by any applicable Company disability policy then in effect and available to other employees of the Company. Upon termination due to death or disability, the Executive (or the Executive's estate or beneficiaries in the case of the death of the Executive) shall be entitled to receive any salary and other benefits earned and accrued prior to the date of termination and reimbursement for expenses incurred prior to the date of termination. No provision of this Agreement shall limit any of the Executive's rights under any insurance, pension or other benefit programs of the Company for 3 which the Executive shall be eligible at the time of such death or disability. 4.2 Termination by the Company For Cause. The Company may, at any ------------------------------------ time during the Term after the occurrence of an event constituting Cause (as defined below), terminate the Executive's employment hereunder in accordance with the procedures described below in this Section 4.2. The Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of termination for Cause other than salary and other benefits earned and accrued prior to the date of termination and reimbursement for expenses incurred prior to the date of termination in accordance with Section 3.3(c). For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its subsidiaries (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this Section 4.2, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the 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 Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has engaged in the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. References in this paragraph to the "Board" shall refer to the board of directors of U.S. Foodservice. 4.3 Other Termination by the Company. Notwithstanding anything -------------------------------- contained herein to the contrary (including, without limitation, the provisions of Section 1), the Company may terminate the Executive's employment for any reason, or for no reason, either during the Initial Term or during any Extension Period upon written notice. In the event of such termination, the Company shall notify the Executive of the date of termination, which date may be at any time up to and including six (6) months following the date of written notice. The Executive shall continue to perform his duties hereunder through the date of termination 4 determined by the Company. In the event the Company terminates the Executive's employment in accordance with this Section 4.3, the Company shall pay to the Executive an amount determined in accordance with Section 4.6, below and provide the benefits provided in such Section. Except for the payments and benefits provided in Section 4.6, the Executive shall have no right to receive any further compensation or benefit hereunder on and after the termination date. 4.4 Other Termination by the Executive. Notwithstanding anything ---------------------------------- contained herein to the contrary (including, without limitation, the provisions of Section 1), the Executive may terminate the Executive's employment hereunder for any reason, or for no reason, either during the Initial Term or during any Extension Period upon written notice given not less than ninety (90) days prior to the date of termination of employment. The Executive shall have no right to receive any compensation or benefit hereunder on and after the effective date of the notice of termination other than salary and other benefits earned and accrued prior to the date of termination and reimbursement for expenses incurred prior to the date of termination in accordance with Section 3.3(c). 4.5 Definition of Good Reason. The Executive's employment may be ------------------------- terminated by the Executive for Good Reason (as hereinafter defined). For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2 of this Agreement, or any other action by the Company 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 Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location outside of the Baltimore/Washington metropolitan area or more than thirty (30) miles from the Company's current headquarters facility in Columbia, Maryland or the Company's requiring the Executive to travel on Company business after the Change Date to a substantially greater extent than required immediately prior to the Change Date; or (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement. For purposes of this Section 4.5, any good faith determination of "Good Reason" made by the 5 Executive after the Change Date shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the date six months after the Change Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. 4.6 Change of Control and Termination without Cause or with Good ------------------------------------------------------------ Reason Provisions. - ----------------- 4.6.1. Certain Definitions. ------------------- (a) The "Change Date" shall mean the first date during the Change of Control Period (as defined in Section 4.6.1(b)) on which a Change of Control (as defined in Section 4.6.2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and the Executive's employment with the Company is terminated by the Company or the Executive terminates his employment for Good Reason (as defined in Section 4.5) prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement the "Change Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date of a Change of Control and ending on the third anniversary thereof. 4.6.2. Change of Control. For the purpose of this Agreement, a ----------------- "Change of Control" shall mean any of the following events: (a) Individuals who, as of the date hereof, constitute the Board of Directors of U.S. Foodservice ("USF") (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if any individual becoming a director subsequent to the date hereof whose election, or nomination for election by USF'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 Section 4.6.2(b)) other than the Board; or (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 USF'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 USF or other 6 transaction (a "Business Transaction"), in each case, unless, following such Business Transaction, (i) no Person (excluding any employee benefit plan (or related trust) of USF 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 USF 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, providing for such Business Transaction; or (c) Approval by the shareholders of USF of a complete liquidation or dissolution of USF. 4.6.3. Obligations of the Company Upon Certain Terminations. ---------------------------------------------------- (a) Termination without Cause, Non-renewal during Change of Control --------------------------------------------------------------- Period, or Termination with Good Reason. If (1) the Company shall terminate the - --------------------------------------- Executive's employment other than pursuant to Section 4.1 or 4.2 (death, Disability or Cause) or (2) the Company shall, after the Change Date, elect not to renew the Term of this Agreement at the expiration of the Initial Term or any Extension Period (other than at the expiration of any such Term ending on or after the last day of the Change of Control Period) or (3) the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the date of termination the aggregate of the following amounts: (A) the sum of (1) the Executive's annual Base Salary through the date of termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the highest Annual Bonus (annualized the case of any partial year) paid to the Executive with respect to any of the three fiscal years ending prior to the date of termination (provided that if the date of termination occurs prior to the end of the Company's 2002 fiscal year, such amount shall be not less than 80% of the Executive's annual Base Salary), and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Term, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the date of termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) three and (2) the sum of (x) the Executive's annual Base Salary as in effect at the date of termination and (y) the Highest Annual Bonus; and 7 (ii) for three years after the Executive's date of termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Sections 3.3(b) and 3.3(d) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliates and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the date of termination and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its subsidiaries (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). 4.6.4. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (including, without limitation, amounts attributable to the acceleration of vesting of stock options), but determined without regard to any additional payments required under this Section 4.6.4) (a "payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment , the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 4.6.4(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced 8 Amount. (b) Subject to the provisions of Section 4.6.4(c), all determinations required to be made under this Section 4.6.4, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4.6.4, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 4.6.4(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall make a payment of any Excise Tax, the Accounting firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, 9 (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceeding relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.6.4(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 4.6.4(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 4.6.4(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 4.6.4(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 4.7 Coordination of Provisions. In the event that the Executive's -------------------------- employment with the Company terminates under circumstances governed by both Section 4.6 and Section 4.3, 10 only that section which provides the greater benefit to the Executive shall apply. 4.8 Execution of Release. As a condition to the Company's -------------------- obligation to pay any form of severance to the Executive upon the termination of the Executive's employment with the Company (including, by way of illustration and not in limitation, the payments described in Sections 4.3 and 4.6), the Executive shall at the time of such termination, execute and deliver to the Company (and shall fail to revoke within such time periods as may be established by law) a full and unconditional release in favor of the Company and its affiliates of all obligations other than those set forth in this agreement, in form and substance satisfactory to the Company. 5. Covenants of the Executive. The Executive acknowledges that (i) the -------------------------- principal business of the Company is the broadline foodservice distribution business (the "Present Business"); (ii) the Company constitutes one of a limited number of persons who have developed the Present Business; (iii) the Executive's work for the Company will give him access to the confidential affairs and proprietary information of the Company, not readily available to the public; and (iv) the agreements and covenants of the Executive contained in this Section 5 are essential to the business and goodwill of the Company. Accordingly, the Executive agrees as follows: 5.1 Covenant Against Competition. During the Term and for a ---------------------------- period of one (1) year after the termination of the Executive's employment with the Company for any reason (such period commencing on the date hereof is hereinafter referred to as the "Restricted Period"), the Executive shall not, directly or indirectly, own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or be a proprietor, director, officer, stockholder, member, partner or an employee or agent of, or a consultant to, (i) SYSCO Corporation, Alliant (formerly Kraft) Foodservice, Inc., PYA/Monarch, Performance Food Group Corporation, MBM Corporation, ProSource, Inc., Ameriserve, Inc. or Marriott Distribution Services or (ii) any business, firm, corporation, partnership or other entity which engages in (A) the Present Business, or (B) any other principal line of business developed by the Company after the date hereof but prior to the date of termination of Executive's employment with the Company (a "New Business") in any state (other than any Excluded State, as defined below) in which the Company has conducted business during the Measuring Period (as defined below); provided, however, that -------- ------- the Executive may own, directly or indirectly, solely as an investment, securities of any business, firm, corporation, partnership or other entity which are traded on any national securities exchange or the NASDAQ if the Executive (A) is not a controlling person of, or a member of a group which controls, such entity and (B) does not, directly or indirectly, own one percent (1%) or more of any class of securities of such entity. The "Measuring Period" shall be the two (2) year period preceding the date of termination of the Executive's employment with the Company. For purposes of this Section 5.1, "Excluded State" shall mean any state in which annual sales of the Company in the most recently completed fiscal year (as of the time such determination is to be made) were less than $1,000,000. 5.2 Solicitations of Customers. During the Restricted Period, the -------------------------- Executive shall not, directly or indirectly, for his own account or as proprietor, stockholder, member, partner, director, officer, employee, agent or otherwise for or on behalf of any person, business, firm, corporation, partnership or other entity other than the Company, sell or broker, offer to sell or 11 broker, contact or solicit any orders for the purchase of foodstuffs, paper products, chemical products or other products of a nature typically sold by broadline foodservice distributors from any person, corporation or other entity which was a customer or prospective customer of the Company at any time during the Measuring Period. For purposes of this Agreement, "customers of the Company" means and includes (i) any and all persons, businesses, corporations, partnerships or other entities which (A) have done business with the Company as a customer during the relevant time period, (B) have been contacted by the Company for the purpose of purchasing the Company's products or services, or (C) have preexisting business relationships and/or dealings with the Executive when his employment with the Company terminates and (ii) all persons, businesses, corporations, partnerships or other entities which control, or are controlled by, the same person, business, corporation, partnership or other entity which controls, any such customer of the Company. For purposes of this Agreement, "customers" includes food service brokers, prospective customers and referral sources of customers. 5.3 Solicitation of Employees. During the Restricted Period, the ------------------------- Executive shall not, directly or indirectly, for his own account or as proprietor, stockholder, partner, director, officer, employee, agent or otherwise for or on behalf of any person, business, firm, corporation, partnership or other entity other than the Company, solicit to hire or hire any person (i) who is an employee of the Company, or (ii) who has left the employment of the Company for a period of one (1) year following the termination of such employee's employment, for employment with any person, business, firm, corporation, partnership or other entity other than the Company. 5.4 Confidential Information. From and after the date of this ------------------------ Agreement, the Executive shall not at any time, directly or indirectly, use for pecuniary benefit or disclose to any person, business, firm, corporation, partnership or other entity any confidential or proprietary information concerning the Company, its business, its suppliers or its customers. All information, whether written or otherwise, regarding the Company's business, including but not limited to, information regarding customers, customer lists, costs, prices, earnings, systems, operating procedures, prospective and executed contracts and other business arrangements, sources of supply and business acquisition strategies (including pricing models) are presumed to be confidential information of the Company for purposes of this Agreement. The Executive agrees to return to the Company all books, records, lists and other written, typed or printed materials, whether furnished by the Company or prepared by the Executive, which contain any information relating to the Company, its business, its suppliers or its customers, promptly upon termination of this Agreement, and the Executive shall neither make nor retain any copies of such material without the prior written consent of the Company. 5.5 Cumulative Provisions. The covenants and agreements contained --------------------- in this Section 5 are independent of each other and cumulative. 5.6 Acknowledgments. The Executive acknowledges the broad scope of --------------- the covenants contained in this Agreement, but agrees that such covenants are reasonable in light of the scope of the Executive's duties and knowledge of the Company. The Executive further acknowledges and agrees that the covenants contained in this Agreement do not unreasonably restrict his employment opportunities or unduly burden or deprive him of a means of earning a 12 livelihood. 5.7 Remedies for Breach. The Executive further acknowledges and ------------------- agrees that his obligations under this Agreement are unique and that any breach or threatened breach of such obligations may result in irreparable harm and substantial damages to the Company. Accordingly, in the event of a breach or threatened breach by the Executive of any of the provisions of this Section 5, the Company shall have the right, in addition to exercising any other remedies at law or equity which may be available to it under this Agreement or otherwise, to obtain ex parte, preliminary, interlocutory, temporary or permanent injunctive relief, specific performance and other equitable remedies in any court of competent jurisdiction, to prevent the Executive from violating such provision or provisions or to prevent the continuance of any violation thereof, together with an award or judgment for any and all damages, losses, liabilities, - -------- ---- expenses and costs incurred by the Company as a result of such breach or threatened breach including, but not limited to, attorneys' fees incurred by the Company in connection with, or as a result of, the enforcement of these covenants. The Executive expressly waives any requirement based on any statute, rule or procedure, or other source, that the Company post a bond as a condition of obtaining any of the above described remedies. 5.8 Divisibility. The Executive agrees that the provisions of this ------------ Section 5 are divisible and separable so that if any provision or provisions hereof shall be held to be unreasonable, unlawful or unenforceable, such holding shall not impair the remaining provisions hereof. If any provision hereof is held to be unreasonable, unlawful or unenforceable in duration, geographical scope or character of restriction by any court of competent jurisdiction, such provision shall be modified to the extent necessary in order that any such provision or portion thereof shall be legally enforceable to the fullest extent permitted by law, and the parties hereto do hereby expressly authorize any court of competent jurisdiction to enforce any such provision or portion thereof or to modify any such provision or portion thereof in order that any such provision or portion thereof shall be enforced by such court to the fullest extent permitted by applicable law. 5.9 Notice of Employment. During the Restricted Period the -------------------- Executive shall provide immediate written notice to the Company of each instance of ownership, management, operation, control, proprietorship, employment, agency or consultancy in which the Executive becomes involved, including, but not limited to, the location and nature of the relationship formed or the services rendered and the identity of the person or entity with whom the relationship has been formed or on whose behalf the services are rendered. The Executive hereby consents to the notification by the Company of any such party of the Executive's obligations under this Agreement. 5.10 Definition of the Company. For the purposes of this Section 5, ------------------------- any reference to the "Company" shall be deemed to include the Company, USF, any division, affiliate or subsidiary of the Company or USF and any and all subsidiaries, divisions or affiliates acquired or formed by any of such entities after the date hereof. 5.11 Other Non-Competition Agreements in Favor of the Company. -------------------------------------------------------- The parties acknowledge that the Executive and the Company may enter into other agreements from time to time containing provisions similar to the provisions of this Section 5, including, without limitation, 13 Stock Option Agreements with respect to stock options granted pursuant to the U.S. Foodservice 1994 Stock Incentive Plan or the U.S. Foodservice 1998 Stock Option and Incentive Plan. The parties intend that all such provisions shall be interpreted to provide the Company with cumulative rights and remedies and that the benefits and protections provided to the Company under each of such agreements shall be given full force and effect. 6. Other Provisions. ---------------- 6.1 Severability. If it is determined that any of the provisions ------------ of this Agreement are invalid or unenforceable, the remainder of the provisions of this Agreement shall not thereby be affected and shall be given full effect, without regard to the invalid portions. 6.2 Notices. Any notice or other communication required or ------- permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, five (5) days after the date of deposit in the United States mails as follows: (i) If to the Company, to: U.S. Foodservice, Inc. 9755 Patuxent Woods Drive Columbia, MD 21046 Attn: David M. Abramson, Executive Vice President and General Counsel Fax: 410-312-7149 (ii) If to the Executive, to the address given by the Executive. Either such person may by notice in accordance with this Section to the other party hereto designate another address or person for receipt by such person of notices hereunder. 6.3 Entire Agreement. This Agreement contains the entire ---------------- agreement between the parties (including all affiliates of the Company) with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. Without limiting the generality of the foregoing, the Executive and the Company acknowledge that upon the execution and delivery of this Agreement, the following agreements shall be null and void: (1) that certain Employment Agreement dated as of January 4, 1996 between the Executive and USF (then known as JP Foodservice, Inc.); and (2) that certain Severance Agreement dated as of September 27, 1995 between the Executive and USF (then known as JP Foodservice, Inc.). 6.4 Waivers and Amendments. This Agreement may be amended, ---------------------- superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of either party in exercising any right, power or privilege hereunder shall operate as a waiver 14 thereof, nor shall any waiver on the part of either party of such rights, power or privilege not any single or partial exercise of any such right, power or privilege, preclude any other further exercise thereof or the exercise of any other such right, power or privilege. 6.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND APPLICABLE TO AGREEMENTS MADE TO BE PERFORMED ENTIRELY WITHIN THE STATE OF MARYLAND, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREUNDER. 6.6 Jurisdiction. Except as otherwise provided in Section 7, ------------ below, the Executive irrevocably (i) consents and submits to the jurisdiction of any Maryland state court or federal court located in the State of Maryland with respect to any suit, action or proceeding relating to this Agreement; (ii) waives, to the fullest extent permitted by law, any objection which the Executive may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum; (iii) waives the right to object that any such court does not have jurisdiction over the Executive; (iv) consents to the service of process in any such suit, action or proceeding by the mailing of copies of such process to the Executive by certified mail, return receipt requested, at the Executive's address indicated in this Agreement or at such other address of which the Company shall have received notice; and (v) agrees not to bring any action relating to this Agreement in any court other than a Maryland state court or federal court located in the State of Maryland. Nothing in this paragraph shall affect the Company's right to serve process in any other manner permitted by law or to bring proceedings against the Executive in any other court having jurisdiction. 6.7 Assignment. This Agreement, and the Executive's rights and ---------- obligations hereunder, may not be assigned by the Executive. Any purported assignment by the Executive in violation hereof shall be null and void. 6.8 Binding Effect. This Agreement shall be binding upon and -------------- inure to the benefit of the parties and their respective successors, permitted assigns, heirs, executors and legal representatives. 6.9 Counterparts; Delivery by Facsimile. 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 together shall constitute one and the same instrument. Each counterpart may consist of two copies hereof each signed by one of the parties hereto. The transmission of an executed counterpart of this Agreement by facsimile transmission shall constitute due and sufficient delivery thereof for all purposes. 6.10 Headings. The headings in this Agreement are for reference -------- only and shall not affect the interpretation of this Agreement. 15 7. Arbitration. In the event of any dispute, controversy or claim ----------- arising out of any provision of this Agreement, (excluding, however, any dispute, controversy or claim arising out of Section 5), the parties agree to submit such dispute, controversy or claim to arbitration and that the determination in such arbitration shall be final and binding. Arbitration shall be effected in the State of Maryland by a panel of three arbitrators in accordance with the commercial arbitration rules then in force of the American Arbitration Association, which shall administer the arbitration and act as appointing authority. In the event of any conflict between the rules and the provisions of this Section 7, the provisions of this Section 7 shall govern. The arbitrators shall interpret this Agreement in accordance with the substantive laws of the State of Maryland. Any judgment upon the award of the arbitrators may be entered in any court having jurisdiction thereof, with costs of the arbitration to be borne equally by the parties, except that each party shall pay the fees and expenses of its own counsel in the arbitration. 8. Certain Expenses of the Executive. With respect to all matters --------------------------------- arising on or after the occurrence of a Change Date, the Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, and provision of this Agreement or any guaranty of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. Prior to the occurrence of a Change Date, the Company agrees to pay all expenses of the nature described in the preceding sentence, but only to the extent that, and upon the determination that, the position of the Executive with respect to the matter being contested was correct. IN WITNESS WHEREOF, the parties hereto have signed their names under seal as of the day and year first written above. U.S. FOODSERVICE, INC. By: /s/ David M. Abramson (SEAL) ------------------------------------ Name: David M. Abramson Title: Executive Vice President EXECUTIVE /s/ George T. Megas (SEAL) --------------------------------------- George T. Megas 16 EX-10.9 3 EXHIBIT 10.9 EXHIBIT 10.9 U.S. FOODSERVICE STOCK OPTION PLAN FOR OUTSIDE DIRECTORS AS AMENDED AS OF JULY 20, 1999 U.S.FOODSERVICE STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (AS AMENDED) 1. PURPOSE. The purpose of the U.S. Foodservice Stock Option Plan for Outside Directors is to promote the long-term growth of U.S. Foodservice (the "Corporation") by rewarding directors of the Corporation for outstanding long- term performance and to attract, motivate and retain highly qualified and capable outside directors (the "Directors"). All stock options ("Options") granted under the Plan are non-statutory options that do not qualify as incentive stock options intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986 or any successor provisions. The Plan conforms to the provisions of Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934 (the "Exchange Act"), as presently in effect. 2. ELIGIBILITY AND GRANT OF OPTIONS. Subject to approval of the Plan by the shareholders of the Corporation. (a) No director of the Corporation who is an employee of the Corporation or who is a nominee of Merrill Lynch Capital Partners, Inc. is eligible to participate in this Plan. Each other director of the Corporation is eligible to participate in the Plan. (b) Each eligible Director shall receive an Option to purchase 5,000 shares of Common Stock, $0.01 par value, of the Corporation ("Common Stock"), on the date of such person's initial appointment or election to the position of Director; provided, however, that each Director who is a nominee of Rykoff-Sexton, Inc. shall receive an Option to purchase 775 shares of Common Stock on the date of such person's initial appointment or election to the position of Director. (c) Each eligible Director who has received an initial grant shall receive an annual grant of an Option to purchase 4,000 shares of Common Stock on each anniversary of the initial grant of an Option to such Director. The option price for each Option shall be determined as of the date of grant, pursuant to Section 4. The Corporation shall effect the grant of Options under the Plan by the execution and delivery of written option agreements between the Corporation and the Directors receiving the Options ("Optionees"). No Option, nor anything contained in this Plan, shall confer upon any Optionee any right to continue as a Director of the Corporation nor limit in any way the ability of the Board of Directors or the shareholders of the Corporation to terminate such Optionee's service as a Director at any time. 3. STOCK. The Corporation has reserved an aggregate of 200,000 shares of Common Stock for issuance pursuant to the exercise of Options granted under the Plan. The aggregate number of shares of Common Stock reserved (i) is subject to future adjustments as provided in Section 8 and (ii) shall be reduced by the issuance of shares upon the exercise of Options, but shall not be reduced if Options, for any reason, expire or terminate unexercised. The Corporation shall not be required to issue or deliver any certificate for shares of Common Stock purchased upon the exercise of any part of an Option before (i) the admission of such shares to listing on any stock exchange on which the Common Stock may then be listed or the approval of such shares for quotation on any automated quotation system on which the Common Stock may then be quoted, (ii) receipt of any required representations by the Optionee or completion of any required registration or any qualification of such shares under any state or federal law or regulation that the Corporation's counsel shall determine is necessary or advisable, and (iii) receipt of advice by the Corporation's counsel that all applicable legal requirements have been satisfied. 4. PRICE. Except as provided below, the purchase price of each share of Common Stock covered by an Option (the "Option Price" shall be equal to the fair market value, as hereinafter defined, of one share of Common Stock on the date the Option is granted (the "Option Grant Date"). If the Common Stock is listed on the New York Stock Exchange (NYSE"), its fair market value shall be the opening price of the Common Stock reported by the NYSE on the Option Grant Date, provided that if there should be no opening price reported on such date, the fair market value shall be deemed equal to the closing price as reported by the NYSE for the last preceding date on which sales of Common Stock were reported. Notwithstanding the foregoing, in the event the Common Stock is listed upon more than one established stock exchange, the fair market value shall be the opening price of the Common Stock on the exchange that trades the largest volume of Common Stock on the Option Grant Date. In no event shall the Option Price be less than the par value of the Common Stock. Payment of the Option Price may be made (i) in cash, (ii) by the surrender of shares of Common Stock owned by the Director exercising the Option and having a fair market value on the date of exercise equal to the aggregate Option Price, or (iii) any combination thereof. Shares of Common Stock surrendered in payment of the Option Price shall be valued at the fair market value thereof, as defined above, on the date of exercise. 5. TERM AND LIMITATIONS ON EXERCISE. Options may be exercised, in whole or in part, but only with respect to whole shares of Common Stock, as set forth below, by giving timely written notice to the Corporation. (a) The term of any Option shall be ten years from the Option Grant Date. No Option may be exercised after the expiration of its term or after the date set forth in subsection (c), (d), or (e) below, if earlier. -2- (b) Options are exercisable only to the extent they are vested. One-fourth of each Option granted shall vest on the Option Grant Date and an additional one- fourth of such Option shall vest on each of the first, second, and third anniversary dates of the Option Grant Date provided that the Optionee is a Director on such date. No Options shall be exercisable unless and until the shareholders of the Corporation approve the Plan. No Option may be exercised during the first six months after the Option Grant Date, unless the Optionee dies or becomes disabled (as determined under Title 11 of the Social Security Act, 42 U.S.C. Sections 301 et seq.) before the expiration of the six-month period. (c) If an Optionee ceases to be a Director after the Optionee attains age sixty-five or on account of the Optionee's death or disability, all outstanding Options granted to such Optionee shall vest and the Optionee (or the Optionee's legatees or distributees or the personal representative of the Optionee's estate, in the event of the Optionee's death) may exercise the Optionee's outstanding Options at any time until the first to occur of (x) the date that is two years after the date on which the Optionee ceases to be a Director or (y) the date on which such outstanding Options expire according to their terms. (d) If an Optionee ceases to be a Director for any reason other than described in subsection (c) above, the Optionee may exercise the Optionee's outstanding Options to the extent vested at any time (subject to the limitations of subsection (b) above) until the first to occur of (x) the date that is three months after the date on which the Optionee ceases to be a Director or (y) the date on which such outstanding Options expire according to their terms. (e) If an Optionee dies after the Optionee ceases to be a Director, but within the time period during which the Optionee's outstanding Options are still exercisable, the Director's outstanding Options may be exercised by the Optionee's legatees or distributees or the personal representative of the Optionee's estate. Such outstanding Options may be exercised at any time (subject to the limitations of subsection (b) above) until the first to occur of (x) the date that is two years after the date on which the Optionee ceases to be a Director or (y) the date on which such outstanding Options expire according to their terms. (f) Notwithstanding the foregoing, in the event of a Change in Control (as defined below) of the Corporation, each Option that has been outstanding for at least six months after the Option Grant Date shall vest and the Option shall be fully exercisable. (g) Definition of Change of Control. A "Change of Control" shall occur when: -3- (i) a "person" or "group" (which terms, when used in this Section 5, shall have the meaning they have when used in Section 13(d) of the Exchange Act) (other than the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any corporation, owned, directly or indirectly, by the shareholders of the Corporation in substantially the same proportions as their ownership of voting Stock (as defined below) of the Corporation) is or becomes (other than solely by reason of a repurchase of Voting Stock by the Corporation), the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% or more of the total outstanding Voting Stock of the Corporation; or (ii) the Corporation consolidates with or merges with or into another corporation or partnership or conveys, transfers or leases, in any transaction or series of transactions, all or substantially all of its assets to any corporation or partnership, or any corporation or partnership consolidates with or merges with or into the Corporation, in any event pursuant to a transaction in which the outstanding Voting Stock of the Corporation is reclassified or changed into or exchanged for cash, securities or other property, other than any such transaction where (A) the outstanding Voting Stock of the Corporation is changed into or exchanged for voting stock of the surviving corporation and (B) no "person" or "group" who did not beneficially own, immediately after such transaction, 50% or more of the total outstanding voting stock of the surviving corporation, or the Corporation is liquidated or dissolved or adopts a plan of liquidation or dissolution; or (iii) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by the Board or whose nomination for election by the stockholders of the Corporation was approved by a vote of 66 2/3% of the directors than still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board than in office. The term "Voting Stock" means all capital stock of the Corporation which by its terms is entitled under ordinary circumstances to vote in the election of directors. (b) Notwithstanding anything herein to the contrary, Options shall be granted and exercised in such a manner as to conform to the provisions of Rule 16b-3, or any replacement rule adopted pursuant to the provisions of -4- the Exchange Act, as the same now exists or may, from time to time, be amended. (i) The exercise of any Option and delivery of the Option shares shall be contingent upon the receipt by the Corporation of the Option Price in cash or shares of Common Stock as provided in Section 4. 6. NON-TRANSFERABILITY OF OPTIONS. Options, by their terms, shall not be transferable by the Optionee during the Optionee's lifetime and may not be assigned, exchanged, pledged, transferred, or otherwise encumbered or disposed of except pursuant to a qualified domestic relations order, by will or by the applicable laws of descent and distribution. Options shall be exercisable during the Optionee's lifetime only by the Optionee or the Optionee's guardian or legal representative. 7. TAX WITHHOLDING. To the extent required by applicable federal, state, local or foreign law, an Optionee shall make arrangements acceptable to the Corporation for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option or any sale of the shares of Common Stock acquired upon exercise of an Option. The Corporation shall not be required to issue shares until such obligations are satisfied. The Corporation may permit such obligations to be satisfied by having the Corporation withhold a portion of the shares of Common Stock that otherwise would be issued to the Optionee upon exercise of the Option. 8. EFFECT OF STOCK DIVIDENDS AND OTHER CHANGES. Appropriate adjustments shall be made to the Option Price and the number of shares subject to Options if there are any changes in the Common Stock by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers, or consolidations. 9. ADMINISTRATION OF THE PLAN. The Board of Directors shall be responsible for the proper implementation of the Plan. 10. EXPIRATION AND TERMINATION OF THE PLAN. Options may be granted under the Plan at any time until the Plan is terminated by the Board of Directors or until such earlier date on which termination of the Plan shall be required by applicable law. If not sooner terminated, the Plan shall terminate automatically on November 4, 2004, which is ten years from the date on which the Plan was originally approved by the Board of Directors. Options granted under the Plan prior to its termination shall remain outstanding following the Plan's termination and shall be exercisable in accordance with their terms. 11. AMENDMENTS. The Board of Directors may from time to time make such changes in and additions to the Plan as it may deem proper, provided that, if and to the extent required by applicable law or regulation, no change in an addition to the Plan shall be made unless such change in or addition to the Plan is -5- authorized by the shareholders. The termination of the Plan or any change or addition to the Plan shall not, without the consent of any Optionee who is adversely affected thereby, alter any Options previously granted to the Optionee pursuant to the Plan. 12. GOVERNING LAW. The Plan and each Option granted under the Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. 13. EFFECTIVE DATE. The Plan shall be effective on the date and at the time of the initial closing of the Corporation's initial public offering of Common Stock, subject to the approval of the Plan on or before such date by a majority of the voting shares represented and entitled to vote. Any amendment to the Plan requiring shareholder approval shall be effective on the date and at the time such amendment is approved by a majority of the voting shares represented and entitled to vote. 14. RELOAD OPTIONS. An Option may include the right to acquire an option (the "Reload Option") which shall entitle the Optionee, upon exercise of the original Option (in whole or in part) prior to termination of the Optionee's services and satisfaction of the Option Price in shares of Common Stock, to receive a new non-qualified stock option. In addition to any other terms and conditions the Board of Directors deems appropriate, the Reload Option shall be subject to the following terms: (i) the number of shares of Common Stock shall not exceed the number of whole shares used to satisfy the Option Price of the original Option and the number of whole shares of Common Stock, if any, withheld by the Corporation as payment for withholding taxes in accordance with Section 7; (ii) the Option Grant Date shall be the date of the exercise of the original option; (iii) the Option Price per share shall be the Fair Market Value on the option Grant Date; (iv) the Reload Option shall be exercisable no earlier than six months after the Option Grant Date; (v) the Reload Option term shall not extend beyond the term of the original Option; and (vi) the Reload Option shall otherwise meet all conditions of this Plan. -6- EX-10.10 4 EXHIBIT 10.10 EXHIBIT 10.10 U.S. FOODSERVICE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective: July 1, 1998 AS AMENDED AS OF JULY 20,1999 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
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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 6.2, 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) 90,000 and (ii) any shares of Common Stock that are reserved for issuance under the Company's Restricted Unit 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 or the U.S. Foodservice 1998 Stock Option and 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 6.2. 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-10.11 5 EXHIBIT 10.11 EXHIBIT 10.11 U.S. FOODSERVICE RESTRICTED UNIT PLAN Effective: July 1, 1998 AS AMENDED AS OF JULY 20, 1999 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 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) 500,000 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 or the U.S. Foodservice 1998 Stock Option and 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 6.1. 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-10.12 6 EXHIBIT 10.12 EXHIBIT 10.12 U.S. FOODSERVICE 1998 STOCK OPTION AND INCENTIVE PLAN AS AMENED AS OF JULY 20, 1999 TABLE OF CONTENTS
Page ---- 1. PURPOSE........................................................................................... 1 2. DEFINITIONS....................................................................................... 1 3. ADMINISTRATION OF THE PLAN........................................................................ 4 3.1. Board........................................................................................ 4 3.2. Committee.................................................................................... 4 3.3. Grants....................................................................................... 5 3.4. No Liability................................................................................. 6 3.5. Applicability of Rule 16b-3.................................................................. 6 4. STOCK SUBJECT TO THE PLAN......................................................................... 6 4.1. Aggregate Limitation......................................................................... 6 4.2. Other Plan Limits............................................................................ 7 4.3. Payment Shares............................................................................... 7 4.4. Application of Aggregate Limitation.......................................................... 7 4.5. Per-Grantee Limitation....................................................................... 7 5. EFFECTIVE DATE AND TERM OF THE PLAN............................................................... 8 5.1. Effective Date............................................................................... 8 5.2. Term......................................................................................... 8 6. PERMISSIBLE GRANTEES.............................................................................. 9 6.1. Employees and Service Providers.............................................................. 9 6.2. Successive Grants............................................................................ 9 7. LIMITATIONS ON GRANTS OF INCENTIVE STOCK OPTIONS.................................................. 9 8. AWARD AGREEMENT................................................................................... 9 9. OPTION PRICE...................................................................................... 10 10. VESTING, TERM AND EXERCISE OF OPTIONS............................................................ 10 10.1. Vesting and Option Period.................................................................. 10 10.2. Term....................................................................................... 10 10.3. Acceleration............................................................................... 11 10.4. Termination of Employment or Other Relationship for a Reason Other than Death or Disability...................................................... 11 10.5. Rights in the Event of Death............................................................... 11 10.6. Rights in the Event of Disability.......................................................... 12 10.7. Rights in the Event of Retirement.......................................................... 12 10.8. Limitations on Exercise of Option.......................................................... 12 10.9. Method of Exercise......................................................................... 13 10.10. Rights as a Stockholder; Dividend Equivalents............................................. 13 10.11. Delivery of Stock Certificates............................................................ 14 11. TRANSFERABILITY OF OPTIONS....................................................................... 14 11.1. General Rule............................................................................... 14 11.2. Family Transfers........................................................................... 14 12. RELOAD OPTIONS................................................................................... 15
-i- 13. RESTRICTED STOCK................................................................................. 15 13.1. Grant of Restricted Stock or Restricted Stock Units........................................ 15 13.2. Restrictions............................................................................... 15 13.3. Restricted Stock Certificates.............................................................. 16 13.4. Rights of Holders of Restricted Stock...................................................... 16 13.5. Rights of Holders of Restricted Stock Units................................................ 17 13.6. Termination of Employment or Other Relationship for a Reason Other than Death or Disability...................................................... 17 13.7. Rights in the Event of Death............................................................... 18 13.8. Rights in the Event of Disability.......................................................... 18 13.9. Delivery of Shares and Payment Therefor.................................................... 18 14. STOCK APPRECIATION RIGHTS........................................................................ 18 14.1. Grant of Stock Appreciation Rights......................................................... 19 14.2. Nature of a Stock Appreciation Right....................................................... 19 14.3. Terms and Conditions Governing SARs........................................................ 19 15. PARACHUTE LIMITATIONS............................................................................ 19 16. 16. REQUIREMENTS OF LAW.......................................................................... 20 16.1. General.................................................................................... 20 16.2. Rule 16b-3................................................................................. 21 17. AMENDMENT AND TERMINATION OF THE PLAN............................................................ 21 18. EFFECT OF CHANGES IN CAPITALIZATION.............................................................. 22 18.1. Changes in Stock........................................................................... 22 18.2. Reorganization, Sale of Assets or Sale of Stock............................................ 22 18.3. Adjustments................................................................................ 23 18.4. No Limitations on Company.................................................................. 24 19. DISCLAIMER OF RIGHTS............................................................................. 24 20. NONEXCLUSIVITY OF THE PLAN....................................................................... 24 21. WITHHOLDING TAXES................................................................................ 25 22. CAPTIONS......................................................................................... 25 23. OTHER PROVISIONS................................................................................. 25 24. NUMBER AND GENDER................................................................................ 26 25. SEVERABILITY..................................................................................... 26 26. POOLING.......................................................................................... 26 27. GOVERNING LAW.................................................................................... 26
-ii- U.S. FOODSERVICE 1998 STOCK OPTION AND INCENTIVE PLAN U.S. Foodservice, a Delaware corporation (the "Company"), sets forth herein the terms of its 1998 Stock Option and Incentive Plan (the "Plan") as follows: 1. PURPOSE The Plan is intended to enhance the Company's ability to attract and retain highly qualified officers, key employees, outside directors and other persons, and to motivate such officers, key employees, outside directors and other persons to serve the Company and its affiliates (as defined herein) and to expend maximum effort to improve the business results and earnings of the Company, by providing to such officers, key employees, outside directors and other persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, restricted stock, restricted stock units and stock appreciation rights in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein, except that stock options granted to outside directors shall in all cases be non-qualified stock options. 2. DEFINITIONS For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply: 2.1 "affiliate" of, or person "affiliated" with, a person means any company or other trade or business that controls, is controlled by or is under common control with such person within the meaning of Rule 405 of Regulation C under the Securities Act. 2.2 "Award Agreement" means the stock option agreement, restricted stock agreement, restricted stock unit agreement, stock appreciation right agreement or other written agreement between the Company and a Grantee that evidences and sets out the terms and conditions of a Grant. 2.3 "Board"means the Board of Directors of the Company. 2.4 "Code"means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. -1- 2.5 "Committee" means a committee of, and designated from time to time by resolution of, the Board, which shall consist of no fewer than two members of the Board, none of whom shall be an officer or other salaried employee of the Company or any affiliate of the Company. 2.6 "Company" means U.S. Foodservice. 2.7 "Effective Date" means the date designated by the Board in its resolution adopting the Plan. 2.8 "Exchange Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. 2.9 "Fair Market Value" means the opening price of a share of Stock reported on the New York Stock Exchange ("NYSE") on the date Fair Market Value is being determined, provided that if there should be no opening price reported on such date, the Fair Market Value of a share of 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 were reported. Notwithstanding the foregoing, in the event that the shares of Stock are listed upon more than one established stock exchange, Fair Market Value means the opening price of a share of Stock reported on the exchange that trades the largest volume of shares on the Grant Date. If the Stock is not at the time listed or admitted to trading on a stock exchange, Fair Market Value means the mean between the lowest reported bid price and highest reported asked price of the Stock on the date in question in the over- the-counter market, as such prices are reported in a publication of general circulation selected by the Board and regularly reporting the market price of Stock in such market. If the Stock is not listed or admitted to trading on any stock exchange or traded in the over-the-counter market, Fair Market Value shall be as determined in good faith by the Board. 2.10 "Grant" means an award of an Option, Restricted Stock, Restricted Stock Unit or Stock Appreciation Right under the Plan. 2.11 "Grant Date" means, as determined by the Board or authorized Committee, (i) the date as of which the Board or such Committee approves a Grant, (ii) the date on which the recipient of a Grant first becomes eligible to receive a Grant under Section 6 hereof or (iii) such other date as may be specified by the Board or such Committee. 2.12 "Grantee" means a person who receives or holds an Option, Restricted Stock, Restricted Stock Unit or Stock Appreciation Right under the Plan. 2.13 "Immediate Family Members" means the spouse, children, grandchildren, parents and siblings of the Grantee. -2- 2.14 "Incentive Stock Option "means an "incentive stock option"within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time. 2.15 "Option" means an option to purchase one or more shares of Stock pursuant to the Plan. 2.16 "Option Period" means the period during which Options may be exercised as set forth in Section 10 hereof. 2.17 "Option Price" means the purchase price for each share of Stock subject to an Option. 2.18 "Outside Director" means a member of the Board who is not an officer or employee of the Company or any Subsidiary. 2.19 "Plan" means this U.S. Foodservice 1998 Stock Option and Incentive Plan, as amended from time to time. 2.20 "Reload Option" means the right, upon exercise of and satisfaction of an Option through the delivery of shares, automatically to be granted a new Non- Qualified Stock Option subject to the terms and provisions of Section 12 hereof. 2.21 "Reporting Person" means a person who is required to file reports under Section 16(a) of the Exchange Act. 2.22 "Restricted Period" means the period during which Restricted Stock or Restricted Stock Units are subject to restrictions or conditions pursuant to Section 13.2 hereof. 2.23 "Restricted Stock" means shares of Stock, awarded to a Grantee pursuant to Section 13 hereof, that are subject to restrictions and to a risk of forfeiture. 2.24 "Restricted Stock Unit" means a unit awarded to a Grantee pursuant to Section 13 hereof, which represents a conditional right to receive a share of Stock in the future, and which is subject to restrictions and to a risk of forfeiture. 2.25 "Securities Act" means the Securities Act of 1933, as now in effect or as hereafter amended. 2.26 "Service Provider" means a consultant or adviser to the Company, a manager of the Company's properties or affairs, or other similar service provider or affiliate of the Company, and employees of any of the foregoing, as such persons may be designated from time to time by the Board pursuant to Section 6 hereof. -3- 2.27 "Stock" means the common stock, par value $0.01 per share, of the Company. 2.28 "Stock Appreciation Right" or "SAR" means a right granted to a Grantee pursuant to Section 14 hereof. 2.29 "Subsidiary" means any "subsidiary corporation"of the Company within the meaning of Section 424(f) of the Code. 2.30 "Termination Date" means the date upon which an Option shall terminate or expire, as set forth in Section 10.2 hereof. 3. ADMINISTRATION OF THE PLAN 3.1. Board The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Company's certificate of incorporation, bylaws and applicable law. The Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Grant or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan, any Grant or any Award Agreement. All such actions and determinations shall be by the affirmative vote of a majority of the members of the Board present at a meeting or by unanimous consent of the Board executed in writing in accordance with the Company's certificate of incorporation, bylaws and applicable law. The interpretation and construction by the Board of any provision of the Plan, any Grant or any Award Agreement shall be final and conclusive. As permitted by law, the Board may delegate its authority under the Plan to a member of the Board or an executive officer of the Company; provided, however, that, unless otherwise provided by resolution of the Board, only the Board or the Committee may make a Grant to an executive officer of the Company and establish the number of shares of Stock that may be subject to Grants with respect to any fiscal period. 3.2. Committee. The Board from time to time may delegate to a Committee such powers and authorities related to the administration and implementation of the Plan, as set forth in Section 3.1 hereof and in other applicable provisions of the Plan, as the Board shall determine, consistent with the Company's certificate of incorporation, -4- bylaws and applicable law. In the event that the Plan, any Grant or any Award Agreement provides for any action to be taken or determination to be made by the Board, such action may be taken by or such determination may be made by the Committee if the power and authority to do so has been delegated to the Committee by the Board as provided for in this Section 3.2. Unless otherwise expressly determined by the Board, any such action or determination by the Committee shall be final, binding and conclusive. As permitted by law, the Committee may delegate the authority delegated to it under the Plan to a member of the Board of Directors or an executive officer of the Company; provided, however, that, unless otherwise provided by the Board, only the Board or the Committee may make a Grant to an executive officer of the Company and establish the number of shares of Stock that may be subject to Grants during any fiscal period. 3.3. Grants. Subject to the other terms and conditions of the Plan, the Board shall have full and final authority (i) to designate Grantees, (ii) to determine the types of Grants to be made to a Grantee, (iii) to determine the number of shares of Stock to be subject to a Grant, (iv) to establish the terms and conditions of each Grant, including, but not limited to, the exercise price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof, including lapse relating to a change in control of the Company) relating to the vesting, exercise, transfer or forfeiture of a Grant or the shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options, (v) to prescribe the form of each Award Agreement evidencing a Grant, (vi) to make Grants alone, in addition to, in tandem with, or in substitution or exchange for any other Grant or any other award granted under another plan of the Company or a Subsidiary, and (vii) to amend, modify or supplement the terms of any outstanding Grant. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify Grants to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy or custom. As a condition to any subsequent Grant, the Board shall have the right, at its discretion, to require Grantees to return to the Company any Grants previously awarded under the Plan. Subject to the terms and conditions of the Plan, any such subsequent Grant shall be upon such terms and conditions as are specified by the Board at the time the subsequent Grant is made. The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any affiliate thereof or any confidentiality obligation with respect to the Company or any affiliate thereof or otherwise in competition with the Company, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul a Grant if the Grantee is an -5- employee of the Company or an affiliate thereof and is terminated "for cause"as defined in the applicable Award Agreement. The Board may permit or require the deferral of any award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Stock equivalents. 3.4. No Liability. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Grant or Award Agreement. 3.5. Applicability of Rule 16b-3. Those provisions of the Plan that make express reference to Rule 16b-3 under the Exchange Act shall apply only to Reporting Persons. 4. STOCK SUBJECT TO THE PLAN 4.1. Aggregate Limitation. Subject to adjustment as provided in Section 18 hereof, the aggregate number of shares of Stock available for issuance under the Plan pursuant to Incentive Stock Options or other Grants shall be equal to the sum of (i) eight million (8,000,000) shares, (ii) six hundred seventy-eight thousand fifty-four (678,054) shares (which equals the number of shares of Stock available for future awards under the Company's 1994 Stock Incentive Plan as of the Effective Date after giving effect to the Company's two-for-one stock dividend paid on August 4, 1999) and (iii) any shares of Stock that are represented by awards granted under the Company's 1994 Stock Incentive Plan or which have been assumed by the Company, which are forfeited, expire or are canceled without the delivery of shares of Stock or which result in the forfeiture of shares of Stock to the Company after the Effective Date. Any shares of Stock granted under the Plan which are forfeited to the Company because of the failure to meet an award contingency or condition shall again be available for delivery pursuant to new awards granted under the Plan. Any shares of Stock covered by an award (or portion of an award) granted under the Plan which is forfeited or canceled, expires or is settled in cash shall be deemed not to have been delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. If any stock option is exercised by tendering shares of Stock, either actually or by attestation, to the Company as full or partial payment in connection with the -6- exercise of a stock option under the Plan or any prior plan of the Company as hereinabove described, only the number of shares of Stock issued net of the shares of Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of Stock available for delivery under the Plan. Shares of Stock issued under the Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards resulting from the acquisition of another entity shall not reduce the maximum number of shares available for delivery under the Plan. 4.2. Other Plan Limits. Subject to adjustment as provided in Section 18 hereof, the following additional limitations are imposed under the Plan. The maximum number of shares of Stock that may be delivered through stock options intended to be Incentive Stock Options shall be eight million (8,000,000). The maximum number of shares of Stock that may be issued in conjunction with awards granted pursuant to Section 13 hereof shall be twenty percent (20%) of the aggregate number of shares of Stock available for issuance under the Plan pursuant to Section 4.1 hereof. 4.3. Payment Shares. Subject to the overall limitation on the number of shares of Stock that may be delivered under the Plan, the Board may use available shares of Stock as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of the Company, including the plan of any entity acquired by the Company. 4.4. Application of Aggregate Limitation. The limitation contained in Section 4.1 hereof shall apply not only to Grants that are settleable by the delivery of shares of Stock but also to Grants relating to shares of Stock but settleable only in cash (such as cash-only SARs). The Board may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares of Stock previously counted in connection with a Grant. 4.5. Per-Grantee Limitation. -7- During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act: (i) no person eligible for a Grant under Section 6 hereof may be awarded Options for purposes of the Plan exercisable for greater than two million (2,000,000) shares of Stock (subject to adjustment as provided in Section 18 hereof); (ii) the maximum number of shares of Restricted Stock that may be awarded under the Plan (including for this purpose any shares of Stock represented by Restricted Stock Units) to any person eligible for a Grant under Section 13 hereof is eight hundred thousand (800,000) for purposes of the Plan (subject to adjustment as provided in Section 18 hereof); and (iii) the maximum number of shares of Stock that may be the subject of SARs awarded to any Grantee under Section 14 hereof is two million (2,000,000) for purposes of the Plan (subject to adjustment as provided in Section 18 hereof). 5. EFFECTIVE DATE AND TERM OF THE PLAN 5.1. Effective Date. The Plan shall be effective as of the Effective Date, subject to approval of the Plan by the stockholders of the Company, within one year before or after the date upon which the Plan was adopted by the Board. Such approval shall be by a majority of the votes cast on the proposal at a meeting of stockholders, provided that a quorum is present. Upon approval of the Plan by the stockholders of the Company as set forth above, all Grants made under the Plan on or after the Effective Date shall be fully effective as if the stockholders of the Company had approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within the time period set forth above, any Grants made hereunder shall be null and void and of no effect. 5.2. Term. The Plan has no termination date; however, no Incentive Stock Option may be granted under the Plan on or after September 24, 2008. -8- 6. PERMISSIBLE GRANTEES 6.1. Employees and Service Providers. Subject to the provisions of Section 7 hereof, Grants may be made under the Plan to any employee of the Company or any Subsidiary, including any such employee who is an officer or director of the Company, to an Outside Director, to a Service Provider or employee of a Service Provider providing, or who has provided, services to the Company or any Subsidiary, and to any other individual whose participation in the Plan is determined by the Board to be in the best interests of the Company, as the Board shall determine and designate from time to time. 6.2. Successive Grants. An eligible person may receive more than one Grant, subject to such restrictions as are provided herein. 7. LIMITATIONS ON GRANTS OF INCENTIVE STOCK OPTIONS An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee's employer and its affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted. 8. AWARD AGREEMENT Each Grant pursuant to the Plan shall be evidenced by an Award Agreement, in such form or forms as the Board shall from time to time determine. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing a Grant of Options shall specify whether such Options are intended to be non-qualified stock options or Incentive Stock Options, and in the -9- absence of such specification such options shall be deemed non-qualified stock options. 9. OPTION PRICE The Option Price of each Option shall be no less than the Fair Market Value on the date of grant of a share of Stock and stated in the Award Agreement evidencing such Option; provided, however, that in the event that a Grantee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than ten percent (10%) of the Company's outstanding shares of Stock), the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock. 10. VESTING, TERM AND EXERCISE OF OPTIONS 10.1. Vesting and Option Period. Subject to Sections 10.2 and 18 hereof, each Option granted under the Plan shall become exercisable at such times and under such conditions as shall be determined by the Board and stated in the Award Agreement. For purposes of this Section 10.1, fractional numbers of shares of Stock subject to an Option shall be rounded down to the next nearest whole number. The period during which any Option shall be exercisable shall constitute the "Option Period"with respect to such Option. 10.2. Term. Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Board and thereafter stated in the Award Agreement relating to such Option; provided, however, that in the event that the Grantee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than ten percent (10%) of the outstanding shares of Stock), an Option granted to such Grantee that is intended to be an Incentive Stock -10- Option shall not be exercisable after the expiration of five years from its date of grant. 10.3. Acceleration. Any limitation on the exercise of an Option contained in any Award Agreement may be rescinded, modified or waived by the Board, in its sole discretion, at any time and from time to time after the Grant Date of such Option, so as to accelerate the time at which the Option may be exercised. Notwithstanding any other provision of the Plan, no Option shall be exercisable in whole or in part prior to the date the Plan is approved by the stockholders of the Company as provided in Section 5.1 hereof. 10.4. Termination of Employment or Other Relationship for a Reason Other than Death or Disability. Unless otherwise provided by the Board, upon the termination of a Grantee's employment or other relationship with the Company and its Subsidiaries other than by reason of death, "permanent and total disability"(within the meaning of Section 22(e)(3) of the Code) or retirement, any Option or portion thereof held by such Grantee that has not vested in accordance with the provisions of Section 10.1 hereof shall terminate immediately, and any Option or portion thereof that has vested in accordance with the provisions of Section 10.1 hereof but has not been exercised shall terminate at the close of business on the 90th day following the Grantee's termination of employment or other relationship (or, if such 90th day is a Saturday, Sunday or holiday, at the close of business on the next preceding day that is not a Saturday, Sunday or holiday). Upon termination of an Option or portion thereof, the Grantee shall have no further right to purchase shares of Stock pursuant to such Option or portion thereof. Whether a leave of absence or leave on military or government service shall constitute a termination of employment or other relationship for purposes of the Plan shall be determined by the Board, whose determination shall be final and conclusive. For purposes of the Plan, a termination of employment, service or other relationship shall not be deemed to occur if the Grantee is immediately thereafter employed with the Company, a Subsidiary or a Service Provider, or is engaged as a Service Provider or an Outside Director. Whether a termination of a Grantee's employment or other relationship with the Company and its Subsidiaries shall have occurred shall be determined by the Board, whose determination shall be final and conclusive. 10.5. Rights in the Event of Death. -11- Unless otherwise provided by the Board, if a Grantee dies while employed by or providing services to the Company, all Options granted to such Grantee that have not previously terminated shall fully vest on the date of death, and the executors or administrators or legatees or distributees of such Grantee's estate shall have the right, at any time within one year after the date of such Grantee's death and prior to termination of the Option pursuant to Section 10.2 hereof, to exercise any Option held by such Grantee at the date of such Grantee's death. 10.6. Rights in the Event of Disability. Unless otherwise provided by the Board, if a Grantee's employment or other relationship with the Company is terminated by reason of the "permanent and total disability"(within the meaning of Section 22(e)(3) of the Code) of such Grantee, such Grantee's Options that have not previously terminated shall fully vest, and shall be exercisable for a period of one year after such termination of employment or other relationship, subject to earlier termination of the Option as provided in Section 10.2 hereof. Whether a termination of employment or other relationship is considered to be by reason of "permanent and total disability"for purposes of the Plan shall be determined by the Board, whose determination shall be final and conclusive. 10.7. Rights in the Event of Retirement. Unless otherwise provided by the Board, if a Grantee retires under the terms of any Company retirement plan applicable to the Grantee or as determined by the Board, the Grantee shall be considered retired and all Options granted to such Grantee that have not previously terminated shall fully vest on the date of retirement, and the Grantee shall have the right, at any time within three years after the date of such Grantee's retirement and prior to termination of the Option pursuant to Section 10.2 hereof, to exercise any Option held by such Grantee at the date of such Grantee's retirement. 10.8. Limitations on Exercise of Option. Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the stockholders of the Company as provided herein, or after ten years following the date upon which the Option is granted, or after the occurrence of an event referred to in Section 18 hereof which results in termination of the Option. -12- 10.9. Method of Exercise. An Option that is exercisable may be exercised by the Grantee's delivery to the Company of written notice of exercise on any business day, at the Company's principal office, addressed to the attention of the Board. Such notice shall specify the number of shares of Stock with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares of Stock for which the Option is being exercised. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Award Agreement and (ii) the maximum number of shares of Stock available for purchase under the Option at the time of exercise. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made (i) in cash or in cash equivalents acceptable to the Company; (ii) to the extent permitted by law and at the Board's discretion, through the actual or constructive tender to the Company of shares of Stock, which shares of Stock, if acquired from the Company, shall have been held for at least six months prior to such tender and which shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their Fair Market Value on the date of exercise; or (iii) to the extent permitted by law and at the Board's discretion, by a combination of the methods described in clauses (i) and (ii). The Board may provide, by inclusion of appropriate language in an Award Agreement, that payment in full of the Option Price need not accompany the written notice of exercise, provided that the notice is accompanied by delivery of an unconditional and irrevocable undertaking by a licensed broker acceptable to the Company as the agent for the individual exercising the Option to deliver promptly to the Company sufficient funds to pay the Option Price and directs that the certificate or certificates for the shares of Stock for which the Option is exercised be delivered to a licensed broker acceptable to the Company as the agent for the individual exercising the Option and, at the time such certificate or certificates are delivered, the broker tenders to the Company cash (or cash equivalents acceptable to the Company) equal to the Option Price for the shares of Stock purchased pursuant to the exercise of the Option plus the amount (if any) of federal or other taxes which the Company may in its judgment be required to withhold with respect to the exercise of the Option. An attempt to exercise any Option granted hereunder other than as set forth above shall be invalid and of no force and effect. 10.10. Rights as a Stockholder; Dividend Equivalents. Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the -13- subject shares of Stock or to direct the voting of the subject shares of Stock) until the shares of Stock covered thereby are fully paid and issued to such individual. Except as provided in Section 18 hereof, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance. However, the Board may, on such conditions as it deems appropriate, provide that a Grantee will receive a benefit in lieu of cash dividends that would have been payable on any or all shares of Stock subject to the Grant if such shares of Stock had been outstanding. Without limitation, the Board may provide for payment to the Grantee of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Grantee. 10.11. Delivery of Stock Certificates. Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a Stock certificate or certificates evidencing such Grantee's ownership of the shares of Stock subject to the Option. 11. TRANSFERABILITY OF OPTIONS 11.1. General Rule Except as provided in Section 11.2 hereof, during the lifetime of a Grantee, only the Grantee (or, in the event of legal incapacity or incompetency, the Grantee's guardian or legal representative) may exercise an Option. Except as provided in Section 11.2 hereof, no Option shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution. 11.2. Family Transfers. To the extent permitted by the Board and under such rules and conditions as imposed by the Board, a Grantee may transfer all or part of an Option that is not an Incentive Stock Option to (i) any Immediate Family Member, (ii) a trust or trusts for the exclusive benefit of any Immediate Family Member or (iii) a partnership or limited liability company in which Immediate Family Members are the only partners or members, provided that (x) there may be no consideration for any such transfer, and (y) subsequent transfers of transferred Options are prohibited except those in accordance with this Section 11.2 or by will or the laws of descent and -14- distribution. Following such transfer, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to the transfer, provided that, for purposes of this Section 11.2, the term "Grantee"shall be deemed to refer to the transferee. The events of termination of employment or other relationship referred to in Section 10.4 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent and for the periods specified in Section 10.4, 10.5, 10.6 or 10.7 hereof. 12. RELOAD OPTIONS. A non-qualified stock option may include the right to acquire a Reload Option which shall entitle the Grantee, upon exercise of the original Option (in whole or in part) prior to termination of the Grantee's employment and satisfaction of the Option Price in shares of Stock, to receive a new non-qualified stock option. In addition to any other terms and conditions the Board deems appropriate, the Reload Option shall be subject to the following terms: (i) the number of shares of Stock shall not exceed the number of whole shares used to satisfy the Option Price of the original Option and the number of whole shares of Stock, if any, withheld by the Company as payment for withholding taxes in accordance with Section 21 hereof; (ii) the Grant Date shall be the date of the exercise of the original Option; (iii) the Option Price per share shall be the Fair Market Value on the Grant Date; (iv) the Reload Option shall be exercisable no earlier than six months after the Grant Date; (v) the Reload Option term shall not extend beyond the term of the original Option; and (vi) the Reload Option shall otherwise meet all conditions of the Plan. 13. RESTRICTED STOCK 13.1. Grant of Restricted Stock or Restricted Stock Units. The Board from time to time may grant Restricted Stock or Restricted Stock Units to persons eligible to receive Grants under Section 6 hereof, subject to such restrictions, conditions and other terms as the Board may determine. 13.2. Restrictions. At the time a Grant of Restricted Stock or Restricted Stock Units is made, the Board shall establish a period of time (the "Restricted Period") applicable to such Restricted Stock or Restricted Stock Units. Unless otherwise determined by the -15- Board or unless the Grant is being made under another plan, the Restricted Period will be a minimum of three years. Each Grant of Restricted Stock or Restricted Stock Units may be subject to a different Restricted Period. At the time a Grant of Restricted Stock or Restricted Stock Units is made, the Board may, in its sole discretion, prescribe restrictions in addition to or other than the expiration of the Restricted Period, including the satisfaction of corporate or individual performance objectives, which may be applicable to all or any portion of the Restricted Stock or Restricted Stock Units. Such performance objectives shall be established in writing by the Board by not later than the 90th day of the period of service to which such performance objectives relate and while the outcome is substantially uncertain. Performance objectives may be stated either on an absolute or relative basis and may be based on any of the following criteria: earnings per share, total stockholder return, operating earnings, growth in assets, return on equity, return on capital, market share, stock price, net income, cash flow, sales growth (in general, by type of product and by type of customer), retained earnings, completion of acquisitions, completion of divestitures and asset sales, cost or expense reductions, introduction or conversion of product brands and achievement of specified management information systems objectives. Performance objectives may include positive results, maintaining the status quo or limiting economic losses. Subject to the fifth sentence of this Section 13.2, the Board also may, in its sole discretion, shorten or terminate the Restricted Period or waive any other restrictions applicable to all or a portion of the Restricted Stock or Restricted Stock Units. Neither Restricted Stock nor Restricted Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period or prior to the satisfaction of any other restrictions prescribed by the Board with respect to such Restricted Stock or Restricted Stock Units. 13.3. Restricted Stock Certificates. The Company shall issue, in the name of each Grantee to whom Restricted Stock has been granted, Stock certificates representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Secretary of the Company shall hold such certificates for the Grantee's benefit until such time as the shares of Restricted Stock are forfeited to the Company, or the restrictions lapse. 13.4. Rights of Holders of Restricted Stock. Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such shares of Stock and the right to receive any dividends declared or paid with respect to such shares of Stock. The Board may provide that any dividends paid on Restricted Stock must be reinvested in shares of -16- Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of shares or other similar transaction shall be subject to the restrictions applicable to the original Grant. 13.5. Rights of Holders of Restricted Stock Units. Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock Units shall have no rights as stockholders of the Company. The Board may provide in an Award Agreement evidencing a Grant of Restricted Stock Units that the holder of such Restricted Stock Units shall be entitled to receive, upon the Company's payment of a cash dividend on its outstanding shares of Stock, a cash payment for each Restricted Stock Unit held equal to the per-share dividend paid on the shares of Stock. Such Award Agreement may also provide that such cash payment will be deemed reinvested in additional Restricted Stock Units at a price per unit equal to the Fair Market Value of a share on the date that such dividend is paid. 13.6. Termination of Employment or Other Relationship for a Reason Other than Death or Disability. Unless otherwise provided by the Board, upon the termination of a Grantee's employment or other relationship with the Company and its Subsidiaries, in either case other than, in the case of individuals, by reason of death or "permanent and total disability"(within the meaning of Section 22(e)(3) of the Code), any Restricted Stock or Restricted Stock Units held by such Grantee that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon forfeiture of Restricted Stock or Restricted Stock Units, the Grantee shall have no further rights with respect to such Grant, including, but not limited to, any right to vote Restricted Stock or any right to receive dividends with respect to Restricted Stock or Restricted Stock Units. Whether a leave of absence or leave on military or government service shall constitute a termination of employment or other relationship for purposes of the Plan shall be determined by the Board, whose determination shall be final and conclusive. For purposes of the Plan, a termination of employment, service or other relationship shall not be deemed to occur if the Grantee is immediately thereafter employed with the Company or any other Service Provider, or is engaged as a Service Provider or an Outside Director. Whether a termination of a Grantee's employment or other relationship with the Company and its Subsidiaries shall have occurred shall be determined by the Board, whose determination shall be final and conclusive. -17- 3.7. Rights in the Event of Death. Unless otherwise provided by the Board, if a Grantee dies while employed by the Company or a Service Provider, or while serving as a Service Provider, all Restricted Stock or Restricted Stock Units granted to such Grantee shall fully vest on the date of death unless the Board provided otherwise in the Award Agreement relating to such Restricted Stock or Restricted Stock Units. Upon such vesting, the shares of Stock represented thereby shall be deliverable in accordance with the terms of the Plan to the executors, administrators, legatees or distributees of the Grantee's estate. 13.8. Rights in the Event of Disability. Unless otherwise provided by the Board, if a Grantee's employment or other relationship with the Company or a Service Provider, or service as a Service Provider, is terminated by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Grantee, such Grantee's then unvested Restricted Stock or Restricted Stock Units shall be fully vested. Whether a termination of employment, service or other relationship is to be considered by reason of "permanent and total disability"for purposes of the Plan shall be determined by the Board, whose determination shall be final and conclusive. 13.9. Delivery of Shares and Payment Therefor. Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Board, the restrictions applicable to Restricted Stock or Restricted Stock Units shall lapse, and, upon payment by the Grantee to the Company, in cash or by check, of the greater of (i) the aggregate par value of the shares of Stock represented by such Restricted Stock or Restricted Stock Units or (ii) the purchase price, if any, specified in the Award Agreement relating to such Restricted Stock or Restricted Stock Units, a certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee's beneficiary or estate, as the case may be. 14. STOCK APPRECIATION RIGHTS -18- 14.1. Grant of Stock Appreciation Rights. The Board may from time to time grant SARs to persons eligible to receive grants under Section 6 hereof, subject to the provisions of this Section 14 and to such restrictions, conditions and other terms as the Board may determine. 14.2. Nature of a Stock Appreciation Right. An SAR shall confer on the Grantee a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the grant price of the SAR, as determined by the Board. Unless the Board provides otherwise in the Award Agreement, the grant price of an SAR shall not be less than the Fair Market Value of a share of Stock on the Grant Date. 14.3. Terms and Conditions Governing SARs. The Board shall determine at the Grant Date or thereafter the time or times at which and the circumstances under which an SAR may be exercised in whole or in part (including exercise based on achievement of performance objectives or future service requirements), the time or times at which and the circumstances under which an SAR shall cease to be exercisable, the method of exercise, the method of settlement, form of consideration payable in settlement, whether or not an SAR shall be in tandem or in combination with any other Grant, and any other terms and conditions of any SAR. Such performance objectives shall be established in writing by the Board by not later than the 90th day of the period of service to which such performance objectives relate and while the outcome is substantially uncertain. Performance objectives may be stated either on an absolute or relative basis and may be based on any of the following criteria: earnings per share, total stockholder return, operating earnings, growth in assets, return on equity, return on capital, market share, stock price, net income, cash flow, sales growth (in general, by type of product and by type of customer), retained earnings, completion of acquisitions, completion of divestitures and asset sales, cost or expense reductions, introduction or conversion of product brands and achievement of specified management information systems objectives. Performance objectives may include positive results, maintaining the status quo or limiting economic losses. 15. PARACHUTE LIMITATIONS -19- If the Grantee is a "disqualified individual"(as defined in Section 280G(c) of the Code), any Option, Restricted Stock, Restricted Stock Unit or SAR and any other right to receive any payment or benefit under the Plan shall not vest or become exercisable (i) to the extent that the right to vest or any other right to any payment or benefit, taking into account all other rights, payments or benefits to or for the Grantee, would cause any payment or benefit to the Grantee under the Plan to be considered a "parachute payment"within the meaning of Section 280G(b)(2) of the Code as then in effect (a "Parachute Payment") and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under any Award Agreements, the Plan, and all other rights, payments or benefits to or for the Grantee would be less than the maximum after-tax amount that could be received by the Grantee without causing the payment or benefit to be considered a Parachute Payment. In the event that, but for the provisions of this Section 15, the Grantee would be considered to have received a Parachute Payment under any Award Agreements that would have the effect of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantee's sole discretion, to designate any rights, payments or benefits under any Award Agreements, the Plan, any other agreements and any benefit arrangements to be reduced or eliminated so as to avoid having the payment or benefit to the Grantee under any Award Agreements be deemed to be a Parachute Payment. 16. 16. REQUIREMENTS OF LAW 16.1. General. The Company shall not be required to sell or issue any shares of Stock under any Grant if the sale or issuance of such shares of Stock would constitute a violation by the Grantee, any other person exercising a right emanating from such Grant, or the Company of any provision of any law or regulation of any governmental authority, including, without limitation, any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares of Stock subject to a Grant upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares of Stock hereunder, no shares of Stock may be issued or sold to the Grantee or any other person exercising a right emanating from such Grant unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Grant. Without limiting the generality of the foregoing, upon the exercise of any Option or any SAR that may be -20- settled in shares of Stock or the delivery of any Restricted Stock or shares of Stock underlying Restricted Stock Units, unless a registration statement under the Securities Act is in effect with respect to the shares of Stock covered by such Grant, the Company shall not be required to sell or issue such shares of Stock unless the Board has received evidence satisfactory to it that the Grantee or any other person exercising a right emanating from such Grant may acquire such shares of Stock pursuant to an exemption from registration under the Securities Act. Any such determination by the Board shall be final, binding and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or an SAR or the issuance of shares of Stock pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option (or SAR that may be settled in shares of Stock) shall not be exercisable until the shares of Stock covered by such Option (or SAR) are registered or are exempt from registration, the exercise of such Option (or SAR) under circumstances in which the laws of such jurisdiction apply shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 16.2. Rule 16b-3. During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Grants pursuant to the Plan and the exercise of Options and SARs granted hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Board does not comply with the requirements of Rule 16b-3, such provision or action shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to modify the Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement. 17. AMENDMENT AND TERMINATION OF THE PLAN The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any shares of Stock as to which Grants have not been made; provided, however, that the Board shall not, without approval of the Company's stockholders, amend the Plan such that it does not comply with the Code. Except as permitted under this Section 17 or Section 18 hereof, no amendment, suspension or -21- termination of the Plan shall, without the consent of the Grantee, alter or impair rights or obligations under any Grant theretofore awarded under the Plan. 18. EFFECT OF CHANGES IN CAPITALIZATION 18.1. Changes in Stock. Subject to Section 18.2 hereof, in the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, spin- off, split-up, share combination or other change in the corporate structure of the Company affecting the shares of Stock, (a) such adjustment may be made in the number and class of shares which may be delivered under Section 4 hereof and the Grant limits under Section 4 hereof, and in the number and class of or price of shares subject to outstanding Grants as may be determined to be appropriate and equitable by the Board, in its sole discretion, to prevent dilution or enlargement of existing rights; and (b) the Board or, if another legal entity assumes the obligations of the Company hereunder, the board of directors, compensation committee or similar body of such other legal entity shall either (i) make appropriate provision for the protection of outstanding Grants by the substitution on an equitable basis of appropriate equity interests or awards similar to the Grants, provided that the substitution neither enlarges nor diminishes the value and rights under the Grants, or (ii) upon written notice to the Grantees, provide that Grants shall be exercised distributed, canceled or exchanged for value pursuant to such terms and conditions (including the waiver of any existing terms or conditions) as shall be specified in the notice. Any adjustment of an Incentive Stock Option under this Section 18.1 shall be made in such a manner so as not to constitute a "modification"within the meaning of Section 424(h)(3) of the Code. The conversion of any convertible securities of the Company shall not be treated as a change in the corporate structure of the Company affecting the shares of Stock. Subject to any contrary language in an Award Agreement evidencing a Grant of Restricted Stock, any restrictions applicable to such Restricted Stock shall apply as well to any replacement shares received by the Grantee as a result of the merger, reorganization or other transaction referred to in this Section 18.1. 18.2. Reorganization, Sale of Assets or Sale of Stock. Upon the dissolution or liquidation of the Company or upon a merger, consolidation or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, or upon a sale of substantially all of the assets of the Company to another entity, or upon any transaction (including, without -22- limitation, a merger or reorganization in which the Company is the surviving entity) approved by the Board that results in any person or entity (or person or entities acting as a group or otherwise in concert) owning eighty percent (80%) or more of the combined voting power of all classes of securities of the Company, (i) all outstanding Restricted Stock and Restricted Stock Units shall be deemed to have vested, and all restrictions and conditions applicable to such Restricted Stock and Restricted Stock Units shall be deemed to have lapsed, immediately prior to the occurrence of such transaction, and (ii) all Options and SARs outstanding hereunder shall become immediately exercisable for a period of fifteen days immediately prior to the scheduled consummation of such transaction. Any exercise of an Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the transaction and shall be effective only immediately before the consummation of the transaction. This Section 18.2 shall not apply to any transaction to the extent that (A) provision is made in writing in connection with such transaction for the continuation of the Plan or the assumption of the Options, SARs, Restricted Stock and Restricted Stock Units theretofore granted, or for the substitution for such Options, SARs, Restricted Stock and Restricted Stock Units of new options, stock appreciation rights, restricted stock and restricted stock units covering the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares or units and exercise prices, in which event the Plan and Options, SARs, Restricted Stock and Restricted Stock Units theretofore granted shall continue in the manner and under the terms so provided or (B) a majority of the full Board determines that such transaction shall not trigger application of the provisions of this Section 18.2, subject to Section 26 hereof and limited by any "change in control"provision in any employment agreement or Award Agreement applicable to the Grantee. Upon consummation of any such transaction, the Plan and all outstanding but unexercised Options and SARs shall terminate, except to the extent provision is made in writing in connection with such transaction for the continuation of the Plan or the assumption of such Options and SARs theretofore granted, or for the substitution for such Options and SARs of new options and stock appreciation rights covering the shares of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares or units and exercise prices, in which event the Plan and Options and SARs theretofore granted shall continue in the manner and under the terms so provided. The Board shall send written notice of an event that will result in such a termination to all individuals who hold Options and SARs not later than the time at which the Company gives notice thereof to its stockholders. 18.3. Adjustments. Adjustments under this Section 18 related to shares of Stock or securities of the Company shall be made by the Board, whose determination in that respect shall be final and conclusive. No fractional shares or other securities shall be issued -23- pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share. 18.4. No Limitations on Company. The making of Grants pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 19. DISCLAIMER OF RIGHTS No provision in the Plan or in any Grant or Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any affiliate thereof, or to interfere in any way with any contractual or other right or authority of the Company or Service Provider either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company or any affiliate thereof. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement or employment agreement, no Grant awarded under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a director, officer, consultant or employee of the Company. The obligation of the Company to pay any benefits pursuant to the Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any participant or beneficiary under the terms of the Plan. No Grantee shall have any of the rights of a stockholder with respect to the shares of Stock subject to an Option or SAR except to the extent such shares of Stock shall have been issued upon the exercise of the Option or SAR. 20. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations upon the -24- right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of Stock options otherwise than under the Plan. 21. WITHHOLDING TAXES The Company or a Subsidiary, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to Restricted Stock or Restricted Stock Units or upon the exercise of an Option or SAR. At the time of such vesting, lapse or exercise, the Grantee shall pay to the Company or the Subsidiary, as the case may be, any amount that the Company or the Subsidiary may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company or the Subsidiary, which may be withheld by the Company or the Subsidiary, as the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company or the Subsidiary to withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering to the Company or the Subsidiary shares of Stock already owned by the Grantee. The shares of Stock so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company or the Subsidiary as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 21 may satisfy such Grantee's withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirement. 22. CAPTIONS The use of captions in the Plan or any Award Agreement is for convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement. 23. OTHER PROVISIONS -25- Each Grant awarded under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Board, in its sole discretion. 24. NUMBER AND GENDER With respect to words used in this Plan, the singular form shall include the plural form and, the masculine gender shall include the feminine gender, as the context requires. 25. SEVERABILITY If any provision of the Plan or any Award Agreement shall be finally determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction. 26. POOLING Notwithstanding anything in the Plan to the contrary, if any right under or feature of the Plan would cause a transaction to be ineligible for pooling of interests accounting that would, but for the right or feature hereunder, be eligible for such accounting treatment, the Board may modify or adjust the right or feature so that the transaction will be eligible for pooling of interests accounting. Such modification or adjustment may include payment of cash or issuance to a Grantee of shares of Stock having a Fair Market Value equal to the cash value of such right or feature. 27. GOVERNING LAW The validity and construction of this Plan and the instruments evidencing the Grants awarded hereunder shall be governed by the laws of the State of Maryland (without giving effect to the choice of law provisions thereof). * * * The Plan was duly adopted and approved by the Board of Directors of the Company as of the 24th day of September, 1998. -26- The Plan was duly approved by the stockholders of the Company on the 20th day of November, 1998. -27- EX-10.19.1 7 EXHIBIT 10.19.1 Exhibit 10.19.1 PARTICIPATION AGREEMENT Dated as of April 29, 1994 Entered Into Among Rykoff-Sexton, Inc., as Lessee Tone Brothers, Inc., as Sublessee BA Leasing & Capital Corporation, not individually, except as expressly set forth herein, but as Agent and The Lessors Listed on the Signature Pages Hereto TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS ARTICLE II PURCHASES OF EQUIPMENT Section 2.1 Payment of Purchase Price ................................ 2 Section 2.2 Time and Place of Fundings and Delivery Dates ............ 3 Section 2.3 Delivery Date Notices .................................... 4 Section 2.4 Application of Funds; Sale and Lease of Equipment ........ 4 Section 2.5 Conditions for Participants to Initial Funding and Delivery Date ........................................ 4 Section 2.6 Conditions for Participants .............................. 7 ARTICLE III ADDITIONAL DELIVERY DATE REQUIREMENTS Section 3.1 Lease Supplements ........................................ 10 Section 3.2 Delivery of Search Reports ............................... 12 Section 3.3 Postponement of a Subsequent Delivery Date ............... 12 Section 3.4 Interest Payments to Lessors ............................. 12 ARTICLE IV GENERAL PROVISIONS Section 4.1 Nature of Transaction .................................... 14 [Section 4.2 Reserved ................................................ 14 Section 4.3 Replacement of Equipment ................................. 14 Section 4.4 Additional Fees .......................................... 15 Section 4.5 Increased Capital Costs .................................. 15 Section 4.6 Assignment of Purchase Agreements ........................ 16 ARTICLE V REPRESENTATIONS AND WARRANTIES Section 5.1 Representations and Warranties of Lessee and Sublessee ................................................ 16 Section 5.2 Representations and Warranties of Lessors ................ 22 Section 5.3 Representations and Warranties of Agent .................. 24 ARTICLE VI COVENANTS Section 6.1 Covenants of Lessee ...................................... 25 Section 6.2 Covenants of Sublessee ................................... 32 Section 6.3 Covenants of Agent and Lessors ........................... 34 ARTICLE VII GENERAL INDEMNITY Section 7.1 Indemnity ................................................ 35 Page ---- Section 7.2 Excessive Use Indemnity .................................. 36 ARTICLE VIII GENERAL TAX INDEMNITY Section 8.1 General Tax Indemnity .................................... 37 Section 8.2 Contest .................................................. 40 Section 8.3 Gross Up ................................................. 41 Section 8.4 Tax Returns .............................................. 41 Section 8.5 Tax Character of Transaction ............................. 42 Section 8.6 Withholding Tax Exemption ................................ 42 ARTICLE IX LIMITATIONS Section 9.1 Limitation of Liability of Agent ......................... 44 ARTICLE X AMENDMENTS TO OPERATIVE AGREEMENTS Section 10.1 Amendments to Operative Agreements With Consent of Lessors ...................................... 44 Section 10.2 Amendments to Operative Agreements Affecting Agent ................................................... 45 ARTICLE XI MISCELLANEOUS Section 11.1 Survival of Covenants ................................... 46 Section 11.2 APPLICABLE LAW .......................................... 46 Section 11.3 Effect and Modification of Participation Agreement ...... 46 Section 11.4 Notices ................................................. 46 Section 11.5 Transaction Costs ....................................... 47 Section 11.6 Counterparts ............................................ 47 Section 11.7 Severability ............................................ 47 Section 11.8 Successors and Assigns .................................. 48 Section 11.9 Brokers ................................................. 48 Section 11.10 JURY TRIAL ............................................. 48 Section 11.11 Captions; Table of Contents ............................ 48 Section 11.12 FINAL AGREEMENT ........................................ 48 Section 11.13 No Third-Party Beneficiaries ........................... 48 Section 11.14 Further Assurances ..................................... 49 Section 11.15 Reproduction of Documents .............................. 49 Section 11.16 Consideration for Consents to Waivers and Amendments ... 49 Section 11.17 Submission to Jurisdiction ............................. 50 -ii- LIST OF SCHEDULES AND EXHIBITS Schedule I -- Commitments of Lessors; Payment Instructions Schedule II -- Description of Eligible Equipment to be Delivered by Lessee and Sublessee on the Initial Delivery Date Schedule III -- Description of Eligible Equipment to be Delivered on the Subsequent Delivery Dates Schedule IV -- Disclosure Schedule Schedule X -- Definitions Schedule Y -- Functional Units Exhibit A -- Form of Lease Schedule I -- Equipment Schedule II -- Functional Units Schedule III -- Rental Payment Percentage Exhibit A -- Form of Investors Letter Exhibit B -- Form of Lease Supplement Schedule I -- Equipment and Purchase Prices Schedule II -- Interest Rate; Rent Payments Schedule III -- Allocation of Rent Payments among Lessors Schedule IV -- Functional Unit Balances Exhibit B -- Form of Sublease Schedule I -- Sublease Items Schedule II -- Notice Addresses Exhibit C -- Form of Delivery Date Notice Schedule I -- Equipment List, Purchase Price and Site(s) Schedule II -- Purchase Agreements Exhibit D -- Form of Lessee's and Sublessee's Opinion of Counsel Exhibit E -- Form of Bill of Sale Schedule I -- Equipment List -iii- PARTICIPATION AGREEMENT This PARTICIPATION AGREEMENT, dated as of April 29, 1994, is entered into among: (a) Rykoff-Sexton, Inc., a Delaware corporation, as Lessee, (b) Tone Brothers, Inc., an Iowa corporation, as Sublessee, (c) BA Leasing & Capital Corporation, a California corporation, not in its individual capacity, except as otherwise expressly provided herein, but solely as Agent for the Lessors, and (d) the various Lessors listed on the signature pages hereto. WHEREAS, on the Initial Delivery Date, the Lessee or the Sublessee will transfer to the Agent, for the benefit of the Lessors, and the Agent, on behalf of the Lessors will purchase, the items of Eligible Equipment identified in Schedule II hereto; AND WHEREAS, on each Subsequent Delivery Date, Lessee or Sublessee, as the case may be, will cause to be transferred to the Agent, for the benefit of the Lessors, certain of the items of Eligible Equipment generally described on Schedule III hereto and the Agent, on behalf of the Lessors, will purchase such Equipment directly from the Manufacturers or Lessee, as the case may be; AND WHEREAS, the Eligible Equipment is grouped into Functional Units as identified on Schedule Y hereto; AND WHEREAS, upon the transfer of the Functional Units on each Delivery Date, Lessors will lease such Functional Units to Lessee and Lessee will lease such Functional Units from the Lessors pursuant to the terms of the Lease substantially in the form of Exhibit A hereto and a Lease Supplement substantially in the form of Exhibit B to the Lease; AND WHEREAS, the Lessee will enter into the Sublease substantially in the form of Exhibit B hereto subleasing to the Sublessee the Functional Units described therein; NOW THEREFORE, in consideration of the mutual terms and conditions herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS Capitalized terms used but not defined herein (including those used in the foregoing recitals) shall have the meanings specified in Schedule X hereto unless the context otherwise requires, which Schedule X shall for all purposes constitute a part of this Participation Agreement. ARTICLE II PURCHASES OF EQUIPMENT Section 2.1 Payment of Purchase Price. (a) Subject to the terms and conditions hereinafter set forth, and in reliance on the representations and warranties contained herein or made pursuant hereto, following receipt of the Initial Delivery Date Notice and each Subsequent Delivery Date Notice, each Lessor shall transfer to Agent an amount equal to the product of the aggregate Purchase Price of the Eligible Equipment specified in the Delivery Date Notice to be delivered by Lessee prior to such Delivery Date, multiplied by such Lessor's Commitment Percentage (each such transfer being referred to herein as a "Funding"). In no event shall any Lessor be required to provide funds under this Participation Agreement in an aggregate amount exceeding such Lessor's Commitment. (b) Remittances pursuant to this Section 2.1 shall be made in immediately available federal funds by wire transfer to the account of the Agent set forth below (or as otherwise specified by Agent to each Lessor from time to time not less than three Business Days prior to the date of the requested Funding) and must be received by Agent by 9:00 a.m., San Francisco time on the applicable Delivery Date: Bank: Bank of America NT&SA San Francisco Main Branch San Francisco, California ABA Routing #: 121 000 358 Account #: 06568-57503 Payee: BA Leasing & Capital Corporation Notify: Richard Walter (415) 765-7476. (c) If on any date specified for a Funding, any Lessor wrongfully fails to make any payment then required of it, then any party hereto (other than the party so failing to make the payment or otherwise in breach) may cancel its obligations under this Participation Agreement and the transactions contemplated hereby by notice to the other parties; provided, however, that if such failure to pay is on the part of only one Lessor, then the other Lessors shall be obligated to make the payments that they would otherwise have been obligated to make pursuant to the relevant 2 Funding, so long as the Equipment to be delivered on the corresponding Delivery Date consists solely of Functional Units; and provided, further, that if the total Purchase Price of the Equipment subject to the Lease must be reduced because of a Lessor's wrongful failure to fund, the Required Lessors shall have the right to reject any tendered delivery of a Functional Unit so long as there are one or more other Functional Units described on Schedule III which have not previously been delivered and which have a total Purchase Price approximately equal to the rejected Functional Unit. The party wrongfully failing to make its payment shall not be responsible for any consequential damages suffered by the Sublessee or the Lessee or any of their Affiliates as a result of its failure to so fund. Section 2.2 Time and Place of Fundings and Delivery Dates. (a) The following shall be applicable to the Fundings and the Delivery Dates: (i) no more than four Fundings and four Delivery Dates may occur; (ii) each Funding and each Delivery Date shall occur on a Business Day on or after April 29, 1994 and before March 31, 1995, it being understood that there may be a Funding without a Delivery Date Closing if Lessee has postponed the Delivery Date pursuant to Section 3.3, so long as such Delivery Date occurs prior to March 31, 1995; (iii) each Funding shall provide for financing of Eligible Equipment having an aggregate Purchase Price which equals or exceeds, except in the case of the final Funding, $1,000,000; (iv) all items of Eligible Equipment to be purchased with the proceeds of such Funding shall comprise one or more complete Functional Units; and (v) in no event shall the aggregate amount advanced by the Lessors exceed the aggregate amount of the Commitment. (b) The closing for each Funding shall take place on the Delivery Date set forth in the Delivery Date Notice applicable to such Funding, commencing at 9:00 a.m. Los Angeles time, at Mayer, Brown & Platt, 350 South Grand Avenue, Suite 2500, Los Angeles, California 90071. 3 Section 2.3 Delivery Date Notices. With respect to each Funding (unless waived by the parties hereto), the Lessee shall, not later than 1:00 p.m. San Francisco time on the tenth (10th) Business Day prior thereto, provide an irrevocable (subject to Section 3.3) notice to Agent and each of the Lessors (a "Delivery Date Notice") substantially in the form of Exhibit C, specifying (i) the Delivery Date, (ii) a description of each item of Eligible Equipment to be purchased on such Delivery Date, categorized on a Functional Unit basis, (iii) the aggregate Purchase Price of all Eligible Equipment to be purchased on such Delivery Date, (iv) wire transfer instructions for the disbursement of funds, and (v) in the event such Delivery Date is to be the final Delivery Date, that such Delivery Date is to be the final Delivery Date. Section 2.4 Application of Funds; Sale and Lease of Equipment. On each Delivery Date, upon (a) receipt by Agent of all amounts to be paid by the Lessors pursuant to Section 2.1, and (b) satisfaction or waiver of the conditions set forth in Sections 2.5 and 2.6, (i) Agent shall purchase, for the benefit of the Lessors, the Equipment to be acquired on such Delivery Date, as specified in the Delivery Date Notice delivered pursuant to Section 2.3, and the Bill of Sale and Lease Supplement to be executed on such Delivery Date, (ii) in consideration therefor, the Agent, on behalf of the Lessors, shall pay, from the funds made available by the Lessors pursuant to Section 2.1, an amount equal to the aggregate Purchase Price of Equipment then being sold and purchased pursuant thereto in immediately available federal funds remitted by wire transfer to the account of the Lessee at: Bank of America, ABA #121 000 358, Beneficiary: Rykoff-Sexton, Inc., Benef. A/C #14 596 01430 (or as otherwise specified by the Lessee to the Agent at least three (3) Business Days before such Delivery Date) in the case of Eligible Equipment described at Schedule II or directly to the Manufacturer for all Eligible Equipment described in Schedule III hereto and (iii) Lessors shall lease to the Lessee the Equipment purchased by the Agent on behalf of Lessors on such Delivery Date and Lessee shall accept delivery of and lease from Lessors such Equipment pursuant to the Lease and the Lease Supplement entered into by Lessors, Agent and Lessee on such Delivery Date. Delivery of the Eligible Equipment to be purchased by the Agent on behalf of Lessors on such Delivery Date shall be effected by the delivery by Lessee or the Manufacturer, as applicable, of one or more Bills of Sale specifically identifying the Equipment delivered on such Delivery Date. Each Lessor shall hold an undivided interest in the Equipment equal to such Lessor's Lease Percentage. Section 2.5 Conditions for Participants to Initial Funding and Delivery Date. The obligation of each Participant to perform its obligations on the Initial Delivery Date, and of each Lessor 4 to make its initial Funding, shall be subject to the fulfillment to the satisfaction of (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver in writing by, such Participant of the following conditions precedent on or prior to the Initial Delivery Date (except that the obligation of any party hereto shall not be subject to such party's own performance or compliance): (a) each of the Participants shall have received a fully executed counterpart of this Participation Agreement; (b) each Participant shall have received a fully executed counterpart of the Lease; provided, however, only Agent shall receive the Lease marked "Counterpart No. 1 - Agent's Original Copy"; (c) each Participant shall have received a fully executed counterpart of the Sublease; provided, however, only Agent shall have received the Sublease marked "Counterpart No. 1 - Sublessor's Original Copy"; (d) at least two (2) Business Days prior to the Initial Delivery Date, the Agent and Lessors shall have received a report from the Appraiser to their satisfaction opining: (i) that the Appraised Value of the Functional Units Numbered 1 through 32 on Schedule Y hereto is reasonably expected to be as follows: Date Value ---- ----- Sum of Fair Market Value of Eligible Equipment described at Schedule II on the Initial Delivery Date $18,646,310 End of Initial Term $16,395,359 End of First Renewal Term $13,978,188 End of Second Renewal Term $11,770,338 End of Third Renewal Term $ 9,981,357 End of Fourth Renewal Term $ 8,497,320 End of Fifth Renewal Term $ 7,363,875 (ii) that the remaining composite economic useful life of the Eligible Equipment is not less than eight (8) years, (iii) that it would be reasonable to assume an increase for inflation of at least two percent (2%) per 5 annum in the values set forth in the foregoing clause (i), and (iv) that it is commercially feasible for a Person other than the Lessee or Sublessee to use the Eligible Equipment at the end of the Lease Term and each Renewal Term; (e) Lessee shall have paid to Agent, for the benefit of Agent and the Lessors, the Transaction Costs. Such payment shall be made by wire transfer of immediately available funds to the account specified for Agent at Schedule I; (f) each Lessor and the Agent shall have received the opinions of Maslon, Edelman, Borman & Brand, as counsel to Lessee and Sublessee, and of local counsel in each jurisdiction in which any Equipment to be delivered on the Initial Delivery Date is located, substantially to the effect of the matters set forth in Exhibit D; (g) each Lessor and the Agent shall have received: (i) copies of each of the Lessee's and the Sublessee's certificate of incorporation, certified by the Secretary of State of the States of their incorporation no earlier than the 15th day prior to the Initial Delivery Date, and by-laws of such corporation, accompanied by an Officer's Certificate, dated the Initial Delivery Date, stating that such documents are in full force and effect and have not been amended since the respective dates thereof; (ii) certificates of existence and good standing from the Secretary of State of the States of their incorporation and the Secretary of State of the State of California, dated no earlier than the 15th day prior to the Initial Delivery Date, with respect to each of the Lessee and Sublessee; (iii) a copy of resolutions of each of the Lessee's and Sublessee's board of directors authorizing the execution, delivery and performance by each such corporation of each of the Operative Agreements to which it is or will be a party, accompanied by an Officer's Certificate, dated the Initial Delivery Date, of each such corporation, stating that such resolution is in full force and effect and has not been amended since the date of its adoption; and (iv) an incumbency certificate, dated the Initial Delivery Date, of each of the Lessee and Sublessee; and (h) each Lessor and the Agent shall have received: (i) a report or reports, in form and substance reasonably satisfactory to them, from a satisfactory environmental consultant, as to the compliance of the Sites on which the Eligible Equipment being delivered on the Initial Delivery 6 Date is to be located with all applicable Environmental Laws and as to such other matters as shall be reasonably requested by such Participant; and (ii) a written agreement from such environmental consultant that each Lessor and the Agent may rely upon such report or reports to the same extent as the Person that engaged such firm to provide such report or reports. Section 2.6 Conditions for Participants on each Delivery Date. The obligation of each Participant to perform its obligations on each Delivery Date shall be subject to the fulfillment to the satisfaction of (including, with respect to writings, such writings being in form and substance reasonably satisfactory to the addressee or beneficiary thereof), or the waiver in writing by, such Participant of the following conditions precedent on or prior to the Delivery Date (except that the obligation of any party hereto shall not be subject to such party's own performance or compliance): (a) Each of the Participants shall have received a fully executed counterpart of a Lease Supplement as required by Section 3.1; provided, however, only Agent shall receive the Lease Supplement marked "Counterpart No. 1 - Lessors' Original Copy." (b) (i) Lessee and Sublessee shall have executed and delivered to the Agent financing statements with respect to the Equipment identified in such Delivery Date Notice. Such financing statements shall have been filed for record in all appropriate offices of all relevant jurisdictions; (ii) the Agent shall have received such releases of liens, termination statements, landlord consents (from Site landlords) and mortgagee consents (from Site mortgagees) as maybe necessary to insure (x) a first priority security interest in the Equipment which may be deemed "fixtures" and thereby subject to prior liens and (y) the ability of the Agent and Lessors to obtain access to such Sites and remove the Equipment therefrom in connection with exercising their rights and remedies under the Operative Agreements; and (iii) the Agent, on behalf of the Lessors, shall have received a fully executed Bill of Sale substantially in the form of Exhibit E hereof with respect to the items of Eligible Equipment identified in such Delivery Date Notice; 7 (c) at least ten (10) Business Days prior to each Subsequent Delivery Date, each Lessor and Agent shall have received a report from the Appraiser to their satisfaction opining, with respect to any Equipment proposed to be delivered on such Delivery Date that was not covered in any Appraisal previously delivered to the Agent and the Lessors, that: (i) the Fair Market Value of the Equipment identified in the Delivery Date Notice preceding and relating to such Subsequent Delivery Date is equal to the Purchase Price for such Equipment, (ii) the estimated Fair Market Value of such Equipment at the end of the Initial Term and each Renewal Term, which shall be set forth in such report, is a reasonable estimate, and that it would be reasonable to assume an increase for inflation of at least two percent (2%) per annum in such Fair Market Values, and (iii) the remaining composite economic useful life of such Eligible Equipment is not less than eight (8) years, and (iv) it is commercially feasible for a Person other than the Lessee or Sublessee, as appropriate, to use such Eligible Equipment at the end of the Lease Term and each Renewal Term; (d) the representations and warranties of each of the parties hereto contained in this Participation Agreement and in any of the other Operative Agreements shall be true and correct in all material respects on the Delivery Date with the same effect as though made on and as of the Delivery Date (provided that the representation set forth in Section 5.1(b) shall be true with respect to each State, County and Parish in which any Equipment to be delivered on the applicable Delivery Date is located), and an Officer's Certificate, dated the Delivery Date, of each of such parties (other than the Lessors and the Agent) to that effect shall have been delivered to each Participant, and in the case of any Lessor, the funding of its Commitment (or portion thereof) pursuant to Section 2.1, shall be deemed to constitute a confirmation by it that its representations and warranties contained herein are true and correct in all material respects on such Delivery Date; (e) all Impositions other than Charges payable on or prior to such Delivery Date in connection with the execution, delivery, recording or filing of any of the 8 Operative Agreements, in connection with the filing of any of the financing statements, any applications regarding certificates of title and any other documents, in connection with the consummation of any other transactions contemplated hereby or by any of the other Operative Agreements, shall have been paid in full by Lessee; (f) the Agent and each of the Lessors shall have received reports acceptable to the Agent and each of the Lessors (i) as to each of the Lessee and Sublessee by the office of the Secretaries of State of the States in which the Equipment to be delivered on such Delivery Date is to be located, each dated as close to the relevant Delivery Date as practicable, in respect of a search of the applicable Uniform Commercial Code files maintained by such offices and (ii) as to each of the Lessee and Sublessee by the appropriate county filing or recording office of each County or Parish in which the Equipment to be delivered on such Delivery Date is to be located, each dated as close to the relevant Delivery Date as practicable, in respect of a search of the applicable Uniform Commercial Code files and any indices of Liens maintained by such offices (including, if applicable, indices of judgment, revenue and tax liens); (g) the Agent shall have received (and each Lessor shall have received a copy of) a current certificate to the effect that insurance complying with Section 7.2 of the Lease is in full force and effect; (h) the Lessors and the Agent shall have received satisfactory evidence that the Purchase Price of the Equipment accepted on the Delivery Date does not exceed (i) with respect to Eligible Equipment described in Schedule II, the Fair Market Value of such Equipment, and (ii) to the extent such Equipment constitutes Eligible Equipment described in Schedule III, the invoice cost for such Equipment plus the Charges properly attributable thereto; (i) all proceedings taken in connection with the Delivery Date Closing and all documents relating thereto shall be reasonably satisfactory to each Participant and its counsel, and each Participant and its counsel shall have received copies of such documents as such Participant or its counsel may reasonably request in connection therewith, all in form and substance reasonably satisfactory to such Participant and its counsel; (j) each Lessor and the Agent shall have received one or more opinions of local counsel to the Lessee to the effect that the Agent, for the benefit of the Lessors, has a perfected security interest in the Collateral delivered on 9 such Delivery Date in each State where such Collateral is located to the extent a security interest can be so perfected by filing in each such State; (k) no material adverse change (financial or otherwise) in the condition, operation, property or business on either a consolidated or separate basis of the Lessee has occurred since the previous Delivery Date (or, with respect to the Initial Delivery Date, since May 1, 1993); (l) no Lease Default or an event which with the giving of notice and/or lapse of time could become a Lease Default shall have occurred and be continuing; (m) the Agent and the Lessors shall have received evidence to their reasonable satisfaction that no materially adverse environmental conditions or instances of noncompliance with applicable Environmental Laws exist with respect to any Site(s) on which the Eligible Equipment being delivered on such Delivery Date is to be located; and (n) the Agent and Lessors shall have received such other documents as they may reasonably request and which are consistent with the terms hereof including any third party approvals. ARTICLE III ADDITIONAL DELIVERY DATE REQUIREMENTS Section 3.1 Lease Supplements. On each Delivery Date, Lessee shall execute and deliver to each of the Lessors and the Agent a Lease Supplement in form and substance reasonably satisfactory to Lessors and substantially in the form set forth in Exhibit B to the Lease (a "Lease Supplement"). Each Lease Supplement to be executed and delivered by Lessee on each Delivery Date shall set forth: (a) in Schedule I thereto, a description of and the Purchase Price for each Functional Unit to be purchased by Lessor on such Delivery Date; (b) in Schedule II thereto, the Interest Rate, the Interim Rent, the Applicable Percentage Amount, a schedule of the installments of Basic Rent and Renewal Rent and the Payment Dates therefor and the Supplement Balance of such Lease Supplement as of the end of the Initial Term and each Renewal Term; 10 (c) in Schedule III thereto, a schedule of each Lessor's proportionate share of each installment of Rent and of the Supplement Balance as of the end of the Initial Term and each Renewal Term, based on each such Lessor's Lease Percentage; and (d) in Schedule IV thereto, the Functional Unit Balance of each Functional Unit subject to that Lease Supplement as of the Delivery Date therefor and as of each Payment Date in the Initial Term and each Renewal Term. Schedules I, II, III and IV to each Lease Supplement shall be prepared by Agent and delivered on or prior to the relevant Delivery Date. With respect to the Lease Supplement delivered on the Initial Delivery Date, all parties hereto hereby approve such Schedules, and with respect to all Lease Supplements delivered on subsequent Delivery Dates, the items set forth by Agent in such Schedules shall be conclusive and binding upon Lessee for all purposes hereunder. The schedule of Rent set forth in Schedule II to each Lease Supplement shall be calculated based upon the following assumptions: (i) that Lessors have loaned the total Purchase Price of the Eligible Equipment to be covered by the Lease Supplement to the Lessee on the applicable Delivery Date Closing; (ii) that such principal amount of such deemed loan will bear interest at the Interest Rate; (iii) that the maturity date of such deemed loan will be April 30, 2000; (iv) that the average life of such deemed loan will be four years plus or minus six months; (v) that the "Specified Portion" of the principal amount of such deemed loan on each anniversary of the Base Commencement Date of such Lease Supplement shall be 21-1/2% of the outstanding principal balance of the deemed loan on the immediately preceding anniversary of such Base Commencement Date; (vi) that a payment consisting solely of interest accrued on the outstanding principal of the deemed loan at the Interest Rate will be due and payable on the last day of the 90-day period ending on April 30, July 30, October 30 or January 30 (as the case may be) in which the deemed loan was made, and that thereafter principal and interest will be paid on each Payment Date; and 11 (vii) that the Supplement Balance of the relevant Lease Supplement at the end of the second Renewal Term and each Renewal Term thereafter will be equal to the Adjusted Appraised Value of the Functional Units subject to such Lease Supplement. Upon execution and delivery of each Lease Supplement, Lessee conclusively agrees to lease from Lessors on the terms and conditions set forth in the Lease and such Lease Supplement the Functional Units described in Schedule I to such Lease Supplement. Section 3.2 Delivery of Search Reports. No later than April 30, 1995, Lessee shall cause to be delivered to the Agent and each Lessor (i) reports as to each of the Lessee and Sublessee by the office of the Secretary of State of each State in which any of the Equipment is located, each dated as close to April 30, 1995 as practicable, in respect of a search of the Uniform Commercial Code files maintained by such offices; and (ii) acceptable reports as to each of the Lessee and Sublessee by the offices of the appropriate filing or recording office of each County or Parish in which any of the Equipment is located, each dated as close to April 30, 1995 as practicable in respect of a search of the Uniform Commercial Code files and any indices of Liens maintained by such offices (including, if applicable, indices of judgment, revenue and tax liens), to determine in each case whether there are any Liens (other than Permitted Liens) filed against the Equipment. Section 3.3 Postponement of a Subsequent Delivery Date. A Subsequent Delivery Date with respect to all or any Functional Units identified in a Delivery Date Notice may be postponed by the Lessee from time to time (but subject in any event to Section 2.2(a)) if the Lessee gives the Agent and each Lessor written notice of such postponement no later than two days prior to such date. The notice shall indicate that the delivery of all of the Functional Units identified in the applicable Delivery Date Notice, or if only a portion is being delayed, the notice shall identify the Functional Unit(s) that will not be delivered on such date. The notice shall also indicate the Subsequent Delivery Date on which such items will be purchased. A postponement of a Delivery Date shall not postpone the corresponding Funding, which shall be made in any event, and to the extent proceeds are not used to purchase Eligible Equipment, such proceeds shall be held by Agent in trust for the Lessors, subject to the terms of Section 3.4. Section 3.4 Interest Payments to Lessors. (a) In the event of any postponement of a Subsequent Delivery Date with respect to all or any Functional Unit(s) pursuant to Section 3.3 hereof, or if on a Subsequent Delivery Date all or any Functional 12 Unit(s) is not delivered or accepted by the Lessee under the Lease for any reason, the Lessee will reimburse each Lessor for the loss of the use of its funds occasioned by such deposit, postponement or failure to deliver or accept (unless such failure to accept is caused by a default by such Lessor) by paying to each such Lessor on demand (A) interest at the Assumed Interest Rate on the amount funded by such Lessor but which is not applied to the purchase of Functional Units (the "Unfunded Amount") for the period from and including the Subsequent Delivery Date specified in such notice to but excluding the earlier of (x) the Business Day on which such Unfunded Amount is returned to it and (y) the next Delivery Date when such Unfunded Amount is applied by the Agent to purchase Functional Units pursuant to Article II minus (B) such interest as shall have been realized from the investments by the Agent of the amount of the Unfunded Amount (if investment thereof was effected pursuant to Section 3.4(b) hereof). If the requisite amount of Equipment is not accepted on a Subsequent Delivery Date, the Agent shall retain the Unfunded Amount in trust for such Lessor until March 31, 1995, on which day (or at such earlier time as may have been directed in the same manner by the Lessee), such funds (together with accrued interest thereon) shall be returned to such Lessor not later than 11:00 a.m., California time in the same form as such funds were made available by such Lessor, unless the requisite amount of Equipment shall have been accepted by the Lessee, and the conditions set forth in Section 2.6 hereof shall have been satisfied or waived, prior to such return of funds, in which case such funds shall be applied in the manner and at the times provided in Section 2.4 hereof. Upon return of such funds pursuant to the preceding sentence, such Lessor's Commitment shall be canceled and Lessee shall pay to each Lessor on demand a Make-Whole Premium with respect to the Unfunded Amount. (b) Upon any failure to deliver or accept the requisite amount of Equipment on a Subsequent Delivery Date, the Agent shall, to the extent practicable, invest all funds held by it, if any, under Section 3.4(a) hereof, in Permitted Investments pursuant to written instructions by the Required Lessors. Agent shall bear no liability for any losses on such investments. Agent shall distribute, quarterly in arrears (or promptly upon the return or application of such Lessor's Commitment, if earlier), to each Lessor which had previously delivered its Commitment to it any interest or other income realized from the investment thereof, ratably, in the proportion that such Lessor's Commitment bears to the total of such Commitments. (c) Notwithstanding the foregoing provisions of this Section 3.4, no Lessor shall be under any obligation to make its Commitment available after March 31, 1995, and such time shall be of the essence in this Participation Agreement. 13 ARTICLE IV GENERAL PROVISIONS Section 4.1 Nature of Transaction. It is the intent of the Participants that: (a) the transaction contemplated hereby constitutes an operating lease from the Agent and Lessors to Lessee for purposes of Lessee's financial reporting, (b) the transaction contemplated hereby grants (and with respect to existing Equipment, preserves) ownership in the Equipment to the Lessee for purposes of Federal and state income tax, bankruptcy and Uniform Commercial Code purposes, and (c) the Lease grants a security interest in the Equipment and the other Collateral to the Agent for the benefit of the Agent and the Lessors. Nevertheless, the Lessee and Sublessee acknowledge and agree that no Participant or any other Person has made any representations or warranties concerning the tax, accounting or legal characteristics of the Operative Agreements and that the Lessee and Sublessee have obtained and relied upon such tax, accounting and legal advice concerning the Operative Agreements as they deem appropriate. [Section 4.2 Reserved] Section 4.3 Replacement of Equipment. Required Lessors shall instruct the Agent to release a Substituted Item or a Replaced Unit from the Lease and evidence such release by the execution and delivery of a termination statement release, a Bill of Sale and such other documents as may be required to release the Substituted Item or Replaced Unit from the Lease and which are in form and substance satisfactory to the Required Lessors subject to the following conditions: (a) each of the Lessors and Agent has received a written notice from the Lessee (the "Replacement Notice") at least 10 days prior to the requested release which identifies (i) the Replacement Part and Substituted Item or (ii) the Replacement Unit and the Replaced Unit, as the case may be; (b) in the case of a substitution pursuant to Section 5.4(a) of the Lease, the Replacement Part is new and of the same or greater value, utility and useful life than the Substituted Item on the date it became subject to the Lease to the satisfaction of the Lessors; (c) Lessee shall execute and deliver to the Agent, for the benefit of the Lessors, a Bill of Sale and a certificate of acceptance conforming to Sections 1, 2, 3 and 4 of the Lease Supplement in respect of the Replacement Part or the Replacement Unit, as the case may be; and 14 (d) the conditions set forth in Sections 2.6(b), 2.6(e), 2.6(g), 2.6(h), 2.6(l) and 2.6(m) (and Section 2.6 (c), if requested by the Required Lessors in connection with a substitution pursuant to Section 5.4(a) of the Lease) have been satisfied with respect to the Replacement Part or the Replacement Unit, as the case may be, as though it had been identified in a Delivery Date Notice. Lessee shall purchase the Replacement Part or the Replacement Unit, as the case may be, with its own funds. There shall be no obligation on the part of the Agent or the Lessors to pay for or otherwise finance any Replacement Part or Replacement Unit except by way of releasing the corresponding Substituted Item or Replaced Unit as provided by this Section 4.3. Section 4.4 Additional Fees. (a) On March 31, 1995, Lessee shall pay directly to the Lessors (pro rata in accordance with each Lessor's Commitment Percentage) a nonutilization fee equal to one percent (1.00%) of the amount by which $20,000,000 exceeds the funded amount of the Commitment on such date. (b) If Lessee elects the Sale Option during the second or fourth Renewal Term pursuant to Section 11.1(c) of the Lease as to all or any portion of the Equipment, Lessee shall, as a condition to exercising the Lessee Sale Option, pay to each Lessor on the Termination Date an additional fee equal to the product of (A) $250,000 if such option is exercised during the second Renewal Term or $160,000 if such option is exercised during the fourth Renewal Term, multiplied by (B) such Lessor's Lease Percentage. Section 4.5 Increased Capital Costs. If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lessor directly (or by its parent company) and such Lessor determines (in its sole and absolute discretion) that the rate of return on it or its parent's capital as a consequence of the Fundings made by such Lessor hereunder is reduced to a level below that which such Lessor or its parent could have achieved but for the occurrence of any such circumstances, then, in any such case, upon written notification from time to time by such Lessor to Lessee, Lessee shall immediately pay as Supplemental Rent hereunder directly to such Lessor additional amounts sufficient to compensate Lessor or its parent on an after-tax basis for such reduction in rate of return. A statement of each Lessor as to 15 any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on Lessee. In determining such amount, each Lessor shall use any method of averaging or attribution that it (in its reasonable discretion) shall deem applicable. Section 4.6 Assignment of Purchase Agreements. Lessee does hereby sell, assign, transfer and set over unto Agent for the benefit of the Lessors all of the Lessee's right, title and interest in and to each of the Purchase Agreements, whether now or hereafter existing, as and to the extent that the same relate to the Equipment and the purchase and operation thereof. Subject to the terms and conditions hereof and of the Lease, the Agent hereby and from time to time accepts the assignments contained in this Section 4.6. Notwithstanding anything herein to the contrary, the Agent shall not have any obligation or liability under any Purchase Agreement by reason of, or arising out of, the assignment contained in this Section 4.6 or be obligated to perform any of the obligations or duties of the Lessee under any Purchase Agreement or to make any payment or to take any other related action thereunder. ARTICLE V REPRESENTATIONS AND WARRANTIES Section 5.1 Representations and Warranties of Lessee and Sublessee. Lessee and Sublessee jointly and severally represent and warrant to the Agent and Lessors that, as of the Effective Date and as of each Delivery Date: (a) Lessee has good and marketable title to the items of Eligible Equipment identified in Schedule II hereto delivered through such date and all of the items of Eligible Equipment delivered through such date are free from all Liens except for Permitted Liens; (b) no filing, recordation or registration is necessary in order to perfect the security interest in the Equipment referred to in the foregoing subsection (a), except for the filing of a Uniform Commercial Code financing statement with respect to Lessee and Sublessee in the office of the Secretary of State of the States of California and Iowa, in the county records of Los Angeles County, California, and Polk County, Iowa, and a Uniform Commercial Code fixture filing in the real property records of each of the foregoing Counties, and that upon such filings, the security interest in such Equipment are enforceable and properly perfected; 16 (c) the information provided by Lessee to the Appraiser and forming the basis for the conclusions set forth in the Appraiser's reports, taken as a whole, was true and correct in all material respects and did not omit any information necessary to make the information provided not materially misleading; (d) Lessee and Sublessee are corporations duly incorporated, validly existing and in good standing under the laws of the States of Delaware and Iowa, respectively; (e) Lessee is duly qualified or licensed and in good standing as a foreign corporation authorized to do business in the States of California and Oregon, and Lessee and Sublessee are duly qualified or licensed and in good standing as foreign corporations authorized to do business in each other jurisdiction where, because of the nature of their respective activities or properties, such qualification or licensing is required, except for such jurisdictions where the failure to be so qualified or licensed will not materially adversely affect the consolidated condition (financial or otherwise), business, prospects or operations of Lessee or Sublessee and their respective consolidated subsidiaries; (f) Lessee and Sublessee each have all requisite corporate power and authority to execute, deliver, and perform its respective obligations under each Operative Agreement to which it is a party; (g) the execution and delivery by each of Lessee and Sublessee of the Operative Agreements to which it is a party, and the performance by Lessee and Sublessee of their respective obligations under such Operative Agreements, have been duly authorized by all necessary corporate action (including any necessary stockholder action) on its part, and do not and will not: (i) violate any provision of any law, rule or regulation presently in effect having applicability to Lessee or Sublessee or of any order, writ, judgment, decree, determination or award presently in effect having applicability to Lessee or Sublessee or of the charter or bylaws of Lessee or Sublessee; (ii) result in a breach of or constitute a default under any indenture or loan or credit agreement (which are, individually or in the aggregate, material to the consolidated condition (financial or otherwise), business, prospects or operations of Lessee or Sublessee and their respective consolidated subsidiaries), or result in a breach of or constitute a default under any other agreement or instrument to which Lessee or Sublessee is a party or by which Lessee or Sublessee or their respective properties may be bound or affected; or 17 (iii) result in, or require, the creation or imposition of any Lien of any nature upon or with respect to any of the properties now owned or hereafter acquired by Lessee or Sublessee (other than the security interest contemplated by the Lease), and none of Lessee or Sublessee is in default under or in violation of their respective charters or bylaws; (h) each of the Operative Agreements to which Lessee or Sublessee is a party constitutes the legal, valid and binding obligation of Lessee or Sublessee, respectively, enforceable against Lessee or Sublessee, respectively, in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity; (i) there is no litigation (including, without limitation, derivative actions), arbitration or governmental proceedings pending or, to the knowledge of Lessee or Sublessee, threatened against Lessee or Sublessee which may adversely affect the consolidated condition (financial or otherwise), business, prospects or operations of Lessee, Sublessee or their respective consolidated subsidiaries or impair Lessee's or Sublessee's ability to perform their respective obligations under the Operative Agreements to which they are party; (j) no authorization, consent, approval, license or formal exemption from, nor any filing, declaration or registration with, any court, governmental agency or regulatory authority (Federal, state, local or foreign), including, without limitation, the Securities and Exchange Commission, or with any securities exchange, is or will be required in connection with the execution and delivery by Lessee or Sublessee of the Operative Agreements to which they are party, the performance by Lessee or Sublessee of their respective obligations under such Operative Agreements or the ownership, operation and maintenance of the Equipment as contemplated by the Operative Agreements; (k) there is no agreement, understanding, contract or document to which the Lessee or Sublessee is a party which is necessary in order to test, maintain, repair, use or operate any item of Equipment (other than as described on Schedule IV hereto, which Schedule may be supplemented from time to time on each Delivery Date); (l) the principal place of business and chief executive office (as such term is used in Article 9 of the 18 Uniform Commercial Code) of the Lessee is located at 761 Terminal Street, Los Angeles, CA 90021; and Sublessee is located at 2301 Southeast Tones Drive, Ankeny, IA 50021-8888; (m) relying upon the accuracy of the representations in Section 5.2(f) hereof, the execution and delivery of the Operative Agreements by the Lessee and Sublessee will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended; (n) the Lessee and Sublessee have filed or caused to be filed all United States Federal and all other material tax returns that are required to be filed by the Lessee or Sublessee, and have paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessment received by the Lessee or Sublessee to the extent that such taxes have become due and payable except to the extent that taxes due, but unpaid, are being contested in good faith by Lessee or Sublessee by appropriate action or proceeding and, to the extent (if any) that such taxes are not due and payable, has established or caused to be established reserves that are adequate for the payment thereof in accordance with GAAP; (o) to the best of Lessee's and Sublessee's knowledge, the Equipment and the property where it is located and the current operation thereof and thereon do not violate any laws, rules, regulations, or orders of any Authorities that are applicable thereto, including, without limitation, any thereof relating to matters of occupational safety and health or Environmental Laws the violation of which would have a material adverse effect on Lessee, Sublessee or any of the Equipment; (p) taken as a whole, neither this Participation Agreement, nor any offering materials, nor the other Operative Agreements to which the Lessee or Sublessee is or will be a party nor the other documents and certificates furnished pursuant to this Participation Agreement to the Agent, or the Lessors in connection with the transactions contemplated by this Participation Agreement, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in the light of the circumstances under which they were made, not misleading. There is no fact known to the Lessee or Sublessee that materially and adversely affects the ability of the Lessee or Sublessee to perform their respective obligations under this Participation Agreement or the Operative Agreements. 19 Except for matters described in the Environmental Reports, there is no fact of a materially adverse nature concerning the environmental conditions at the Sites known to the Lessee or Sublessee; (q) neither Lessee nor the Sublessee is subject to regulation as a "holding company," an "affiliate" of a "holding company", or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended; (r) neither the Lessee nor the Sublessee is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (s) there are no patents, patent rights, trademarks, service marks, trade names, copyrights, licenses or other intellectual property rights with respect to the Equipment that are necessary for the continued economic operation of the Equipment (other than as described on Schedule IV hereto, which Schedule may be supplemented from time to time on each Delivery Date); (t) neither the Agent nor any Lessor will, solely by reason of entering into, the Operative Agreements or the consummation and performance of the transactions contemplated thereby (other than upon the exercise of remedies under the Lease) (i) be required to qualify to do business in any jurisdiction, (ii) become subject to ongoing regulation by any authority as a company engaged in the business of Lessee in any jurisdiction or (iii) to the best of Lessee's knowledge, become subject to any other ongoing regulation of its operations by any Authority; (u) the use of the proceeds from the transaction contemplated by this Participation Agreement will not violate or result in any violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System; (v) no Lease Default or event which with the passage of time and/or giving of notice could become a Lease Default has occurred and is continuing; (w) no Casualty has occurred with respect to the Equipment to be delivered on such Delivery Date; 20 (x) the transfer of Equipment made by the Lessee pursuant to the Delivery Date Closing did not render the Lessee insolvent, nor was it made in contemplation of the Lessee's insolvency; the value of the assets and properties of the Lessee at fair valuation and at their then present fair salable value is and, after such transfers, will be greater than Lessee's total liabilities, including contingent liabilities, as they become due; the property remaining in the hands of the Lessee after such transfers was not and will not be an unreasonably small amount of capital; (y) all insurance coverages required by Section 7.1 of the Lease are in full force and effect and there are no past due premiums in respect of any such insurance; (z) the Equipment is personal property within the meaning of the laws of each jurisdiction in which it is located; and the Equipment is "goods" (as defined in the Uniform Commercial Code); (aa) the Lessee has delivered to the Agent and Lessors the audited consolidated balance sheet of the Lessee and its consolidated subsidiaries as of May 1, 1993 and the related audited consolidated statements of income, cash flows and changes in shareholders' equity accounts for the year then ended and the unaudited consolidated balance sheets of the Lessee and its consolidated subsidiaries as of July 31 and October 31, 1993 and the related consolidated statements of income, cash flows and changes in shareholders' equity accounts for the months then ended; such consolidated financial statements have been prepared in accordance with GAAP, applied on a consistent basis throughout the periods covered thereby and on a basis consistent with prior periods; and such consolidated financial statements fairly present the consolidated financial condition of the Lessee and its consolidated subsidiaries at such dates and the consolidated results of their operations for such periods. There has been no material adverse change (financial or otherwise) in the condition, operation, prospects or business of Lessee or Sublessee on either a consolidated or separate basis since May 1, 1993; (ab) the combined single limit insurance amount of $5,000,000 set forth in Section 7.1(b) of the Lease is the limit of insurance customarily insured against by similar corporations engaged in similar operations in each State where the Equipment to be delivered on the Delivery Date is located; 21 (ac) each of the Purchase Agreements is either freely assignable by the Lessee to the Agent or a consent to the Lessee's assignment of its rights under each of such Purchase Agreements to the Agent has been received from each Manufacturer related thereto. The Purchase Agreements are in full force and effect and are legal, valid and binding obligations of the Lessee, enforceable against it in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and by general principles of equity, and the Lessee is not in default thereunder; the Lessee has not assigned or pledged, and hereby covenants that it will not assign or pledge, so long as this Participation Agreement shall remain in effect, the whole or any part of the rights in, to and under the Purchase Agreements assigned herein to anyone other than the Agent; (ad) the Charges relating to each of the Functional Units do not exceed 20% of the Purchase Price thereof; and (ae) neither it nor anyone acting on its behalf has taken or will take any action which will subject the issue and sale of any interest being acquired by the Lessors under the Operative Agreements to the requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), and, assuming the truth and accuracy of the representations set forth in Section 5.2(g), the issuance, sale and delivery of such interests under the circumstances contemplated by this Agreement do not require the registration of such interests under the Securities Act or the qualification of any of the Operative Agreements under the Trust Indenture Act of 1939, as amended. Section 5.2 Representations and Warranties of Lessors. Each of the Lessors hereby represents and warrants severally but not jointly to the other Participants as follows: (a) it is organized and validly existing in good standing under the laws of its jurisdiction and has the corporate power and authority to enter into and perform its obligations under each of the Operative Agreements to which it is a party; (b) each of the Operative Agreements to which it is a party has been duly authorized, executed and delivered by it and is the valid, legal and binding agreement of it, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and 22 by general principles of equity, including, without limitation, concepts of good faith and fair dealing, materiality, reasonableness and the possible unavailability of specific performance or injunctive relief (regardless of whether such enforceability is considered in a proceeding in equity or at law); (c) neither the execution and delivery of any of the Operative Agreements to which it is a party nor compliance with the terms and provisions of any of the Operative Agreements to which it is a party conflicts with, results in a breach of, constitutes a default under (with or without the giving of notice or lapse of time or both), or violates any of the terms, conditions or provisions of: (i) its articles of association or by-laws, (ii) to the best of its knowledge, any bond, debenture, note, mortgage, indenture, agreement, lease or other instrument to which it is now a party or by which it or its property, is bound or affected, where such conflict, breach, default or violation would materially and adversely affect the ability of it to perform its obligations hereunder, or (iii) to the best of its knowledge, any of the terms, conditions or provisions of any law, rule, regulation, order, injunction or decree of any Authority applicable to it, where such conflict, breach, default or violation would materially and adversely affect the ability of it to perform its obligations hereunder; (d) there is no litigation (including, without limitation, derivative actions), arbitration or governmental proceeding pending or, to its knowledge, threatened against it which may adversely affect its ability to perform its respective obligations under the Operative Agreements to which it is party; (e) to the best of its knowledge, no authorization, consent, approval, license or formal exemption from, nor any filing, declaration or registration with, any court, governmental agency or regulatory authority (Federal, state, local or foreign), including, without limitation, the Securities and Exchange Commission, or with any securities exchange, is or will be required in connection with the execution and delivery by it of the Operative Agreements to which it is party, the acquisition of its interest in the Equipment and the Operative Agreements, or the performance by it of its obligations under such Operative Agreements; (f) it is not and will not be funding any of its Commitment or performing any of its obligations under the Operative Documents with the assets of an "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject 23 to Title I of ERISA, or a "plan" (as defined in Section 4975(e)(1) of the Code; and (g) the interest being acquired by it under the Operative Agreements is being acquired for its own account, without any view to the distribution thereof or any interest therein, provided that such Lessor shall be entitled to assign, transfer or convey its interest in accordance with Section 22.2 of the Lease. Section 5.3 Representations and Warranties of Agent. BA Leasing & Capital Corporation, in its individual capacity, hereby represents and warrants to the other parties as follows: (a) it is a California corporation duly organized and validly existing in good standing under the laws of the State of California and has the corporate power and authority to enter into and perform its obligations under the Operative Agreements; (b) the Operative Agreements to which the Agent is or will be a party have been or will be, on the date required to be delivered hereby, duly authorized, executed and delivered by the Agent, and this Participation Agreement is, and such other Operative Agreements are, or, when so executed and delivered by the Agent will be, valid, legal and binding agreements of the Agent, enforceable against the Agent in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and by general principles of equity, including, without limitation, concepts of good faith and fair dealing, materiality, reasonableness and the possible unavailability of specific performance or injunctive relief (regardless of whether such enforceability is considered in a proceeding in equity or at law); (c) neither the execution and delivery by the Agent of the Operative Agreements to which it is or will be a party, either in its individual capacity, as Agent, or both, nor compliance with the terms and provisions thereof, conflicts with, results in a breach of, constitutes a default under (with or without the giving of notice or lapse of time or both), or violates any of the terms, conditions or provisions of: (i) the articles of incorporation or by-laws of the Agent; (ii) to the best of Agent's knowledge any bond, debenture, note, mortgage, indenture, agreement, lease or other instrument to which the Agent, either in its individual capacity, as Agent, or both, is now a party or by 24 which it or its property, either in its individual capacity, as Agent, or both, is bound or affected, where such conflict, breach, default or violation would materially and adversely affect the ability of the Agent, either in its individual capacity, as Agent or both, to perform its obligations under any Operative Agreement to which it is or will be a party, either in its individual capacity, as Agent, or both; or (iii) to the best of Agent's knowledge, any of the terms, conditions or provisions of any law, rule, regulation, order, injunction or decree of any Authority applicable to it in its individual capacity, as Agent, or both; (d) there is no litigation (including, without limitation, derivative actions), arbitration or governmental proceedings pending or, to the knowledge of Agent, threatened against it which may adversely affect Agent's ability to perform its obligations under the Operative Agreements to which it is party; (e) no authorization, consent, approval, license or formal exemption from, nor any filing, declaration or registration with, any court, governmental agency or regulatory authority (Federal, state, local or foreign), including, without limitation, the Securities and Exchange Commission, or with any securities exchange, is or will be required in connection with the execution and delivery by Agent of the Operative Agreements to which it is party or the performance by Agent of its obligations under such Operative Agreements. ARTICLE VI COVENANTS Section 6.1 Covenants of Lessee. Lessee covenants and agrees with the Lessors and the Agent that during the Lease Term, and, if the Lessee has not purchased the Equipment pursuant to the Lease, for 90 days thereafter, except with respect to clauses (a)(ii), (a)(iii) and (a)(iv) below, which Lessee may comply with at any time after the execution hereof without being required to wait for 90 days: (a) (i) Lessee shall at all times maintain its corporate existence except as otherwise permitted by clause (ii) hereof, and Lessee shall do or cause to be done all things necessary to preserve and keep in full force and effect its full corporate power and authority 25 to perform its obligations under each Operative Agreement to which it is or will be a party; (ii) Lessee shall not, without the consent of each of the Lessors: (A) consolidate with or merge with or into any other corporation (a "Merger"), unless (x) Lessee is the surviving corporation of such Merger, (y) Lessee's Consolidated Net Worth after giving effect to such Merger is no less than it was immediately prior to such Merger, and (z) immediately before and after giving effect to such Merger, no default under the Lease or any of the Prior Debt Agreements shall have occurred and be continuing, or (B) transfer, directly or indirectly, by sale, exchange, lease or other disposition, in one transaction or a series of related transactions to one or more Persons, all or substantially all of its assets or all or substantially all of the assets of any of its divisions (a "Transfer") unless immediately before and after giving effect to such Transfer, no default under the Lease or any of the Prior Debt Agreements shall have occurred and be continuing, and any transaction described in this clause (ii) shall be subject in any event to Section 22.1 of the Lease; (iii) Lessee shall not, without the consent of each of the Lessors, permit any sublessee (other than Sublessee in accordance with the following clause (iv) or Section 6.2(a) (ii)) to effect a Merger, unless such sublessee is the surviving corporation of such Merger and continues to be a Subsidiary of Lessee, and immediately before and after giving effect to such Merger, no default under the Lease or any of the Prior Debt Agreements shall have occurred and be continuing; (iv) Lessee shall not dispose of any of the outstanding shares of capital stock of Sublessee, consent to a Merger or a Transfer in respect of the assets or outstanding shares of capital stock of Sublessee, or permit Sublessee to assign the Sublease to any Person that is not a Subsidiary of Lessee, and Sublessee shall not do any of the foregoing and shall not issue any shares of its capital stock to any Person other than Lessee, without the consent of each of the Lessors, unless one of the following options is satisfied: (A) Lessee shall, concurrently with or prior to such transaction, purchase from the Lessors all of the Functional Units then subject to the Sublease in accordance with the procedures set forth in Article X 26 of the Lease, for a purchase price equal to the sum of (x) the Functional Unit Balances for all such Functional Units plus (y) the applicable Make-Whole Premiums for all such Functional Units, and Lessee shall pay to the Lessors all unpaid Accrued Rent due and payable on or prior to the date of such purchase with respect to such Functional Units; (B) in the case of an assignment by Sublessee of its rights and obligations under the Sublease to, or a Merger of Sublessee with, a Person that is not a Subsidiary of Lessee, each of the following conditions must be satisfied: (1) the assignee or surviving corporation must be a corporation organized under the laws of the United States, (2) the assignee or surviving corporation must expressly assume in writing the due and punctual performance and observance of each obligation of Sublessee under this Agreement and the other Operative Agreements and affirm and acknowledge the security interest of the Agent, for the benefit of the Lessors, thereunder, (3) the assignee or surviving corporation must deliver to the Agent and each Lessor an opinion of counsel, in form and scope reasonably acceptable to the Agent and the Lessors, to the effect that each obligation of the Sublessee under the Sublease and each other Operative Agreement to which Sublessee is a party is the legal, valid and binding obligation of such assignee or surviving corporation, and that the Sublease remains subject to the Agent's security interest and subordinate to the Lease, and covering such other matters as the Agent and the Lessors may reasonably request, (4) both at the time of, and immediately after giving effect to, such assignment or Merger, no default under the Lease or any of the Prior Debt Agreements shall have occurred and be continuing, (5) such assignment or Merger shall not release Lessee from any of its obligations under the Lease or any of the other Operative Agreements with respect to the Equipment subject to the Sublease, and (6) Lessee shall have made an irrevocable election to exercise the Lessee Purchase Option with respect to all of the Equipment subject to the Sublease upon the expiration of the Lease Term, and (C) in the case of a transfer of any of the Equipment subject to the Sublease by Lessee to any Person that is not a Subsidiary of Lessee, Lessors will instruct the Agent to release such Equipment from the Lease upon the satisfaction of each of the following conditions: 27 (1) such transferee ("Transferee") shall enter into a new lease (the "Transferee Lease") for such Equipment upon substantially similar terms and conditions as those contained in the Lease (including without limitation, the granting and perfection of a security interest in favor of the Agent, for the benefit of the Lessors, in such Equipment), provided that Transferee shall be required to purchase all of the Equipment subject to the Transferee Lease at the termination thereof and if Transferee fails to satisfy the following conditions (2) and (3), then Transferee's parent company ("Parent") must guarantee Transferee's obligations under the Transferee Lease and satisfy conditions (2) and (3) below, (2) Transferee, or Parent if a guarantee of Parent is required, shall have a Consolidated Net Worth (x) after giving effect to the transaction in question, equal to or greater than that of Lessee immediately prior to giving effect to such transaction, and (y) at the end of such Person's most recently ended fiscal year, equal to or greater than $147,348,000, (3) Transferee, or Parent if a guarantee of Parent is required, shall have had a Fixed Charge Coverage Ratio of not less than 1.30:1.00 as of the end of its most recently ended fiscal quarter for the period of four consecutive fiscal quarters ended on such date, (4) There shall be no constraints or restrictions (whether imposed by law or regulation or by the internal credit or underwriting policies, oral or written, of any Lessor) preventing any Lessor in its sole and absolute discretion from doing business with such Transferee or with the business or industry in which such Transferee is engaged, (5) Both at the time of and immediately after giving effect to such transaction, no default shall have occurred and be continuing under the Prior Debt Agreements with respect to Lessee, 28 (6) Transferee and each Lessor shall have agreed, in their sole and absolute discretion, upon new affirmative and negative (including financial) covenants of a type similar to those contained in the Prior Debt Agreements (as in effect on the date hereof) for purposes of the Transferee Lease, and (7) Transferee must (x) be a corporation organized under the laws of the United States, (y) deliver to the Agent and each Lessor an opinion of counsel in form and scope reasonably acceptable to the Agent and the Lessors, to the effect that each obligation of Transferee (and Parent, if Parent is required to guarantee Transferee's obligations) under the Transferee Lease and each other Operative Agreement to which Transferee (and Parent, if applicable) is a party is the legal, valid and binding obligation of Transferee (and Parent, if applicable), and that the security interest in favor of the Agent, for the benefit of the Lessors, created by the Transferee Lease, is a valid and perfected security interest, and covering such other matters as the Agent and the Lessors may reasonably request, and (z) if Parent is required to guarantee Transferee's obligations, Parent must be a corporation organized under the laws of the United States unless the Lessors are satisfied as to the enforceability of Parent's guarantee; (b) Lessee shall furnish to the Agent notice on or before the 30th day prior to any relocation of its chief executive office, change of its name or change in its corporate structure; (c) Lessee, at its expense, shall cause, as soon as possible, but in any event no later than the 10th day after any request, financing statements (and continuation statements with respect thereto) and all other documents necessary or reasonably requested by the Agent in connection with the establishment and perfection of the interest of the Agent in the Collateral, to be recorded or filed at such places and times, and in such manner, and, at its expense, shall take, or shall cause to be taken, all such other action as may be necessary or reasonably requested by the Agent in order to establish, preserve, protect and perfect the rights, titles and interests of the Agent to the Collateral; 29 (d) Lessee shall continually use all Equipment in its business (subject to normal interruption in the ordinary course of business for maintenance, inspection, service, repair and testing) unless such Equipment has been sublet to the Sublessee pursuant to the Sublease, exchanged for a Replacement Part pursuant to Section 4.3 hereto or a Casualty has been declared with respect thereto; (e) without limiting the terms of Section 7.1 hereof, Lessee shall pay: (i) to the Agent and each Lessor all reasonable expenses, including, without limitation, legal fees and expenses incurred by it in connection with the entering into, or giving or (in the case of any amendments, supplements, waivers or consents proposed by the Lessee or the Sublessee) withholding, of any future amendments or supplements or waivers or consents: (A) with respect to the Operative Agreements (including without limitation any legal services rendered in connection with or arising under Sections 6.1 and 6.2 hereof); or (B) which are further assurances requested pursuant to Section 11.14 hereof or a similar provision in other Operative Agreements; and (ii) the ongoing fees and expenses of the Agent under the Lease. (f) the Lessee shall deliver to the Agent: (i) as soon as practicable but in any event no later than the 60th day after the end of each quarterly accounting period in each fiscal year of the Lessee, copies of the unaudited consolidated balance sheet of the Lessee and its consolidated subsidiaries as of the end of such accounting period and a copy of the related unaudited consolidated statements of income and cash flows of the Lessee and its consolidated subsidiaries for such quarterly period and for the portion of its fiscal year ended with the last day of such quarterly period, all in accordance with GAAP (except for the absence of footnotes and subject to year-end audit adjustments); (ii) as soon as practicable after the end of each fiscal year of the Lessee, but in any event no later than the 120th day thereafter, a copy of the audited consolidated financial statements of the Lessee and its consolidated subsidiaries in comparative form certified as fairly presented and in accordance with GAAP consistently applied by a nationally recognized firm of independent certified public accountants (which certification shall state that its audit was made without any limitation upon the scope thereof being required by the Lessee); 30 (iii) as soon as practicable, but in any event not later than the 60th day after the end of each quarterly accounting period in each fiscal year of Lessee, an Officer's Certificate of Lessee stating that such officer has reviewed the activities of the Lessee and Sublessee during such period and that, to the best of such officer's knowledge, the Lessee and Sublessee during such period have observed, performed and fulfilled each and every covenant, obligation and condition contained in the Operative Agreements, no Lease Default, event which with the passage of time and/or giving of notice could become a Lease Default, or Casualty exists under any of the Operative Agreements, or if such condition shall exist, specifying the nature and status thereof; (iv) promptly following such delivery or filing (but in no event more than ten (10) days thereafter), a copy of each report or statement delivered to the Lessee's stockholders and each regular or periodic report and any Current Report on Form 8-K filed by the Lessee with any securities exchange or with the Securities and Exchange Commission or any successor agency, and the delivery of any Quarterly Report on Form l0-Q or any Annual Report on Form 10-K in either case as filed with the Securities and Exchange Commission, shall be deemed to satisfy the Lessee's obligations under Section 6.1(f)(i) and Section 6.1(f)(ii), respectively, for the period covered by such report; and (v) if: (A) the Lessee shall cease to be subject to Section 13 or 15(d) of the Securities Exchange Act of 1934; and (B) the Agent or any Lessor at the time outstanding shall request that the Lessee deliver to the Agent, or to such holder, information with respect to the Lessee that meets the requirements of Rule 144A(d)(4)(i) of such Act (or any successor provision), then: (x) promptly following the receipt by the Lessee of that request, the Lessee shall deliver such information to the Agent, or to Lessors, and (y) such information shall, at the time of such delivery, be as of a date so as to be entitled to the presumption that such information is "reasonably current" within the meaning of Rule 144A(d)(4)(ii) of such Act (or any successor provision); (g) if there is any change in the ownership interest of the Sublessee during the Lease Term or any Renewal Term, the Lessee shall promptly notify the Agent and the Lessors; 31 (h) promptly upon becoming aware of the occurrence of any (i) "Reportable Event" as such term is defined in Section 4043 of ERISA, (ii) "Accumulated Funding Deficiency" as such term is defined in Section 302 of ERISA or (iii) "Prohibited Transaction", as such term is defined in 4975 of the Code or described in Section 406 of ERISA, in connection with any Pension Plan (or any trust created thereunder), Lessee shall notify Agent and each of the Lessors in writing specifying the nature thereof, what action Lessee or the Related Person is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto; (i) promptly upon, but in no event later than seven (7) days after Lessee shall have obtained Actual Knowledge thereof, Lessee shall notify the Agent and each Lessor in writing of the existence of a Lease Default or any event which with the passage of time and/or giving of notice could result in a Lease Default, or any other matter which has resulted or could reasonably be expected to result in a material adverse change in the financial condition or operations of Lessee and its Subsidiaries, taken as a whole, which notice shall describe the nature of such Lease Default or other matter and the action Lessee is taking with respect thereto; (j) promptly upon Lessee's becoming aware of (i) any proposed or pending investigation of it or any Affiliate by any Authority, (ii) any court or administrative proceeding involving Lessee or a Subsidiary, or (iii) any notice, claim or demand from any Authority which alleges that Lessee or any Affiliate is in violation of any law or has failed to comply with any order issued pursuant to any Federal, state or local statute regulating its operation and business, which in any case involves (A) a claim in the amount of $5,000,000 or more, or (B) the possibility of materially and adversely affecting the properties, business, profits or financial condition of Lessee and its subsidiaries taken as a whole, Lessee shall notify Agent and each of the Lessors specifying its nature and the action the Lessee is taking with respect thereto; and (k) promptly upon receipt of a written request from the Agent or any Lessor, Lessee shall deliver to such requesting party such other data and information as from time to time may be reasonably requested. Section 6.2 Covenants of Sublessee. Sublessee covenants and agrees (while the Sublease is in effect) with the Agent and each of the Lessors that during the Lease Term and Renewal Terms and, if the Lessee has not purchased the Equipment pursuant to 32 the Lease, for 90 days thereafter, except with respect to clause (ii) below, which Sublessee may comply with at any time without being required to wait for 90 days: (a) (i) Sublessee shall at all times maintain its corporate existence except as otherwise permitted by paragraph (ii) hereto, and Sublessee shall do or cause to be done all things necessary to preserve and keep in full force and effect its full corporate power and authority to perform its obligations under each Operative Agreement to which it is or will be a party; (ii) Sublessee shall not effect a Merger or a Transfer or an assignment of the Sublease except as provided in Section 6.1(a)(iv) hereof; (b) Sublessee shall furnish to the Agent notice on or before the 30th day prior to any relocation of its chief executive office, change of its name or change in its corporate structure; (c) Sublessee, at its expense, shall cause, as soon as possible, but in any event no later than the 10th day after any request, financing statements (and continuation statements with respect thereto) and all other documents necessary or reasonably requested by the Agent in connection with the establishment and perfection of the interest of the Agent in the Collateral, to be recorded or filed at such places and times, and in such manner, and, at its expense, shall take, or shall cause to be taken, all such other action as may be necessary or reasonably requested by the Agent in order to establish, preserve, protect and perfect the rights, titles and interests of the Agent to the Collateral; (d) Sublessee shall continually use all Equipment in its business (subject to normal interruption in the ordinary course of business for maintenance, inspection, service, repair and testing) that has been sublet to the Sublessee pursuant to the Sublease, unless such Equipment has been exchanged for a Replacement Part pursuant to Section 4.3 hereof or a Casualty has been declared with respect thereto; (e) promptly upon becoming aware of the occurrence of any (i) "Reportable Event" as such term is defined in Section 4043 of ERISA, (ii) "Accumulated Funding Deficiency" as such term is defined in Section 302 of ERISA or (iii) "Prohibited Transaction", as such term is defined in 4975 of the Code or described in Section 406 of ERISA, in connection with any Pension Plan (or any trust created thereunder), Sublessee shall notify Agent specifying the 33 nature thereof, what action Sublessee or Related Person is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto; (f) promptly upon, but in no event later than seven (7) days after Sublessee shall have obtained Actual Knowledge thereof, Sublessee shall notify the Agent and each Lessor in writing of the existence of a default under the Sublease, a Lease Default or any event which with the passage of time and/or giving of notice could result in a Lease Default, or any other matter which has resulted or could reasonably be expected to result in a material adverse change in the financial condition or operations of Sublessee and its Subsidiaries, taken as a whole, which notice shall describe the nature of such Lease Default or other matter and the action Sublessee is taking with respect thereto; (g) promptly upon Sublessee's becoming aware of (i) any proposed or pending investigation of it or any Affiliate by any Authority, (ii) any court or administrative proceeding involving Sublessee or a Subsidiary of Sublessee, or (iii) any notice, claim or demand from any Authority which alleges that Sublessee or any Affiliate is in violation of any law or has failed to comply with any order issued pursuant to any Federal, state or local statute regulating its operation and business, which in any case involves (A) a claim in the amount of $5,000,000 or more, or (B) the possibility of materially and adversely affecting the properties, business, profits or financial condition of Sublessee and its subsidiaries taken as a whole, Sublessee shall notify Agent and each of the Lessors specifying its nature and the action the Sublessee is taking with respect thereto; and (h) promptly upon receipt of a written request from the Agent or any Lessor, Sublessee shall deliver to such requesting party such other data and information as from time to time may be reasonably requested. In addition to the foregoing, Lessee shall, concurrently with any notice, delivery or other communication to Agent pursuant to any Operative Agreement, deliver a copy of such notice, delivery or other communication to each Lessor at such Lessor's current address. Section 6.3 Covenants of Agent and Lessors. The Agent, in its individual capacity, and each of the Lessors covenants and agrees with each of the other parties that: (a) it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Liens arising by, through or under it on the 34 Collateral, other than Permitted Lessor Liens; (b) it will, at its own cost and expense, promptly take such action in its individual capacity as may be necessary to discharge fully such Lessor Liens created by it on the Collateral, other than Permitted Lessor Liens; and (c) it will not sell, transfer or otherwise dispose of all or any part of the Equipment or the other Collateral where such sale, transfer or disposition would violate the Operative Agreements. ARTICLE VII GENERAL INDEMNITY Section 7.1 Indemnity. Whether or not the transactions contemplated hereby are consummated, to the fullest extent permitted by applicable law, Lessee and Sublessee waive and release any claims now or hereafter existing against Indemnitees on account of, and shall indemnify, reimburse and hold the Indemnitees harmless from, any and all claims by third parties (including, but not limited to, claims relating to trademark or patent infringement and claims based upon negligence, strict liability in tort, violation of laws, including, without limitation, Environmental Laws, statutes, rules, codes or orders or claims arising out of any loss or damage to any property or death or injury to any Person), any losses, damages or obligations owing to third parties, any penalties, liabilities, demands, suits, judgments or causes of action, and all legal proceedings (either administrative or judicial), and any costs or expenses in connection therewith (including costs incurred in connection with discovery) or in connection with the enforcement of this indemnity (including reasonable attorneys' fees and expenses, and fees and expenses of internal counsel, incurred by the Indemnitees), including, in each case, matters based on the negligence of Indemnitees (subject to the proviso below), which may be imposed on, incurred by or asserted against the Indemnitees in any way relating to or arising in any manner out of: (a) the registration, purchase, taking or foreclosure of a security interest in, ownership, delivery, condition, lease, sublease, assignment, storage, transportation, possession, use, operation, return or other disposition of any of the Equipment, or any defect in any such Equipment, arising from the material or any article used therein or from the design, testing or use thereof, or from any maintenance, service, repair, overhaul or testing of any such Equipment regardless of when such defect shall be discovered, whether or not such Equipment is in the possession of Lessee or Sublessee and no matter where it is located; or 35 (b) this Participation Agreement, any other Operative Agreement or any document or certificate delivered in connection therewith, the enforcement hereof or thereof or the consummation of the transactions contemplated hereby or thereby; provided that Lessee and Sublessee shall not be obligated to indemnify an Indemnitee for any such claim, loss, damage or liability which results directly from (c) the willful misconduct or gross negligence of such Indemnitee; (d) acts or events that occur with respect to any of the Equipment from and after (but not before) the delivery thereof by Lessee to Agent by reason of the expiration of the Lease Term in accordance with the terms of the Lease; (e) the incorrectness in any material respect of any representation or warranty made by such Indemnitee in the Operative Agreements; (f) the willful failure by such Indemnitee to perform or observe in any material respect any agreement or covenant made by it in any of the Operative Agreements; (g) the creation or existence of a Lessor Lien attributable to such Indemnitee other than Permitted Lessor Liens; or (h) a disposition by such Indemnitee of any Equipment following the purchase of such Equipment by such Indemnitee from the Agent in a foreclosure sale; provided, however, that nothing in the preceding proviso shall be deemed to exclude or limit any claim that any Indemnitee may have under any Operative Agreement or applicable laws for damages from Lessee or Sublessee for breach of their representations, warranties or covenants. Section 7.2 Excessive Use Indemnity. In the event that at the end of the Lease Term: (a) Lessee elects the Sale Option with respect to one or more Functional Units; and (b) after paying to the Agent any amounts due under Section 11.1(c) of the Lease, Proceeds and the Sale Recourse Amount, the Agent does not have sufficient funds to reduce the Lease Balance to zero, then the Lessee shall promptly pay over to the Agent the shortfall unless and to the extent that the Lessee delivers a report from the Appraiser in form and substance satisfactory to the Required Lessors which establishes that the decline in value in the Equipment which was sold pursuant to the Sale Option from that 36 amount anticipated for such date in the Appraiser's report delivered with respect to such Equipment on the applicable Delivery Date was not due to extraordinary use, failure to maintain or replace, failure to use, workmanship or method of installation or removal or any other cause or condition within the power of the Lessee to control or effect. ARTICLE VIII GENERAL TAX INDEMNITY Section 8.1 General Tax Indemnity. Lessee agrees to pay or reimburse Indemnitees for, and to indemnify and hold Indemnitees harmless from, all Impositions arising at, or relating to, any time prior to or during the Lease Term or Renewal Terms, or upon any termination of the Lease or prior to, or upon the return of, the Equipment to Agent, and levied or imposed upon Indemnitees directly or otherwise, by any Federal, state or local government or taxing authority in the United States or by any foreign country or foreign or international taxing authority upon or with respect to: (a) the Equipment; (b) the exportation, importation, registration, purchase, ownership, delivery, condition, lease, sublease, assignment, storage, transportation, possession, use, operation, maintenance, repair, return, sale (including to Agent or Lessee pursuant to the Operative Agreements), transfer of title or other disposition thereof; (c) the rentals, receipts, or earnings arising from any of the Equipment; or (d) the Lease or any payment made thereunder; provided that this Section 8.1 shall not apply to: (i) Impositions which are based upon or measured by the Indemnitee's net income, or which are expressly in substitution for, or relieve Indemnitee from, any actual Imposition based upon or measured by Indemnitee's net income; (ii) Impositions characterized under local law as franchise, net worth, or shareholder's capital (excluding, however, any value-added, license, property or similar Impositions); (iii) Impositions based upon the voluntary transfer, assignment or disposition by Agent or any Lessor of any interest in any of the Equipment (other than a transfer pursuant to the exercise of remedies under the Operative Agreements, transfers pursuant to the exercise of the Sale Option or the Lessee Purchase Option or a transfer to Lessee or otherwise pursuant to the Lease); 37 (iv) Impositions based upon the involuntary transfer by Agent or any Lessor of any interest in the Equipment in connection with any bankruptcy or other similar proceeding for the relief of debtors in which such Indemnitee is the debtor or any foreclosure by a creditor of such Indemnitee; (v) any interest, penalties or additions to tax imposed on an Indemnitee that would not have resulted but for the failure of such Indemnitee to file any return properly and timely unless such failure shall result from the failure of the Lessee to fulfill its obligations, if any, under Section 8.4 with respect to such return; (vi) with respect to an Indemnitee, Impositions that result from such Indemnitee engaging, with respect to the Equipment or any part thereof, in transactions other than those permitted by this Agreement or any other Operative Agreement; (vii) Impositions to the extent of the excess of such Impositions over the amount of such Impositions that would have been imposed (or, if less, that would not have been subject to indemnification hereunder) had there not been a transfer by a predecessor in interest of the Indemnitee (other than the Agent in its capacity as Agent) of any interest in the Equipment or any interest arising under any Operative Agreement or any Lessor other than a transfer in contemplation of the exercise of remedies while an Event of Default shall have occurred and be continuing; (viii) subject to the penultimate sentence of Section 8.2, Impositions that are being contested in accordance with Section 8.2 during the pendency of such contest; (ix) subject to the last paragraph of this Section 8.1, Impositions to the extent such Impositions would not have been imposed if such Indemnitee had not engaged in activities in the jurisdiction imposing such Imposition which activities are unrelated to the transactions contemplated by the Operative Agreements; (x) any Impositions imposed on an Indemnitee to the extent the payment or accrual of such Impositions actually reduces permanently the Impositions of such Indemnitee otherwise payable by such Indemnitee; (xi) any Impositions that would not have been imposed but for the existence of any Lessor Liens created by such Indemnitee or any act or omission of the Indemnitee that are in violation of any of the terms of the Operative Agreements or that constitute gross negligence or willful misconduct or 38 the inaccuracy of any representation, warranty or covenant in any material respect by the Indemnitee, but only if, in any such case, such act, omission or inaccuracy is not a result of (a) any act or omission of the Lessee or the Sublessee or (b) the breach or inaccuracy of any representation, warranty or covenant of the Lessee or the Sublessee; and (xii) except where there exists an Event of Default, Impositions in respect of any of the Equipment arising after the expiration or earlier termination of the Lease in respect of such Equipment and the return or other disposition of such Equipment in full compliance with the terms of the Lease, provided that such Impositions do not relate to acts or events arising or occurring prior to or coincident with such time. Notwithstanding anything to the contrary in this Section 8.1, Lessee agrees to pay or reimburse Indemnitees for, and to indemnify and hold Indemnitees harmless from, any Impositions imposed by any State or any political subdivision thereof in which any Equipment is located (including income, severance, franchise and personal property taxes, but net of any foreign, Federal, state or local income tax benefits which are recognized by Indemnitees as a result of such Imposition) arising solely by virtue of, and to the extent attributable to, Indemnitees participation in the transactions contemplated by the Operative Agreements or the exercise of remedies under the Operative Agreements. Notwithstanding anything in the foregoing clauses (i) through (xii) of this Section 8.1, Lessee agrees to pay or reimburse Indemnitees for, and to indemnify and hold Indemnitees harmless from: (A) any Imposition based on, or measured by the net income of Indemnitees imposed by any federal, state or local taxing authority in the United States or any taxing authority in any other jurisdiction in which Indemnitee maintains its principal place of business to the extent they would not have been imposed if on each Delivery Date the Lessors had advanced funds directly to Lessee in the form of a loan secured by the Equipment in an amount equal to the amount advanced on such Delivery Date or Dates with the debt service for such loan equal to scheduled rental payments payable from time to time and a principal balance in the amount of the Lease Balance remaining at the end of the Initial Term and each Renewal Term was due at the end of such terms (the "Income Tax Indemnity") and (B) Impositions imposed with respect to the payment, receipt or accrual of any indemnity payment hereunder; and (C) with respect to any Lessor which is not incorporated under the laws of the United States, or a state thereof, and which has complied with 39 Section 8.6, any deduction or withholding of any United States Federal income tax. Section 8.2 Contest. Lessee shall pay on or before the time or times prescribed by law any Impositions (except any Impositions excluded by Section 8.1); provided, however, that Lessee shall be under no obligation to pay any such Imposition so long as the payment of such Imposition is not delinquent or is being contested by a Permitted Contest. If any claim or claims is or are made against any Indemnitee solely for any Imposition which is subject to indemnification as provided in Section 8.1, Indemnitee shall as soon as practicable, but in no event more than 20 days after receipt of formal written notice of the Imposition or proposed Imposition, notify Lessee and if, in the opinion of Lessee and tax counsel acceptable to the Indemnitee, there exists a reasonable basis to contest such Imposition (and if clause (ii) of the definition of "Permitted Contest" continues to be satisfied and so long as no Event of Default exists), Lessee at its expense may, to the extent permitted by applicable law, contest such Imposition (other than an Imposition resulting in an Income Tax Indemnity), and subsequently may appeal any adverse determination, in the appropriate administrative and legal forums; provided that in all other circumstances, upon notice from Lessee that there exists a reasonable basis to contest any such Imposition, the Indemnitee, at Lessee's expense, shall contest any such Imposition. Lessee shall pay all expenses incurred by the Indemnitee in contesting any such Imposition (including, without limitation, all reasonable attorneys' and accountants' fees, including the allocated costs of internal counsel), upon demand by the Indemnitee. Lessee shall have the right to participate in the conduct of any proceedings controlled by the Indemnitee to the extent that such participation by such Person does not interfere with the Indemnitee's control of such contest and Lessee shall in all events be kept informed of material developments relative to such proceedings. The Indemnitee shall have the right to participate in the conduct of any proceedings controlled by Lessee and the Indemnitee shall in all events be kept informed of material developments relative to such proceedings. The Indemnitees agree that a contested claim for which Lessee would be required to make a reimbursement payment hereunder will not be settled or compromised without Lessee's prior written consent, unless clause (ii) of the definition of "Permitted Contest" would not continue to be satisfied. Indemnitee shall endeavor to settle or compromise any such contested claim in accordance with written instructions received from Lessee, provided that: (x) Lessee on or before the date the Indemnitee executes a settlement or compromise pays the contested Imposition to the extent agreed upon or makes an indemnification payment to the Indemnitee in an amount acceptable to the Indemnitee; and (y) the settlement or compromise does not, in the reasonable opinion of the Indemnitee materially adversely 40 affect the right of the Lessor to receive payment of Rent or the Lease Balance, or involve a material risk of sale, forfeiture or loss of any of the Equipment or any interest therein or materially adversely affect the security interests created by the Lease. The failure of an Indemnitee to timely contest a claim against it for any Imposition which is subject to indemnification under Section 8.1 and for which it has an obligation to Lessee to contest under this Section 8.2 in the manner required by applicable law or regulations where Lessee has timely requested that such Indemnitee contest such claim shall relieve Lessee of its obligations to such Indemnitee under Section 8.1 with respect to such claim to the extent such failure results in the loss of an effective contest. If applicable law requires the payment of a contested Imposition as a condition to, or regardless of, its being contested, and Lessee chooses to contest such Imposition or to direct the Indemnitee to contest such Imposition in accordance with this Section, then Lessee shall provide the Indemnitee with the funds to pay such Imposition, such provision of funds to be deemed a non-interest bearing loan by Lessee to the Indemnitee to be repaid by any recovery of such Imposition from such contest and any remaining unpaid amount not recovered to offset Lessee's obligation to indemnify the Indemnitee for such Imposition. In the event that the Indemnitee receives a refund (or like adjustment) in respect of any Imposition for which the Indemnitee has been reimbursed by Lessee, the Indemnitee shall immediately remit the amount of such refund (or like adjustment) to Lessee, net of all costs and expenses incurred by such Indemnitee. Section 8.3 Gross Up. If an Indemnitee shall not be entitled to a corresponding and equal deduction with respect to any Imposition which Lessee is required to pay or reimburse under Section 8.1 or 8.2 and which payment or reimbursement constitutes income to such Indemnitee, then Lessee shall also pay to such Indemnitee on demand the amount of such Imposition on a gross-up basis such that, after subtracting all Impositions imposed on such Indemnitee with respect to such payment by Lessee (including any Impositions otherwise excluded by Section 8.1 and assuming for this purpose that such Indemnitee was subject to taxation at the applicable Federal, state or local marginal rates used to compute such Indemnitee's tax return for the year in which such income is taxable) such Indemnitee shall be fully reimbursed for the Imposition with respect to which such Indemnitee is entitled to be paid or reimbursed. Section 8.4 Tax Returns. Except as otherwise provided in the third sentence below, Lessee shall prepare and file (whether or not it is a legal obligation of an Indemnitee) all tax returns or reports that may be required with respect to any Impositions assessed, charged or imposed on the Equipment or the Lease, including, but not limited to sales and use taxes (as to which Lessee shall prepare all returns as hereinabove provided and file 41 all such returns to the extent permitted by applicable law), property taxes (ad valorem and real property) and any other tax or charge based upon the ownership, leasing, subleasing, rental, sale, purchase, possession, use, operation, delivery, return or other disposition of any of the Equipment or upon the rentals or the receipts therefrom (excluding, however, any tax based upon the net income of an Indemnitee or any tax which is in substitution for or relief of a tax imposed upon or measured by the net income of an Indemnitee). Lessee may notify in writing all applicable governmental authorities having jurisdiction with respect to personal property taxes that Lessee is the appropriate party for receiving notices of (or copies of, if such governmental authority is required by law to notify Agent) assessment, appeal and payment with respect to the Equipment. If an Indemnitee is obligated by law to file any such reports or returns, then Lessee shall at least 10 days before the same are due prepare the same and forward them to the Indemnitee, as appropriate, with detailed instructions as to how to comply with all applicable filing requirements, together with funds in the amount of any payment required pursuant thereto. Indemnitee shall forward to Lessee at its address listed on the signature page hereto copies of all assessment and valuation notices it receives within 10 days of receipt; provided that Indemnitee's failure to deliver on a timely basis such notices shall not relieve Lessee of any obligations hereunder. Section 8.5 Tax Character of Transaction. It is the intention of the Participants that for Federal and state income tax purposes: (a) the Lessee or a corporation that is a member of its affiliated group shall be treated as owner of the Equipment with the ability to claim depreciation on the Equipment and to deduct the interest component of the Rents; and (b) the Rents payable to Agent under the Lease constitute payments of interest and principal. Participants agree that neither they nor any corporation controlled by them, or under common control with them, directly or indirectly will at any time take any action or fail to take any action with respect to the filing of any income tax return, including an amended income tax return, inconsistent with the intention of the parties expressed in the preceding sentence. Section 8.6 Withholding Tax Exemption. (a) At least five (5) Business Days prior to the first date on which any Rent is payable hereunder or under any other Operative Agreement for the account of any Lessor not incorporated under the laws of the United States or a state thereof, such Lessor agrees that it will have delivered to each of the Lessee and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lessor is entitled to receive payments under this Agreement and the other Operative Agreements without deduction or withholding of any 42 United States Federal income taxes. Each Lessor which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Lessee and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Lessee or the Agent, in each case certifying that such Lessor is entitled to receive payments under this Agreement and the other Operative Agreements without deduction or withholding of any United States Federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lessor from duly completing and delivering any such form with respect to it and such Lessor advises the Lessee and the Agent that it is not capable of receiving payments without any withholding of United States Federal income tax. (b) At least five (5) Business Days prior to the first date on which any Rent is payable hereunder or under any other Operative Agreement for the account of any Lessor who does not have a street address in the State of California, such Lessor agrees that it will have delivered to each of the Lessee and the Agent two duly completed copies of California Form 587 or 590, certifying in either case that such Lessor is entitled to receive payments under this Agreement and the other Operative Agreements without deduction or withholding of any California income taxes. Each Lessor which so delivers a Form 587 or 590 further undertakes to deliver to each of the Lessee and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it (including, without limitation, any change in residency or address), and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Lessee or the Agent, in each case certifying that such Lessor is entitled to receive payments under this Agreement and the other Operative Agreements without deduction or withholding of any California income taxes, unless an event (including any change in law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lessor from duly completing and delivering any such form with respect to it and such Lessor advises the Lessee and the Agent that it is not capable of receiving payments without any withholding of California income tax. 43 ARTICLE IX LIMITATIONS Section 9.1 Limitation of Liability of Agent. It is expressly understood and agreed by and among the parties hereto that, except as otherwise provided herein or in the other Operative Agreements: (a) this Participation Agreement and the other Operative Agreements to which the Agent is a party are executed by the Agent, not in its individual capacity, but solely as Agent under the Lease in the exercise of the power and authority conferred and vested in it as such Agent; (b) each and all of the undertakings and agreements herein made on the part of the Agent are each and every one of them made and intended not as personal undertakings and agreements by the Agent, or for the purpose or with the intention of binding the Agent personally, but are made and intended for the purpose of binding only the Collateral unless expressly provided otherwise; (c) actions to be taken by the Agent pursuant to its obligations under the Operative Agreements may, in certain circumstances, be taken by the Agent only upon specific authority of the Lessors; (d) nothing contained in the Operative Agreements shall be construed as creating any liability on the Agent, individually or personally, or any incorporator or any past, present or future subscriber to the capital stock of, or stockholder, officer or director of, the Agent to perform any covenants either express or implied contained herein, all such liability, if any, being expressly waived by the other parties hereto and by any Person claiming by, through or under them; and (e) so far as the Agent, individually or personally, is concerned, the other parties hereto and any Person claiming by, through or under them shall look solely to the Collateral and the Lessee (and the Sublessee, if appropriate) for the performance of any obligation under any of the instruments referred to herein; provided, however, that nothing in this Section 9.1 shall be construed to limit in scope or substance the general corporate liability of the Agent in respect of its gross negligence or willful misconduct or those representations, warranties and covenants of the Agent in its individual capacity set forth herein or in any of the other agreements contemplated hereby. ARTICLE X AMENDMENTS TO OPERATIVE AGREEMENTS Section 10.1 Amendments to Operative Agreements With Consent of Lessors. This Participation Agreement and each of the other Operative Agreements shall be changed, waived, discharged or terminated with respect to each Lessor upon the ratification in writing of such change, waiver, discharge or termination by 44 the Required Lessors, in which case such change, waiver, discharge or termination shall be effective as to each Lessor; provided no such change, waiver, discharge or termination shall, without the written ratification of each Lessor: (i) modify any of the provisions of this Section 10.1, change the definition of "Required Lessors" or modify or waive any provision of an Operative Agreement requiring action by the foregoing, or release any Collateral (except as otherwise specifically provided in any Operative Agreement); (ii) modify, amend, waive or supplement any of the provisions of Section 7.1, 7.2, 8.1, 8.2, 8.3, 11.1, 13, 22.1, 22.2 or 28 of the Lease, or Section 6.1(a) of this Agreement; (iii) reduce, modify, amend or waive any indemnities in favor of any Participant (except that any Person may consent to any reduction, modification, amendment or waiver of any indemnity payable to it); (iv) modify, postpone, reduce or forgive, in whole or in part, any payment of Rent (other than pursuant to the terms of any Operative Agreement), Make-Whole Premium, Lease Balance, Supplement Balance, Functional Unit Balance, Purchase Option Exercise Amount, Recourse Deficiency Amount, Applicable Percentage Amount, interest or yield or, subject to clause (iii) above, any other amount payable under the Lease or Participation Agreement, or modify the definition or method of calculation of any payment of Rent (other than pursuant to the terms of any Operative Agreement), Make-Whole Premium, Lease Balance, Supplement Balance, Functional Unit Balance, Purchase Option Exercise Amount, Recourse Deficiency Amount, Applicable Percentage Amount or other amount payable hereunder; (v) consent to any assignment of the Lease releasing the Lessee from its obligations in respect of the payments of Rent or changing the absolute and unconditional character of such obligations, or any similar assignment of the Sublease similarly releasing the Sublessee; or (vi) permit the creation of any Lien on the Collateral or any part thereof except as contemplated in the Operative Agreements, or deprive any Lessor of the benefit of the security interest in the Collateral granted by Lessee. Section 10.2 Amendments to Operative Agreements Affecting Agent. Without the prior written consent of the Agent, no amendment of, supplement to, or waiver or modification of, any 45 Operative Agreement shall adversely affect Agent's rights or immunities or modify or increase the duties or obligations of the Agent with respect to any Operative Agreement. ARTICLE XI MISCELLANEOUS Section 11.1 Survival of Covenants. All claims pertaining to the representations, warranties, covenants or indemnities of Lessee or Sublessee shall survive the termination of the Lease to the extent such claims arose out of events occurring or conditions existing prior to any such termination. Without limiting the foregoing, the provisions of Article VII and Article VIII hereof shall survive the termination of the Lease. Section 11.2 APPLICABLE LAW. THIS PARTICIPATION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF CALIFORNIA WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF. Section 11.3 Effect and Modification of Participation Agreement. No variation, modification, amendment or waiver of this Participation Agreement, including any Schedules or Exhibits hereto, or any other Operative Agreement to which Agent is a party shall be valid unless in writing and signed by the Lessee and the Agent with the consent of the Lessors required to effect such variation, modification, amendment or waiver pursuant to Article X hereof. Section 11.4 Notices. All notices, demands, declarations, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof shall be in writing and shall be deemed to have been duly given when delivered personally, by facsimile (and confirmed, which confirmation may be mechanical) or otherwise actually received or 5 Business Days after being deposited in the United States mail certified, postage prepaid, addressed as follows: If to the Lessee: Rykoff-Sexton, Inc. 761 Terminal Street Los Angeles, CA 90021 Attn: Chief Financial Officer with a copy to: Maslon, Edelman, Borman & Brand 3300 Norwest Center Minneapolis, MN 55402-4140 Attention: Tern Krivosha, Esq. 46 If to the Sublessee: Tone Brothers, Inc. 2301 Southeast Tones Drive Ankeny, IA 50021-8888 Attn: President If to the Agent: BA Leasing & Capital Corporation Four Embarcadero Center, Suite 1200 San Francisco, California 94111 Attn: Contract Administration If to the Lessors, to their respective addresses set forth on Schedule I hereto or at such other place in the United States as any such party may designate by notice given in accordance with this Section 11.4. Section 11.5 Transaction Costs. The Lessee shall pay all Transaction Costs whether or not the transactions contemplated hereby close. In addition, the Lessee agrees to pay or reimburse the Agent and the Lessors for all other out-of-pocket costs and expenses reasonably incurred in connection with: (a) negotiating and entering into the Operative Agreements or entering into, or the giving or withholding of, any future amendments, supplements, waivers or consents with respect to the Operative Agreements; (b) any Casualty or termination of the Lease or any other Operative Agreement; (c) the negotiation and documentation of any restructuring or "workout," whether or not consummated, of any Operative Agreement; (d) the enforcement of the rights or remedies under the Operative Agreements; (e) any transfer by Agent or a Lessor of any interest in the Operative Agreements during the continuance of an Event of Default; or (f) any Delivery Date. Section 11.6 Counterparts. This Participation Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each executed counterpart constituting an original but all together one agreement. Section 11.7 Severability. Whenever possible, each provision of this Participation Agreement shall be interpreted in such manner as to be effective and valid under applicable law; but if any provision of this Participation Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Participation Agreement. 47 Section 11.8 Successors and Assigns. This Participation Agreement shall be binding upon the parties hereto and their respective successors and assigns, and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Section 11.9 Brokers. None of the Participants has engaged or authorized any broker, finder, investment banker or other third party to act on its behalf, directly or indirectly, as a broker, finder, investment banker, agent or any other like capacity in connection with this Participation Agreement or the transactions contemplated hereby, except that Lessee and its Affiliates have retained BA Leasing & Capital Corporation as arranger in connection with the transactions contemplated hereby and the Lessee shall be responsible for, and shall indemnify, defend, and hold the other Participants harmless from and against any and all claims, liabilities, or demands by BA Leasing & Capital Corporation for fees or other entitlements with respect to the Lease or the transactions contemplated hereby. Section 11.10 JURY TRIAL. THE LESSEE AND SUBLESSEE WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS PARTICIPATION AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS PARTICIPATION AGREEMENT OR ANY OPERATIVE AGREEMENT AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. Section 11.11 Captions; Table of Contents. Section captions and the table of contents used in this Participation Agreement (including the exhibits and schedules) are for convenience of reference only and shall not affect the construction of this Participation Agreement. Section 11.12 FINAL AGREEMENT. THIS PARTICIPATION AGREEMENT, TOGETHER WITH THE OTHER OPERATIVE AGREEMENTS, REPRESENT THE ENTIRE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY AND IN THE OTHER OPERATIVE AGREEMENTS. THIS PARTICIPATION AGREEMENT CANNOT BE MODIFIED, SUPPLEMENTED, AMENDED, RESCINDED OR CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES, EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 11.13 No Third-Party Beneficiaries. Nothing in this Participation Agreement or the other Operative Agreements shall be deemed to create any right in any Person not a party 48 hereto or thereto (other than the permitted successors and assigns of the Lessors, the Agent, the Lessee and the Sublessee) and such agreements shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party except as aforesaid. Section 11.14 Further Assurances. Each Participant, at the expense of the Lessee, will promptly and duly execute and deliver all such documents and take such further action as may be necessary or appropriate in order to effect the intent or purpose of this Participation Agreement and the other Operative Agreements and to establish and protect the rights and remedies created or intended to be created in favor of the Lessors and the Agent for the benefit of the Lessors, including, without limitation, if requested by Required Lessors at the expense of the Lessee, the recording or filing of any Operative Agreement or any other document in accordance with the laws of the appropriate jurisdictions. Section 11.15 Reproduction of Documents. This Participation Agreement, all documents constituting Schedules or Exhibits hereto, and all documents relating hereto received by a party hereto, including, without limitation: (a) consents, waivers and modifications that may hereafter be executed; (b) documents received by the Lessors or the Agent in connection with the receipt and/or acquisition of the Equipment; and (c) financial statements, certificates, and other information previously or hereafter furnished to the Agent or any Lessor may be reproduced by the party receiving the same by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. Each of the Participants agrees and stipulates that, to the extent permitted by law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such party in the regular course of business) and that, to the extent permitted by law, any enlargement, facsimile, or further reproduction of such reproduction shall likewise be admissible in evidence. Section 11.16 Consideration for Consents to Waivers and Amendments. Each of the Lessee and the Sublessee hereby jointly and severally agrees that it will not, and that it will not permit any of its Affiliates to, offer or give any consideration or benefit of any kind whatsoever to any Lessor in connection with, in exchange for, or as an inducement to, such Lessor's consent to any waiver in respect of, any modification or amendment of, any supplement to, or any other consent or approval under, any Operative Agreement unless such consideration or benefit is offered ratably to all Lessors. 49 Section 11.17 Submission to Jurisdiction. Any suit by the Agent and the Lessors to enforce any claim arising out of the Operative Agreements shall be brought (subject to the penultimate sentence of this Section 11.17) in any state or Federal court located in San Francisco, California having subject matter jurisdiction, and with respect to any such claim, each Participant hereby irrevocably: (a) submits to the jurisdiction of such courts; and (b) consents to the service of process out of said courts by mailing a copy thereof, by registered mail, postage prepaid, to the Lessee or Sublessee at their respective addresses specified in this Participation Agreement, and agrees that such service, to the fullest extent permitted by law: (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding; and (ii) shall be taken and held to be valid personal service upon and personal delivery to it. Each of the Lessee and Sublessee irrevocably waives, to the fullest extent permitted by law: (A) any claim, or any objection, that it now or hereafter may have, that venue is not proper with respect to any such suit, action or proceeding brought in such a court located in San Francisco, California including, without limitation, any claim that any such suit, action or proceeding brought in such court has been brought in an inconvenient forum; and (B) any claim that any of the Lessee or Sublessee is not subject to personal jurisdiction or service of process in such forum. The Lessee and Sublessee agree that any suit to enforce any claim arising out of the Operative Agreements or any course of conduct or dealing of the Agent or any Lessor shall be brought and maintained exclusively in any state or Federal court located in San Francisco, California. Nothing herein contained shall preclude any Participant (other than the Lessee and Sublessee) from bringing an action or proceeding in respect hereof in any other state or Federal court in any jurisdiction where any Equipment is located. Lessee and Sublessee agree that a final judgment in any action or proceeding in a state or Federal court within the United States may be enforced in any other jurisdiction by suit on the judgment or in any other manner provided by law. [Remainder of page intentionally left blank.] 50 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed and delivered as of the date first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent for the Lessors By /s/ Victor B. Chavez By ------------------------------------ ------------------------------------ Name Printed: Victor B. Chavez Name Printed: ------------------------- ------------------------- Title: Vice Pres. & Chief Title: -------------------------------- -------------------------------- Acctg. Officer TONE BROTHERS, INC., By as Sublessee ------------------------------------ Name Printed: By ------------------------- ------------------------------------ Title: Name Printed: -------------------------------- ------------------------- Title: -------------------------------- LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By By ------------------------------------ ------------------------------------ Name Printed: Name Printed: ------------------------- ------------------------- Title: Title: -------------------------------- -------------------------------- By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- MANUFACTURERS BANK By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- 51 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed and delivered as of the date first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent for the Lessors By By ------------------------------------ ------------------------------------ Name Printed: Name Printed: ------------------------- ------------------------- Title: Title: -------------------------------- -------------------------------- TONE BROTHERS, INC., By as Sublessee ------------------------------------ Name Printed: By /s/ Garth B. Thomas ------------------------- ------------------------------------ Title: Name Printed: GARTH B. THOMAS -------------------------------- ------------------------- Title: V. P. FINANCE -------------------------------- LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By By ------------------------------------ ------------------------------------ Name Printed: Name Printed: ------------------------- ------------------------- Title: Title: -------------------------------- -------------------------------- By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- MANUFACTURERS BANK By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- 52 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed and delivered as of the date first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent for the Lessors By By /s/ Cheryl J. Emerson ------------------------------------ ------------------------------------ Name Printed: Name Printed: Cheryl J. Emerson ------------------------- ------------------------- Title: Title: Assistant Vice President -------------------------------- -------------------------------- TONE BROTHERS, INC., By /s/ Christine Bennett as Sublessee ------------------------------------ Name Printed: Christine Bennett By ------------------------- ------------------------------------ Title: Assistant Vice President Name Printed: -------------------------------- ------------------------- Title: -------------------------------- LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By By /s/ Christine Bennett ------------------------------------ ------------------------------------ Name Printed: Name Printed: Christine Bennett ------------------------- ------------------------- Title: Title: Assistant Vice President -------------------------------- -------------------------------- By /s/ Cheryl J. Emerson ------------------------------------ Name Printed: Cheryl J. Emerson ------------------------- Title: Assistant Vice President -------------------------------- MANUFACTURERS BANK By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- 53 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed and delivered as of the date first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent for the Lessors By By ------------------------------------ ------------------------------------ Name Printed: Name Printed: ------------------------- ------------------------- Title: Title: -------------------------------- -------------------------------- TONE BROTHERS, INC., By as Sublessee ------------------------------------ Name Printed: By ------------------------- ------------------------------------ Title: Name Printed: -------------------------------- ------------------------- Title: -------------------------------- LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By /s/ Russell D. Piper By ------------------------------------ ------------------------------------ Name Printed: Russell D. Piper Name Printed: ------------------------- ------------------------- Title: Region Credit Manager Title: -------------------------------- -------------------------------- By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- MANUFACTURERS BANK By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- 54 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed and delivered as of the date first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent for the Lessors By By ------------------------------------ ------------------------------------ Name Printed: Name Printed: ------------------------- ------------------------- Title: Title: -------------------------------- -------------------------------- TONE BROTHERS, INC., By as Sublessee ------------------------------------ Name Printed: By ------------------------- ------------------------------------ Title: Name Printed: -------------------------------- ------------------------- Title: -------------------------------- LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By By ------------------------------------ ------------------------------------ Name Printed: Name Printed: ------------------------- ------------------------- Title: Title: -------------------------------- -------------------------------- By ------------------------------------ Name Printed: ------------------------- Title: -------------------------------- MANUFACTURERS BANK By /s/ Mike Toomey ------------------------------------ Name Printed: MIKE TOOMEY ------------------------- Title: VICE PRESIDENT -------------------------------- 55 SCHEDULE I TO PARTICIPATION AGREEMENT COMMITMENTS OF LESSOR
===================================================================================================================== Initial Commitment Remaining After Funding Lessors Delivery Date Initial Delivery Date Commitments ===================================================================================================================== 4/29/94 - --------------------------------------------------------------------------------------------------------------------- 1. BA Leasing & Capital Corporation $2,700,982.13 $10,000,000 44.44% Four Embarcadero Center, Suite 1200 San Francisco, CA 94111 Bank of America NT & SA San Francisco Main Branch San Francisco, CA ABA# 121 000 358 Accounts 06568-57503 Payee: BA Leasing & Capital Corporation Notify: Richard Walter (415)765-7476 - --------------------------------------------------------------------------------------------------------------------- 2. Pitney Bowes Credit Corporation $2,025,736.72 $ 7,500,000 33.33% Mellon Bank, N.A. ABA# 043 000 261 Account# 092-0931 Notify: Jeff Ramos (203)846-5732 - --------------------------------------------------------------------------------------------------------------------- 3. Manufacturers Bank $1,350,491.15 $ 5,000,000 22.22% 515 South Figueroa Street Los Angeles, CA 90071 ABA# 122226076 Notify: Grace Surell or Marie Galoosian ===================================================================================================================== TOTAL: $6,077,210.00 $22,500,000 100.00% =====================================================================================================================
SI-1 SCHEDULE II TO PARTICIPATION AGREEMENT DESCRIPTION OF EQUIPMENT ACQUIRED FROM LESSEE TO BE DELIVERED ON THE INITIAL DELIVERY DATE SII-1 SCHEDULE II to PARTICIPATION AGREEMENT Functional Purchase Unit # Equipment Description Price - ---------- --------------------- -------- 1 Packaging Line #1 (5 lb.) $ 132,533.00 2 Packaging Line #3 [Ankeny #11] (1 lb.) $ 253,500.00 3 Packaging Line #4 [Ankeny #8] (2 lb.) $ 239,731.00 4 Packaging Line #5 [Ankeny #10] (Hand Feed) $ 33,600.00 5 Packaging Line #6 (4 & 8 oz.) $ 131,600.00 6 Packaging Line #7 (1 lb.) $ 288,333.00 7 Packaging Line #8 (1 oz. Tube) $ 177,000.00 8 Packaging Line #9 (1 oz. Tube) $ 179,000.00 9 Pkgg Line #10 [A#12] (O.M. Bag Fill) $ 205,233.00 10 Packaging Line #11 (Mr. Pepper/Jollytime) $ 81,200.00 11 Packaging Line #12 (1 lb. Kraft/Rykoff) $ 204,307.00 12 Extract Food Service Packaging Line $ 100,200.00 13 Extract Retail Packaging Line $ 96,367.00 14 Packaging Line #2 [Future] (4 & 8 lb.) $ 102,667.00 15 Blending Equipment $ 3,741,314.00 16 Production & Distribution Support $ 1,612,982.00 17 Office & Building Support $ 3,678,333.00 18 Oil Production $ 190,680.00 19 Margarine Production $ 1,052,750.00 20 Receiving/Distribution $ 806,830.00 21 Injection Molding $ 359,850.00 22 Blow Molding $ 789,420.00 23 Straw $ 441,660.00 24 Mayonaisse Production $ 363,360.00 25 Cook Line/Dry Mix $ 269,050.00 26 Repro Line $ 609,820.00 27 Plastics $ 281,470.00 -------------- Total for All Functional Units $16,422,790.00 ============== SCHEDULE III TO PARTICIPATION AGREEMENT DESCRIPTION OF ELIGIBLE EQUIPMENT TO BE DELIVERED ON THE SUBSEQUENT DELIVERY DATES SIII-1 SCHEDULE III to PARTICIPATION AGREEMENT A. Functional Purchase Unit # Equipment Description Price ---------- --------------------- -------- 28 Packaging Line Equipment $590,000.00 29 Production & Distribution Support $870,000.00 30 Office & Building Support $143,000.00 31 Portland Location $500,550.00 32 San Francisco Location $119,970.00 B. The Equipment described in this part B has not been appropriately designated as Functional Units, and each Lessor shall have the right to reject any item of Equipment which otherwise complies with the general categories set forth below, in which case Lessee shall have the right to propose in lieu thereof other Equipment (consisting solely of Functional Units) by providing an amended Delivery Date Notice, and the originally proposed Delivery Date shall not be delayed as a result of such amendment. Material handling equipment, pallet racks and The aggregate price of office furniture at Lessee's La Mirada, CA all equipment delivered distribution center, and pursuant to this part B Manufacturing and processing equipment located shall not exceed at Sublessee's Ankeny, Iowa facility $ 3,853,690.00 SCHEDULE IV TO PARTICIPATION AGREEMENT DISCLOSURE SCHEDULE None. SIV-1 SCHEDULE X TO PARTICIPATION AGREEMENT DEFINITIONS The following terms (or other terms used or defined in any Operative Agreement which have meanings substantially similar or equivalent to the meanings assigned to such terms) shall have the following meanings for all purposes, and such meanings shall be equally applicable both to the singular and plural forms of the terms defined. Any agreement, document or instrument defined or referred to in this Schedule X shall include each amendment, modification or supplement thereto including each waiver and consent that may (pursuant to the Operative Agreements) be effective from time to time, except as otherwise expressly indicated. The definition of any person herein shall include its successors and permitted assigns. Reference to schedules and exhibits in this Schedule X shall mean Schedules and Exhibits attached to the Participation Agreement, except as otherwise indicated. "Accrued Rent" shall mean, as of any date of determination, the aggregate Accrued Supplement Rent under all of the Lease Supplements as of such date. "Accrued Supplement Rent" shall mean, with respect to any Lease Supplement, the interest that has accrued on the Functional Unit Balances covered by such Lease Supplement at the applicable Interest Rate to the date of determination. "Actual Knowledge" with respect to any Person shall mean the actual knowledge of a Responsible Officer of such Person and shall include receipt of a notice of a fact by any such Person. "Adjusted Appraised Value" shall mean, with respect to any Functional Unit as of any date of determination, the Appraised Value of such Functional Unit, adjusted on the basis of an assumed annual inflation rate of two percent (2%), as set forth on Schedule III to the Lease Supplement governing such Functional Unit. "Affiliate(s)" of any Person shall mean any other Person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such Person. No Person shall be considered an Affiliate of the Agent unless such Person directly or indirectly through one or more intermediaries controls, is controlled by, or is under common SX-1 control with, the Agent solely in its capacity as agent under the Lease. "Agent" shall have the meaning assigned to such term in the preamble of the Lease. "Agent's Corporate Office" shall mean the principal corporate office of the Agent, which office is, on the date the Participation Agreement is executed by all parties thereto, located at the address for the Agent set forth in Section 11.4 of the Participation Agreement. "Aggregate Make-Whole Premium" shall mean, as of any date of determination, the sum of the Make-Whole Premiums then payable with respect to each Lease Supplement as determined pursuant to clause (B) of the definition of "Make-Whole Premium" set forth in this Schedule X. "Allocable Rent" shall mean, for any period with respect to any Functional Unit as of any date of determination, the sum of the portions of the principal component of each payment of Rent required to reduce the Functional Unit Balance of such Functional Unit to the amount specified in Schedule IV of the applicable Lease Supplement as of each Payment Date, plus interest that would accrue during the relevant period on such principal amount at the Interest Rate. "alter" shall have the meaning assigned to such term in Section 5.5(a) of the Lease. "Applicable Percentage" shall mean, with respect to each Lease Supplement as of the end of the Initial Term and each Renewal Term, the percentage set forth opposite each such date in Schedule II to such Lease Supplement. "Applicable Percentage Amount" shall mean the sum of the products obtained by multiplying the Purchase Price of each Functional Unit subject to the Sale Option by the Applicable Percentage set forth in Schedule II to the Lease Supplement governing such Functional Unit. "Appraisal(s)" shall mean each of the appraisals of the Equipment from the Appraiser received pursuant to a Delivery Date Closing. "Appraised Value" shall mean, with respect to any Functional Unit as of any date of determination, the Fair Market Value of such Functional Unit as set forth on the Appraisal therefor. SX-2 "Appraiser" shall mean the American Appraisal Company, The Manufacturers' Appraisal Company or such other Person as is acceptable to the Required Lessors. "Assumed Interest Rate" shall mean, as of the date of any Funding, the Interest Rate that would have been applicable under a Lease Supplement in the event that a Delivery Date had occurred on such date. "Authority" shall mean any: (a) Federal, state, local or (if the Equipment or any component thereof has been moved outside of the United States) foreign, tribunal, legislative body, governmental subdivision, administrative agency or other governmental authority; or (b) arbitrator or panel of arbitrators, in the case of each of clause (a) and (b) having or exercising jurisdiction over the Lessee, the Sublessee, the Agent, or the Equipment (or any component thereof). "Base Commencement Date" shall mean, with respect to each Lease Supplement, the date immediately succeeding the last day of the Interim Period of such Lease Supplement. "Basic Rent" shall mean, (a) with respect to each Lease Supplement, all installments of Rent due and payable by Lessee on each Payment Date during the period commencing on the Base Commencement Date and ending on April 29, 1995, as set forth in Schedule II to such Lease Supplement, and (b) with respect to the Lease, the aggregate of the payments described in the preceding clause (a) for all Lease Supplements. "Bill of Sale" shall mean a bill of sale substantially in the form of Exhibit E to the Participation Agreement to be delivered to the Lessors pursuant to Article II or Section 4.3 of the Participation Agreement, granting to each Lessor an undivided interest in the Equipment described in such Bill of Sale equal to each Lessor's Lease Percentage. "Business Day" shall mean any day on which Federal and state chartered banks in San Francisco, California are open for commercial banking business. "Capitalized Lease Obligations" of any Person shall mean all rental obligations which, under GAAP, are or will be required to be capitalized on the books of such Person or any Subsidiary, in each case taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with GAAP but excluding industrial revenue bonds and pollution control financing. "Casualty" shall mean any of the following events in respect of each Functional Unit: (a) the total loss of a Functional SX-3 Unit, the total loss of use thereof due to theft, disappearance, destruction, damage beyond repair or rendition of a Functional Unit permanently unfit for normal use for any reason whatsoever; (b) any damage to a Functional Unit which results in an insurance settlement with respect to the Functional Unit on the basis of a total loss; (c) the permanent condemnation, confiscation or seizure of, or requisition of title to or use of, a Functional Unit; or (d) as a result of any rule, regulation, order or other action by any Authority, the use of a Functional Unit in the normal course of the business of Lessee shall have been prohibited, directly or indirectly, for a period of 180 consecutive days, unless Lessee, prior to the expiration of such 180-day period, shall have undertaken and shall be diligently carrying forward all steps which are necessary or desirable to permit the normal use of such Functional Unit by Lessee or, in any event, if use of such Functional Unit shall have been prohibited, directly or indirectly, for a period of twelve consecutive months. "Casualty Notice" shall have the meaning assigned to such term in Section 6.1 of the Lease. "Casualty Proceeds" shall have the meaning assigned to such term in Section 6.1(b) of the Lease. "Casualty Settlement Date" shall have the meaning assigned to such term in Section 6.1(a) of the Lease. "Charges" shall mean freight, installation and applicable sales, use or similar taxes imposed upon an item of Eligible Equipment described at Schedule III to the Participation Agreement. "Closing" shall mean the completion of those transactions described in Section 2.1 of the Participation Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Collateral" shall mean (a) the Equipment; (b) the Intellectual Property Collateral; (c) the Sublease and all subleases entered into in connection with the Equipment as permitted pursuant to Section 5.2 of the Lease, together with all security interests granted pursuant to the Sublease and all such Subleases; SX-4 (d) all contracts necessary to purchase, operate and maintain the Equipment, including without limitation the Purchase Agreements; (e) the Deposit Account; (f) any rights to a rebate, offset or other assignment under a purchase order, invoice or purchase agreement with any manufacturer of any item of Equipment; (g) all books, records, writings, data bases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing; and (h) all products, accessions, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Collateral (including proceeds which constitute property of the types described in clauses (a), (b), (d), (e), (f) and (g) above and, to the extent not otherwise included, all payments under insurance (whether or not Lessor is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral). "Commitment(s)" for each Lessor shall mean the aggregate amount set forth in Schedule I to the Participation Agreement across from the name of such Lessor. "Commitment Percentage" shall mean, with respect to each Lessor, the quotient (expressed as a percentage) of such Lessor's Commitment divided by the Total Commitment. "Computer Software Collateral" shall mean: (a) all software programs (including both source code, object code and all related applications and data files), whether now owned, licensed or leased or hereafter acquired by Lessee or Sublessee, designed for use on any computers and electronic data processing hardware constituting part of the Equipment and necessary for the operation and maintenance of the Equipment; provided that with respect to any licensed or leased software program the foregoing shall be included in "Computer Software Collateral" only to the extent that a grant of a security interest is not prohibited by the terms of the license or lease; (b) all firmware associated therewith; SX-5 (c) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such hardware, software and firmware described in the preceding clauses (a) and (b); and (d) all rights with respect to all of the foregoing, including, without limitation, any and all copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing. "Consolidated Net Earnings" of any Person shall mean the consolidated gross revenues of such Person and its Subsidiaries less all operating and non-operating expenses of such Person and its Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets) when such gains exceed Two Hundred Fifty thousand Dollars ($250,000) in the aggregate, any gains resulting from the write-up of assets, any equity of such Person or any Subsidiary in the unremitted earnings of any corporation which is not a Subsidiary, any earnings of any other Person acquired by such Person or any Subsidiary through purchase, merger or consolidation or otherwise for the period prior to the date of acquisition, or any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary. "Consolidated Net Worth" of any Person shall mean the amount by which the total consolidated assets (excluding goodwill, trade names, trademarks, patents, treasury stock, organization expense and other intangible assets) of such Person and its Subsidiaries exceeds the total consolidated liabilities (including deferred taxes and minority interests) of such Person and its Subsidiaries, in each case determined in accordance with GAAP. "Credit Agreement" shall mean the Credit Agreement dated as of October 25, 1993, between Rykoff-Sexton, Inc. and Bank of America National Trust and Savings Association ("Bank of America"), as such agreement is amended, modified, restated or refinanced from time to time. "Delivery Date" shall mean each of the actual dates on which the transactions contemplated in Sections 2.1 and 3.1 of the Participation Agreement are completed. SX-6 "Delivery Date Closing" shall mean, with respect to a Delivery Date, the completion of those transactions described in Article II of the Participation Agreement. "Delivery Date Notice" shall have the meaning assigned to such term at Section 2.3. "Deposit Account" shall have the meaning assigned to such term in Section 6.1(b) of the Lease. "Effective Date" shall have the meaning assigned to such term in the preamble to the Lease. "Eligible Equipment" shall mean items of Equipment which qualify to be purchased by Agent, on behalf of the Lessors under the Participation Agreement on the Initial Delivery Date or any Subsequent Delivery Date, as described in Schedule II or Schedule III to the Participation Agreement. "Environmental Laws" shall mean all applicable Federal, state or local statutes, laws, ordinances, codes, rules, regulations and orders (including consent decrees) relating to public health and safety and protection of the environment. "Environmental Reports" shall mean the environmental reports or audits styled as follows: (a) Report for Phase I and II Environmental Audits of Dennis Elwell Property, Ankeny (Polk County), Iowa. SENECA Project No. 8626. (b) Phase I Environmental Assessment, Jacobson Warehouse Company 4121, 4141, and 4161 MacDonald Avenue, Des Moines, Iowa, prepared by Environmental Science & Engineering, Inc. Project Number 593-3082. (c) Remedial Action Plan for Soil and Groundwater and the Unleaded Gasoline Tank Area, Previous UST Area, and PSC Car Wash Area, Former Ford Predelivery Service Center, La Mirada, California, August 7, 1992, prepared by Geraghty & Miller, Inc. (d) Work Plan for Remediation System Modification, Former Ford Pre-Delivery Service Center, La Mirada, California, November 12, 1993, CA0209.001, prepared by Geraghty & Miller, Inc. "Equipment" shall mean those items of equipment listed on Schedule I to the Lease purchased by Lessors on a Delivery Date for which a Lease Supplement has been delivered to each Lessor by SX-7 Lessee, all Replacement Units, Replacement Parts and Mandatory Parts. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" shall have the meaning assigned to such term in Section 8.1. of the Lease. "Expiration Date" shall mean the date upon which the Credit Agreement is repaid in its entirety or otherwise expires, or when Bank of America (or any successor to Bank of America by operation of law) ceases to be a party thereto. "Fair Market Value" shall mean, with respect to any item of Equipment as of any date, the price which a purchaser would pay to purchase such Equipment in an arm's-length transaction between a buyer and seller, neither of them being under any compulsion to buy or sell. In making any determination of Fair Market Value the appraiser may assume such Equipment has been maintained in accordance with the requirements of the Lease and that such Equipment is in the condition in which it is required to be hereunder as of the date for which such determination is made. Appraiser shall use such reasonable methods of appraisal as are chosen by the Agent upon instructions from the Required Lessors. "Fixed Charge Coverage Ratio" of any Person shall mean, for any period, the ratio derived from dividing (a) the sum of (i) Consolidated Net Earnings (ii) income taxes, (iii) Rental Expense and (iv) interest on Funded Debt to (b) Rental Expense and interest on Funded Debt. For purposes of this definition, amounts attributable to accreted or other interest or accreted or other value in respect of so-called "zero coupon" subordinated Funded Debt of such Person that is convertible into shares of capital stock of such Person shall be included as interest on such subordinated Funded Debt only to the extent of the amount paid in cash during such period. "Functional Unit(s)" shall mean each group of items of Equipment classified as a Functional Unit on Schedule Y to the Participation Agreement or on Schedule I to a Lease Supplement. Each Functional Unit has an assigned number on Schedule Y and on Schedule I to the Lease Supplement governing such Functional Unit, and all references to the assigned number of any Functional Unit shall be deemed to refer to such Functional Unit and to all items of Equipment comprising such Functional Unit. "Functional Unit Balance" shall mean, with respect to any Functional Unit as of any date of determination, the amount set forth on Schedule IV to the applicable Lease Supplement opposite SX-8 the most recent Payment Date through which all installments of Rent have been paid. "Funded Debt" shall mean and includes, without duplication, in each case as to any Person and its Subsidiaries, the following (all as determined in accordance with GAAP): (i) any obligation which under GAAP is shown on the balance sheet as a liability (including Capitalized Lease Obligations, industrial revenue bonds and pollution control bond financing, but excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation); (ii) indebtedness which is secured by any Lien on property owned by such Person or any subsidiary, whether or not the indebtedness secured thereby shall have been assumed by such Person or such Subsidiary; (iii) guarantees, endorsements (other than endorsements of negotiable instruments for collection in the ordinary course of business) and other contingent liabilities (whether direct or indirect) in connection with the obligations, stock or dividends of any Person; (iv) obligations under any contract providing for the making of loans, advances or capital contributions to any Person, or for the purchase of any property from any Person, in each case in order to enable such Person primarily to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (v) obligations under any contract for the purchase of materials, supplies or other property or services if such contract (or any related document) requires that payment for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; (vi) obligations under any contract to rent (as lessee) any real or personal property if such contract (or any related document) provides that the obligation to make payments thereunder is absolute and unconditional under conditions not customarily found in commercial leases then in general use or requires that the lessee purchase or otherwise acquire securities or obligations of the lessor; and (vii) obligations under any contract for the sale or use of materials, supplies or other property or services if such SX-9 contract (or any related document) requires that payment for such materials, supplies or other property or services, or the use thereof, shall be subordinated to any indebtedness (of the purchaser or user of such materials, supplies or other property or the Person entitled to the benefit of such services) owed or to be owed to any Person; provided, however, that Funded Debt shall not include noncompete agreements of the nature and type heretofore entered into by such Person in connection with its purchase of a business through the purchase of its stock or assets. "Funding" shall have the meaning assigned to that term in Section 2.1 of the Participation Agreement. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts. "Impositions" shall mean all fees (including, but not limited to, license, documentation, recording or registration fees) and taxes (including but not limited to all income, sales, use, lease, sublease, gross receipts, personal property, occupational, value added or other taxes, levies, imposts, duties, assessments, charges or withholdings of any nature whatsoever), together with any penalties, fines or additions to tax or interest thereon. "Income Tax Indemnity" shall have the meaning assigned to such term in Section 8.1 of the Participation Agreement. "Indemnitee(s)" shall mean the Agent in both its individual and agent capacity, the Lessors, any Affiliate of any of them and any assign, officer, director, employee, attorney or agent of any of them. "Indenture" shall mean that certain Indenture dated as of November 1, 1993, between Lessee and Norwest Bank Minnesota, N.A., as trustee. "Initial Delivery Date" shall mean the first Delivery Date completed pursuant to A Article II of the Participation Agreement. "Initial Delivery Date Notice" shall mean the Delivery Date Notice relating to the Initial Delivery Date. "Initial Term" shall have the meaning assigned to such term in Section 2.1 of the Lease. SX-10 "Insolvency Default" shall have the meaning assigned to such term in Section 8.2(d) of the Lease. "Intellectual Property Collateral" shall mean all Computer Software Collateral, all copyrights, whether statutory or common law, registered or unregistered, and all applications therefore, all trademarks and trade names, all common law and statutory trade secrets and all other confidential or proprietary information, but only to the extent in each case necessary to operate and maintain the Equipment, and all know-how (which know-how is used in connection with the Equipment). "Interest Rate" shall mean with respect to each Lease Supplement a fixed rate of interest to be established by Agent two days prior to each Delivery Date pursuant to Section 3.1 of the Participation Agreement in an amount equal to the sum of (i) the rate of interest of United Stated Treasury securities having a weighted average life equal to a period commencing on the Delivery Date applicable to the Equipment described in such Lease Supplement and continuing to and ending on April 29, 2000 plus (ii) 316 basis points. "Interim Period" shall mean as to each Lease Supplement a period commencing on the Delivery Date applicable to the Equipment described in such Lease Supplement and continuing to and ending on the last day of the 90-day period ending on April 30, July 30, October 30 or January 30 (as the case may be) in which such Delivery Date occurs. "Interim Rent" shall mean all payments due and payable by Lessee under each Lease Supplement on the last day of the applicable Interim Period. The Interim Rent payable under each Lease Supplement is set forth on Schedule II to such Lease Supplement. "IRS" shall mean the Internal Revenue Service. "Lease" shall mean that certain Lease Intended as Security, dated as of April 29, 1994, by and between the Agent, the Lessors and Lessee, substantially in the form of Exhibit A. "Lease Balance" shall mean, as of any determination date, the aggregate of all Supplement Balances due under all Lease Supplements. "Lease Default" shall mean an Event of Default. "Lease Percentage" shall mean, with respect to each Lessor, the quotient (expressed as a percentage) of (i) the aggregate amount funded by such Lessor on all Delivery Dates, divided by SX-11 (ii) the aggregate amount funded by all Lessors on all Delivery Dates as of the date such determination is made. "Lease Supplement" shall have the meaning attributed to such term at Section 3.1 of the Participation Agreement. "Lease Term" shall mean the Initial Term and all of the Renewal Terms. "Lessee" shall mean Rykoff-Sexton, Inc., a Delaware corporation. "Lessee Purchase Option" shall have the meaning assigned to such term in Section 11.1(b) of the Lease. "Lessors" shall mean each of the Persons identified as a Lessor in the preamble to the Lease and those persons to whom the interests in the Lease and the Collateral shall have been transferred or assigned from time to time in accordance with the provisions of the Lease and the Participation Agreement. "Lessor Commitment" shall mean, with respect to each Lessor, the amount set forth opposite such Lessor's name on Schedule I of the Participation Agreement. "Lessor Liens" shall mean Liens or other conveyances resulting from any act of or claim against the Agent in its individual capacity (or any Person claiming by, through or under the Agent in its individual capacity) or any Lessor, in each case arising out of any event or condition not related to the exercise of such Person's rights or the performance of its duties expressly provided under any Operative Agreement. "Lien" shall mean: (a) any interest in property securing an obligation owed to, or claimed by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including, without limitation, any judgment lien, security interest, mortgage, encumbrance, pledge, conditional sale, right of distraint or trust receipt or a lease, consignment or bailment for security purposes; or (b) any reservation, exception, encroachment, easement, right-of-way, covenant, condition, restriction, lease or other title exception or defect, cloud on title or encumbrance affecting property. "Make-Whole Premium" shall mean, as of any date of determination, in connection with any purchase or sale of Functional Units requiring payment of a Make-Whole Premium pursuant to the Operative Agreements (an "Early Payment"), (A) with respect to each Functional Unit, the amount determined by the Lessors to be equal to the greater of: SX-12 (i) the excess, if any, of (a) the present value (determined using a discount rate equal to the Reference Treasury Constant Yield plus 110 basis points) of the sum of (1) the amount of Allocable Rent (exclusive of Rent accrued to the date of payment) that would have been payable on each Payment Date with respect to the period commencing on the date on which such Early Payment is required to be paid and ending on the last day of fifth Renewal Term if such Early Payment had not been made (and assuming the exercise of all Renewal Options), and (2) the amount of the Functional Unit Balance at the end of the fifth Renewal Term if such Early Payment had not been made, over (b) the Functional Unit Balance being so prepaid; or (ii) one percent (1%) of the Functional Unit Balance at such payment date, prior to giving effect to such prepayment; and (B) with respect to each Lease Supplement, the sum of the amounts determined by the Lessors pursuant to the foregoing clause (A) for each Functional Unit governed by such Lease Supplement. "Mandatory Parts" shall have the meaning assigned to such term in Section 5.5 of the Lease. "Manufacturers" shall mean those manufacturers or vendors of Equipment listed in Schedule III to the Participation Agreement or Schedule I to the Delivery Date Notice. "Merger" shall mean a transaction described in Section 6.1(a) (ii) (A) of the Participation Agreement. "Multiemployer Plan" shall have the meaning assigned to the term "multiemployer plan" in Section 3(37) of ERISA. "Notice of Partial Casualty" shall mean the notice given by Lessee to Lessor in accordance with Section 6.2 of the Lease and shall include: (a) a description of the item of Equipment suffering the Partial Casualty, (b) the Purchase Price of such item of Equipment; and (c): (x) a description of the remedial steps that Lessee will undertake (or cause to be undertaken) and the time-frame in which such steps will be accomplished to repair and rebuild such item of Equipment; or (y) if the item of SX-13 Equipment is to be replaced, a description of the Replacement Part and its Purchase Price. "Officer's Certificate" shall mean a certificate executed on behalf of any entity by its President, one of its Vice Presidents, its Chief Financial Officer, its Treasurer, its Assistant Treasurer or its Controller. "Operative Agreement(s)" shall mean the Participation Agreement, the Lease, the Sublease, the Bills of Sale and the Lease Supplements executed on each Delivery Date. "Outstanding Investment" of any Lessor as of any date of determination shall mean the aggregate amount funded by such Lessor pursuant to Article II of the Participation Agreement, reduced by the principal amount of all Basic Rent and all Renewal Rent paid to such Lessor and all Reduction Amounts paid to such Lessor. "Partial Casualty" shall mean any loss, damage, destruction, taking by eminent domain, loss of use or theft of any portion of a Functional Unit which does not constitute a Casualty. "Partial Casualty Proceeds" shall mean all payments from any Authority or other Person, and all proceeds of any insurance, which are received as a result of a Partial Casualty. "Participant(s)" shall mean any or all of the parties to the Participation Agreement including, without limitation, the Agent in both its individual and agent capacity, and the successors and assigns thereof. "Participation Agreement" shall mean the Participation Agreement, dated as of April 29, 1994, entered into among the Lessee, the Sublessee, the Lessors and the Agent. "Part(s)" shall mean all appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature that may from time to time be incorporated or installed in or attached to any item of Equipment. "Payment Date" shall mean each April 30, July 30, October 30 and January 30 (or if any such day is not a Business Day, then the first day thereafter which is a Business Day). "Payment Default" shall have the meaning assigned to such term in Section 8.2(d) of the Lease. "PBGC" shall mean the Pension Benefit Guaranty Corporation. SX-14 "Pension Plan" shall mean, with respect to any Person, a "pension plan" as such term is defined in section 3(2) of ERISA which is subject to Title IV of ERISA and to which such Person may have any liability or contingent liability, including, but not limited to, liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason or being deemed to be a contributing sponsor under section 4069 of ERISA. "Permitted Contest" shall mean actions taken by a Person to contest in good faith, by appropriate proceedings initiated timely and diligently prosecuted, the legality, validity or applicability to the Equipment or any interest therein of any Person of: (a) any law, regulation, rule, judgment, order, or other legal provision or judicial or administrative requirements; (b) any term or condition of, or any revocation or amendment of, or other proceeding relating to, any authorization or other consent, approval or other action by any Authority; or (c) any Lien; provided that the initiation and prosecution of such contest would not: (i) result in, or materially increase the risk of, the imposition of any criminal liability on any Indemnitee; (ii) materially and adversely affect the security interests created by the Lease or the right, title or interest of the Agent or any Lessor in or to any of the Equipment or the right of Agent to receive payment of Rent or the Lease Balance or any interest therein; or (iii) materially and adversely affect the fair market value, utility or remaining useful life of the Equipment or any interest therein or the continued economic operation thereof; and provided further that in any event adequate reserves in accordance with GAAP are maintained against any adverse determination of such contest. "Permitted Investments" shall mean (a) direct obligations of, or obligations guaranteed by, the United States or any agency thereof (or any mutual fund investing solely in any of the foregoing), (b) commercial paper issued in the United States by any corporation (other than Lessee or its subsidiaries or its Affiliates) and rated at least A-1 (by Standard & Poor's Corporation) or P-1 (by Moody's Investors Service, Inc.), (c) certificates of deposit issued by, or drafts accepted by, any bank or trust company the short-term obligations of which (or of such Person's corporate parent) are rated at least A-I (by Standard & Poor's Corporation) or P-1 (by Moody's Investors Service, Inc.) and (d) any other negotiable instrument guaranteed or endorsed with full recourse by any such bank or trust company; provided that all such obligations, commercial paper, certificates of deposit, drafts and instruments are denominated in Dollars and the obligor thereon is located in the United States, each such obligation, certificate of deposit, draft and instrument matures within thirty days after the date of SX-15 investment and each item of such commercial paper matures within thirty days after the date of investment. "Permitted Lessor Liens" shall mean Lessor Liens: (a) for Taxes of the Agent or a Lessor either not yet due or being challenged by a Permitted Contest; (b) arising out of judgments or awards against the Agent or a Lessor with respect to which at the time an appeal or proceeding for review is being prosecuted by a Permitted Contest; and (c) arising out of Liens arising in the ordinary course of business of the Agent or a Lessor for amounts the payment of which is either not delinquent or is being contested by a Permitted Contest. "Permitted Liens" shall mean: (i) any rights in favor of Lessors under the Operative Agreements and any rights of any persons entitled to use of the Collateral in accordance with Section 5.2 of the Lease; (ii) any Lien, (including, without limitation, Liens of landlords, carriers, warehousemen, mechanics or materialmen) in favor of any Person securing payment of the price of goods or services provided in the ordinary course of business for amounts the payment of which is not overdue or is being contested in good faith by appropriate proceedings promptly initiated and diligently prosecuted, so long as such proceedings do not involve any reasonable danger of sale, forfeiture or loss of all or any material part of the Collateral and do not materially adversely affect any Lien created in favor of Lessor under the Lease; (iii) any Permitted Lessor Lien or any Lien arising out of any breach by Lessor of its obligations under the Operative Agreements; (iv) any Lien for current taxes, assessments or other governmental charges which are not delinquent or the validity of which is being contested by a Permitted Contest; (v) attachments, judgments and other similar Liens arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured hereby are being contested in good faith and by appropriate proceedings; (vi) reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, zoning and land use restrictions and other similar title exceptions or encumbrances affecting real property that were not incurred in connection with the incurrence of indebtedness, so long as such Liens do not involve a reasonable danger of sale, forfeiture or loss of all or any material portion of the Collateral and do not materially adversely affect any Lien created in favor of Lessor under the Lease; and (vii) any Lien incurred in the ordinary course of business to secure performance of statutory obligations. "Person" shall mean any individual, partnership, corporation, trust, unincorporated association or joint venture, a government or any department or agency thereof or any other legal entity. SX-16 "Plan" shall mean an "employee benefit plan" as defined in section 3(3) of ERISA. "Prior Debt Agreements" shall mean, collectively, the Credit Agreement and the Indenture; provided, however, that for purposes of Sections 6.1(a) (ii), 6.1(a) (iii), 6.1(a) (iv) (B), and 6.1(a) (iv) (C) (5) of the Participation Agreement, the Credit Agreement, as included in the term "Prior Debt Agreements" shall mean the Credit Agreement as in effect from time to time and, following the Expiration Date, the Credit Agreement as in effect on the Expiration Date. "Proceeds" shall have the meaning assigned to such term in Section 11.1(c) (2) of the Lease. "Purchase Agreements" shall mean all now and hereafter existing contracts, invoices or purchase orders to acquire Equipment. "Purchase Option Exercise Amount" shall mean, on the last day of the Initial Term and each Renewal Term, the aggregate of all Supplement Purchase Option Exercise Amounts under all Lease Supplements. "Purchase Price" shall mean (i) for any item of Equipment described in Schedule II of the Participation Agreement, the Fair Market Value of such Equipment as determined by the Appraisal and (ii) for any item of Equipment described in Schedule III of the Participation Agreement, the invoice price for such item of Equipment plus any Charges fairly attributable thereto and not otherwise included in the invoice price. "Recourse Deficiency Amount" shall mean, with respect to the exercise of the Sale Option, the difference between (i) the Purchase Option Exercise Amount at the end of any Renewal Term in which such Sale Option was elected and (ii) the product of (A) 21.5% and (B) the Appraised Value of the Functional Units subject to the Sale Option as of the first day of the Renewal Term in which the Sale Option was elected. "Reduction Amounts" shall mean any amounts paid by Lessee to Agent for the benefit of Lessors for the purchase of any Equipment pursuant to Section 6.1 of the Lease. "Reduction Amounts" shall not include any Rent or any costs, expenses or taxes to be paid by Lessee in connection with any such purchase, sale or transfer. "Reference Treasury Constant Yield" shall mean, relative to any payment, the yield calculated with reference to the Statistical Release No. H.15 (519) then most recently published by the Board of Governors of the Federal Reserve System or any SX-17 successor thereto three Business Days prior to the date of such prepayment as the yield of a hypothetical U.S. Treasury security with a remaining term equal to the weighted average remaining term to maturity (rounded to the nearest month) corresponding to the remaining scheduled terms, including the five Renewal Terms, of the Lease. If no maturity exactly corresponds to the weighted average remaining term to maturity of the remaining term, including the five Renewal Terms, of the Lease, yields for two published maturities most closely corresponding to such weighted average shall be selected in the Statistical Release and the yield shall be interpolated or extrapolated from such yields on a straight line basis, rounding in each period to the nearest month. "Related Person" shall mean, with respect to any Person, any trade or business (whether or not incorporated) which, together with such person, is under common control as described in Section 414 of the Code. "Removable Part" shall have the meaning assigned to such term in Section 5.5(a) of the Lease. "Renewal Option" shall have the meaning assigned to such term in Section 11.1(a) of the Lease. "Renewal Rent" shall mean, with respect to the Lease, all payments due and payable by Lessee under all Lease Supplements on each Payment Date occurring during the applicable Renewal Term, as set forth on Schedule II to such Lease Supplement. "Renewal Term" shall have the meaning assigned to such term in Section 2.2 of the Lease. "Rent" shall mean, with respect to either the Lease or any Lease Supplement, Interim Rent, Basic Rent, and/or Renewal Rent, as the context may require. "Rental Expense" shall mean rental expense under any lease (other than a lease for data processing or other office equipment used in the ordinary course of business) having a term (including all renewal terms which are not at the option of the lessee, whether or not exercised) extending more than three (3) years from the date of its inception. "Replaced Unit" shall have the meaning assigned to such term in Section 5.4(b) of the Lease. "Replacement Notice" shall mean a notice provided by the Lessee pursuant to Section 4.3 of the Participation Agreement. SX-18 "Replacement Part" shall have the meaning assigned to such term in Section 5.4(a) of the Lease. "Replacement Unit" shall have the meaning assigned to such term in Section 5.4(b) of the Lease. "Reportable Event" shall mean a "reportable event" described in Section 4043(b) of ERISA and the regulations thereunder. "Required Lessors" shall mean, with respect to any approval, action, waiver, direction, or consent, Lessors whose Outstanding Investments aggregate at least a majority of the Lease Balance as of such date of determination; provided, however, for purposes of instructing the Agent to provide Lessee with a notice of an Event of Default other than for a Payment Default, then Required Lessors shall mean Outstanding Investments aggregating twenty-five percent (25%) or more of the Lease Balance as of such date of determination. "Responsible Officer" of any Person shall mean: (i) in the case of any business corporation, the chairman of the board of directors of such corporation if such chairman is an officer of such corporation, the president, any vice president or any assistant vice president of such corporation, the secretary or any assistant secretary of such corporation or the treasurer or any assistant treasurer of such corporation; (ii) in the case of any partnership, a general partner (if such general partner is an individual), or a Responsible Officer of a corporate general partner, of such partnership or the general manager of such partnership or any assistant general manager of such partnership; and (iii) in the case of any commercial bank or trust company, the chairman or vice chairman of the board of directors or trustees of such bank or trust company, the chairman or vice chairman of the executive committee of the board of directors or trustees of such bank or trust company, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or any assistant trust officer of such bank or trust company, the controller or any assistant controller of such bank or trust company, any executive or senior or assistant or second vice president of such bank or trust company or any other individual who is employed by such bank or trust company and customarily performs functions similar to those performed by any of the other officers of such bank or trust company referred to herein. "Sale Option" shall have the meaning assigned to such term in Section 11.1(c) (1) of the Lease. "Sale Recourse Amount" shall have the meaning assigned to such term in Section 11.1(c) (2) of the Lease. SX-19 "Schedule X" shall mean this Schedule to the Participation Agreement. "Seller" shall have the meaning assigned to such term in the Bill of Sale. "Site(s)" shall mean all of the land described in Schedule I to Exhibit C to the Delivery Date Notice and any other land on which Eligible Equipment is affixed. "Specified Portion" shall mean, with respect to any Lease Supplement as of any date of determination, the Supplement Balance of such Lease Supplement at the immediately preceding Payment Date minus the Applicable Percentage Amount of such Lease Supplement at such Payment Date. "Sublessee" shall mean Tone Brothers, Inc., an Iowa corporation. "Subsequent Delivery Date" shall mean each of the dates scheduled for a Delivery Date Closing pursuant to a Delivery Date Notice occurring following the Initial Delivery Date. "Subsequent Delivery Date Closing" shall mean the Subsequent Delivery Date on which a transaction contemplated in Section 3.1 of the Participation Agreement is scheduled to be completed. "Subsequent Delivery Date Notice" shall mean a Delivery Date Notice relating to a Subsequent Delivery Date. "Subsidiary" shall mean any corporation, association, partnership, joint venture or other business entity more than 50% (by number of votes) of the stock of any class or classes (or equivalent interests) of which is at the time owned by the Lessee or Sublessee or by one or more Subsidiaries of the Lessee or Sublessee, if the holders of the stock of such class or classes (or equivalent interests) (a) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or Persons performing similar functions) of such business entity, even though the right so to vote has been suspended by the happening of such a contingency, or (b) at the time entitled, as such holders, to vote for the election of a majority of the directors (or Persons performing similar functions) of such business entity, whether or not the right so to vote exists by reason of a happening of a contingency. "Substituted Item" shall have the meaning assigned to such term in Section 5.4(a) of the Lease. SX-20 "Supplemental Rent" shall mean all amounts due and payable by the Lessee under the Lease other than Interim Rent, Basic Rent and Renewal Rent. "Supplement Balance" shall mean, with respect to any Lease Supplement as of any date of determination, the aggregate Functional Unit Balances of all of the Functional Units subject to such Lease Supplement. "Supplement Purchase Option Exercise Amount" shall mean as to each Lease Supplement, on the last day of the Initial Term and each Renewal Term, the Functional Unit Balances of all Functional Units subject to the Lessee Purchase Option, after taking into account any scheduled installment of Basic or Renewal Rent payable pursuant to such Lease Supplement on or prior to such date. "Termination Date" shall mean the date the Lease Term including any Renewal Term, ends pursuant to (a) Article VIII of the Lease relating to termination as a result of an Event of Default, (b) Article X of the Lease relating to early termination, (c) Section 11.1 of the Lease relating to the exercise of the Lessee Purchase Option or Sale Option, or (d) with respect to the Functional Units subject to the Sublease, Section 6.1(a) (iv) of the Participation Agreement as provided in such Section. "Total Commitment" shall mean $22,500,000, as reduced from time to time by a Funding pursuant to the Participation Agreement. "Transaction Costs" shall mean (i) the reasonable fees and expenses of Mayer, Brown & Platt and any local counsel incurred in connection with the negotiation, execution and delivery of the term sheet, the commitment letters, the Operative Agreements, and the transactions contemplated thereby (including, without limitation, on each Funding and Delivery Date); (ii) the reasonable allocated internal counsel fees of BA Leasing & Capital Corporation incurred in connection with the negotiation and drafting of the confidential memorandum dated January 1994 and the Operative Agreements; (iii) the reasonable fees and expenses of the Appraiser, environmental consultant and insurance consultant; (iv) the fees, costs and expenses of the Agent; SX-21 (v) all costs of searching and perfecting a first priority security interest in the Equipment; and (vi) the arrangement fee of BA Leasing and Capital Corporation. "Transfer" shall mean a transaction described in Section 6.1(a) (ii) (B) of the Participation Agreement. "Unfunded Amount" shall have the meaning assigned to such term in Section 3.4 of the Participation Agreement. "Unused Commitment" shall mean for each Lessor the aggregate amount of such Lessor's Commitment less such Lessor's Used Commitment. "Used Commitment" shall mean for each Lessor that portion of such Lessor's Commitment that has been transferred to Agent to be funded on a Delivery Date. "Uniform Commercial Code" shall mean the Uniform Commercial Code, as in effect from time to time in any jurisdiction where any Equipment is located. "Welfare Plan" shall mean, with respect to any Person, a "welfare plan" as such term is defined in section 3(1) of ERISA to which such Person or any Related Person to such Person may have any liability or contingent liability. SX-22 SCHEDULE Y FUNCTIONAL UNITS SCHEDULE V to PARTICIPATION AGREEMENT A. Functional Unit # Equipment Description - ---------- --------------------- 1 Packaging Line #1 (5 lb.) 2 Packaging Line #3 [Ankeny #11] (1 lb.) 3 Packaging Line #4 [Ankeny #8] (2 lb.) 4 Packaging Line #5 [Ankeny #10] (Hand Feed) 5 Packaging Line #6 (4 & 8 oz.) 6 Packaging Line #7 (1 lb.) 7 Packaging Line #8 (1 oz. Tube) 3 Packaging Line #9 (1 oz. Tube) 9 Pkgg Line #10 [A#12] (O.M. Bag Fill) 10 Packaging Line #11 (Mr. Pepper/Jollytime) 11 Packaging Line #12 (1 lb. Kraft/Rykoff) 12 Extract Food Service Packaging Line 13 Extract Retail Packaging Line 14 Packaging Line #2 [Future] (4 & 8 lb.) 15 Blending Equipment 16 Production & Distribution Support 17 Office & Building Support 18 Oil Production 19 Margarine Production 20 Receiving/Distribution 21 Injection Molding 22 Blow Molding 23 Straw 24 Mayonaisse Production 25 Cook Line/Dry Mix 26 Repro Line 27 Plastics 28 Packaging Line Equipment 29 Production & Distribution Support 30 Office & Building Support 31 Portland Location 32 San Francisco Location B. The Equipment described in this part B has not been appropriately designated as Functional Units, and each Lessor shall have the right to reject any item of Equipment which otherwise complies with the general categories set forth below, in which case Lessee shall have the right to propose in lieu thereof other Equipment (consisting solely of Functional Units) by providing an amended Delivery Date Notice, and the originally proposed Delivery Date shall not be delayed as a result of such amendment. Equipment Description --------------------- Material handling equipment pallet racks and office furniture at Lessee's La Mirada, CA distribution center, and Manufacturing and processing equipment located at Sublessee's Ankeny, Iowa facility EXHIBIT A TO PARTICIPATION AGREEMENT FORM OF LEASE A-1 EXHIBIT A TO PARTICIPATION AGREEMENT FORM OF LEASE INTENDED AS SECURITY Dated as of April 29, 1994 among RYKOFF-SEXTON, INC., as Lessee, BA LEASING & CAPITAL CORPORATION, not individually, but solely as Agent for the Lessors, and The Lessors Listed on the Signature Pages Hereto TABLE OF CONTENTS Page Article I DELIVERY AND ACCEPTANCE ................................ 1 1.1. Acceptance and Lease of Equipment ........................... 1 1.2. Acceptance Procedure ........................................ 2 Article II LEASE TERM ............................................. 2 2.1. Initial Term ................................................ 2 2.2. Lease Renewal ............................................... 2 Article III RENT; OTHER ECONOMIC PROVISIONS ........................ 2 3.1. Rent Payments ............................................... 2 3.2. Place and Manner of Payment ................................. 2 3.3. Net Lease ................................................... 3 Article IV WARRANTIES ............................................. 4 4.1. Warranty Disclaimer ......................................... 4 4.2. Assignment of Warranties .................................... 5 Article V POSSESSION, ASSIGNMENT, USE AND MAINTENANCE OF EQUIPMENT ............................... 5 5.1. Restriction on Lessee's Possession and Use .................. 5 5.2. Sublease .................................................... 5 5.3. Maintenance ................................................. 6 5.4. Replacement and Substitution ................................ 7 5.5. Alterations, Modifications and Additions; Removable Parts ............................................. 9 5.6. Labeling of Equipment ....................................... 10 5.7. Inspection of Collateral .................................... 11 Article VI RISK OF LOSS; REPLACEMENT .............................. 11 6.1. Casualty .................................................... 11 6.2. Partial Casualty ............................................ 12 6.3. Partial Casualty Proceeds ................................... 12 Article VII INSURANCE .............................................. 14 7.1. Required Coverages .......................................... 14 7.2. Delivery of Insurance Certificates .......................... 15 Article VIII DEFAULT ................................................ 16 8.1. Events of Default ........................................... 16 8.2. Remedies .................................................... 19 8.3. Additional Remedies ......................................... 20 8.4. Proceeds of Sale; Deficiency ................................ 20 8.5. Right to Perform Lessee's Agreements ........................ 22 Article IX RETURN OF EQUIPMENT .................................... 23 Article X EARLY TERMINATION ...................................... 23 Article XI LEASE TERMINATION ...................................... 24 11.1. Lessee's Options ............................................ 24 11.2. Election of Options ......................................... 26 11.3. Sale Option Procedures ...................................... 26 11.4. Payment of Excess Amounts ................................... 27 11.5. Appraisals .................................................. 27 Article XII AGENT .................................................. 28 12.1. Appointment of Agent; Powers and Authorization to Take Certain Actions ....................... 28 12.2. Reliance .................................................... 29 12.3. Action Upon Instructions Generally .......................... 29 12.4. Indemnification ............................................. 30 12.5. Independent Credit Investigation ............................ 31 12.6. Refusal to Act .............................................. 31 12.7. Resignation or Removal of Agent; Appointment of Successor ................................................ 32 12.8. Separate Agent .............................................. 32 12.9. Termination of Agency ....................................... 33 12.10. Compensation of Agency ...................................... 33 Article XIII OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES ..................................... 33 13.1. Grant of Security Interest .................................. 33 13.2. Retention of Title or Proceeds in the Case of Default .................................................. 35 Article XIV EFFECT OF WAIVER ....................................... 35 Article XV SURVIVAL OF COVENANTS .................................. 35 Article XVI APPLICABLE LAW ......................................... 36 Article XVII EFFECT AND MODIFICATION OF LEASE ....................... 36 Article XVIII NOTICES ................................................ 36 Article XIX COUNTERPARTS ........................................... 36 Article XX SEVERABILITY ........................................... 36 Article XXI SUCCESSORS AND ASSIGNS; MERGER ......................... 37 21.1. Successors and Assigns ................................. 37 21.2. Merger ................................................. 37 Article XXII ASSIGNMENTS ............................................ 37 22.1. Assignment by Lessee ................................... 37 22.2. Lessor Transfers ....................................... 37 Article XXIII BROKERS ................................................ 40 Article XXIV JURY TRIAL ............................................. 40 Article XXV CAPTIONS; TABLE OF CONTENTS ............................ 41 Article XXVI FINAL AGREEMENT ........................................ 41 Article XXVII TIMELINESS OF PERFORMANCE .............................. 41 Article XXVIII DISTRIBUTION AND APPLICATION OF RENTS AND OTHER PAYMENTS ......................................... 41 28.1. Pro Rata Payment ....................................... 41 Schedule I - Equipment Exhibit A - Form of Investors Letter Exhibit B - Form of Lease Supplement LEASE INTENDED AS SECURITY This LEASE INTENDED AS SECURITY (as amended, modified, restated or supplemented from time to time, this "Lease") dated as of April 29, 1994 (the "Effective Date") is between Rykoff-Sexton, Inc., a Delaware corporation ("Lessee"), with its principal office at 761 Terminal Street, Los Angeles, CA 90021, BA Leasing & Capital Corporation, Pitney Bowes Credit Corporation and Manufacturers Bank (collectively, the "Lessors" and each a "Lessor"), and BA Leasing & Capital Corporation, a California corporation, not in its individual capacity, but solely in its capacity as agent under this Lease ("Agent") for the benefit of the Lessors. WHEREAS, pursuant to the terms and conditions set forth herein and in that certain Participation Agreement dated as of April 29, 1994 (the "Participation Agreement"), among Lessee, Sublessee, the Lessors and Agent, Lessors have agreed to purchase and thereafter lease the Equipment to Lessee pursuant to this Lease. AND WHEREAS, the Participation Agreement contemplates that, following Lessee's execution and delivery of this Lease, Lessee will sublease a portion of the Equipment to Sublessee pursuant to the terms of the Sublease; AND WHEREAS, capitalized terms used but not otherwise defined herein (including those used in the foregoing recitals) shall have the meanings specified in Schedule X to the Participation Agreement, unless the context otherwise requires. AND WHEREAS, to secure Lessee's obligations under this Lease and the other Operative Agreements, Lessee will grant to the Agent, for the benefit of the Lessors, a security interest in the Collateral, including, without limitation, the Equipment and the Sublease. NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Article I DELIVERY AND ACCEPTANCE Section 1.1. Acceptance and Lease of Equipment. Subject to each Participant's satisfaction or waiver, as applicable, of the conditions set forth in Articles II and III of the Participation Agreement, on each Delivery Date and upon execution and delivery of a Lease Supplement covering all of the Equipment to be purchased on such date, Lessors shall lease to the Lessee, and Lessee will lease from the Lessors, on the terms and subject to the conditions in this Lease and such Lease Supplement, the Equipment purchased by the Agent on behalf of the Lessors on such Delivery Date. Section 1.2. Acceptance Procedure. Lessors hereby authorize one or more employees of Lessee to be designated by Lessee as the authorized representative or representatives of Lessors to accept delivery of the Equipment on each Delivery Date. Lessee hereby agrees that such acceptance of delivery by such authorized representative or representatives and the execution and delivery by Lessee on each Delivery Date of a Lease Supplement shall, without further act, constitute the irrevocable acceptance by Lessee of the Equipment which is the subject thereof for all purposes of this Lease and the other Operative Agreements on the terms set forth therein and herein. Article II LEASE TERM Section 2.1. Initial Term. The commencement of the term of this Lease shall be on the Effective Date and shall continue until, but not including, April 29, 1995 (the "Initial Term"), unless earlier terminated in accordance with the provisions herein or extended pursuant to Section 2.2 and Article XI. Section 2.2. Lease Renewal. Lessee may elect to renew this Lease for up to five successive one-year renewal terms (each, a "Renewal Term") as provided in Article XI. Article III RENT; OTHER ECONOMIC PROVISIONS Section 3.1. Rent Payments. On each Payment Date during the Initial Term and each Renewal Term, Lessee shall pay to Agent for the benefit of the Lessors the Interim Rent, Basic Rent or Renewal Rent, as applicable, that has become due and payable pursuant to the terms of each Lease Supplement entered into prior to such Payment Date. Scheduled installments of Basic Rent and Renewal Rent may be adjusted pursuant to Section 6.1. Section 3.2. Place and Manner of Payment. (a) Rent and all other sums due Lessors hereunder shall be paid in immediately available funds to Agent, for the benefit of the Lessors, at the Agent's Corporate Office, or at such other office of Agent as it 2 may from time to time specify to Lessee in a notice pursuant to this Lease. All such payments shall be received by Agent not later than 11:00 a.m. San Francisco time, on the date due; funds received after such time shall for all purposes under the Operative Agreements be deemed to have been received by Lessor on the next succeeding Business Day. Lessee shall pay to Agent for the benefit of the Lessors, on demand, interest (i) with respect to any overdue amount of Rent or Make-Whole Premium, at the rate per annum which is 2% above the Interest Rate under the Lease Supplement relating to the Functional Unit in respect of which such amount is due and (ii) with respect to any other payment under this Lease that is not paid when due (without taking into account any applicable grace period), at the rate which is 2% per annum above the Interest Rate set forth in Schedule II to the Lease Supplement delivered on the Initial Delivery Date, and (to the extent permitted by applicable law) interest from the date due (not taking into account any grace period) until payment is made. (b) Agent shall make all payments to Lessors required under this Lease or the Participation Agreement on the date the Agent receives the applicable payment from Lessee, so long as Agent has received such payment from Lessee not later than 9:00 a.m. San Francisco time, and if Agent receives the applicable payment from Lessee later than 9:00 a.m. San Francisco time, then Agent shall make payment to the Lessors on the next succeeding Business Day. Notwithstanding the foregoing, any such amounts may be held by the Agent pending the Agent's reasonable, good faith determination of the Lessor or Lessors entitled to such payment (and the portion thereof payable to each Lessor), and shall be paid by the Agent to each Lessor entitled thereto promptly upon making such determination by transferring such amounts to such Lessors; provided, however, that if such determination is not made by the end of the second Business Day following receipt by the Agent of the applicable payment and the amount of such payment shall exceed, in the aggregate, $100,000, the Agent shall, at the request of the Required Lessors, invest such funds in Permitted Investments. Section 3.3. Net Lease. This Lease is a net lease and Lessee's obligation to pay all Rent, indemnity and other amounts payable hereunder shall be absolute and unconditional under any and all circumstances and, without limiting the generality of the foregoing, Lessee shall not be entitled to any abatement or reduction of Rent or any setoff against Rent, indemnity or other amount, whether arising by reason of any past, present or future claims of any nature by Lessee against Agent or any Lessor, or otherwise. Except as otherwise expressly provided herein, this Lease shall not terminate, nor shall the obligations of Lessee be otherwise affected (a) by reason of any defect in, damage to, or loss of possession or use, obsolescence or destruction, of any or 3 all of the Equipment, however caused; or (b) by the taking or requisitioning of any or all of the Equipment by condemnation or otherwise; or (c) by the invalidity or unenforceability or lack of due authorization by Agent, Lessors or Lessee or other infirmity of this Lease; or (d) by lack of power or authority of Lessor to enter into this Lease; or (e) by the attachment of any Lien of any third party to any item of Equipment; or (f) by any prohibition or restriction of or interference with Lessee's use of any or all of the Equipment by any Person; or (g) by the insolvency of or the commencement by or against Lessee, Agent or any Lessor of any bankruptcy, reorganization or similar proceeding; or (h) by any other cause, whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding. It is the intention of the parties that all Rent, indemnities and other amounts payable by Lessee hereunder shall be payable in all events in the manner and at the times herein provided unless Lessee's obligations in respect thereof have been terminated or modified pursuant to the express provisions of this Lease. To the extent permitted by applicable law, Lessee waives any and all rights which it may now have or which may at any time be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease, in whole or in part, except strictly in accordance with the express terms hereof. Each rental, indemnity or other payment made by Lessee hereunder shall be final, and Lessee shall not seek to recover (except as expressly provided in this Lease) all or any part of such payment from Lessors or the Agent for any reason whatsoever. Article IV WARRANTIES Section 4.1. Warranty Disclaimer. LESSEE ACKNOWLEDGES AND AGREES THAT: (a) THE EQUIPMENT IS OF A SIZE, DESIGN, CAPACITY AND MANUFACTURE SELECTED BY LESSEE; (b) LESSEE IS SATISFIED THAT THE SAME IS SUITABLE FOR ITS PURPOSES; (c) NEITHER AGENT NOR ANY LESSOR IS A MANUFACTURER THEREOF OR A DEALER IN PROPERTY OF SUCH KIND; AND (d) NEITHER AGENT NOR ANY LESSOR HAS MADE OR SHALL BE DEEMED TO HAVE MADE: (i) ANY REPRESENTATION OR WARRANTY OR COVENANT WITH RESPECT TO THE TITLE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONDITION, QUALITY, DESCRIPTION, DURABILITY OR SUITABILITY OF ANY ITEM OF EQUIPMENT IN ANY RESPECT OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES OF LESSEE; OR (ii) ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY ITEM OF EQUIPMENT, EXCEPT THAT EACH OF THE LESSORS REPRESENTS AND WARRANTS, SEVERALLY AND NOT JOINTLY, THAT ON EACH DELIVERY DATE IT SHALL HAVE RECEIVED AN UNDIVIDED INTEREST IN WHATEVER TITLE WAS CONVEYED BY THE MANUFACTURERS OF THE EQUIPMENT DELIVERED ON SUCH DELIVERY DATE BY 4 SUCH MANUFACTURERS, FREE OF LESSOR LIENS CREATED BY SUCH LESSOR EXCEPT FOR PERMITTED LESSOR LIENS AND LIENS CREATED PURSUANT TO THE OPERATIVE AGREEMENTS. Section 4.2. Assignment of Warranties. Lessors assign to Lessee, to the extent assignable, all of their interest, if any, in any warranties, covenants and representations of any manufacturer, producer, vendor or maker of any item of Equipment, provided that such assignment shall remain in effect only so long as no Event of Default has occurred and is continuing, and provided, further, that any action taken by Lessee by reason thereof shall be at the expense of Lessee and shall be consistent with Lessee's obligations pursuant to this Lease. Article V POSSESSION, ASSIGNMENT, USE AND MAINTENANCE OF EQUIPMENT Section 5.1. Restriction on Lessee's Possession and Use. Lessee shall not (a) use, operate, maintain or store any Functional Unit, item of Equipment or any portion thereof (i) except in accordance with Section 5.3; or (ii) in violation of any applicable insurance policy or law or regulation of any Authority; (b) abandon any item of Equipment; (c) except as permitted by Section 5.2 and Section 6.1 of the Participation Agreement, sublease or assign, without the prior written consent of Lessor, any item of Equipment or permit the use thereof by anyone other than Lessee; (d) except as set forth in Section 5.2 and Section 6.1 of the Participation Agreement, sell, assign or transfer any of its rights hereunder or in any item of Equipment, or directly or indirectly create, incur or suffer to exist any Lien on any of its rights hereunder or in any item of Equipment, except for Permitted Liens; or (e) except in connection with any maintenance or repair thereof, permit any item of Equipment or any Part relating to such item of Equipment to be located at any location other than the location of such Equipment or Part as of the Delivery Date applicable thereto and as set forth opposite such item of Equipment on Schedule I of the applicable Lease Supplement. Lessee will defend the sale of the Equipment by Lessee and Manufacturers to Agent, for the benefit of the Lessors, against the claims or demands of all Persons. Section 5.2. Sublease. Subject to Sections 6.1(a) and 6.2(a) of the Participation Agreement, so long as no Event of Default has occurred and is continuing, Lessee may sublease one or more Functional Units to a Subsidiary of Lessee without the prior written consent of Lessors or Agent; provided that (i) any such sublease shall automatically expire upon the expiration of the Lease Term or any earlier termination of this Lease and shall 5 be expressly subject and subordinate to this Lease and the Liens created hereby, (ii) the sublease agreement shall be in writing and shall expressly prohibit any further assignment, sublease or transfer and (iii) all of Lessee's rights, title and interest in, to and under the sublease shall be pledged by Lessee to Lessors, as collateral for Lessee's obligations under the Operative Agreements, by delivery of an executed copy upon the execution and delivery thereof, marked as the sole original execution copy for Uniform Commercial Code purposes, to the Agent, and Lessee shall, at its own cost and expense, do any further act and execute, acknowledge, deliver, file, register and record any further documents which the Agent or Lessors may reasonably request in order to create, perfect, preserve and protect Agent's and Lessors' security interest in the sublease. Lessee shall remain primarily liable hereunder for the performance of all of the terms of this Lease to the same extent as if such sublease had not been entered into. Section 5.3. Maintenance. Lessee shall at its own cost and expense and at all times during the term of this Lease (a) maintain, manage and monitor the Equipment in compliance with all applicable requirements of any law, Authority and/or insurance policies; (b) maintain the Equipment (or cause the Equipment to be maintained) in as good operating order, repair, condition and appearance as it was on the date such Equipment became subject to this Lease (assuming that, as of such date, the Equipment was in good operating order, repair, condition and appearance), ordinary wear and tear excepted; (c) maintain, manage and monitor the Equipment in accordance with the terms of all applicable contracts (including, without limitation, service contracts and insurance contracts); (d) conduct all scheduled maintenance of the Equipment in conformity with Lessee's past practices, and manufacturer's maintenance and repair guidelines, for similar equipment (including, without limitation, Lessee's maintenance program for such equipment); and (e) cause the Equipment to continue to have at all times the capacity and functional ability to perform, on a continuing basis (subject to normal interruption in the ordinary course of business for maintenance, inspection, service, repair and testing) and in commercial operation, the functions for which it was specifically designed. Lessee shall in any event maintain the Equipment (or cause the Equipment to be maintained) in at least as good a condition as comparable equipment owned or leased by it or any of its Subsidiaries. Lessee will maintain or cause to be maintained and shall permit the Agent and Lessors to inspect any records, logs and other materials required by any governmental authority having jurisdiction to be maintained or filed in respect of any items of Equipment. 6 Section 5.4. Replacement and Substitution. (a) In the event that any Part which may from time to time be incorporated or installed in or attached to any item of Equipment, or any item of Equipment itself, becomes at any time worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever (unless such event constitutes a Casualty or Partial Casualty, in which event the provisions of Section 6.1. or 6.2 hereof shall apply), Lessee, at its own cost and expense, will promptly replace, or cause to be replaced, such Part or item of Equipment (the "Substituted Item") with a replacement Part or item of Equipment (a "Replacement Part"). In addition, Lessee may, at its own cost and expense, remove in the ordinary course of maintenance, service, repair, overhaul or testing, any Part, whether or not worn out, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use, provided that Lessee will, at its own cost and expense, replace such Part as promptly as is commercially reasonable. All Replacement Parts shall be free and clear of all Liens (other than Permitted Liens) and shall be in as good an operating condition as, and shall have a value and utility at least equal to, the Parts replaced, assuming such replaced Parts and the Equipment were immediately prior to such replacement or the event or events necessitating such replacement in the condition and repair required to be maintained by the terms hereof. Any Part at any time removed from any item of Equipment shall remain subject to the interests of the Agent and the Lessors under the Operative Agreements, no matter where located, until such time as such Part shall be replaced by a Part which has been incorporated or installed in or attached to such item of Equipment and which meets the requirements for a Replacement Part specified above. Immediately upon any Replacement Part becoming incorporated or installed in or attached to any such item of Equipment as above provided, without further act (i) title to the replaced Part shall thereupon vest in Lessee, free and clear of all rights of the Lessors, and shall no longer be deemed a Part hereunder, (ii) title to such Replacement Part shall thereupon vest in the Lessors and (iii) such Replacement Part shall become subject to this Lease and the security interest created hereunder and be deemed part of such item of Equipment for all purposes hereof to the same extent as the Parts incorporated or installed in or attached to such item of Equipment on the date such item of Equipment became subject to this Lease. No later than 45 days after the end of each fiscal quarter of Lessee, Lessee shall deliver to Lessors a Bill of Sale evidencing the conveyance by Lessee to the Lessors of all Replacement Parts not previously evidenced by 7 a Bill of Sale and such other documents in respect of such Part or Parts as the Required Lessors may reasonably request in order to confirm that title to such Part or Parts has passed to Lessors, as provided above. Each such Bill of Sale shall provide that each Lessor is granted an undivided interest in such Replacement Parts equal to its Lease Percentage as of the date of such transfer. (b) In addition to the foregoing, Lessee shall have the option at any time to replace any Functional Unit (a "Replaced Unit") with a substitute Functional Unit (a "Replacement Unit"), subject to the following conditions: (i) any such Replacement Unit shall satisfy one of the following conditions: (x) the Replacement Unit shall consist of items of new equipment of identical manufacture and model as the equipment comprising the Replaced Unit, or (y) such Replacement Unit shall have a utility, an Appraised Value, and an economic useful life at least equal to those of the Replaced Unit immediately prior to such substitution, assuming that the Replaced Unit was in the condition and repair required to be maintained by the terms of this Lease, and Lessee shall have provided to the Agent and each Lessor, at Lessee's expense, an Appraisal satisfactory to Agent and each Lessor in their sole and absolute discretion with respect to the determination of such utility, Fair Market Value and economic useful life or (z) such Replacement Unit shall otherwise be acceptable to each of the Lessors in its respective sole and absolute discretion; (ii) Lessee shall have satisfied each of the conditions set forth in Section 4.3 of the Participation Agreement (other than subsection (b) thereof) with respect to the proposed replacement; and (iii) Lessee shall not remove the Replaced Unit from the location set forth on Schedule I to the Delivery Date Notice pursuant to which the Replaced Unit was delivered until such time as it has executed all documents reasonably requested by Agent or any Lessor to perfect the security interest of the Agent, for the benefit of the Lessors, in the Replacement Unit. Any Replacement Unit substituted in accordance with this Section 5.4(b) shall thereafter be considered a Functional Unit for all purposes of this Lease. 8 (c) Lessee may request the replacement of an item of Equipment (pursuant to the foregoing subsection (a)) or a Functional Unit (pursuant to the foregoing subsection (b) by delivery of a Replacement Notice in the manner described in Section 4.3 of the Participation Agreement. Upon the satisfaction of the conditions specified in such Section 4.3, each in form and substance satisfactory to the Required Lessors, and the Replacement Part or Replacement Unit becoming subject to this Lease and the security interest created hereunder, Lessor shall execute and deliver to Lessee a bill of sale (without representations or warranties, except that the Substituted Item or Replaced Unit, as the case may be, is free and clear of all Lessor Liens) and such other documents as may be required to release the Substituted Item or Replaced Unit, as the case may be, from the terms and scope of this Lease, in such form as may be reasonably requested by Lessee and are in form and substance satisfactory to the Lessors, all at Lessee's own cost and expense. Section 5.5. Alterations, Modifications and Additions; Removable Parts. (a) Except as provided in Section 5.4, Lessee shall not remove, replace, modify, improve or alter (collectively, "alter") any item of Equipment or affix or place any Part on any item of Equipment if such alteration or addition would materially impair the originally intended function or use or materially reduce the value of such item of Equipment or the Functional Unit to which such item of Equipment belongs, provided that Lessee, at its own cost and expense, will make, or cause to be made any alteration or addition to or in respect of any item of Equipment that may be necessary, from time to time, to comply in all material respects with any applicable law, governmental rule or regulation (including any Environmental Law) or any provision of any insurance policy required to be maintained under Section 7.1 (any Parts being used to comply with this provision shall be hereafter referred to as "Mandatory Parts"); provided, however, that Lessee shall be under no obligation to take such action so long as the application of the applicable law, rule, regulation or provision is being contested by Lessee pursuant to a Permitted Contest. Lessee shall notify Agent and the Lessors in advance of any proposed alteration of or addition to any item of Equipment if the cost of such alteration or addition, in the aggregate, can reasonably be expected to exceed $250,000, or if such advance notice is not practicable, within 30 days after the completion of such alteration or addition. All Parts affixed to or installed as a part on any item of Equipment, excluding temporary 9 replacements, shall thereupon become subject to the security interest under this Lease. (b) If no Event of Default shall exist, Lessee may remove, at its own cost and expense, any Part at any time during the term of this Lease (such Part, a "Removable Part") which (i) is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to an item of Equipment on the date such item became subject to this Lease or any Part in replacement of or substitution for any such Part originally incorporated or installed or attached to such Equipment, (ii) is not a Mandatory Part and (iii) can be removed from any item of Equipment without causing damage to such item of Equipment or diminishing or impairing the value, utility or condition that such item of Equipment would have had at such time had such addition not occurred, provided that (x) such removal will not materially impair the value or use which the item of Equipment would have had at such time had such Part not been affixed to or placed on such Equipment, (y) such Part is not necessary for the continued normal use of such item of Equipment and (z) such removal would not cause the Functional Unit to which such items of Equipment belong to no longer constitute a Functional Unit. Lessee shall repair all damage to the item of Equipment resulting from any alteration so as to restore any item of Equipment to the condition in which it existed prior to such alteration (ordinary wear and tear excepted). Lessors shall not have any obligation to pay for or to reimburse Lessee for any alteration permitted by this Section 5.5. Title to all Parts incorporated or installed in or attached or added to any item of Equipment as the result of alterations, modifications or additions under this Section 5.5, except Removable Parts, shall, without further act, vest in Agent, for the benefit of the Lessors, in the manner provided in clause (ii) of Section 5.4(a) and the other applicable provisions of Section 5.4 shall apply with respect to such Parts. Title to any Removable Part shall not vest in Agent, and upon the removal by Lessee of any Removable Part as provided herein, such Removable Part shall no longer be deemed part of the item of Equipment from which it was removed. Any Removable Part not removed by Lessee as provided herein prior to the end of the Lease Term or applicable Renewal Term shall become the property of Agent, for the benefit of the Lessors, at such time. Section 5.6. Labeling of Equipment. Lessee shall as soon as practicable affix and keep throughout the Lease Term, including any Renewal Terms, labels, plates or other markings, bearing the inscription "Security Interest held by BA Leasing & 10 Capital Corporation, as agent for the Lessors" upon a prominent place on each item of Equipment reasonably susceptible to being so labeled. Section 5.7. Inspection of Collateral. Agent, the Lessors and each of their agents and representatives shall have the right at all reasonable times, upon reasonable notice, to inspect any Collateral. Article VI RISK OF LOSS; REPLACEMENT Section 6.1. Casualty. Upon a Casualty, Lessee shall give prompt written notice thereof (a "Casualty Notice") to Agent and Lessors, which notice shall specify whether Lessee will: (a) repay the Functional Unit Balance for each Functional Unit subject to such Casualty together with unpaid Accrued Supplement Rent on each such Functional Unit Balance so prepaid to the date of payment and the applicable Make-Whole Premium on each such Functional Unit Balance so repaid. All such amounts shall be paid to Agent for the benefit of the Lessors no later than the next scheduled Payment Date occurring at least 30 days after such Casualty, but in no event later than the Termination Date (such date being referred to as the "Casualty Settlement Date"); or (b) replace pursuant to the provisions of Section 5.4(b) hereof and Section 4.3 of the Participation Agreement each Functional Unit with respect to which the Casualty has occurred; provided, however, that upon the occurrence of an Event of Default or an event which with the giving of notice and/or the passage of time could give rise to an Event of Default, Lessee shall be obligated, at the option of the Required Lessors, to make the payments referred to in clause (a) above and shall not be entitled to exercise any right or election of replacement as set forth in this clause (b). All proceeds of any casualty insurance or condemnation proceeds ("Casualty Proceeds") paid to the Lessee or any of its Affiliates by reason of a Casualty to a Functional Unit shall be deposited into a deposit account established by Agent for the benefit of the Lessors (the "Deposit Account"). Any Casualty Proceeds paid to Agent with respect to a Functional Unit suffering a Casualty shall also be deposited in the Deposit Account. Any monies in the Deposit Account attributable to a Casualty shall be remitted promptly to Lessee after either (i) Lessee's payment in full of the Functional Unit Balance 11 together with the applicable Make-Whole Premium or (ii) Lessee's full compliance with the conditions governing a Replacement Part, as applicable pursuant to clause (a) or (b) above. If Lessee has elected to pay the Functional Unit Balance and an amount equal to the applicable Make-Whole Premium pursuant to clause (a) above, Lessee shall continue to make all payments of Rent due hereunder in respect of the Functional Unit or Units suffering a Casualty through the date the Functional Unit Balance and the applicable Make-Whole Premium are paid. Upon payment of each of the amounts required by Section 6.1(a), then all scheduled installments of Rent, including installments of Renewal Rent, thereafter payable for the remainder of the Lease Term in respect of the Lease Supplement applicable to the Functional Unit or Units suffering the Casualty, and the portion of the Purchase Option Exercise Amounts allocable to such Lease Supplement, shall be re-calculated by the Agent in the manner specified in Section 3.1 of the Participation Agreement, without taking into account the Purchase Price or Functional Unit Balance of the Functional Unit suffering the Casualty. Section 6.2. Partial Casualty. Upon any Partial Casualty with respect to a Functional Unit, Lessee shall give to Agent and Lessors a Notice of Partial Casualty. As soon as practicable after a Partial Casualty, Lessee shall (a) repair and rebuild the affected portions of such Functional Unit (or cause such affected portions to be repaired and rebuilt) to the condition required to be maintained by Section 5.3 hereof, provided that the value and functional capability of such Functional Unit, as restored, is at least equivalent to the value and functional capability of such Functional Unit as in effect immediately prior to the occurrence of such Partial Casualty or (b) replace such affected items of Equipment with Replacement Parts pursuant to the provisions of Section 5.4(a). Section 6.3. Partial Casualty Proceeds. All Partial Casualty Proceeds received by Lessee or any of its Affiliates as a result of a Partial Casualty shall be promptly paid to Agent. Agent shall deposit such Partial Casualty Proceeds into the Deposit Account and, so long as no Event of Default or event which with the giving of notice and/or passage of time could give rise to an Event of Default shall exist, Agent shall disburse such Partial Casualty Proceeds with respect to a Functional Unit (or an item of Equipment constituting part of such Functional Unit) suffering a Partial Casualty as follows: (a) to Lessee in reimbursement of the costs of repairing and rebuilding the affected portions of such Functional Unit (or item of Equipment constituting part of such Functional Unit) suffering a Partial Casualty which the 12 Lessee has chosen to repair and rebuild in accordance with Section 6.2; or (b) upon a Replacement Part being duly substituted for each item of Equipment having suffered a Partial Casualty, to Lessee to the extent Partial Casualty Proceeds with respect to the corresponding Substituted Item were deposited into the Deposit Account. Partial Casualty Proceeds held by Agent and to be distributed in accordance with paragraph (a) of this Section 6.3 shall be disbursed by Agent from the Deposit Account to Lessee from time to time (but no more frequently than once per calendar month) to reimburse Lessee for the costs of repairing and rebuilding the affected Functional Units as required under Section 6.2(a), subject to such reasonable disbursement conditions as Agent may impose, including presentation of invoices and other supporting documentation reflecting such costs and delivery of Lien waivers; provided, however, that Agent shall have no obligation to disburse any Partial Casualty Proceeds out of the Deposit Account at any time that Agent, at the direction of the Required Lessors, shall reasonably determine (i) that such Partial Casualty Proceeds are not sufficient to repair and rebuild the affected Functional Units as required by Section 6.2(a) (unless additional funds which are, in the sole discretion of the Required Lessors, sufficient to so repair and rebuild the affected Functional Units have been deposited in the Deposit Account) or (ii) that Lessee is not diligently performing its obligations under Section 6.2. Notwithstanding the foregoing provisions of this Section 6.3, and provided that no Event of Default and no event which with the giving of notice and/or passage of time could become an Event of Default shall exist, if the aggregate amount of Partial Casualty Proceeds attributable to any Partial Casualty is $100,000 or less, Lessee may receive such Partial Casualty Proceeds directly, without delivery to Agent, provided that such Partial Casualty Proceeds are applied in accordance with the requirements of Section 6.2. In the event that Agent receives Partial Casualty Proceeds in an amount that is less than $100,000 and provided that no Event of Default and no event which with the giving of notice and/or passage of time could become an Event of Default shall exist, Agent shall promptly remit such funds to Lessee. Notwithstanding any Partial Casualty, all of Lessee's obligations under this Lease (including its obligation to make all payments of Rent as they become due) shall continue unabated and in full force and effect as provided in this Lease. 13 Article VII INSURANCE Section 7.1. Required Coverages. Lessee will keep the Equipment insured by financially sound and reputable insurers against loss or damage, with insurance of the kinds and in the amounts customarily maintained by similar corporations engaged in similar operations in similar jurisdictions and carry such other insurance as is usually carried by such corporations, provided that in any event Lessee will maintain: (a) Casualty Insurance -- insurance against risks of direct physical loss or damage with respect to the Equipment (including, without limitation, earthquake insurance) with deductibles and in such minimum amounts as are consistent with industry standards; provided, however, that at no time shall the amount of coverage, on a replacement cost basis, be less than the sum of (x) the Lease Balance and (y) an amount equal to the aggregate portion of the interest component of Basic Rent or Renewal Rent to be accrued under all Lease Supplements for 90 days following the date of determination; (b) Public Liability Insurance -- combined single limit insurance against claims for bodily injury, death or property damage in an amount at least equal to $5,000,000 per occurrence with such deductibles as are carried by similarly situated companies involved in operating similar facilities and equipment; and (c) Other Insurance -- such other insurance, including comprehensive motor vehicle, worker's compensation and business interruption insurance, in each case as generally carried by owners of equipment similar to the Equipment and properties in the States of California, Iowa and Oregon, in such amounts and against such risks as are then customary for equipment and property similar in use. Such insurance shall be written by reputable insurance companies that are financially sound and solvent and otherwise reasonably appropriate considering the amount and type of insurance being provided by such companies. Any insurance company selected by Lessee which is rated in Best's Insurance Guide or any successor thereto (or if there be none, an organization having a similar national reputation) shall have a general policyholder rating of "A" and a financial rating of at least "10" or be otherwise acceptable to the Required Lessors. Property/Casualty insurance maintained by Lessee shall name Agent, for the benefit of the Lessors, as sole loss payee to the extent such claims relate to items of Equipment subject to this Lease, and liability insurance 14 maintained by Lessee shall name Agent, together with the Lessors, as additional insureds. Each policy referred to in this Section 7.1 shall provide that (i) it will not be cancelled or its limits reduced, or allowed to lapse without renewal, except after not less than 30 days' written notice to Agent and the Lessors, (ii) the interests of Agent and the Lessors shall not be invalidated by any act or negligence of Lessee or any person having an interest in any item of Equipment, (iii) such insurance is primary with respect to any other insurance carried by or available to Agent and the Lessors, (iv) the insurer shall waive any right of subrogation, setoff, counterclaim, or other deduction, whether by attachment or otherwise, against Agent and the Lessors and (v) such policy shall contain a cross-liability clause providing for coverage of Agent and each Lessor as if separate policies had been issued to each of them. Lessee will notify Agent and Lessors promptly of any policy cancellation, reduction in policy limits, modification or amendment. Section 7.2. Delivery of Insurance Certificates. On or before the Initial Delivery Date and thereafter on each Subsequent Delivery Date, Lessee shall deliver to Agent (with a copy to each Lessor) certificates of insurance reasonably satisfactory to the Lessors evidencing the existence of all insurance required to be maintained hereunder and setting forth the respective coverages, limits of liability, carrier, policy number and period of coverage. Thereafter, throughout the Lease Term, no sooner than 10 days before and no later than on the last day of April (commencing in 1995), Lessee shall deliver to Agent (with a copy to each Lessor) certificates of insurance evidencing that all insurance required by Section 7.1 hereof to be maintained by Lessee with respect to the Equipment subject to this Lease is in effect. With each such certificate of insurance (other than certificates delivered in connection with Delivery Date Closings) Lessee shall cause to be delivered a written report of a firm of independent insurance brokers of nationally recognized standing, stating that, in their opinion, such policy is in compliance with the provisions of Section 7.1 hereof and is comparable in all material respects with insurance carried by responsible owners and operators of equipment similar to the Equipment. Article VIII DEFAULT Section 8.1. Events of Default. The following shall constitute events of default (each an "Event of Default") hereunder (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order 15 of any court or any order, rule or regulation of any administrative or governmental body): (a) any payment of Rent shall not be paid when due, or any other payment payable by Lessee under any Operative Agreement shall not be paid within ten (10) Business Days; (b) any representation or warranty on the part of Lessee contained in any Operative Agreement or in any certificate, letter or other writing or instrument furnished or delivered to Agent or the Lessors pursuant thereto shall at any time prove to have been incorrect in any material respect when made, deemed made or reaffirmed, as the case may be; (c) Lessee shall default in the performance or observance of any term, covenant, condition or agreement on its part to be performed or observed under Sections 5.1(c) or 5.1(d), Section 5.2, Article XI, or Section 21.2 hereof; (d) Lessee shall default in any material respect in the performance or observance of any term, covenant, condition or agreement on its part to be performed or observed under Section 7.1 hereof; (e) Lessee shall default in any material respect in the performance or observance of any other term, covenant, condition or agreement on its part to be performed or observed hereunder or under any other Operative Agreement (and not constituting an Event of Default under any other clause of this Section 8.1), and such default shall continue unremedied for a period of 30 days after the earlier to occur of (i) written notice thereof by Agent or any Lessor to Lessee or (ii) Lessee has Actual Knowledge thereof, provided that if such failure cannot be remedied within such 30-day period and Lessee is diligently proceeding, as determined in the absolute discretion of the Required Lessors, to correct such failure of performance and such failure of performance is capable of being remedied within a single additional 30-day period, such period shall be extended for an additional 30 days; (f) (i) Lessee shall generally fail to pay, or admit in writing its inability to pay, its debts as they become due, or shall voluntarily commence any case or proceeding or file any petition under any bankruptcy, insolvency or similar law seeking dissolution, liquidation or reorganization or the appointment of a receiver, agent, custodian or liquidator for itself or a substantial portion of its property, assets or business or to effect a plan or other arrangement with its creditors, or shall file any 16 answer admitting the jurisdiction of the court and the material allegations of any involuntary petition filed against it in any bankruptcy, insolvency or similar case or proceeding, or shall be adjudicated bankrupt, or shall make a general assignment for the benefit of creditors, or shall consent to, or acquiesce in the appointment of, a receiver, agent, custodian or liquidator for itself or a substantial portion of its property, assets or business or (ii) corporate action shall be taken by Lessee for the purpose of effectuating any of the foregoing; (g) involuntary proceedings or an involuntary petition shall be commenced or filed against Lessee under any bankruptcy, insolvency or similar law or seeking the dissolution, liquidation or reorganization of Lessee or the appointment of a receiver, agent, custodian or liquidator for Lessee or of a substantial part of the property, assets or business of Lessee, or any writ, judgment, warrant of attachment, execution or similar process shall be issued or levied against a substantial part of the property, assets or business of Lessee, and such proceedings or petition shall not be dismissed or stayed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy, as the case may be; (h) a contribution failure occurs with respect to any Pension Plan (other than a Multiemployer Plan) sufficient to give rise to a lien under Section 302(f) of ERISA or Section 412(n) of the Code with respect to any Pension Plan (other than a Multiemployer Plan) as to which Lessee or any Related Person to Lessee may have any liability, there shall exist an unfunded current liability (as defined in 302(d) (8) of ERISA) with respect to any Pension Plan which unfunded current liability is material to the consolidated financial condition of Lessee and its consolidated subsidiaries taken as a whole, steps are undertaken to terminate any Pension Plan, any Reportable Event occurs with respect to a Pension Plan for which notice to the PBGC has not been waived, any action is taken with respect to a Pension Plan which could result in the requirement that Lessee or any Related Person to Lessee furnish a bond or other security to the PBGC or such Pension Plan, the occurrence of any event which could cause Lessee or any Related Person to Lessee to incur any material liability, fine or penalty with respect to any Pension Plan or any material increase in liability with respect to any Pension Plan, or the occurrence of any event that could result in any material increase in the liability (or contingent liability) of Lessee or any Related Person to Lessee with respect to post-retirement benefits under any Welfare Plan; 17 (i) any Operative Agreement or the security interest granted under this Lease shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of Lessee, or Lessee or any of its Subsidiaries shall, directly or indirectly, contest in any manner in a court of competent jurisdiction the effectiveness, validity, binding nature or enforceability thereof or the security interest securing Lessee's obligations under the Operative Agreements shall, in whole or in part, cease to be a perfected first priority security interest; (j) Lessee or any of its Subsidiaries shall fail to make any payment when due in respect of any indebtedness (including, without limitation, the indebtedness under the Prior Debt Agreements) or any guarantee, installment purchase agreement or similar contingent obligation, or as a result of an event of default, the maturity of an indebtedness (including, without limitation, the indebtedness under the Prior Debt Agreements) or contingent obligation has been accelerated prior to its express maturity, provided that the aggregate of all such defaulted payments and/or accelerations of principal exceeds $5,000,000 or more; (k) a judgment or judgments for the payment of money are entered by a court or courts of competent jurisdiction against Lessee or any of its Subsidiaries, and such judgment or judgments remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days, provided that the aggregate of all such judgments exceeds $5,000,000; and (1) Lessee or any of its "subsidiaries" (as defined in the Credit Agreement) shall default after the Expiration Date in the performance or observance of the covenants set forth in Sections 6.10, 6.11, 6.12, 6.13 or 6.14 of the Credit Agreement as these Sections are in effect on the Expiration Date, it being understood that, for purposes of this Section 8.1(1), the aforementioned covenants and the related definitions and ancillary provisions from the Credit Agreement shall be incorporated by reference herein for the benefit of the Lessors and Agent and shall be treated as having survived any termination of the Credit Agreement so long as any obligation of Lessee may be due and owing under any Operative Agreement. Section 8.2. Remedies. If any Event of Default has occurred and is continuing, Agent, on behalf of the Lessors as provided for in Article XII, may exercise in any order one or 18 more or all of the remedies set forth in this Section 8.2 (it being understood that no remedy herein conferred is intended to be exclusive of any other remedy or remedies, but each and every remedy shall be cumulative and shall be in addition to every other remedy given herein or now or hereafter existing at law or in equity or by statute, including without limitation any applicable Uniform Commercial Code). (a) Agent may proceed by appropriate court action or actions, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof. (b) Agent (with the consent of the Required Lessors) may by notice in writing to Lessee terminate this Lease, but Lessee shall remain liable as hereinafter provided; and Agent may do any one or more of the following, as instructed by the Required Lessors: (i) declare the Lease Balance, all unpaid Accrued Rent, all other amounts then due and payable by Lessee under this Lease and the other Operative Agreements and an amount equal to the Aggregate Make-Whole Premium to be immediately due and payable, and recover any other damages and expenses (including the costs and expenses described in Sections 7.1, 7.2 and 11.5 of the Participation Agreement) in addition thereto which Lessor shall have sustained by reason of such Event of Default, (ii) enforce the security interest given hereunder pursuant to the Uniform Commercial Code or any other law, (iii) enter upon the premises where any item of Equipment may be and either remove such Equipment (or any portion thereof), with any damage to the improvements upon which the Equipment may be attached to be borne by Lessee, or take possession of the Equipment and (iv) require Lessee to disassemble and return the Equipment as provided in Article IX hereof. (c) Agent may require Lessee immediately to purchase the Equipment for a purchase price equal to the sum of the Lease Balance, all unpaid Accrued Rent, an amount equal to the Aggregate Make-Whole Premium and all other amounts then due and payable under the Operative Agreements. (d) If an Event of Default set forth in Section 8.1(a) (a "Payment Default") shall have occurred, any Lessor may declare the Lease Balance immediately due and payable by giving written notice to Agent, Lessee and each other Lessor, whereupon the unpaid Lease Balance together with the Aggregate Make-Whole Premium, if any, and all unpaid Accrued Rent shall become immediately due and payable without further act or notice of any kind. If an Event of Default set forth in Sections 8.1(f) or 8.1(g) (an "Insolvency Default") shall have occurred, the unpaid Lease Balance 19 together with the Aggregate Make-Whole Premium, if any, and all unpaid Accrued Rent shall become immediately due and payable without further act or notice of any kind. If an Event of Default other than an Insolvency Default or a Payment Default shall have occurred and be continuing, the Agent, with the consent of the Required Lessors, may declare the Lease (and each Lease Supplement) to be terminated and all payments thereunder to be due and payable immediately by giving written notice to Agent, Lessee and each Lessor, whereupon the unpaid Lease Balance together with the Aggregate Make-Whole Premium, if any, and all unpaid Accrued Rent shall become immediately due and payable without further act or notice of any kind. Nothing contained in this Section 8.2 shall limit the application of Article XXVIII in accordance with its terms. Except for notices expressly otherwise provided for in the Operative Agreements, Lessee hereby waives presentment, demand, protest and notice of any kind including, without limitation, notices of default, notice of acceleration and notice of intent to accelerate. Section 8.3. Additional Remedies. In addition to the remedies set forth in Section 8.2, if any Event of Default shall occur, Agent shall, if instructed by the Required Lessors, sell the Collateral in one or more sales; provided, Lessors shall have no liability to Lessee if they fail to instruct Agent to conduct such a sale. Any Lessor or Agent may purchase all or any part of the Collateral at such sale. Lessee acknowledges that sales for cash or on credit to a wholesaler, retailer or user of such Collateral, at a public or private auction, are all commercially reasonable. Any notice required by law of intended disposition by Agent shall be deemed reasonable and properly given if given at least 10 days before such disposition. Section 8.4. Proceeds of Sale; Deficiency. All payments received and amounts held or realized by Agent at any time when an Event of Default shall have occurred and be continuing, as well as all payments or amounts then held or thereafter received by Agent, shall be distributed forthwith upon receipt by Agent in the following order of priority: first: so much of such payments or amounts as shall be required to pay the reasonable fees and compensation of Agent in connection with acting as Agent not previously paid by Lessee shall be distributed to Agent; second: so much of such payments or amounts as shall be required to reimburse first Agent and then any Lessor for any tax (except as excluded pursuant to Section 8.1 of the Participation Agreement), expense or other amount owed to 20 Agent (in its capacity as Agent) or any Lessor in connection with the collection or distribution of such payments or amounts to the extent not previously reimbursed by Lessee (including, without limitation, the expenses of any sale, taking or other proceeding, expenses in connection with realizing on any of the Collateral, reasonable attorneys' fees and expenses (including the allocated costs of internal counsel), court costs and any other reasonable expenditures incurred or reasonable expenditures or advances made by Agent (in its capacity as Agent) or any Lessor in the protection, exercise or enforcement of any right, power or remedy upon such Event of Default whether pursuant to Section 8.2 or otherwise) shall be so applied by Agent first to itself and then to Lessors; and in case the aggregate amount so to be paid to the Lessors in accordance herewith shall be insufficient to pay all such amounts as aforesaid, then ratably, without priority of one such Person over the other, in the proportion that the amount which would have been distributed to each such Person pursuant to this provision but for such insufficiency bears to the aggregate amount which would have been distributed to all Persons except for such insufficiency; third: (i) so much of such payments or amounts remaining as shall be required to reimburse the then existing or prior Lessors for payments or deposits pursuant to Article XII (to the extent not previously reimbursed and to the extent not constituting an indemnity paid or payable for an act constituting gross negligence or willful misconduct) shall be distributed to the then existing or prior Lessors, ratably, without priority of one over the other, in accordance with the amount of the payments or deposits made by each such then existing or prior Lessor pursuant to such Article XII; and (ii) so much of such payments or amounts remaining as shall be required to pay the then existing or prior Lessors the amounts payable to them pursuant to the provisions of Section 8.5 hereof or Section 11.5 of the Participation Agreement and the amounts of all other unpaid obligations then due and payable to them hereunder and under the Participation Agreement (other than obligations covered by clause fourth of this Section 8.4) shall be distributed to each Lessor (including its predecessor holders thereof) entitled thereto; and in case the aggregate amount so to be paid in accordance with clauses (i) and (ii) above shall be insufficient to pay all such amounts as aforesaid, then, ratably, without priority of one such Person over the other, in the proportion that the amount which would have been distributed to each such Person pursuant to this clause third but for such insufficiency bears to the aggregate amount which would have 21 been distributed to all such Persons pursuant to this clause third but for such insufficiency; fourth: so much of such payments or amounts remaining as shall be required to pay in full each Lessor's Lease Percentage of the aggregate unpaid Lease Balance, the Aggregate Make-Whole Premium, if any, and all accrued but unpaid Accrued Rent (including, to the extent permitted by applicable law, interest on interest) shall be distributed to the Lessors, and in case the aggregate amount to be so distributed shall be insufficient to pay the unpaid Lease Balance, the Aggregate Make-Whole Premium, if any, and all accrued but unpaid Accrued Rent in full all as aforesaid, then, ratably, without priority of one over the other, in the proportions that each Lessor's Lease Percentage of aggregate unpaid Lease Balance, the Aggregate Make-Whole Premium, if any, then due and payable and all accrued but unpaid Accrued Rent to the date of distribution bears to the aggregate unpaid Lease Balance, the Aggregate Make-Whole Premium, if any, due and payable and all accrued but unpaid Accrued Rent to the date of distribution under the Lease; and fifth: so much of such payments or amounts as shall remain shall be distributed to Lessee. Section 8.5. Right to Perform Lessee's Agreements. If Lessee fails to perform any of its agreements contained herein or in any other Operative Agreement, whether or not an Event of Default has occurred and is continuing, Agent, upon written instructions from the Required Lessors and receipt by Agent of indemnification satisfactory to it, may perform such agreement and the fees and expenses incurred by Agent (or one or more Lessors) in connection with such performance together with interest thereon shall be payable by Lessee upon demand. Interest on fees and expenses so incurred by Agent or one or more Lessors shall accrue at the rate provided in Section 3.2 for overdue payments. Article IX RETURN OF EQUIPMENT If Agent, upon the instruction of the Required Lessors, shall rightfully demand possession of the Equipment pursuant to this Lease, Lessee, at its expense, shall forthwith disassemble, package to facilitate reassembly and deliver exclusive possession of such Equipment to Agent at a location designated by Agent, together with a copy of an inventory list of the Equipment then subject to the Lease, all then current plans, specifications and 22 operating, maintenance and repair manuals relating to the Equipment that have been received or prepared by Lessee, appropriately protected and in the condition required by Section 5.3 hereof, to Agent. In addition, if this Lease has been terminated pursuant to Section 8.2, Lessee shall maintain the Equipment in the condition required by Section 5.3, store the Equipment without cost to the Agent or any Lessor and keep all of the Equipment insured in accordance with Article VII for 90 days after redelivery thereof. Article X EARLY TERMINATION If no Event of Default or event which with the giving of notice and/or passage of time could become an Event of Default shall exist, on any Payment Date after the first Renewal Term, Lessee may, at its option, by giving at least 30 days advance written notice to Agent and the Lessors, purchase all, but not less than all, of the Equipment for the sum of (i) all unpaid Accrued Rent due and payable on or prior to such Payment Date, (ii) the Lease Balance (after taking into account all payments actually made pursuant to clause (i)), (iii) an amount equal to the Aggregate Make-Whole Premium, and (iv) all other fees and expenses then due and payable pursuant to this Lease and the other Operative Agreements. Upon the payment of such sums by Lessee in accordance with the provisions of the preceding sentence, the obligation of Lessee to pay Rent hereunder shall cease, the term of this Lease shall end on the date of such payment and Agent shall execute and deliver to Lessee a bill of sale (without representations or warranties, except that the Equipment is free and clear of Lessor Liens) and such other documents as may be required to release the Equipment from the terms and scope of this Lease, in such form as may be reasonably requested by Lessee, all at Lessee's own cost and expense. Article XI LEASE TERMINATION Section 11.1. Lessee's Options. Not later than 270 days prior to the last day of the Initial Term, or of any Renewal Term then in effect hereunder (other than the fifth Renewal Term in the case of paragraph (a) below), Lessee shall by delivery of written notice to the Agent and Lessors, exercise either the Renewal Option, on the one hand, or the Lessee Purchase Option or the Sale Option, or a combination of both, on the other hand, all in accordance with the terms set forth below: 23 (a) Renew this Lease as to all of the Equipment for an additional one year Renewal Term (the "Renewal Option") on the terms and conditions set forth herein and in each Lease Supplement; (b) Purchase for cash all or one or more Functional Units then subject to this Lease on the last day of the Initial Term or Renewal Term with respect to which such option is exercised (the "Lessee Purchase Option"). If Lessee elects to exercise the Lessee Purchase Option with respect to all of the Functional Units then subject to this Lease, Lessee shall pay to Agent, for the benefit of the Lessors, the Purchase Option Exercise Amount, the Aggregate Make-Whole Premium (provided such premium shall not be due if such option is exercised at the end of the fifth Renewal Term) and any other amounts then due and payable by Lessee under the Lease or any other Operative Agreement. If Lessee elects to exercise the Lessee Purchase Option with respect to Functional Units comprising less than all of the Functional Units then subject to this Lease, (A) Lessee shall pay to Agent, for the benefit of the Lessors, together with all Rent then due and payable the sum of the following amounts: (i) the applicable Make-Whole Premium with respect to each Functional Unit subject to the Lessee Purchase Option (provided such premium shall not be due if such option is exercised at the end of the fifth Renewal Term), and (ii) with respect to each Functional Unit subject to the Lessee Purchase Option, the greater of (x) the Functional Unit Balance of such Functional Unit to be purchased or (y) the Appraised Value of such Functional Unit at the date of purchase, provided that in no event shall Lessee be required to pay to Agent an amount greater than the Lease Balance (after application of Proceeds pursuant to subsection (c) below) plus the applicable Make-Whole Premiums if due as provided for above and any other amounts then due and payable by Lessee under the Lease and (B) Lessee shall be deemed to have elected the Sale Option (defined below) with respect to all of the remaining Functional Units, providing, however that if after the Lessee's election of the Lessee Purchase Option the total Purchase Price of the remaining Functional Units represents less than 20% of the total Purchase Price of all Functional Units subject to the Lease immediately prior to the purchases contemplated by Sections 11.1(b) and 11.1(c), Lessee shall be treated as having made the Lessee Purchase Option with respect to all of the Functional Units; 24 (c) (1) Sell on behalf of Lessors on the Termination Date for cash, to a purchaser or purchasers not in any way affiliated with Lessee, the Functional Units not purchased by Lessee pursuant to the Lessee Purchase Option (the "Sale Option"); provided, however, that Lessee may exercise the Sale Option only with respect to Functional Units whose aggregate Purchase Price represents at least 20% of the total Purchase Price of all Functional Units then subject to the Lease. If Lessee elects the Sale Option with respect to Functional Units comprising less than all of the Functional Units then subject to this Lease, Lessee shall be deemed to have elected the Lessee Purchase Option with respect to all of the remaining Functional Units. (2) Simultaneously with dispositions pursuant to the Sale Option, Lessee shall pay to Agent, for the benefit of the Lessors, from the gross proceeds of such sales, without deductions or expense reimbursements (the "Proceeds"), the Lease Balance as of the Termination Date (as determined after any payment of Rent due on such date) plus the applicable Make-Whole Premiums (except that no Make-Whole Premiums shall be payable by Lessee on Functional Units sold pursuant to an exercise of the Sale Option with respect to the second, fourth or fifth Renewal Term) and any other amounts then due and payable under any of the Operative Agreements. If the Proceeds exceed the sum of the Lease Balance as of the Termination Date, plus applicable Make-Whole Premiums as of such date and any other payments then due and payable under any of the Operative Agreements, Lessee will retain the portion of the Proceeds in excess thereof. If the Proceeds are less than the sum of the Lease Balance as of the Termination Date plus applicable Make-Whole Premiums as of such date and any other payments then due and payable under any of the Operative Agreements, Lessee will pay or will cause to be paid to Agent, for the benefit of the Lessors, on the Termination Date (i) the Proceeds and (ii) from its own funds, the sum of any payments then due and payable under any of the Operative Agreements, including any installments of Rent then due and payable, applicable Make-Whole Premiums (except that no Make-Whole Premiums shall be payable by Lessee on Functional Units sold pursuant to an exercise of the Sale Option with respect to the second, fourth or fifth Renewal Term) plus, at the option of the Required Lessors, either (x) the Applicable Percentage Amount or (y) the Recourse Deficiency Amount (the amount determined pursuant to this clause (ii) shall be referred to as the "Sale Recourse Amount"); provided that in no event shall the Sale Recourse Amount exceed the Lease Balance and the applicable Make-Whole Premiums, if required above, after taking into account all payments of Rent and Proceeds. Agent, upon instruction of 25 the Required Lessors, shall exercise the option in the preceding sentence by written notification to Lessee not later than ten Business Days prior to the last day of the Lease Term. The obligation of Lessee to pay the Sale Recourse Amount shall be a recourse obligation of Lessee (and shall be in addition to any other recourse obligation of Lessee under any other provision of the Operative Agreements) and shall be payable on the date provided for in the preceding sentence. The Sale Recourse Amount and all Proceeds paid to Agent for the direct benefit of the Lessors shall be distributed in accordance with Article XXVIII. Section 11.2. Election of Options. Lessee's election of any of the foregoing options in Section 11.1 shall be irrevocable at the time made, but if Lessee fails to make a timely election, Lessee will be deemed, in the case of the Initial Term and each Renewal Term then in effect (other than the fifth Renewal Term) to have irrevocably elected the Renewal Option and, in the case of the fifth Renewal Term, Lessee will be deemed to have irrevocably elected the Lessee Purchase Option with respect to all of the Functional Units then subject to this Lease. In addition, if there exists an Event of Default at any time after the Sale Option is properly elected, the Sale Option shall automatically be revoked and Lessor shall be entitled to exercise all rights and remedies provided in Article VIII. Lessee may not elect the Sale Option if there exists on the date the election is made an Event of Default or an event which with the giving of notice and/or passage of time could become an Event of Default. Section 11.3. Sale Option Procedures. If Lessee elects the Sale Option, Lessee shall use its best commercial efforts to obtain the highest all cash purchase price for the Functional Units subject to the Sale Option. All costs related to such sale and delivery, including, without limitation, the cost of sales agents, removal of such Equipment, delivery of documents and Equipment, certification and testing of such Equipment in any location chosen by the buyer or prospective buyer, legal costs, costs of notices, any advertisement or other similar costs, or other information and of any parts, configurations, repairs or modifications desired by a buyer or prospective buyer shall be borne entirely by Lessee, without regard to whether such costs were incurred by Agent, the Lessors, Lessee or any potentially qualified buyer. Neither Agent nor Lessors shall have any responsibility for procuring any purchaser. If, nevertheless, any Lessor, or Agent, at the direction of the Required Lessors, undertakes any sales efforts, Lessee shall promptly reimburse Agent or such Lessor for any charges, costs or expenses incurred in such effort, including any allocated time charges, costs or expenses of internal counsel or other attorneys' fees. Equipment subject to the Sale Option shall be in the condition required by Section 5.3 hereof at the time of the sale. Agent, at the 26 direction of the Required Lessors, shall determine whether to accept the highest all cash offer for the Equipment subject to the Sale Option. Any purchaser or purchasers of the Equipment shall not in any way be affiliated with Lessee. Pending the consummation of the Sale Option, Lessee shall at all times maintain the Equipment in the condition required by Section 5.3, store the Equipment without cost to the Lessors and keep all of the Equipment insured in accordance with Article VII hereof. Section 11.4. Payment of Excess Amounts. Following the application of all amounts required pursuant to Section 11.2, if the Appraised Value of any Functional Unit sold pursuant to the Sale Option (without taking into account any removal costs) as of the Termination Date is in excess of the Proceeds attributable to any such Functional Unit, Lessee shall promptly pay to Agent, for the benefit of the Lessors, such excess. Section 11.5. Appraisals. If Lessee gives notice of exercise of the Sale Option with respect to one or more Functional Units, Agent (upon direction from any Lessor) shall engage an appraiser of nationally recognized standing reasonably acceptable to the Required Lessors, at Lessee's expense, to determine (by appraisal methods satisfactory to Lessors holding at least 66.67% of the Outstanding Investments in their sole and absolute discretion) the Fair Market Value of the Equipment subject to the Sale Option as of (a) the first day of any Renewal Term in which the Sale Option was elected, and (b) the Termination Date. The Appraised Value determined pursuant to this Section 11.5 shall be applied in accordance with the provisions of this Article XI. Article XII AGENT Section 12.1. Appointment of Agent; Powers and Authorization to Take Certain Actions. (a) Each Lessor irrevocably appoints and authorizes BA Leasing & Capital Corporation to act as agent hereunder, with such powers as are specifically delegated to Agent by the terms of this Lease, together with such other powers as are reasonably incidental thereto. Each Lessor authorizes and directs Agent to, and Agent agrees for the benefit of the Lessors, that, on each Delivery Date it will accept the documents described in Articles II and III of the Participation Agreement. Agent accepts the agency hereby created applicable to it and agrees to receive all payments and proceeds pursuant to this Lease and disburse such payments or proceeds in accordance with this Lease. Agent 27 shall have no duties or responsibilities except those expressly set forth in this Lease and the Participation Agreement. Agent shall not be responsible to any Lessor (or to any other Person) (i) for any recitals, statements, representations or warranties of any party contained in this Lease, the Participation Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Lease or the other Operative Agreements, other than the representations and warranties made by Agent in Section 5.3 of the Participation Agreement, or (ii) for the value, validity, effectiveness, genuineness, enforceability or sufficiency of the Collateral or the title thereto (subject to the Agent's obligations under Section 6.3 of the Participation Agreement) or of this Lease or any other document referred to or provided for herein or (iii) for any failure by Lessee, any Lessor or any other third party (other than Agent) to perform any of its obligations hereunder. Agent may employ agents, trustees or attorneys-in-fact, may vest any of them with any property, title, right or power deemed necessary for the purposes of such appointment and shall not be responsible for the negligence or misconduct of any of them selected by it with reasonable care. Neither Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder, or in connection herewith, except for its or their own gross negligence or willful misconduct. (b) Agent shall not have any duty or obligation to manage, control, use, operate, store, lease, sell, dispose of or otherwise deal with any item of Equipment or this Lease, or to otherwise take or refrain from taking any action under, or in connection with, this Lease or any related document to which Agent is a party, except as expressly provided by the terms hereof, and no implied duties of any kind shall be read into this Lease against Agent. The permissive right of Agent to take actions enumerated in this Lease shall never be construed as a duty, unless Agent is instructed or directed to exercise, perform or enforce one or more rights by the Required Lessors (provided that Agent has received indemnification reasonably satisfactory to it). Subject to Section 12.1(c) below, no provision of this Lease shall require Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its obligations hereunder, or in the exercise of any of its rights or powers hereunder. It is understood and agreed that the duties of Agent are ministerial in nature. (c) Except as specifically provided herein, Agent is acting hereunder solely as agent and, except as specifically 28 provided herein, is not responsible to any party hereto in its individual capacity, except with respect to any claim arising from Agent's gross negligence or willful misconduct or any breach of a representation or covenant made in its individual capacity. (d) Agent may accept deposits from, lend money to and otherwise deal with Lessee or any of its Affiliates with the same rights as it would have if it were not the named Agent hereunder. Section 12.2. Reliance. Agent may rely upon, and shall not be bound or obligated to make any investigation into the facts or matters stated in, any certificate, notice or other communication (including any communication by telephone, telecopy, telex, telegram or cable) reasonably believed by it to be genuine and correct and to have been made, signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by Agent with due care (including any expert selected by Agent to aid Agent in any calculations required in connection with its duties under this Lease). Section 12.3. Action Upon Instructions Generally. Subject to Sections 8.2(d), 12.4 and 12.6, upon written instructions of the Required Lessors, Agent shall, on behalf of the Lessors, give such notice or direction, exercise such right, remedy or power hereunder or in respect of any item of Equipment, and give such consent or enter into such amendment to any document to which it is a party as Agent as may be specified in such instructions. Agent shall deliver to each Lessor a copy of each notice, report and certificate received by Agent described in Article X and Sections 5.4, 5.5, 6.1, 6.2, 7.1, 7.2 and 11.1 hereof and Sections 6.1 and 6.2 of the Participation Agreement. Agent shall have no obligation to investigate or determine whether there has been an Event of Default or an event which with the passage of time and/or the giving of notice could result in an Event of Default. Agent shall not be deemed to have notice or knowledge of an Event of Default or event which with the passage of time and/or the giving of notice could result in an Event of Default unless a Responsible Officer of Agent is notified in writing of such Event of Default or event which with the passage of time and/or the giving of notice could result in an Event of Default, provided that Agent shall be deemed to have been notified in writing of any failure of Lessee to pay Rent in the amounts and at the times set forth in Article III. If Agent receives notice of an Event of Default, Agent shall give prompt notice thereof, at Lessee's expense, to each Lessor. Subject to Sections 8.2(d), 12.4 and 12.6 and Article XVII, Agent shall take action or refrain from taking action with respect to such Event of Default as directed by the Required Lessors; provided that, unless and 29 until Agent receives such directions, Agent shall refrain from taking any action with respect to such Event of Default. Prior to the date the Lease Balance shall have become due and payable by acceleration pursuant to Section 8.2, Required Lessors may deliver written instructions to the Agent to waive, and Agent shall waive pursuant thereto, any Event of Default and its consequences; provided that in the absence of written instructions from all Lessors, Agent shall not waive any (i) Payment Default or (ii) covenant or provision which, under Section 10.1 of the Participation Agreement, cannot be modified or amended without the consent of all Lessors. As to any matters not expressly provided for by this Lease, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Lessors and such instructions of the Required Lessors and any action taken or failure to act pursuant thereto shall be binding on each Lessor. Section 12.4. Indemnification. Each Lessor shall reimburse and hold Agent harmless, ratably in accordance with its Lease Percentage at the time the indemnification is required to be given, (but only to the extent that any such indemnified amounts have not in fact been paid to Agent by, or on behalf of, the Lessee in accordance with Section 7.1 of the Participation Agreement) from any and all claims, losses, damages, obligations, penalties, liabilities, demands, suits, judgments, or causes of action, and all legal proceedings, and any reasonable costs or expenses in connection therewith, including allocated charges, costs and expenses of internal counsel of Agent and all other reasonable attorneys' fees and expenses incurred by Agent, in any way relating to or arising in any manner out of (i) this Lease or any other Operative Agreement, the enforcement hereof or thereof or the consummation of the transactions contemplated hereby or thereby, or (ii) instructions from the Required Lessors (including, without limitation, the costs and expenses that Lessee is obligated to and does not pay hereunder, but excluding normal administrative costs and expenses incident to the performance by Agent of its agency duties hereunder other than materially increased administrative costs and expenses incurred as a result of an Event of Default), provided that no Lessor shall be liable for any of the foregoing to the extent they arise from (a) the gross negligence or willful misconduct of Agent, (b) the inaccuracy of any representation or warranty or breach of any covenant given by Agent in Section 5.3 or in Section 6.3 of the Participation Agreement or in this Lease, (c) in the case of the Agent's handling of funds, the failure to act with the same care as the Agent uses in handling its own funds or (d) any taxes, fees or other charges payable by the Agent based on or measured by any fees, commissions or compensation received by it for acting as Agent in connection with the transactions contemplated by the Operative Agreements. 30 Section 12.5. Independent Credit Investigation. Each Lessor by entering into this Lease agrees that it has, independently and without reliance on Agent or any other Lessor and based on such documents and information as it has deemed appropriate, made its own credit analysis of Lessee and its own decision to enter into this Lease and all related documents to which it is a party and that it will, independently and without reliance upon Agent or any other Lessor, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking action under this Lease and any related documents to which it is a party. Agent shall not be required to keep itself informed as to the performance or observance by Lessee of any other document referred to (directly or indirectly) or provided for herein or to inspect the properties or books of Lessee. Except for notices or statements which Agent is expressly required to give under this Lease and for notices, reports and other documents and information expressly required to be furnished to Agent alone (and not also to each Lessor, it being understood that Agent shall forward copies of same to each Lessor) hereunder or under any other Operative Agreement, Agent shall not have any duty or responsibility to provide any Lessor with copies of notices or with any credit or other information concerning the affairs, financial condition or business of Lessee (or any of its affiliates) that may come into the possession of Agent or any of its Affiliates. Section 12.6. Refusal to Act. Except for notices and actions expressly required of Agent hereunder and except for the performance of its covenants in Section 6.3 of the Participation Agreement, Agent shall in all cases be fully justified in failing or refusing to act unless (a) it is indemnified to its reasonable satisfaction by the Lessors against any and all liability and reasonable expense which may be incurred by it by reason of taking or continuing to take any such action (provided that such indemnity shall not be required to extend to liability or expense arising from Agent's gross negligence or willful misconduct, it being understood that no action taken, or not taken, by Agent in accordance with the instructions of the Required Lessors shall be deemed to constitute gross negligence or willful misconduct on its part) and (b) it is reasonably satisfied that such action is not contrary to this Lease or any other Operative Agreement or to any applicable law. Section 12.7. Resignation or Removal of Agent; Appointment of Successor. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving notice thereof to each Lessor or may be removed at any time by written notice from the Required Lessors. Upon any such resignation or removal, the Required Lessors at the time of the resignation or removal shall have the right to appoint a 31 successor Agent which shall be a financial institution having a combined capital and surplus of not less than $100,000,000. If, within 30 calendar days after the retiring Agent's giving of notice of resignation or receipt of a written notice of removal, a successor Agent is not so appointed and does not accept such appointment, then the retiring or removed Agent may appoint a successor Agent and transfer to such successor Agent all rights and obligations of the retiring Agent. Such successor Agent shall be a financial institution having combined capital and surplus of not less than $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent and the retiring or removed Agent shall be discharged from duties and obligations as Agent thereafter arising hereunder and under any related document. If the retiring Agent does not appoint a successor, any Lessor shall be entitled to apply to a court of competent jurisdiction for such appointment, and such court may thereupon appoint a successor to act until such time, if any, as a successor shall have been appointed as above provided. Section 12.8. Separate Agent. The Required Lessors may, and if they fail to do so at any time when they are so required, Agent may, for the purpose of meeting any legal requirements of any jurisdiction in which any item of Equipment or Collateral may be located, appoint one or more individuals or corporations either to act as co-agent jointly with Agent or to act as separate agent of all or any part of the items of Equipment or Collateral or this Lease, and vest in such individuals or corporations, in such capacity, such title to the items of Equipment or Collateral or this Lease or any part thereof, and such rights or duties as Agent may consider necessary or desirable. Agent shall not be required to qualify to do business in any jurisdiction where it is not now so qualified. Agent shall execute, acknowledge and deliver all such instruments as may be required by any such co-agent or separate agent more fully confirming such title, rights or duties to such co-agent or separate agent. Upon the acceptance in writing of such appointment by any such co-agent or separate agent, it or he shall be vested with such interest in the items of Equipment or Collateral and this Lease or any part thereof, and with such rights and duties, not inconsistent with the provisions of this Lease, as shall be specified in the instrument of appointment, jointly with Agent (except insofar as local law makes it necessary for any such co-agent or separate agent to act alone), subject to all terms of this Lease. Any co-agent or separate agent, to the fullest extent permitted by legal requirements of the relevant jurisdiction, at any time, by an instrument in writing, shall constitute Agent its attorney-in-fact and agent, with full power and authority to do all acts and things and to 32 exercise all discretion on its behalf and in its name. If any co-agent or separate agent shall die, become incapable of acting, resign or be removed, the interest in the items of Equipment or Collateral and this Lease and all rights and duties of such co-agent or separate agent shall, so far as permitted by law, vest in and be exercised by Agent, without the appointment of a successor to such co-agent or separate agent. Section 12.9. Termination of Agency. The agency created hereby shall terminate upon the final disposition by Agent of all Collateral at any time subject hereto and the final distribution by Agent of all monies or other property or proceeds received pursuant to this Lease in accordance with Article XXVIII, provided that at such time Lessee shall have complied fully with all the terms hereof. Section 12.10. Compensation of Agency. Lessee shall pay Agent its reasonable and customary fees, costs and expenses for the performance of Agent's obligations hereunder. Article XIII OWNERSHIP, GRANT OF SECURITY INTEREST AND FURTHER ASSURANCES Section 13.1. Grant of Security Interest. Title to the Equipment shall remain in the Agent, for the benefit of the Lessors, as security for the obligations of Lessee hereunder and under each of the other Operative Agreements to which it is a party until such time as Lessee has fulfilled all of its obligations hereunder and under such other Operative Agreements. Lessee hereby assigns, grants and pledges to Agent, for the benefit of the Lessors, a security interest in all of Lessee's right, title and interest, whether now or hereafter existing or acquired, in the Collateral, to secure the payment and performance of all obligations of Lessee now or hereafter existing under this Lease or any other Operative Agreement. Lessee shall, at its own cost and expense, do any further act and execute, acknowledge, deliver, file, register and/or record any further documents which Agent or any Lessor may reasonably request in order to protect its or their title to and perfected security interest in the Collateral, subject to no Liens other than Permitted Liens, and Agent's or Lessor's rights and benefits under this Lease. Lessee shall promptly and duly execute and deliver to Agent, for the benefit of the Lessors, such documents and assurances and take such further action as Agent or Lessors may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Lease and the other Operative Agreements, to establish and protect the rights and remedies created or intended to be created in favor of 33 Lessors and Agent hereunder and thereunder, and to establish, perfect and maintain the right, title and interest of Agent or Lessors in and to the Equipment, subject to no Lien other than Permitted Liens, or of such financing statements, fixture filings, certificates of title or other documents with respect hereto as Agent may from time to time reasonably request, and Lessee agrees to execute and deliver promptly such of the foregoing financing statements, fixture filings and certificates of title or other documents as may require execution by Lessee. To the extent permitted by applicable laws, Lessee hereby authorizes any such financing statements, fixture filings and certificates of title to be filed without the necessity of the signature of Lessee. Upon Lessee's request and at such time as all of the obligations of Lessee under this Lease and any other Operative Agreement have been indefeasibly paid or performed in full (other than Lessee's contingent obligations, if any, under Articles VII and VIII of the Participation Agreement), Agent shall, and Agent is hereby authorized by Lessors to act on their behalf to, execute and deliver termination statements and other appropriate documentation reasonably requested by Lessee, all at Lessee's own cost and expense, to evidence Agent's release of Agent's security interest in the Collateral. At such time, Agent shall execute and deliver to Lessee a bill of sale (without representations or warranties except that the Equipment is free and clear of Lessor Liens) for the Equipment. Notwithstanding the foregoing, such release shall not relieve Lessee of its continuing obligations under Articles VII, VIII, and XI of the Participation Agreement or any other provision of an Operative Agreement which survives the termination hereof. Section 13.2. Retention of Title or Proceeds in the Case of Default. If Lessee would be entitled to any amount (including any Casualty Proceeds or Partial Casualty Proceeds) or title to any item of Equipment hereunder but for the existence of any Event of Default or event which with the giving of notice and/or passage of time could become an Event of Default, Agent shall, on behalf of the Lessors, hold such amount or item of Equipment as part of the Collateral and shall be entitled to apply such amounts against any amounts due hereunder, provided that Agent shall distribute such amount or transfer such Equipment in accordance with the other terms of this Lease if and when no Event of Default or event which with the giving of notice and/or passage of time could become an Event of Default exists. Article XIV EFFECT OF WAIVER No delay or omission to exercise any right, power or remedy accruing to Lessors upon any breach or default of Lessee 34 hereunder shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein or of or in any similar breach or default thereafter occurring, nor shall any single or partial exercise of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of Lessors of any breach or default under this Lease must be specifically set forth in writing and must satisfy the requirements set forth in Article XVII with respect to approval by Lessors. Article XV SURVIVAL OF COVENANTS All claims pertaining to the representations, warranties and covenants of Lessee under Articles II, III, IV, V, VI, VII, X, XI, XXI and XXII shall survive the termination of this Lease to the extent such claims arose out of events occurring or conditions existing prior to any such termination. Article XVI APPLICABLE LAW THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF CALIFORNIA, WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF. Article XVII EFFECT AND MODIFICATION OF LEASE No variation, modification, amendment or waiver of this Lease, including any schedules or exhibits hereto, shall be valid unless the same shall be effected in accordance with Article X of the Participation Agreement. Article XVIII NOTICES All notices, demands, requests, consents, approvals and other instruments hereunder shall be in writing and shall be 35 deemed to have been properly given if given as provided for in Section 11.4 of the Participation Agreement. Article XIX COUNTERPARTS This Lease has been executed in several counterparts. One counterpart has been prominently marked "Counterpart No. 1 -- Agent's Original Copy." Only the counterpart marked "Counterpart No. 1--Agent's Original Copy" shall evidence a monetary obligation of Lessee or shall be deemed to be an original or to be chattel paper for purposes of the Uniform Commercial Code, and such copy shall be held by Agent, for the benefit of the Lessors. Article XX SEVERABILITY Whenever possible, each provision of this Lease shall be interpreted in such manner as to be effective and valid under applicable law; but if any provision of this Lease shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Lease. Article XXI SUCCESSORS AND ASSIGNS; MERGER Section 21.1. Successors and Assigns. This Lease shall be binding upon the parties hereto and, subject to Article XXII hereof, their respective successors and assigns, and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Section 21.2. Except as otherwise provided in Section 6.1(a) (ii) of the Participation Agreement, Lessee shall not consolidate with or merge with or into any other corporation or entity, or permit any other corporation or entity to consolidate with or merge with or into Lessee or any subsidiary of Lessee. 36 Article XXII ASSIGNMENTS Section 22.1. Assignment by Lessee. Lessee shall not sell, assign, transfer or otherwise dispose of its rights or delegate its obligations under this Lease to any other person, except as permitted or required by Section 5.2 or Section 6.1 of the Participation Agreement. Section 22.2. Lessor Transfers. No Lessor shall assign, convey or otherwise transfer (including pursuant to a participation) all or any portion of its right, title or interest in, to or under any of the Operative Agreements, any Collateral and its interest in the Equipment except that without the prior written consent of the Agent or the Lessee (x) any bank or similar financial or commercial lending institution may pledge its interest in the ordinary course of its business without the consent of the Lessee or the Agent; provided, that no transfer upon a foreclosure pursuant to such a pledge may occur unless this Section (other than clause (x)) is complied with, (y) any Lessor may transfer all or any portion of its interest to any other existing Lessor and (z) any Lessor may transfer any or all of such right, title and interest as provided in paragraph (a) or (b) below: (a) Transfers to Affiliates. Subject to the satisfaction of the conditions set forth in this Section 22.2, any Lessor may make any such assignment, conveyance or transfer to any Affiliate if such transferee's obligations under the Operative Agreements shall have been unconditionally guaranteed by such Lessor by an instrument in form and substance reasonably satisfactory to the Agent; provided that the term of such Lessor's guarantee shall not be required to extend past March 31, 1995. (b) Transfers to Non-Affiliates. Subject to the satisfaction of the conditions set forth in this Section 22.2, any Lessor may make any such assignment, conveyance or transfer to any entity which does not qualify as a transferee under the preceding paragraph (a) if (x) (i) such entity has a consolidated net worth of at least $100,000,000 as at the end of its most recent fiscal year, or (ii) such transferee entity's obligations under the Operative Agreements shall have been unconditionally guaranteed by the transferor by an instrument in form and substance reasonably satisfactory to the Lessee and the Agent or (iii) such transferee entity's obligations under the Operative Agreements are unconditionally guaranteed by an instrument in form and substance reasonably satisfactory to the Required Lessors) by an entity controlling such 37 transferee entity, if such entity would qualify as a transferee entity under clause (i) hereof and (y) the provisions of Section 22.2(d) through (i) below are satisfied with respect to such transfer. (c) Transfer with Consent. Any transfer to an entity other than one satisfying the requirements set forth in paragraph (a) or (b) of this Section 22.2 may only be made with the prior written consent of the Lessee and the Required Lessors, which consent shall not be unreasonably withheld or delayed. (d) Required Notice and Effective Date. Any Lessor desiring to effect a transfer of its interest hereunder shall give written notice of each such proposed transfer to the Lessee, the Agent and each other Lessor at least ten (10) days prior to such proposed transfer, setting forth the name of such proposed transferee, the percentage or interest to be retained by such Lessor, if any, and the date on which such transfer is proposed to become effective. All reasonable out-of-pocket costs incurred by the Agent in connection with any such disposition by a Lessor under this Section 22.2 shall be borne by such Lessor. In the event of a transfer under this Section 22.2, any expenses incurred by the transferee in connection with its review of the Operative Agreements and its investigation of the transactions contemplated thereby shall be borne by such transferee or the relevant Lessor, as they may determine, but shall not be considered costs and expenses which the Lessee is obligated to pay or reimburse under Section 11.5 of the Participation Agreement. (e) Assumption of Obligations. Any transferee pursuant to this Section 22.2 shall have executed and delivered to the Agent a letter in substantially the form of the Investors Letter attached hereto as Exhibit A, and thereupon the obligations of the transferring Lessor under the Operative Agreements shall be proportionately released and reduced to the extent of such transfer. Upon any such transfer as above provided, the transferee shall be deemed to be bound by all obligations (whether or not yet accrued) under, and to have become a party to, all Operative Agreements to which its transferor was a party, shall be deemed the pertinent "Lessor" for all purposes of the Operative Agreements and shall be deemed to have made that portion of the payments pursuant to the Participation Agreement previously made or deemed to have been made by the transferor represented by the interest being conveyed; and each reference herein and in the other Operative Agreements to the pertinent "Lessor" shall thereafter be deemed a reference to the transferee, to the extent of such transfer, 38 for all purposes. Upon any such transfer, the Agent shall deliver to each Lessor and the Lessee a new Schedule I to the Participation Agreement, revised to reflect the relevant information for such new Lessor and the Commitment of such new Lessor (and the revised Commitment of the transferor Lessor if it shall not have transferred its entire interest). (f) Employee Benefit Plans. No Lessor may make any such assignment, conveyance or transfer to or in connection with any arrangement or understanding in any way involving any employee benefit plan (or its related trust), as defined in Section 3(3) of ERISA, or with the assets of any such plan (or its related trust), as defined in Section 4975(e) (1) of the Code (other than a governmental plan, as defined in Section 3(32) of ERISA), with respect to which the Lessee or such Lessor or any of their Affiliates is a party in interest within the meaning of ERISA or a "disqualified person" within the meaning of the Code. (g) Limitation on Transfers. Notwithstanding paragraphs (a), (b) and (c) of this Section 22.2, any Lessor proposing to transfer its interest may not make any such assignment, conveyance or transfer at any time when there shall have occurred and be continuing any material default of such Lessor to the Lessee under the Participation Agreement. (h) Amount of Commitment. No Lessor may make any such assignment, conveyance or transfer if, as a consequence thereof, the transferor (if such Lessor retains any part of its Commitment) or transferee Lessor would have a Commitment (assuming for this purpose no funding by such Lessor) of less than U.S. $2,000,000. (i) Representations and Warranties. Notwithstanding anything to the contrary set forth above, no Lessor may assign, convey or transfer its interest to any Person, unless such Person shall have delivered to the Agent and the Lessee a certificate confirming the accuracy of the representations and warranties set forth in Section 5.2 of the Participation Agreement with respect to such Person (other than as such representation or warranty relates to the execution and delivery of Operative Agreements). 39 Article XXIII BROKERS Neither the Lessee nor any Lessor has engaged or authorized any broker, finder, investment banker or other third party to act on its behalf, directly or indirectly, as a broker, finder, investment banker, agent or any other like capacity in connection with this Lease or the transactions contemplated hereby, except that Lessee has retained BA Leasing & Capital Corporation as arranger in connection with the transactions contemplated hereby and Lessee shall be responsible for, and shall indemnify, defend, and hold Agent and each Lessor harmless from and against any and all claims, liabilities, or demands by BA Leasing & Capital Corporation, in its capacity as arranger in connection with the transactions contemplated hereby, for fees or other entitlements with respect to this Lease or the transactions contemplated hereby or by the Participation Agreement. Article XXIV JURY TRIAL LESSEE WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS LEASE OR ANY RELATED DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS LEASE OR ANY RELATED DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. Article XXV CAPTIONS; TABLE OF CONTENTS Section captions and the table of contents used in this Lease (including the schedules) are for convenience of reference only and shall not affect the construction of this Lease. Article XXVI FINAL AGREEMENT THIS LEASE, TOGETHER WITH THE OTHER OPERATIVE AGREEMENTS, REPRESENTS THE ENTIRE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THE LEASE AND THE OTHER OPERATIVE AGREEMENTS. THIS LEASE CANNOT BE MODIFIED, 40 SUPPLEMENTED, AMENDED, RESCINDED OR CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES, EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Article XXVII TIMELINESS OF PERFORMANCE The provisions of Articles VIII and XI pertaining to the delivery of notice and the performance of certain events on dates required by Articles VIII and XI are to be strictly adhered to by the parties hereto. Article XXVIII DISTRIBUTION AND APPLICATION OF RENTS AND OTHER PAYMENTS Section 28.1. Pro Rata Payment. Except as specifically provided for at Section 8.4 of this Lease or Section 4.5 of the Participation Agreement, all amounts of money received or realized by Agent pursuant to any Operative Agreement which are to be distributed to the Lessors (other than indemnification payments payable to any Lessor by Lessee under any Operative Agreement and after payment of accrued fees, expenses and indemnification payments payable to Agent in its capacity as Agent that have been due and unpaid for 30 days or more) shall be distributed to each Lessor pro rata, without preference or priority of any Lessor over another, in accordance with the amounts due each Lessor at the time of such payment in respect of the types of obligations described in the Section pursuant to which the distribution is being made; provided, however, that in the case where the aggregate amount to be so paid to the Lessors in accordance herewith shall be insufficient to pay such amounts due to Lessors on such distribution, then such amount shall be distributed ratably, without priority of one such Person over the other, in the proportion that the amount which would have been distributed to each such Person pursuant to this provision, but for such insufficiency, bears to the aggregate amount which would have been distributed to all Persons except for such insufficiency; and provided, further, with respect to Rent, that all amounts shall be applied first to the interest component thereof and then to the principal component. [remainder of page intentionally left blank] 41 IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent By_________________________________ By______________________________________ Name Printed:______________________ Name Printed:___________________________ Title:_____________________________ Title:__________________________________ By______________________________________ Name Printed:___________________________ Title:__________________________________ LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By_________________________________ By______________________________________ Name Printed:______________________ Name Printed:___________________________ Title:_____________________________ Title:__________________________________ By_________________________________ By______________________________________ Name Printed:______________________ Name Printed:___________________________ Title:_____________________________ Title:__________________________________ MANUFACTURERS BANK By_________________________________ Name Printed:______________________ Title:_____________________________ 42 SCHEDULE I TO LEASE Functional Unit Equipment Location Functional Unit Equipment Location Functional Unit Equipment Location Functional Unit Equipment Location EXHIBIT A TO LEASE FORM OF INVESTORS LETTER Rykoff-Sexton, Inc. [Address For Notice] BA Leasing & Capital Corporation, not individually, but solely as Agent [Address For Notice] Ladies and Gentlemen: Capitalized terms used in this letter and not otherwise defined herein shall have the meanings assigned thereto in that certain Participation Agreement (the "Participation Agreement"), dated as of April __, 1994, among Rykoff-Sexton, Inc., a Delaware corporation, as Lessee, Tone Brothers, Inc., an Iowa corporation, as Sublessee, certain institutions listed on Schedule I thereto, and BA Leasing & Capital Corporation, a California corporation, as Agent, unless the context otherwise requires. The undersigned has agreed to purchase the interest of ______________ as a Lessor under the Participation Agreement and the other Operative Agreements (as defined therein), representing a Commitment of (amount) Dollars $(_______) (the "Interest"), and desires that the Lessee execute and deliver to Agent and that Agent authenticate and deliver to the undersigned and to each Lessor a new Schedule I to the Participation Agreement evidencing the Commitment of the undersigned pursuant to Section 22.2 of the Lease. The undersigned hereby represents and warrants as of the date hereof to the addressees hereof as follows: (a) The undersigned will be acquiring the Interest with funds which constitute general account assets and not assets of any separate account in which any employee benefit plan has any interest or with assets allocated to an insurance company pooled separate account as defined in ERISA Section 3(17) maintained by a Lessor which satisfies the requirements of U.S. Department of Labor Prohibited Transaction Class Exemption 90-1 with respect to the transactions contemplated by the Lease in order for such transactions to be exempt from the prohibitions of Section 406 of ERISA and Section 4975 of the Code; (b) The Interest is being acquired by the undersigned for investment and not with a view to the resale or distribution of such Interest or any part thereof, but without prejudice, however, to the right of the undersigned at all times to sell or otherwise dispose of all or any part of such Interest under a registration available under the Securities Act of 1933, as amended, or under an exemption from such registration available under such Act, it being understood that the disposition by the undersigned of the Interest to be purchased by the undersigned shall, at all times, remain entirely within its control; (c) neither the undersigned nor any Person authorized to act on its behalf has directly or indirectly offered to sell any interests in the Collateral, the Interest or any security similar thereto, to, or otherwise approved or negotiated with respect thereto with, anyone other than the Lessors, and neither it nor any Person authorized to act on its behalf will so offer or sell in violation of Section 5 of the Securities Act of 1933, as amended, or securities or blue sky law of any applicable jurisdiction; and (d) the undersigned agrees to treat its Interest for federal, state and local income and franchise tax purposes as indebtedness of the Lessee. The undersigned understands that the Interest has not been and will not be registered or qualified under the Securities Act of 1933, as amended, or any securities or "blue sky" laws of any jurisdiction and that no participant has an obligation to effect such registration or otherwise assist in the disposition of the Interest. Very truly yours, ________________________________________ By:_____________________________________ Name Printed:___________________________ Title:__________________________________ 2 EXHIBIT B TO LEASE FORM OF LEASE SUPPLEMENT (Rykoff-Sexton, Inc. Lease) LEASE SUPPLEMENT (Rykoff-Sexton, Inc. Lease) dated ____________, 1994 (this "Lease Supplement") between RYKOFF-SEXTON, INC., a Delaware corporation (the "Lessee"), BA Leasing & Capital Corporation, Manufacturers Bank and Pitney Bowes Credit Corporation (the "Lessors") and BA LEASING & CAPITAL CORPORATION, not in its individual capacity, but solely in its capacity as Agent for the Lessors; W I T N E S S E T H: WHEREAS, the Lessee, the Lessors and the Agent have heretofore entered into that certain Lease Intended as Security dated as of April 29, 1994 (the "Lease"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings specified in the Lease; and WHEREAS, the Lease provides for the execution and delivery of a Lease Supplement on each Delivery Date substantially in the form hereof for the purpose of confirming the acceptance and lease of certain Equipment, specifying the Rent applicable to such Equipment and setting forth certain other matters, all as required pursuant to the Lease; NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Agent, the Lessors and the Lessee hereby agree as follows: 1. Inspection and Approval. The Lessee hereby acknowledges and confirms that it has inspected and approved the Equipment set forth on Schedule I hereto for all purposes of the Lease and the other Operative Documents and, as between the Lessors and the Lessee, such Equipment complies in all material respects with the specifications for such Equipment, is in good working order, repair, condition and appearance, and without defect therein with respect to design, manufacture, conditions, operation and fitness for use or in any other respect, whether or not discoverable by Lessee as of the date hereof. Lessee reaffirms, as to the Equipment set forth in Schedule I, each of the waivers, acknowledgments and agreements of Lessee set forth in Section 4.1 of the Lease. 2. Delivery and Acceptance. The Lessors hereby confirm delivery and lease to the Lessee, and the Lessee hereby confirms acceptance of delivery and lease from the Lessors, under the 1 Lease as hereby supplemented, of the Equipment listed on Schedule I hereto. 3. Functional Units. The Equipment set forth on Schedule I consists of one or more of the Functional Units set forth or referred to on Schedule Y to the Participation Agreement, provided that the Required Lessors may from time to time, in their reasonable discretion, direct the Agent to allocate such Equipment into different Functional Units so long as each Item of Equipment subject to the Lease is at all times part of a Functional Unit. 4. Warranty. The Lessee hereby represents and warrants that no event which would constitute a Casualty under the Lease has occurred with respect to the Equipment set forth on Schedule I hereto as of the date hereof. Lessee hereby reaffirms each of the representations and warranties set forth at Section 5.1 of the Participation Agreement as if made on the date hereof, including that the Equipment set forth on Schedule I hereto is free and clear of all Liens other than Permitted Liens. 5. Term, Interim Period, Interest Rate and Supplement Balance. The term of this Lease Supplement shall commence on the date hereof and end on the Termination Date. The Interim Period, the Interest Rate, the Applicable Percentage and the amount of Rent due on each Payment Date are set forth, respectively, in the appropriate portions of Schedule II hereto. Schedule III hereto sets forth the respective portion of each installment of Rent payable on each Payment Date to be paid to each Lessor. Schedule IV hereto sets forth the Functional Unit Balance of each Functional Unit as of each Payment Date. 6. Rent. (a) On the last day of the Interim Period, Lessee shall pay to Agent, for the benefit of the Lessors, the amount of the Interim Rent set forth at Schedule II. (b) On each Payment Date following the expiration of the Interim Period during the Initial Term and during each Renewal Term, Lessee shall pay to Agent, for the benefit of the Lessors, the amount of the Basic Rent and Renewal Rent as set forth at Schedule II hereto. 7. Confirmation. The Lessee hereby confirms its agreement, in accordance with the Lease as supplemented by this Lease Supplement, to pay Rent to the Agent, for the benefit of the Lessors, for each Functional Unit leased hereunder. Nothing herein shall reduce Lessee's obligation to make all other payments required under the Lease, including those payments to be -2- made on the last day of the Lease Term pursuant to Article XI of the Lease. 8. Incorporation into Lease. This Lease Supplement shall be construed in connection with and as part of the Lease, and all terms, conditions and covenants contained in the Lease, as supplemented by this Lease Supplement, shall be and remain in full force and effect and shall govern the Equipment described in Schedule I hereto. 9. References. Any and all notices, requests, certificates and other instruments executed and delivered concurrently with or after the execution and delivery of this Lease Supplement may refer to the "Lease Intended as Security, dated as of April 29, 1994", or may identify the Lease in any other respect without making specific reference to this Lease Supplement, but nevertheless all such references shall be deemed to include this Lease Supplement, unless the context shall otherwise require. 10. Counterparts. This Lease Supplement may be executed in any number of counterparts, each executed counterpart constituting an original but all together one and the same instrument. 11. Governing Law. This Lease Supplement shall be governed by and construed in accordance with the laws and decisions of the State of California without regard to principles of conflicts of laws. -3- IN WITNESS WHEREOF, the Agent, Lessors and the Lessee have caused this Lease Supplement to be duly executed and delivered on the day and year first above written. RYKOFF-SEXTON, INC., BA LEASING & CAPITAL CORPORATION, as Lessee not individually, but solely as Agent for the Lessors By_________________________________ By______________________________________ Name Printed:______________________ Name Printed:___________________________ Title:_____________________________ Title:__________________________________ By______________________________________ Name Printed:___________________________ Title:__________________________________ LESSORS: PITNEY BOWES CREDIT BA LEASING & CAPITAL CORPORATION CORPORATION By_________________________________ By______________________________________ Name Printed:______________________ Name Printed:___________________________ Title:_____________________________ Title:__________________________________ By_________________________________ By______________________________________ Name Printed:______________________ Name Printed:___________________________ Title:_____________________________ Title:__________________________________ MANUFACTURERS BANK By_________________________________ Name Printed:______________________ Title: ____________________________ SCHEDULE I Items of Equipment Purchased by Lessors and Subject to this Lease Supplement Purchase Price Functional Unit Functional Unit Functional Unit Functional Unit SCHEDULE II Delivery Date: ____________ Sum of Purchase Prices*: $____________ Interest Rate: ____________ "Applicable Percentage" shall mean, with respect to the end of the Initial Term and each Renewal Term, the percentage set forth below opposite each such date: Supplement End of Applicable Percentage Balance ------ --------------------- ---------- Initial Term _____% $_____________ First Renewal Term _____% $_____________ Second Renewal Term _____% $_____________ Third Renewal Term _____% $_____________ Fourth Renewal Term _____% $_____________ Fifth Renewal Term _____% $_____________ A. Interim Rent: $_____________ Interim Rent Payment Date: ____________** B. Basic and Renewal Rent: Payment Principal Interest Total Rent Date Component Component Installment ---- --------- --------- ----------- Totals: ====== ========= ========= =========== * Total of Purchase Prices set forth on Schedule I to Lease Supplement. ** This will be the last day of the Interim Period, i.e. the last day of the calendar quarter in which the Delivery Date occurs. SCHEDULE III Rent Total Payment Rent Date Payment BA Leasing Manufacturers Pitney ---- ------- ---------- ------------- ------ ________, 19__ $ $ $ $ ________, 19__ $ $ $ $ ________, 19__ $ $ $ $ SCHEDULE IV Functional Payment Functional Unit No. Date Unit Balance -------- ---- ------------ EXHIBIT B TO PARTICIPATION AGREEMENT FORM OF SUBLEASE B-1 FORM OF SUBLEASE SUBLEASE, dated as of April 29, 1994 between Rykoff-Sexton, Inc., a Delaware corporation ("Sublessor"), and Tone Brothers, Inc., an Iowa corporation ("Sublessee"). RECITALS (A) Sublessor is Lessee under that certain Lease Intended as Security, dated as of April 29, 1994 (as from time to time thereafter amended or supplemented, the "Lease") with the Lessors listed on the signature pages thereto and BA Leasing & Capital Corporation, not individually, but solely as agent for the benefit of the Lessors ("Agent"). Unless otherwise defined herein or the context hereof otherwise requires, terms which are defined or defined by reference in the Lease shall have the same meanings when used herein as such terms have therein, whether or not the Lease is then in effect. (B) Sublessor desires to lease to Sublessee, and Sublessee desires to lease from Sublessor, the items of equipment described on Schedule I hereto, as from time to time hereafter amended ("Sublease Items"). Accordingly, the parties hereto agree as follows: SECTION 1. LEASE. Sublessor leases to Sublessee and Sublessee leases from Sublessor the Sublease Items described on Schedule I hereto, as such description may from time to time be hereafter amended with the consent of Assignee (as hereinafter defined). SECTION 2. TERM. The term of this Sublease shall be concurrent with the term of the Lease and termination of the Lease (including, without limitation, termination pursuant to Article X thereof) shall constitute automatic termination of this Sublease. Termination of the Lease with respect to any but not all of the Sublease Items shall constitute automatic termination of this Sublease only with respect to the Sublease Items no longer subject to the Lease. If Sublessor elects to exercise the Lessee Purchase Option as provided in Section 11.1(b) of the Lease, Sublessor shall sell to Sublessee, and Sublessee shall purchase from Sublessor, the Sublease Items subject thereto for (i) the portion of the Purchase Option Exercise Amount, any applicable Make-Whole Premiums and any other amounts then due and payable attributable to such Sublease Items or, (ii) if less than all of the Equipment is subject to such Lessee Purchase Option, the aggregate of the amounts that are required to be paid by Sublessor to Agent under Section 11.1(b) (A) of the Lease attributable to such Sublease. Items. Such payment for such Sublease Items shall be made by Sublessee concurrently upon Sublessor's payment to the Agent pursuant to Section 11.1(b) (A) of the Lease. Upon payment by the Sublessee for Sublease Items, Sublessor shall execute and deliver to Sublessee a quitclaim bill of sale (without representations or warranties) for such Sublease Items. If Sublessor elects to exercise the Sale Option as provided in Section 11.1(c) of the Lease, Sublessee shall on the last day of the Lease Term permit a purchaser of any Sublease Item to take possession thereof. Sublessee shall pay to Sublessor an amount equal to the amount payable by Sublessor pursuant to Section 11.1(c) (2) (ii) of the Lease attributable to the Sublease Items. Such payment for the Sublease Items shall be made by Sublessee on the date that the Section 11.1(c) (2) (ii) amount is payable by Sublessor to Lessor under the Lease. If such purchaser cannot take possession of a Sublease Item on the last day of the Lease Term, the Sublessee shall store such Sublease Item for a reasonable period of time, but shall at all times comply with the last sentence of Section 11.3 of the Lease. SECTION 3. RENT. The rent and rental payment dates shall be as agreed from time to time by Sublessor and Sublessee; provided, however, that if Assignee is exercising its rights with respect to this Sublease or any Sublease Items, rent shall be payable quarterly on the Sublease Items on each April 30, July 30, October 30 and January 30 and shall be in an amount, with respect to each Sublease Item, equal to that portion of the rental under the Lease and applicable Lease Supplement attributable to such Sublease Item. SECTION 4. WARRANTIES. NEITHER SUBLESSOR NOR ANY ASSIGNEE MAKES ANY EXPRESS OR IMPLIED WARRANTY WHATSOEVER OF TITLE, MERCHANTABILITY, FITNESS FOR ANY PURPOSE OR OTHERWISE REGARDING ANY SUBLEASE ITEM OR ANY PART THEREOF. SECTION 5. LEASE. This Sublease is in all respects subject and subordinate to the Lease (and each Lease Supplement governing any Sublease Item) and the Liens created thereby. Without limiting the foregoing, if for any reason Assignee shall exercise rights or remedies thereunder, such exercise may include the termination hereof, notwithstanding, to the maximum extent permitted by law, any right of Sublessee hereunder. Sublessee shall in all respects comply with all of the terms and provisions of Article V of the Lease. SECTION 6. ASSIGNMENT; SUBLEASE. Sublessor shall have the right to assign, and has assigned to Agent concurrently with entering into this Sublease, all or any part of its right, title and interest in and to this Sublease and shall have the right to grant and has granted to Agent for the benefit of the Lessors a B-2 security interest in the Sublease Items to the Agent (in this capacity, "Assignee", which term shall also be deemed to refer to any successor or assign of Agent in such capacity) pursuant to the Lease. Such assignment and grant shall (i) be superior to Sublessee's rights hereunder; (ii) not relieve Sublessor of any of its obligations hereunder; and (iii) not be construed to be an assumption by Assignee of any obligations of Sublessor hereunder. Upon written request of Assignee, Sublessee shall make all payments of rent directly to Assignee, at such address as Assignee shall specify. Sublessee shall, upon request, execute and deliver such instruments and take such other action as may reasonably be requested to protect Sublessor's or Assignee's interests. This Sublease shall not be amended, modified or waived without the consent of Assignee. Sublessee acknowledges that this Sublease has been assigned, and a security interest in the Sublease Items has been granted, to Agent under the Lease. Sublessee shall not assign any right or interest in this Sublease. Except as expressly provided in this Section 6, any further assignment, sublease or transfer of the Sublease or of all or any portion of the Sublease Items is prohibited. SECTION 7. NOTICES. Notices shall be in writing and shall be deemed to be given when delivered personally, by facsimile (and confirmed, which confirmation may be mechanical) or otherwise actually received or five Business Days after being sent, first class mail postage prepaid, and addressed to Sublessor, Sublessee and Assignee at their respective addresses set forth on Schedule II hereto, or at such other address as any such party from time to time provides to the other parties in accordance with this Section 7. SECTION 8. MISCELLANEOUS. This Sublease shall be governed by the laws of the State of California, without regard to conflict of law principles. Only one counterpart of this Sublease shall be marked as the sole original execution copy hereof, and such counterpart shall be held by Assignee. Each of Sublessor and Sublessee waives any right to trial by jury in any action or proceeding with respect to this Sublease or any instrument, document or agreement now or hereafter relating to this Sublease. If any provision hereof shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Sublease. This Sublease shall be binding upon Sublessor and Sublessee and shall inure to the benefit of Sublessor, Sublessee, Assignee and the successors and assigns of Assignee. B-3 SECTION 9. SECURITY INTEREST. Sublessee hereby grants a security interest in the Sublease Items and proceeds thereof (the "Collateral") to Sublessor to secure Sublessee's obligations under this Sublease. Sublessee shall, at its own cost and expense, do any further act and execute, acknowledge, deliver, file, register and/or record any further documents which Sublessor (or Assignee) may reasonably request in order to protect its perfected security interest in the Collateral. IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of the date and year first above written. TONE BROTHERS, INC. RYKOFF-SEXTON, INC. By:________________________________ By:_____________________________________ Name: _____________________________ Name:___________________________________ Title:_____________________________ Title:__________________________________ B-4 SCHEDULE I SUBLEASE ITEMS B-5 SCHEDULE II ADDRESSES FOR NOTICE Sublessor: Rykoff-Sexton, Inc. 761 Terminal Street Los Angeles, CA 90021 Attn: Chief Financial Officer with a copy to: Maslon, Edelman, Borman & Brand 3300 Norwest Center Minneapolis, MN 55402-4140 Attention: Terri Krivosha, Esq. Sublessee: Tone Brothers, Inc. 2301 Southeast Tones Drive Ankeny, IA 50021-8888 Attn: President with a copy to: Maslon, Edelman, Borman & Brand 3300 Norwest Center Minneapolis, MN 55402-4140 Attention: Terri Krivosha, Esq. Agent/Assignee: BA Leasing & Capital Corporation Four Embarcadero Center, Suite 1200 San Francisco, California 94111 Attn: Contract Administration B-6 EXHIBIT C TO PARTICIPATION AGREEMENT FORM OF DELIVERY DATE NOTICE DELIVERY DATE NOTICE (Date) TO: BA Leasing & Capital Corporation, a California corporation, not individually, but solely as Agent (the "Agent"), under that certain Lease Intended as Security, dated as of April 29, 1994, among Rykoff-Sexton, Inc., a Delaware corporation (the "Lessee"), the Lessors named therein, and Agent as agent for the Lessors (all capitalized terms used herein and not otherwise defined shall have the meaning assigned to such term in the Lease, unless the context otherwise requires). FROM: Lessee REGARDING: Delivery Date Closing 1. A Delivery Date Closing is scheduled for [specify a date no earlier than 10 Business Days after receipt of notice] at the offices of Mayer, Brown & Platt, 350 South Grand Avenue, 25th Floor, Los Angeles, CA 90071, commencing at 9:00 a.m. [This Funding shall be the final Funding.] 2. The Functional Units to be acquired and accepted on such date are identified on Schedule I hereto, all of which Functional Units were previously identified on Schedule to the Participation Agreement. 3. The Purchase Agreements covering the Functional Units identified on Schedule I hereto are attached as Schedule II hereto. 4. The aggregate Purchase Price for the items of Equipment to be acquired is $__________, to be funded by each Lessor ratably in accordance with its Commitment. The Purchase Price for each Functional Unit is listed on Schedule I hereto. 5. The Purchase Price to be funded on the Delivery Date Closing plus the Purchase Price of items previously funded in connection with prior Delivery Date Closings is equal to or less than $22,500,000. C-1 6. The Functional Units identified on Schedule I hereto are [to be] located at the Site(s) described on Schedule III hereto. 7. Payment for the items of Equipment to be acquired shall be made by wire transfer to the following vendors: Name & Address of Wire Vendor Instructions Amount -------------- ------------ ------ 1. _______ 2. _______ 3. _______ Total ======= Such amounts being hereby certified as due and owing to such vendors in payment for such Equipment. [The $___________ balance of the Purchase Price shall be sent by wire transfer to the Lessee at the following account [Wire Instructions].] RYKOFF-SEXTON, INC. By:_____________________________________ Name Printed:___________________________ Title:__________________________________ C-2 Schedule I to Exhibit C Equipment List C-3 Schedule II to Exhibit C Copies of Purchase Agreements (ATTACHED) C-4 Schedule III to Exhibit C Site(s) C-5 EXHIBIT D TO PARTICIPATION AGREEMENT FORM OF LESSEE'S AND SUBLESSEE'S OPINION OF COUNSEL See opinion dated April __, 1994 addressed to Agent and the Lessors. D-1 EXHIBIT E TO PARTICIPATION AGREEMENT FORM OF BILL OF SALE BILL OF SALE [Name of Manufacturer or Lessee, as the case may be] ("Seller"), is the owner of the items (together with all repairs, parts, supplies, accessories, equipment and devices affixed thereto or installed thereon, and all warranties, covenants and representations of any manufacturer or vendor thereof, the "Items of Equipment") of personal property described on Schedule I hereto; Seller sells, grants, conveys, transfers and assigns title to the Items of Equipment to BA Leasing & Capital Corporation (the "Agent"), as agent for each of the persons listed below (the "Lessors"); and Seller warrants to the Agent, the Lessors and their respective successors and assigns that there is conveyed to the Agent, for the benefit of the Lessors, good title to the Items of Equipment, free and clear of all liens, security interests, claims, rights or encumbrances of others. THIS BILL OF SALE shall be governed by the laws of California without regard to conflict of law principles. IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be executed and delivered by one of its duly authorized officers this ____ day of __________, 199_. [NAME OF SELLER] By:________________________________ Name Printed:______________________ Title:_____________________________ LESSORS: ___________________________ ___________________________ ___________________________ ___________________________ E-1 Schedule I to Bill of Sale Equipment List E-2 EX-10.30 8 EXHIBIT 10.30 EXHIBIT 10.30 PORTIONS OF THIS EXHIBIT MARKED BY ASTERISKS (****) HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Confidential - -------------------------------------------------------------------------------- INFORMATION TECHNOLOGY SERVICES AGREEMENT Between U.S. FOODSERVICE And LOCKHEED MARTIN CORPORATION Dated: 5/7/99 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE 1 PURPOSE OF AGREEMENT 1 ARTICLE 2 DEFINITIONS AND CONSTRUCTION 1 Section 2.1 Definitions 1 Section 2.2 Headings 8 Section 2.3 Interpretation of Documents 8 ARTICLE 3 TERM 8 Section 3.1 Agreement 8 Section 3.2 Renewal 9 Section 3.3 Extension Period 9 ARTICLE 4 DESIGNATED SERVICES 9 Section 4.1 Designated Services 9 Section 4.2 Changes to the Designated Services 9 Section 4.3 Lockheed Martin Licenses and Permits 10 Section 4.4 New Releases and Versions of the Software 10 Section 4.5 Technology Developments 10 Section 4.6 Changes in Law and Regulations 10 Section 4.7 Manufacturers' Warranties 11 Section 4.8 Machines 11 Section 4.9 Changes to Designated Fees 11 Section 4.10 Documentation 11 ARTICLE 5 11
Page ---- ARTICLE 6 SERVICE LEVELS AND BENCHMARKING 11 Section 6.1 Service Levels 11 Section 6.2 Additional Services 12 Section 6.3 Reports 12 ARTICLE 7 SERVICE LOCATION; FACILITIES; EMPLOYEES; TRANSITION; EQUIPMENT; SUBCONTRACTORS 12 Section 7.1 Service Location 12 Section 7.2 Facilities 12 Section 7.3 Reserved 12 Section 7.4 Reserved 12 Section 7.5 Reserved 12 ARTICLE 8 ADDITIONAL SERVICES 13 Section 8.1 Additional Services 13 ARTICLE 9 PROJECT TEAM; MANAGEMENT; CHANGE CONTROL AND STRATEGIC PLANNING 13 Section 9.1 Lockheed Martin Project Executive 13 Section 9.2 Reassignment or Termination 13 Section 9.3 Key Employees 14 Section 9.4 Conduct of Lockheed Martin Personnel 14 Section 9.5 U.S. Foodservice Project Executive 14 Section 9.6 Management Committee 14 Section 9.7 Planning 15 Section 9.8 Change Control 15 Section 9.9 Meetings 16 Section 9.10 Reserved 16
Page ---- ARTICLE 10 PROPRIETARY RIGHTS 17 Section 10.1 U.S. Foodservice Proprietary Software. 17 Section 10.2 U.S. Foodservice Third Party Software 17 Section 10.3 U.S. Foodservice Customer Software 18 Section 10.4 Lockheed Martin Software 18 Section 10.5 Custom and Non-Custom Software 18 Section 10.6 Changes and Upgrades to Software 19 Section 10.7 Software Purchased by Lockheed Martin 19 Section 10.8 Infringement 19 Section 10.9 Documentation 19 Section 10.10 Cooperation Upon Divestiture 19 Section 10.11 Support/Source Code 20 ARTICLE 11 DATA RECORDS AND REPORTS 20 Section 11.1 U.S. Foodservice Data 20 Section 11.2 Correction of Errors 20 Section 11.3 Access to and Return of Data 20 Section 11.4 Reserved 21 ARTICLE 12 CONSENTS 21 ARTICLE 13 FORCE MAJEURE; DISASTER RECOVERY 21 Section 13.1 Force Majeure 21 Section 13.2 Allocation of Resources 22 Section 13.3 Disaster Recovery 22 ARTICLE 14 PAYMENTS 23 Section 14.1 Designated Fees 23 Section 14.2 **** 23
Page ---- Section 14.3 Additional Services Fees 23 Section 14.4 Expenses 23 Section 14.5 Proration 23 Section 14.6 Unused Credits 24 Section 14.7 Performance Credits 24 Section 14.8 Offsets 24 Section 14.9 Adjustment for Cost Savings From Technological Advancements 24 ARTICLE 15 PAYMENT SCHEDULE AND INVOICES 24 Section 15.1 Designated Fees 24 Section 15.2 Detailed Invoices 25 Section 15.3 Time of Payment 25 Section 15.4 Special Payments 25 Section 15.5 Late Payments 25 Section 15.6 Method of Payment 25 ARTICLE 16 TAXES 25 ARTICLE 17 AUDIT RIGHTS 26 Section 17.1 Fees 26 Section 17.2 Other Audits and Inspections 27 Section 17.3 Record Retention 27 Section 17.4 Overcharges/Undercharges 27 ARTICLE 18 CONFIDENTIALITY 28 Section 18.1 General Obligations 28 Section 18.2 U.S. Foodservice Confidential Information 28 Section 18.3 Legal Action 29 Section 18.4 Reserved 29
Page ---- Section 18.5 Disclosure Protection 29 ARTICLE 19 REPRESENTATIONS AND WARRANTIES; COVENANT 29 Section 19.1 U.S. Foodservice 29 Section 19.2 Lockheed Martin 30 Section 19.3 DISCLAIMER 31 Section 19.4 Non-Competition Covenant 31 ARTICLE 20 DISPUTE RESOLUTION 32 Section 20.1 Project Executives 32 Section 20.2 Management Committee 32 Section 20.3 Senior Management 32 Section 20.4 Arbitration 32 Section 20.5 Exceptions 34 Section 20.6 Continuity of Services 34 ARTICLE 21 TERMINATION 34 Section 21.1 Termination for Convenience 34 Section 21.2 Termination for Cause 34 Section 21.3 Termination Rights for Downtime 35 ARTICLE 22 TERMINATION FEE 35 ARTICLE 23 TERMINATION ASSISTANCE 35 ARTICLE 24 INDEMNITIES 36 Section 24.1 Indemnity by U.S. Foodservice 36 Section 24.2 Indemnity by Lockheed Martin 37 Section 24.3 Indemnification Procedures 38
Page ---- ARTICLE 25 DAMAGES 39 Section 25.1 Damages 39 Section 25.2 Consequential Damages 39 Section 25.3 Exclusions 39 ARTICLE 26 INSURANCE 39 Section 26.1 Insurance 39 Section 26.2 Insurance Documentation 40 ARTICLE 27 MISCELLANEOUS PROVISIONS 40 Section 27.1 Assignment 40 Section 27.2 Notices 41 Section 27.3 Relationship 42 Section 27.4 Consents, Approvals, Notices, and Requests 42 Section 27.5 Severability 42 Section 27.6 Waiver 42 Section 27.7 Publicity 42 Section 27.8 Entire Agreement; Counterparts 43 Section 27.9 Amendments 43 Section 27.10 Governing Law 43 Section 27.11 Jurisdiction 43 Section 27.12 Survival 43 Section 27.13 Third Party Beneficiaries 43 Section 27.14 Acknowledgment 43 Section 27.15 Covenant of Further Assurances 44 Section 27.16 Performance 44
EXHIBITS 1 Description of Services la Baseline Services lb Operating System and Utility Upgrade 1c Branch Conversion Program Support and Applications Upgrade 2 Reports 3 Service Levels and Performance Goals; Performance Credits; Critical Services 4 Key Employees; Designated Employees 5 Reserved 6 Termination Assistance 7 Hardware and Software Listing; Transferred Machines and Transferred Third Party Software; Retained Resources 8 Designated Fees 9 Termination Schedule 10 Reserved 11 Specifically Excluded Services 12 Reserved 13 Lease Agreements 14 Reserved 15 Reserved Information Technology Service Agreement This INFORMATION TECHNOLOGY SERVICES AGREEMENT, dated , -------------- 1999 (the "Agreement Date") is by and between U.S. FOODSERVICE, INC. ("U.S. Foodservice"), and LOCKHEED MARTIN CORPORATION ("Lockheed Martin"). WITNESSETH: ---------- WHEREAS, Lockheed Martin has provided certain systems operation, network management and other information technology services to U.S. Foodservice and its predecessor for more than five years pursuant to that certain Agreement for Services between the parties dated January 4, 1993; and WHEREAS, U.S. Foodservice and Lockheed Martin have engaged in negotiations and discussions that have culminated in the formation of a broader relationship described in this Agreement which contemplates the management and support of the baseline applications, new application development and network management, and additional services that include operating system upgrade services and branch conversion support services and other information technology services; and WHEREAS, Lockheed Martin, through its Integrated Business Solutions division ("IBS"), desires to provide to U.S. Foodservice, and U.S. Foodservice desires to obtain from IBS, the broader services described in this Agreement on the terms and conditions set forth in this Agreement. NOW, THEREFORE, for and in consideration of the agreements of the parties set forth below, U.S. Foodservice and Lockheed Martin agree as follows: ARTICLE 1 PURPOSE OF AGREEMENT The purpose of this agreement is to provide a new contract in support of expanded and extended services to U.S. Foodservice. Lockheed Martin is the current provider of data processing services for U.S. Foodservice and it is the intent of this contract to continue a mutually beneficial business relationship. ARTICLE 2 DEFINITIONS AND CONSTRUCTION Section 2.1 Definitions The following defined terms shall have the meanings specified below: (1) "Additional Fees" shall mean the fees described in the Additional Services Schedule. -1- (2) "Additional Services" shall mean those services requested by U.S. Foodservice of Lockheed Martin that are mutually agreed as being outside the scope of the Designated Services. (3) "Additional Service Levels" shall mean the levels of service to be provided by Lockheed Martin for an Additional Service that is specified in writing in the Additional Services Schedule. (4) "Additional Services Proposal" shall mean any proposal, submitted by Lockheed Martin for the performance of an Additional Service, containing a description of the scope and functionality of such Additional Service and an estimate, as may be applicable, of the computing, communications, human resources, capacity and schedule requirements necessary to develop and implement such Additional Service, as well as the proposed cost thereof. (5) "Additional Services Schedule" shall mean, in the event that U.S. Foodservice elects to have Lockheed Martin perform an Additional Service, the written amendment to this Agreement, executed by U.S. Foodservice and Lockheed Martin, in a form to be agreed on by the parties in respect of such Additional Service. (6) "Affiliate" shall mean any corporation, partnership, or other entity that is in or under the direct or indirect control of a party hereto or of another Affiliate of such party, or any successor to all or substantially all the business of a party hereto or of an Affiliate of such party, and, for this purpose, "control" shall exist whenever there is an ownership, profits, voting, or similar interest (including any right or option to obtain such an interest) representing at least fifty percent (50%) of the total interests of the pertinent entity then outstanding (treating as outstanding any interests obtainable by a party or the relevant Affiliate pursuant to the exercise of the aforementioned rights or options). "Affiliate" shall also mean any Affiliate of U.S. Foodservice designated in writing by U.S. Foodservice, from time to time, which U.S. Foodservice divests or for whatever other reason will no longer meet the definition of Affiliate. (7) "Agreement Date" shall have the meaning set forth in the preamble. (8) "Agreement" shall mean this Information Technology Services Agreement, dated as of the Effective Date, by and between U.S. Foodservice and Lockheed Martin, including the Exhibits attached hereto. (9) Reserved (10) "Backup Facility" shall have the meaning set forth in Section 13.3. (11) Reserved (12) "Benchmark" shall mean an objective point of performance comparison based on average industry practices or average industry standards of efficiency, quality, cost and/or other attributes of service. (13) Reserved (14) "Change(s)" shall mean all changes to the Systems and the Services that would alter the functionality or technical environment of the Systems. -2- (15) "Change Control Procedures" shall have the meaning set forth in Section 9.8. (16) "Confidential Information" of a party shall mean all confidential or proprietary information of such party, as well as any confidential or proprietary information of anyone else obtained or possessed by a party to this Agreement subject to confidentiality requirements. (17) "Consents" shall mean all consents, approvals, authorizations, notices, requests, and acknowledgments that are necessary to allow (1) Lockheed Martin to use U.S. Foodservice Software, U.S. Foodservice Machines, and the services under U.S. Foodservice's third party service contracts to provide the Services (as applicable), and (2) U.S. Foodservice to use the Lockheed Martin Software, and the Lockheed Martin Machines during the applicable Term and upon expiration or termination of this Agreement. (18) "Consequential Damages" shall mean any indirect, incidental, punitive, special, or consequential damages or amounts for loss of income, profits, or savings. (19) "Contract Year" shall mean each 12-month period commencing on the Effective Date or the anniversary of the Effective Date during the Term. (20) "Critical Services" shall mean those Services set forth in Exhibit 3 of this Agreement. (21) "Custom Software" shall mean (1) any modifications or enhancements to the U.S. Foodservice Software and (2) any software and related documentation developed by Lockheed Martin and Lockheed Martin Agents primarily to meet U.S. Foodservice's particular requirements or specifications. The Custom Software shall be identified as such and listed on Exhibit 7. (22) Reserved (23) "Designated Fees" shall have the meaning set forth in Section 14.1. (24) "Designated Services" shall be as set forth in Section 4.1. (25) "Disaster" shall mean any event or situation including, without limitation, a Force Majeure Event, which (a) causes one or more of the Critical Services to be unavailable at the Service Location or (b) is generally referred to as a disaster in the insurance or information technology services industries. (26) "Effective Date" shall mean December 1, 1998. (27) "Expiration Date" shall mean December 1, 2003. (28) "Fees" shall mean the Designated Fees, Incremental Fees, and Additional Fees, collectively payable by U.S. Foodservice to Lockheed Martin pursuant to this Agreement. -3- (29) "Force Majeure Event" shall mean any failure or delay caused by a party due to fire, flood, earthquake, elements of nature or acts of God, acts of war, terrorism, riots, civil disorders, rebellions or revolutions in the United States, or any other similar cause beyond the reasonable control of such party and without the fault or negligence of such party; provided that such failure or delay could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the nonperforming party through the use of alternate sources, workaround plans, or other means. Notwithstanding anything to the contrary, delays or failures in performance by Lockheed Martin which are caused by acts or omissions of third parties providing support or maintenance for Lockheed Martin Machines or Lockheed Martin Software shall not be considered a Force Majeure Event. (30) "Incremental Charges" shall mean the additional fees payable by U.S. Foodservice at the rates set forth in Exhibit 8 for increased use of the Designated Services, as further described in Exhibit 8. (31) Reserved (32) "Incremental Fees" shall mean the Incremental Charges and the Incremental Credits, collectively. (33) "Indemnifying Party" shall mean the party to whom the Indemnified Party shall give notice of a claim that is covered by Section 24.1 or Section 24.2. (34) "Indemnified Party" shall mean the party who seeks indemnification under this Agreement. (35) "Key Employee(s)" shall mean the Project Staff members who are (1) assigned to the key positions identified in Exhibit 4 of this Agreement and (2) identified, and agreed upon, by the U.S. Foodservice Project Executive and the Lockheed Martin Project Executive (or pursuant to the dispute resolution procedures set forth in Article 20) as important to a particular Project. (36) "Licensed Software" shall have the meaning set forth in Section 10.5. (37) Reserved (38) "Lockheed Martin" shall mean Lockheed Martin Corporation, a Maryland corporation, with a principal place of business in Orlando, Florida. (39) Reserved (40) "Lockheed Martin Machines" shall mean those machines and equipment (1) owned or leased by Lockheed Martin prior to the Effective Date which are used in connection with the Services and (2) which Lockheed Martin owns or leases on or after the Effective Date for use in connection with the Services, including the Transferred Machines. The Lockheed Martin Machines shall be identified as such and listed on Exhibit 7. -4- (41) "Lockheed Martin Project Executive" shall mean an individual who from the Agreement Date shall be in charge of Lockheed Martin's performance hereunder, and shall be the primary point of contact for U.S. Foodservice concerning each parties' obligations under this Agreement and the overall administration of the Agreement. (42) Reserved (43) "Lockheed Martin Proprietary Software" shall mean the software and related documentation (1) owned by Lockheed Martin prior to the Effective Date which is used in connection with the Services, (2) of which Lockheed Martin acquires ownership on or after the Effective Date which is used in connection with the Services, and (3) is developed by or on behalf of Lockheed Martin after the Effective Date for use in connection with the Services that is not U.S. Foodservice Software. The Lockheed Martin Proprietary Software shall be identified as such and listed on Exhibit 7. (44) "Lockheed Martin Software" shall mean the Lockheed Martin Proprietary Software and the Lockheed Martin Third Party Software, collectively. (45) "Lockheed Martin Third Party Software" shall mean all software and related documentation licensed or leased from a third party by Lockheed Martin (1) prior to the Effective Date which will be used in connection with the Services and (2) on or after the Effective Date for use in connection with the Services, including the Transferred Third Party Software. The Lockheed Martin Third Party Software shall be identified as such and listed on Exhibit 7. (46) "Losses" shall mean all losses, liabilities, damages (including direct and Consequential Damages) and claims (including taxes), and all related costs and expenses including any and all attorneys' fees and costs of investigation, litigation, settlement, judgment, interest and penalties). (47) "Machines" shall mean the U.S. Foodservice Machines and the Lockheed Martin Machines, collectively. (48) "Management Committee" shall have the meaning set forth in Section 9.6. (49) Reserved (50) "Non-Custom Software" shall have the meaning set forth in Section 10.5. (51) "Performance Credit(s)" shall mean, in the event of a failure to provide the Services in accordance with the Service Levels, the performance credits incurred by Lockheed Martin to be applied against the Designated Fees identified in and according to the schedule set forth in Exhibit 3. (52) "Performance Goals" shall have the meaning set forth in Section 9.7. (53) "U.S. Foodservice Agents" shall mean the advisors, consultants, vendors, subcontractors and agents of U.S. Foodservice, but excluding Lockheed Martin, its employees, and Lockheed Martin Agents. -5- (54) "U.S. Foodservice Confidential Information" shall mean all confidential or proprietary information of U.S. Foodservice's furnished to or obtained by U.S. Foodservice and/or Lockheed Martin, including U.S. Foodservice Customer Data, and all U.S. Foodservice Third Party Software and related documentation. (55) "U.S. Foodservice Customer Data" shall mean all data and information of U.S. Foodservice's customers furnished to or obtained by U.S. Foodservice and/or Lockheed Martin. (56) "U.S. Foodservice Customer Software " shall mean software, including software from third party vendors, provided to U.S. Foodservice whether through a lease, license or otherwise, by customers of U.S. Foodservice so that U.S. Foodservice can provide services to such customers. (57) "U.S. Foodservice Data" shall mean all data and information submitted to Lockheed Martin by U.S. Foodservice in connection with the Services, including data and information derived from that which is submitted to Lockheed Martin by U.S. Foodservice or U.S. Foodservice's customers. (58) "U.S. Foodservice Machines" shall mean those machines and equipment owned or leased by U.S. Foodservice on or after the Effective Date which are used in connection with the Services, including those machines and equipment set forth in Exhibit 7, excluding the Transferred Machines except as specifically contemplated by Section 10.4. (59) "U.S. Foodservice Proprietary Software" shall mean the Software owned by U.S. Foodservice other than Custom Software. The U.S. Foodservice Proprietary Software shall be identified as such and listed on Exhibit 7. (60) "U.S. Foodservice Project Executive" shall mean the individual who is appointed by U.S. Foodservice who will act as the primary point of contact for Lockheed Martin with respect to each party's obligations under this Agreement. (61) Reserved (62) "U.S. Foodservice Software" shall mean the U.S. Foodservice Proprietary Software, the U.S. Foodservice Third Party Software and the Custom Software, collectively. (63) "U.S. Foodservice Third Party Software" shall mean the Software licensed or leased by U.S. Foodservice from a third party that will be used in connection with the Services, excluding the Transferred Third Party Software (except as specifically contemplated by Section 10). Unless the context otherwise requires, "U.S. Foodservice Third Party Software" also includes Customer Software. The U.S. Foodservice Third Party Software shall be identified as such and listed on Exhibit 7. (64) "Procedures Manual" shall have the meaning set forth in Exhibit 1. (65) "Project Executives" shall mean the Lockheed Martin Project Executive and the U.S. Foodservice Project Executive, collectively. (66) Reserved -6- (67) "Project Staff" shall mean personnel who are required to work under this Agreement. (68) Reserved (69) "Retained Resources" shall mean the information technology assets retained by U.S. Foodservice that will be used in connection with the Services. The Retained Resources are identified as such and set forth on Exhibit 7. (70) "Retained Resources Agreements" shall mean the third party agreements in respect of the Retained Resources. (71) "Retained Resources Invoice(s) " shall mean each invoice or, when used in the plural, all invoices submitted to Lockheed Martin by third parties in connection with the Retained Resources. (72) "Services" shall mean the Designated Services and the Additional Services, collectively. (73) "Service Levels" shall mean Designated Service Levels and the Additional Service Levels, collectively as defined in Exhibit 3. (74) "Service Location" shall mean (1) the data center located in Beltsville, Maryland, until migration, the Mainframe will then be located in Orlando, Florida; (2) some work will be performed on the U.S. Foodservice site; and (3) any other locations agreed to in writing from time to time by U.S. Foodservice and Lockheed Martin in accordance with this Agreement. (75) "Software" shall mean U.S. Foodservice Software and Lockheed Martin Software, collectively. Unless the context otherwise requires, the term "Software," whether capitalized or not, includes all materials related thereto which may include, without limitation, documentation, flow charts, logic diagrams, source codes (provided, however, that the term "Software" only includes the source code if it is normally provided by the third-party vendor), object codes, and materials of any type whatsoever (tangible or intangible and machine or human readable), which incorporate or reflect the design, specifications, or workings of such software and any changes, additions or modifications provided through maintenance or enhancements. (78) "Systems" shall mean the Software and the Machines, collectively. (79) "Systems Software" shall mean all software used to provide the Services, including, but not limited to, the U.S. Foodservice Software and the Lockheed Martin Software. (80) "Term" shall have the meaning set forth in Section 3.1. (81) "Termination Assistance Services" shall mean the cooperation of Lockheed Martin with U.S. Foodservice in effecting the orderly transfer of the Services to U.S. Foodservice or to a third party, commencing no earlier than 6 months prior to the date of expiration or termination of this Agreement and continuing no longer than 12 months after the expiration or termination of this Agreement, during which Lockheed Martin shall provide Termination Assistance Services in accordance with this Agreement. -7- (82) "Third Party Services" shall have the meaning set forth in Section 10. (83) "Transferred Machines" shall mean the machines and equipment owned or leased by U.S. Foodservice that will be transferred to Lockheed Martin in accordance Section 10. (84) "Transferred Third Party Software" shall mean the Software licensed or leased by U.S. Foodservice from a third party that will be transferred to Lockheed Martin (or to which Lockheed Martin will be assigned the right to use for the benefit of U.S. Foodservice and/or its customers) in accordance with Section 10. (85) "Transition" shall have the meaning set forth in Section 7.4. (86) "Transition Acceptance Tests" shall have the meaning set forth in Section 7.4. (87) "Transition Plan" shall have the meaning set forth in Section 7.4. (88) "Year 2000 Compliant" shall when applied to a software product/hardware component requires that component to accurately process date/time data (including, but not limited to calculating, comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries and the years 1999 and 2000 and leap year calculations, to the extent that other software products/hardware components (to include the operating system and environment) used in combination with it are likewise Year 2000 ready and properly exchange date/time data with it. Section 2.2 Headings The article and section headings and the table of contents are for reference and convenience only and shall not be considered in the interpretation of this Agreement. Section 2.3 Interpretation of Documents In the event of a conflict between this Agreement, a modification, an amendment and the terms of any of the Exhibits, the terms of this Agreement shall prevail unless noted otherwise. ARTICLE 3 TERM Section 3.1 Agreement The term (the "Term") of this Agreement shall commence on the Effective Date and continue until the Expiration Date, unless this Agreement is otherwise extended or renewed pursuant to Section 3.2 or terminated earlier pursuant to Article 21. -8- Section 3.2 Renewal During the time period which is 6 months before the Expiration Date, Lockheed Martin shall provide U.S. Foodservice proposed terms and conditions, including the pricing, for the renewal of this Agreement. If U.S. Foodservice elects to renew this Agreement, the terms and conditions of such renewal, including the pricing, shall be agreed upon by the parties not less than 2 months before the Expiration Date. If U.S. Foodservice desires to renew this Agreement, but the parties are unable to agree upon renewal terms and conditions as of sixty (60) days prior to the Expiration Date then, subject to the provisions of Section 3.3, this Agreement will expire at Expiration Date. Section 3.3 Extension Period Notwithstanding the failure of the parties to reach an agreement upon renewal terms and conditions as contemplated by Section 3.2, U.S. Foodservice may extend the term of this Agreement for up to six consecutive one-month periods (the "Extension Period") upon written notice to Lockheed Martin prior to the Expiration Date. U.S. Foodservice will be liable for any annual software renewals required to extend them past the original expiration date. The charges for such Extension Period shall not exceed by more than **** percent (****%) the charges in effect at the end of the initial term. If the parties are unable to reach agreement on renewal during the Extension Period, this Agreement will expire at the end of the Extension Period. ARTICLE 4 DESIGNATED SERVICES Section 4.1 Designated Services Commencing as of the Effective Date and continuing throughout the Term or as otherwise defined in Exhibit 1, Lockheed Martin shall provide services (1) described in Exhibit 1 of this Agreement and (2) otherwise identified in this Agreement as being part of the Designated Services and shall provide the reports described in Exhibit 2. All such services and reports shall be provided in accordance with the Performance Standards set forth in Exhibit 3. Section 4.2 Changes to the Designated Services Except as may be necessary on an emergency basis to maintain the continuity of the Designated Services, Lockheed Martin shall not, without U.S. Foodservice's prior consent, modify the then-current (1) composition or nature of the Designated Services identified in Exhibit 1 or (2) manner in which the Designated Services are to be provided or delivered. -9- Section 4.3 Lockheed Martin Licenses and Permits As part of the Designated Services, Lockheed Martin is responsible for obtaining all necessary licenses, consents, approvals, permits, and authorizations required by applicable laws and regulations that are required to be obtained in order to perform the Services or to consummate the transactions contemplated by this Agreement. Lockheed Martin shall have financial responsibility for, and shall pay, all fees and taxes associated with obtaining such governmental licenses, authorizations and permits for services provided by Lockheed Martin. U.S. Foodservice shall reasonably cooperate with and assist Lockheed Martin in obtaining any such licenses, consents, approvals, permits, and authorizations. Section 4.4 New Releases and Versions of the Software As part of the Designated Services, Lockheed Martin shall keep U.S. Foodservice informed as to the Currentness of the Systems Software, including notifying U.S. Foodservice of new releases, versions, upgrades, enhancements and replacement software and will maintain vendor supported versions of all components of the Systems Software, unless otherwise instructed by U.S. Foodservice or otherwise agreed to by U.S. Foodservice and Lockheed Martin in accordance with Section 8.1 and 9.8. Section 4.5 Technology Developments Lockheed Martin shall use its best efforts to achieve a level of technology that is appropriate for the performance of the Services. In addition, Lockheed Martin will use due diligence to identify, evaluate and bring to U.S. Foodservice's attention new technologies that will enable U.S. Foodservice to maintain competitiveness in the markets served by U.S. Foodservice. Section 4.6 Changes in Law and Regulations Each party shall identify and notify the other party of changes in applicable laws and regulations and, as part of the Designated Services, Lockheed Martin shall identify the impact of such changes on its ability to perform and deliver the Services. Lockheed Martin, after consultation with U.S. Foodservice, shall promptly make any modifications to the Services as are reasonably necessary to perform and deliver the Services in accordance with the Service Levels as a result of such changes. Lockheed Martin shall be responsible for, and shall pay for, the cost of any such modification relating to Lockheed Martin's business. To the extent not included in the Designated Services, U.S. Foodservice shall pay for the cost of any such modification relating to U.S. Foodservice's businesses. All such modifications shall be effected through the Change Control Procedures. -10- Section 4.7 Manufacturers' Warranties If, and when appropriate, upon request of U.S. Foodservice, as part of the Designated Services, Lockheed Martin shall, without limitation of any of U.S. Foodservice's other rights or remedies, pass through to U.S. Foodservice whenever such pass through is permitted, the manufacturer's or Lockheed Martin's warranty (or other remedial options) on all Machines, Software, or any installation or maintenance services provided in connection with such Machines or Software, and, in the event of any claim, cooperate fully with U.S. Foodservice in asserting such claim against the warrantor. Section 4.8 Machines As part of the Designated Services, Lockheed Martin shall provide additional Machines and replace or upgrade the Machines, including such additional Machines, replacements, and upgrades to such Machines as may be necessary for Lockheed Martin to perform the Services in accordance with the Service Levels. Lockheed Martin shall ensure that the Machines have the capacity necessary to provide commercially competitive service with commercially competitive response times. Section 4.9 Changes to Designated Fees Any disagreement between the parties with respect to any adjustments to the Designated Fees contemplated herein shall be resolved in accordance with the dispute resolution procedures set forth in Article 20. Section 4.10 Documentation Lockheed Martin will provide, as reasonably requested by U.S. Foodservice, documentation for the Systems Software. Documentation will be priced as defined in Exhibit 8. ARTICLE 5 Reserved ARTICLE 6 SERVICE LEVELS AND BENCHMARKING Section 6.1 Service Levels Lockheed Martin shall provide the Designated Services at least at the Service Levels described in Exhibit 3. -11- Section 6.2 Additional Services Lockheed Martin shall strive to provide any Additional Services authorized by U.S. Foodservice at the Performance Goals and shall provide the Additional Services at the Additional Services Service Level, if any, set forth in the Additional Services Schedule. Section 6.3 Reports As part of the Designated Services, Lockheed Martin shall provide the reports specified on Exhibit 2 to U.S. Foodservice in a form mutually agreed upon by the parties. ARTICLE 7 SERVICE LOCATION; FACILITIES; EMPLOYEES; TRANSITION; EQUIPMENT; SUBCONTRACTORS Section 7.1 Service Location The Services shall be provided from the Service Location. Section 7.2 Facilities To enable Lockheed Martin to provide the Services, U.S. Foodservice agrees to provide ample facilities capable of supporting the on-site requirements dictated by the services offered in this contract. Section 7.3 Reserved Section 7.4 Reserved Section 7.5 Reserved -12- ARTICLE 8 ADDITIONAL SERVICES Section 8.1 Additional Services U.S. Foodservice may from time to time, but is not required to, request that Lockheed Martin perform Additional Services. Lockheed Martin shall notify U.S. Foodservice within the time period specified in U.S. Foodservice's request, or if no time period is specified, promptly after receipt of U.S. Foodservice's request, as to whether Lockheed Martin desires to perform such Additional Service. If Lockheed Martin desires to perform such Additional Service, Lockheed Martin shall promptly provide U.S. Foodservice with an Additional Services Proposal which, in any event, will include pricing that is ****. In the event U.S. Foodservice elects to have Lockheed Martin perform the Additional Service, U.S. Foodservice and Lockheed Martin shall execute an Additional Services Schedule. Lockheed Martin shall not begin performing any Additional Service until an Additional Services Schedule has been executed by both designated parties. Lockheed Martin shall not modify, without U.S. Foodservice consent, (a) the composition of the Additional Services or (b) the manner in which the Additional Services are provided or delivered, except as may be necessary on a temporary basis to maintain the continuity of the Services. U.S. Foodservice and Lockheed Martin shall perform their respective responsibilities as required in the applicable Additional Services Schedule in connection with any Additional Services. ARTICLE 9 PROJECT TEAM; MANAGEMENT; CHANGE CONTROL AND STRATEGIC PLANNING Section 9.1 Lockheed Martin Project Executive Lockheed Martin shall appoint a Lockheed Martin Project Executive. Lockheed Martin's appointment of any Lockheed Martin Project Executive shall be subject to U.S. Foodservice's consent. The Lockheed Martin Project Executive will always constitute a Key Employee for purposes of Section 9.3. Section 9.2 Reassignment or Termination If U.S. Foodservice reasonably and in good faith decides that any Lockheed Martin personnel (including Lockheed Martin Agents) should not continue in that position, U.S. Foodservice may then request reassignment of the Lockheed Martin personnel by giving Lockheed Martin notice of the request and the reasons therefor. To the extent that U.S. Foodservice's request relates to a good faith belief by U.S. Foodservice that the confidentiality provisions of this Agreement have been or may be violated, Lockheed Martin shall promptly remove the subject of the request from the Project Staff. -13- Section 9.3 Key Employees By the Agreement Date, Lockheed Martin shall deliver to U.S. Foodservice the initial list of the Key Employees (Exhibit 4). Except for a replacement or reassignment of a Key Employee due to a reassignment waiver executed by U.S. Foodservice, Lockheed Martin shall (1) not reassign or replace any Key Employee identified by the U.S. Foodservice Project Executive and the Lockheed Martin Project Executive (or pursuant to the dispute resolution procedures set forth in Article 20) as important to a particular project prior to the time that such project is completed to the reasonable satisfaction of U.S. Foodservice or (2) only replace or reassign a Key Employee after notice to and agreement by U.S. Foodservice, which agreement by U.S. Foodservice will not be unreasonably withheld. Section 9.4 Conduct of Lockheed Martin Personnel While at the Service Location, Lockheed Martin, its employees, and Lockheed Martin Agents shall (1) comply with reasonable requests, standard rules and regulations of U.S. Foodservice regarding personal and professional conduct generally applicable to any such U.S. Foodservice service location and (2) otherwise conduct themselves in a businesslike manner. In the event U.S. Foodservice determines in good faith that a particular employee, or Lockheed Martin Agent is not conducting himself or herself in accordance with this Section 9.4, U.S. Foodservice may provide Lockheed Martin with notice and documentation, in respect of such conduct. Upon receipt of such notice, Lockheed Martin shall promptly (1) investigate the matter and take appropriate action that may include (a)(i) removing him or her from the Project Staff, (ii) providing U.S. Foodservice with prompt notice of such removal, and (iii) replacing him or her with a similarly qualified individual; or (b) take other appropriate action to prevent a reoccurrence. In the event there are repeated violations of this Section 9.4 by a particular employee, or Lockheed Martin Agent, Lockheed Martin shall promptly remove him or her from the Project Staff. Section 9.5 U.S. Foodservice Project Executive U.S. Foodservice shall appoint a U.S. Foodservice Project Executive. U.S. Foodservice shall have the ability, in its sole discretion, to change from time to time the individuals who serve in such capacities so long as Lockheed Martin is informed within two business days of the change. Section 9.6 Management Committee Within 30 days of the Effective Date, U.S. Foodservice and Lockheed Martin shall each appoint at least one representative, in addition to the Lockheed Project Executive, U.S. Foodservice Project Executive to serve on a management committee (the "Management Committee"). The titles and experience of the Lockheed Martin representatives on the Management Committee shall be reasonably acceptable to U.S. Foodservice. U.S. Foodservice shall designate one of its representatives on the Management Committee to act as the chairperson of the Management Committee. The Management Committee shall be authorized and responsible for (1) advising with respect to U.S. Foodservice's strategic and tactical decisions with respect to the establishment, budgeting and implementation of U.S. Foodservice priorities and plans for information technology and (2) monitoring and resolving disagreements regarding the provision of the Services and the Service -14- Levels. Except as provided in Article 20, the Management Committee shall meet no less frequently than quarterly and more frequently as requested by either party. Any or all of U.S. Foodservice's members of the Management Committee may from time to time designate someone else to attend any such meeting on their behalf. The Management Committee shall have no authority to modify the Agreement without independent action by a duly authorized representative of each party. Section 9.7 Planning At least once each Contract Year, the Management Committee will review the agreed upon Service Levels and focus on, if applicable, U.S. Foodservice's reasonable business requirements, including its desire for any increase in the Service Levels and related capacity requirements, for the subsequent year, and any Lockheed Martin recommendations in accordance with Sections 8.1 and 9.8. If such review indicates (1) that the Service Levels need to be adjusted to meet such business requirements, and Lockheed Martin determines in its reasonable business judgment that, in order to meet such adjusted service levels, additional hardware, Software, data/telecommunications services or other items are needed (either as additions to, or replacements of, certain items within U.S. Foodservice's then existing information technology environment), or (2) that technology refreshes in the form of upgrades or otherwise in hardware, Software or other items would be appropriate or desirable, then U.S. Foodservice will determine whether it desires such additional items to be acquired. To the extent that such additional items are so acquired, the parties will mutually determine and agree on appropriate adjustments to the applicable Service Levels. In addition, if and to the extent that Lockheed Martin can demonstrate to the reasonable satisfaction of U.S. Foodservice that the then current Service Levels will, within a period of time reasonably estimated by Lockheed Martin, no longer be achievable due to the fact that certain hardware, Software or other items material to the operation of U.S. Foodservice's then existing information technology environment are (1) obsolete, (2) worn out, (3) incompatible with any upgraded technology in use at U.S. Foodservice, (4) no longer commercially supported by the applicable vendor, or (5) not reasonably sufficient to support U.S. Foodservice's increased business requirements, then U.S. Foodservice will determine whether it desires for such items to be replaced. As part of this planning process, U.S. Foodservice and Lockheed Martin shall consider and establish, if desired, Performance Goals ("Performance Goals") for Lockheed Martin. These Performance Goals are intended to capitalize on Lockheed Martin know-how and expertise, changes in technology, synergies and other similar factors to maximize the quality and value of the Services delivered hereunder. These Performance Goals may, but are not required to, provide for the sharing of benefits or other incentives for Lockheed Martin in the event such Performance Goals are met. The parties shall work together in good faith to establish any such Performance Goals. Section 9.8 Change Control All Changes shall be controlled using a formal change control process to be implemented by U.S. Foodservice and Lockheed Martin (the "Change Control Procedures"). As part of the Designated Services, Lockheed Martin shall deliver to U.S. Foodservice, for its review and approval, the Change Control Procedures to be set forth in the Procedures Manual. All Changes shall be made pursuant to the Change Control Procedures. The Change Control Procedures shall provide, at a minimum that: (1) No change shall be implemented without U.S. Foodservice's prior approval except as may be necessary on a temporary basis to maintain the continuity of the Services. -15- (2) With respect to all Changes to the Software, Machines or Services, other than those made on a temporary basis to maintain the continuity of the Services, Lockheed Martin shall (a) schedule all projects and Changes so as not to interrupt U.S. Foodservice's business operations, (b) prepare and deliver to U.S. Foodservice each month a rolling schedule for ongoing and planned Changes for the next three-month period, and (c) monitor the status of Changes against the applicable schedule. (3) With respect to any Change to the Software, Machines or Services, made on a temporary basis to maintain the continuity of the Services, Lockheed Martin shall document and provide to U.S. Foodservice notification (which may be given orally provided that any oral notice must be confirmed in writing to U.S. Foodservice within three business days) of the Change no later than the next business day after the Change is made. (4) In the event of a conflict between the Change Control Procedures and the provisions of Article 20, the provisions of Article 20 shall prevail. (5) Whenever a Change is proposed, the party proposing the Change shall notify the other party in writing of its desire to implement the Change and shall provide available information with respect to the specifications for the Change, technical and cost justification for the Change, and desired implementation date. Upon receipt of such notice, U.S. Foodservice and Lockheed Martin shall assess the impact and desirability of the proposed Change, including as appropriate, an equitable adjustment to the Designated Fees. Lockheed Martin shall update the Change Control Procedures as and when appropriate, or upon the reasonable request of U.S. Foodservice, and shall duly consider for incorporation therein any reasonable comments or suggestions made by U.S. Foodservice. Lockheed Martin and U.S. Foodservice shall develop and follow interim change control procedures substantially similar to those followed by U.S. Foodservice as of the Effective Date until such time as Lockheed Martin delivers the Change Control Procedures pursuant to this Section 9.8. Section 9.9 Meetings The parties will mutually determine an appropriate set of periodic meetings to be held between representatives of U.S. Foodservice and Lockheed Martin. At U.S. Foodservice's request, Lockheed Martin representatives will physically attend such meetings. As appropriate, the notice pertaining to any meeting will generally state the topics to be discussed at such meeting. Section 9.10 Reserved -16- ARTICLE 10 PROPRIETARY RIGHTS Section 10.1 U.S. Foodservice Proprietary Software. U.S. Foodservice warrants that it has the right to provide, at no cost to Lockheed Martin, and hereby grants to Lockheed Martin for the limited purpose of providing the Services, a nonexclusive, nontransferable, royalty-free license to the U.S. Foodservice Proprietary Software in order for Lockheed Martin to (1) have access to and to use, the U.S. Foodservice Proprietary Software called for in this agreement, (2) copy for archival purposes or as may otherwise be required by this Agreement, and (3) modify as required solely for the purposes of fulfilling Lockheed Martin's obligations as set forth in this Agreement; provided, however, Lockheed Martin may not modify, decompile, disassemble or otherwise reverse engineer the U.S. Foodservice Proprietary Software in any manner, without U.S. Foodservice's prior consent. As of the Effective Date, U.S. Foodservice shall, at no cost to Lockheed Martin, provide Lockheed Martin with a list and copies of all U.S. Foodservice Proprietary Software then currently in use by U.S. Foodservice. Upon termination of this Agreement for any reason, the rights granted to Lockheed Martin in this Article 10 shall revert to U.S. Foodservice consistent with the provisions of Exhibit 6 of this Agreement and Lockheed Martin shall, at no cost to U.S. Foodservice, (1) deliver to U.S. Foodservice a current copy of (a) the list of U.S. Foodservice Proprietary Software in use as of the date of such termination of this Agreement and (b) all of the U.S. Foodservice Proprietary Software in Lockheed Martin's possession on the Termination Date of this Agreement and (2) destroy or erase all other copies of the U.S. Foodservice Proprietary Software in the possession of Lockheed Martin unless otherwise instructed in writing by U.S. Foodservice. Section 10.2 U.S. Foodservice Third Party Software Except for the U.S. Foodservice Customer Software, which is addressed in Article 10, U.S. Foodservice shall use all commercially reasonable efforts so that as of the Effective Date, Lockheed Martin shall have for the limited purpose of providing the Services, a nonexclusive, nontransferable, royalty-free license to the U.S. Foodservice Third Party Software in order for Lockheed Martin to (1) have access to and to use, software of the type(s) called for in this Agreement, (2) copy for archival purposes or as may otherwise be required by this Agreement, and (3) modify as required solely for the purposes of fulfilling Lockheed Martin's obligations as set forth in this Agreement, provided, however, Lockheed Martin may not modify, decompile, disassemble or otherwise reverse engineer the U.S. Foodservice Third Party Software in any manner, without U.S. Foodservice's prior consent. As of the Effective Date, U.S. Foodservice shall, at no cost to Lockheed Martin, provide Lockheed Martin with a list and copies of all U.S. Foodservice Third Party Software then currently in use by U.S. Foodservice. Upon termination of this Agreement for any reason, the rights granted to Lockheed Martin in this Article 10 shall revert to U.S. Foodservice consistent with the provisions of Exhibit 6, of this Agreement and Lockheed Martin shall, at no cost to U.S. Foodservice, (1) deliver to U.S. Foodservice a current copy of (a) the list of U.S. Foodservice Third Party Software in use as of the date of such termination of this Agreement and (b) all of the U.S. Foodservice Third Party Software in Lockheed Martin's possession on the Termination Date of this Agreement and (2) destroy or erase all other copies of the U.S. Foodservice Third Party Software in the possession of Lockheed Martin unless otherwise instructed in writing by U.S. Foodservice. -17- Section 10.3 U.S. Foodservice Customer Software U.S. Foodservice shall use all commercially reasonable efforts so that as of the Effective Date, Lockheed Martin shall be able to use the U.S. Foodservice Customer Software to the extent necessary to perform the Services. Section 10.4 Lockheed Martin Software Except as otherwise provided in this Agreement, all software and related documentation listed in Exhibit 7 that are developed, licensed, or otherwise acquired by or for Lockheed Martin in connection with the Services provided hereunder to U.S. Foodservice on or after the Effective Date and during the term of this Agreement shall be and shall remain the exclusive property of Lockheed Martin, and U.S. Foodservice shall have no rights or interests in the Lockheed Martin Software except as provided herein and in Exhibit 6 of this Agreement. Except for the Transferred Third Party Software, Lockheed Martin warrants that it has the right to utilize the Lockheed Martin Software to perform the Services as contemplated by this Agreement. Section 10.5 Custom and Non-Custom Software With respect to Custom Software, such Custom Software shall be regarded as work-made-for-hire and any such material shall, upon creation, be owned and funded exclusively by U.S. Foodservice. To the extent that any such material, under applicable law, may not be considered works made for hire, Lockheed Martin (1) hereby assigns and transfers to U.S. Foodservice the ownership of all rights, title and interests in such works and materials (including copyrights, whether published or unpublished, and patents thereto); (2) waives any rights or claims to such materials and works, including without limitation any rights or claims to moral rights or rights of paternity and integrity thereto; and (3) will execute all documents which U.S. Foodservice may require to secure and/or confirm U.S. Foodservice's rights, titles and interests hereunder. U.S. Foodservice hereby grants Lockheed Martin during the term a non- exclusive, non-transferable right to use, copy, perform, modify, amend, and update the Custom Software, and to produce derivative works therefrom, in accordance with this Agreement for the benefit of U.S. Foodservice. As part of the Designated Services, Lockheed Martin shall deliver to U.S. Foodservice, upon U.S. Foodservice's request, a copy of the Custom Software (including related source code). Upon the expiration of this Agreement or the termination of this Agreement for any reason, the rights granted to Lockheed Martin in this Section 10.6 shall immediately revert to U.S. Foodservice and Lockheed Martin shall (1) deliver to U.S. Foodservice, at no cost to U.S. Foodservice, a current copy of all such Custom Software in the form in use as of the date of such expiration or termination and (2) erase or destroy all other copies of the Custom Software in Lockheed Martin's possession. With respect to software that is not developed primarily to meet U.S. Foodservice's particular requirements or specifications ("Non-custom Software"), such Non-custom Software shall not be regarded as work- made-for-hire, and no copyright shall be transferred to U.S. Foodservice other than a license to use the Non-custom Software, in accordance with this Section 10.5. -18- Section 10.6 Changes and Upgrades to Software Except as may be approved in advance by U.S. Foodservice, Lockheed Martin may not make any changes or modifications to the U.S. Foodservice Software. Except as may be approved by U.S. Foodservice, any changes or modifications to the Lockheed Martin Software made by Lockheed Martin pursuant to this Agreement shall not have an adverse impact on the functionality or performance of the Systems except as may be necessary on an emergency basis to maintain the continuity of the Services. Lockheed Martin shall be responsible, at no cost to U.S. Foodservice, for any modification or enhancement to, or substitution for, the Software used in connection with the Services necessitated by (1) unauthorized changes by Lockheed Martin to the U.S. Foodservice Software or (2) changes to the Systems Software or related operating environments. Section 10.7 Software Purchased by Lockheed Martin Lockheed Martin may purchase software from time to time under this Agreement for use in providing the Designated Services. As part of the Designated Services, Lockheed Martin shall make available to U.S. Foodservice such software for use by U.S. Foodservice in connection with the Services. Section 10.8 Infringement In the event that the Services, the Lockheed Martin Software, or any code or materials created or used under this Agreement by Lockheed Martin that is contained in the Custom Software is found to be infringing upon the proprietary rights of a third party, Lockheed Martin shall, at its own expense (1) obtain the right to use the infringing material, (2) modify the software or material so that it is no longer infringing, or (3) obtain and install functionally similar software or materials that are not infringing. Section 10.9 Documentation All documentation, written materials, work papers, configurations, manuals (including the Procedures Manual and the Change Control Procedures), and other work product prepared by or on behalf of or otherwise used by Lockheed Martin or Lockheed Martin Agents in connection with providing the Designated Services shall be made available to U.S. Foodservice on a non-exclusive basis. All documentation with respect to U.S. Foodservice Software shall be and will remain the property of U.S. Foodservice. Section 10.10 Cooperation Upon Divestiture In the event of a divestiture of any business or business unit of U.S. Foodservice, Lockheed Martin shall cooperate with U.S. Foodservice with respect to, and shall not unreasonably withhold or delay consent to, Lockheed Martin's transfer of any license or right to use Software or Lockheed Martin proprietary or third party tools to the buyer or any other person or entity obtaining the business or business unit. -19- Section 10.11 Support/Source Code With respect to all Software used in providing the Services, except for the U.S. Foodservice Software, Lockheed Martin shall keep in full force and effect maintenance and support agreements relating to such software. ARTICLE 11 DATA RECORDS AND REPORTS Section 11.1 U.S. Foodservice Data All U.S. Foodservice Data is and shall remain the property of U.S. Foodservice. U.S. Foodservice will provide instructions to Lockheed Martin from time to time concerning U.S. Foodservice Data. The U.S. Foodservice Data shall not without U.S. Foodservice's prior consent be (1) used by Lockheed Martin or Lockheed Martin Agents other than in connection with providing the Services, (2) disclosed, copied, sold, assigned, leased, or otherwise provided to third parties by Lockheed Martin or Lockheed Martin Agents, or (3) commercially exploited by or on behalf of Lockheed Martin or Lockheed Martin Agents. All U.S. Foodservice Data processed by or stored in the System shall be kept confidential and shall not be disclosed to anyone except employees of Lockheed Martin, and Lockheed Martin Agents who have a "need to know" the same in order to further or facilitate the performance of the Services and who are legally bound to respect the confidentiality thereof Section 11.2 Correction of Errors As part of the Designated Services, Lockheed Martin shall promptly correct at U.S. Foodservice's request and sole discretion any errors or inaccuracies in the U.S. Foodservice Data and any reports excluding Software Development and Maintenance caused by Lockheed Martin or Lockheed Martin Agents and such correction shall not limit any other remedies that U.S. Foodservice may be entitled to under this Agreement or at law Notwithstanding the foregoing, Lockheed Martin shall not make any changes to the U.S. Foodservice Data without U.S. Foodservice's prior approval. U.S. Foodservice is responsible for (1) the accuracy and completeness of the U.S. Foodservice Data and (2) any errors or inaccuracies in and with respect to data obtained from Lockheed Martin because of any inaccurate or incomplete U.S. Foodservice Data. Section 11.3 Access to and Return of Data At any time and from time to time, as part of the Designated Services, U.S. Foodservice shall be entitled to obtain any and all U.S. Foodservice Data and U.S. Foodservice Customer Data which U.S. Foodservice may request, in any supported format or media. To the extent that U.S. Foodservice requests such data in a format or media that is different from that currently in use under this Agreement, U.S. Foodservice and Lockheed Martin shall mutually agree upon appropriate compensation for Lockheed Martin for the provision of such data in the requested format or media, provided that, in any event, such pricing will be ****, including any conversion or interface format information, or similar type information, that U.S. Foodservice may request or require. At no cost to U.S. Foodservice, Lockheed Martin shall upon U.S. Foodservice's request at any time before the -20- cessation of the Termination Assistance Services pursuant to this Agreement, (1) promptly return to U.S. Foodservice, in the format and on the media requested by U.S. Foodservice, all or the portion requested of the U.S. Foodservice Data and (2) erase or destroy all or a portion of U.S. Foodservice Data in Lockheed Martin's possession prior to the cessation of the Termination Assistance Services. Archival records containing any U.S. Foodservice Data shall be maintained in accordance with U.S. Foodservice's past practice or as such practice is modified in the Procedures Manual and shall be used solely for backup purposes and shall be returned or destroyed. Section 11.4 Reserved ARTICLE 12 CONSENTS Each party shall be responsible for obtaining and bearing the costs associated with their own Consents. U.S. Foodservice and Lockheed Martin shall cooperate with one another in obtaining the Consents. Lockheed Martin and U.S. Foodservice shall assist one another with the obtaining of consents including, but not limited to, those relating to Software and Machines. ARTICLE 13 FORCE MAJEURE; DISASTER RECOVERY Section 13.1 Force Majeure Any failure or delay by U.S. Foodservice or Lockheed Martin in the performance of its obligations pursuant to this Agreement shall not be deemed a default of this Agreement or a ground for termination hereunder (except as otherwise provided in this Article 13) to the extent such failure or delay is a Force Majeure Event. The occurrence of a Force Majeure Event does not limit or otherwise affect Lockheed Martin's obligation to provide either normal recovery procedures or any disaster recovery services described in this Article 13. The occurrence of a Force Majeure Event in respect of another customer of Lockheed Martin does not constitute a Force Majeure Event under this Agreement except to the extent such customer and U.S. Foodservice experience the same Force Majeure event at a site shared by U.S. Foodservice and such customer. The party delayed by a Force Majeure Event shall immediately notify the other party by telephone (to be confirmed in a written notice within **** hours of the inception of such delay) of the occurrence of a Force Majeure Event and describe in reasonable detail the nature of the Force Majeure Event and the party whose performance is delayed or suspended shall use its best efforts to resume performance of its obligations hereunder as soon as feasible. If any Force Majeure Event prevents, hinders, or delays performance of any Service necessary for the performance of Critical Services for more than **** hours, U.S. Foodservice may, upon notice to Lockheed Martin, procure the Services from an alternate source. U.S. Foodservice shall be excused from paying any fees for services which Lockheed Martin is unable to render during such Force Majeure Event and Lockheed Martin shall be liable to U.S. Foodservice for the amount by which the sum of U.S. Foodservice's payments to such alternate source and to Lockheed Martin with respect to services rendered in such Force Majeure Event period exceed what U.S. Foodservice would have paid Lockheed Martin during such period for the provision of the Services under this Agreement. If any Force Majeure Event prevents, hinders or delays performance of the Services necessary or the performance of Critical Services for more than ****, U.S. Foodservice may terminate this -21- Agreement (without regard to any cure rights that Lockheed Martin might otherwise have under this Agreement) without limitation as to any other remedies that U.S. Foodservice may be entitled to under this Agreement or at law. The occurrence of a Force Majeure Event does not limit or otherwise affect Lockheed Martin's obligation to provide either normal business continuation procedures or any other disaster recovery services as described in Article 13.3. Section 13.2 Allocation of Resources Whenever a Force Majeure Event causes Lockheed Martin to allocate limited resources between or among Lockheed Martin's customers and affiliates, U.S. Foodservice shall receive at least the same priority in respect to such allocation as any of Lockheed Martin's other customers receiving substantially similar services and Lockheed Martin's affiliates. Section 13.3 Disaster Recovery As part of the Designated Services, Lockheed Martin shall (1) as soon as practicable prior to the Effective Date submit to U.S. Foodservice for its approval and, upon U.S. Foodservice's approval, implement a detailed Disaster recovery plan for fulfillment of Lockheed Martin's obligations set forth in Exhibit 1a, Attachment 1, Clause 7 with respect to U.S. Foodservice's operations, (2) update the Disaster recovery plan as appropriate, (3) Exercise the current disaster recovery plan and report on adjustments required within the plan annually, (4) implement the Disaster recovery plans upon the declaration of a Disaster by either party and (5) have a contract with a provider of backup processing services during the Term. Until such time as the Disaster recovery plan is approved by U.S. Foodservice, as part of the Designated Services, Lockheed Martin shall keep in place the U.S. Foodservice disaster recovery plan in effect as of the Effective Date. The purpose of the Disaster recovery plan is to protect U.S. Foodservice in the event of a Disaster. As part of the Designated Services, Lockheed Martin shall at least once each Contract Year, update and test the operability of the Disaster recovery plan in effect at that time and in the event of a Disaster, shall implement the procedures set forth in the Disaster Recovery Plan. The Disaster recovery plan shall identify a backup facility or facilities that can provide the Services in the event of a Disaster (the "Backup Facility"). The Backup Facility shall be sufficiently distant from the Service Location so that a single event would not compromise the Service Location and the Backup Facility simultaneously. In the event (1) Backup Facilities (e.g., operating systems) are not operational within **** hours of the declaration of a Disaster by either party, (2) Critical Services are not operational within **** hours of the declaration of a Disaster or (3) Critical Services are not provided in accordance with the Service Levels within **** hours of the declaration of a Disaster, U.S. Foodservice may terminate the Agreement (without regard to any cure rights that Lockheed Martin might otherwise have under this Agreement) without limitation as to any other remedies that U.S. Foodservice may be entitled to under this Agreement or at law. If the Designated Services under this Agreement are not available to U.S. Foodservice within this time period, or if the Designated Services are provided by Lockheed Martin's disaster recovery provider for more than ****, U.S. Foodservice may terminate this Agreement without penalty upon written notice to Lockheed Martin specifying the termination date in accordance with Section 21.2. In addition, if U.S. Foodservice operations are adversely affected as a result of a material degradation in service levels during the period in which Services are provided by Lockheed Martin disaster recovery provider, there shall be an equitable adjustment to Lockheed Martin's charges under this Agreement for such period. Lockheed Martin shall demonstrate to U.S. Foodservice's satisfaction that the Critical Services can run at current transaction rates and schedules and at the Service Levels at the Backup Facility. As part of the Designated Services, the Disaster recovery plan shall provide that access from -22- U.S. Foodservice's locations to the Backup Facility shall be through direct data communications links (the number of access lines will be agreed upon) and will not pass through the primary data center complex. Lockheed Martin shall maintain throughout the Term, a backup power supply system to guard against electrical outages. ARTICLE 14 PAYMENTS Section 14.1 Designated Fees In consideration of Lockheed Martin providing the Designated Services, U.S. Foodservice shall pay to Lockheed Martin the Designated Fees per Exhibit 8. For purposes of this Agreement, "as part of the Designated Services" means that such services or deliverables are included in the Designated Fees. Section 14.2 **** **** Section 14.3 Additional Services Fees In consideration of Lockheed Martin providing the Additional Services, U.S. Foodservice shall pay to Lockheed Martin the Additional Services Fees, ****. Section 14.4 Expenses All expenses relating to the Designated Services shall be reimbursed according to the provisions in Exhibit 8. Section 14.5 Proration All periodic fees or charges under this Agreement are to be computed on a calendar month basis and shall be prorated on a per diem basis for any partial month. -23- Section 14.6 Unused Credits Any unused credits against future payments owed to either party by the other pursuant to this Agreement shall be paid to the applicable party within 30 days of the expiration or termination of this Agreement for any reason. Section 14.7 Performance Credits In the event Lockheed Martin fails to meet any of the Service Levels applicable to the Critical Services, Lockheed Martin shall pay to U.S. Foodservice the applicable Performance Credits in accordance with Exhibit 8, Section III(5). The Performance Credits represent negotiated amounts on the basis of reduced service levels and shall not be deemed or construed as a measure of damages. Any performance credit shall be made without limitation of any of U.S. Foodservice's other rights or remedies. In addition to the above, Lockheed Martin and Lockheed Martin Agents shall cooperate with U.S. Foodservice, its customers, licensees and others to respond to U.S. Foodservice and others complaints or concerns in connection with Lockheed Martin's performance or non-performance of Services under this Agreement and shall effectuate a prompt work around or other solution to the extent necessary to address these concerns satisfactorily. Section 14.8 Offsets U.S. Foodservice may set off any amounts owed to U.S. Foodservice as a credit against the Fees payable by U.S. Foodservice to Lockheed Martin. Lockheed Martin may set off any amounts owed to U.S. Foodservice as a credit against any amounts payable to U.S. Foodservice. Any such offsets shall be preceded by a notice to the other party with the details of the setoff end a general statement of the reason for it. Section 14.9 Adjustment for Cost Savings From Technological Advancements If technology changes materially reduce Lockheed Martin's costs in providing the Services to U.S. Foodservice, Lockheed Martin shall promptly notify U.S. Foodservice of such reduction and shall renegotiate this Agreement in good faith to share the benefit of those reduced costs with U.S. Foodservice. In the event that Lockheed Martin's charges to U.S. Foodservice are reduced pursuant to this Section based on an expectation of future cost savings to Lockheed Martin from technology changes and such expected future cost savings do not materialize, Lockheed Martin's charges will be subject to further equitable adjustment, as agreed to by the parties, to account for the cost savings which do not materialize. ARTICLE 15 PAYMENT SCHEDULE AND INVOICES Section 15.1 Designated Fees Lockheed Martin shall provide U.S. Foodservice with an invoice for the Designated Fees on or before the tenth day of the month for each month in which the Designated Services are to be provided. -24- Section 15.2 Detailed Invoices Lockheed Martin shall provide invoices with sufficient detail as reasonably requested by U.S. Foodservice in order to permit reconciliation of the fees charged. Section 15.3 Time of Payment Any sum due Lockheed Martin pursuant to this Agreement for which payment is not otherwise specified shall be due and payable 30 days after receipt by U.S. Foodservice of an invoice from Lockheed Martin. Section 15.4 Special Payments Notwithstanding the payment provisions of Sections 15.1 and 15.3, Lockheed Martin will submit to U.S. Foodservice not later than the twentieth day in December of each calendar year an operational fee invoice for services performed in December. U.S. Foodservice agrees to receive, accept, and make payment to Lockheed Martin for such invoice prior to December 31 of each respective calendar year. Section 15.5 Late Payments Any sum due Lockheed Martin pursuant to this Agreement that is not paid within 5 days of the date on which payment is due shall bear interest from the expiration of such 5-day grace period until the date such sum is paid at the lesser of 1 percent per month or the maximum rate of interest allowed by applicable law. Section 15.6 Method of Payment Lockheed Martin will provide U.S. Foodservice bank routing information. All payments are to be via Electronic Funds Transfer, unless otherwise agreed to in writing by the parties. ARTICLE 16 TAXES (1) The fees paid to Lockheed Martin are inclusive of any applicable sales, use, or other taxes attributable to periods on or after the applicable Effective Date based on or measured by Lockheed Martin's cost in acquiring or providing equipment, materials, supplies, or services furnished or used by Lockheed Martin in performing or furnishing the Services. All use taxes, if any, due on Lockheed Martin Machines and Lockheed Martin Software and sales or use tax, if any, due on Lockheed Martin's purchase of assets and assumption of liabilities from U.S. Foodservice hereunder are the responsibility of Lockheed Martin. (2) In the event that a sales tax or any other tax is assessed which U.S. Foodservice is legally obligated to pay as a consumer of the Services, however levied or assessed, the parties will each be responsible for payment of fifty percent (50%) of any such tax. Lockheed Martin shall inform U.S. Foodservice immediately upon its receipt of notice of any kind that any such sales, -25- use, excise or service tax is due or has been assessed on the provision of the Services. In such event, Lockheed Martin and U.S. Foodservice shall jointly determine whether any such tax or assessment shall be paid, compromised, litigated or appealed and shall jointly determine appropriate matters with respect to procedure, compromise, defense, or appeal or any other aspects of any such tax or assessment concerning its liability. (3) In the event any taxes are assessed, including a gross up thereon, on the provision of the Services resulting from either party relocating or rerouting the delivery of Services at a requesting party's direction to, from, or through a location other than the Service Location used to provide the Services as of the Effective Date, such taxes shall be paid by the requesting party. The parties acknowledge and agree that the proposed relocation of the Services to Lockheed Martin's Orlando, Florida data center is at Lockheed Martin's request and direction. (4) U.S. Foodservice and Lockheed Martin each shall bear sole responsibility for all taxes, assessments, and other real property related levies on their respective owned or leased real property. (5) U.S. Foodservice and Lockheed Martin shall cooperate to segregate the Fees into the following separate payment streams for sales tax purposes: (a) those for taxable Services; (b) those for nontaxable Services; (c) those for which a sales, use, or other similar tax has already been paid; and (d) those for which Lockheed Martin functions merely as a paying agent for U.S. Foodservice in receiving goods, supplies, or services (including leasing and licensing arrangements) that otherwise are nontaxable or have previously been subject to tax. (6) U.S. Foodservice and Lockheed Martin shall reasonably cooperate with each other to more accurately determine each party's tax liability and to minimize such liability to the extent legally permissible. In addition, the parties shall cooperate with one another to prorate taxes, or otherwise provide appropriate credit, as required to properly reflect the provisions contained herein. (7) U.S. Foodservice and Lockheed Martin shall provide and make available to the other any resale certificates, information regarding out-of- state sales or use of equipment, materials, or services, and other exemption certificates or information reasonably requested by either party. ARTICLE 17 AUDIT RIGHTS Section 17.1 Fees Upon reasonable notice from U.S. Foodservice, Lockheed Martin shall provide U.S. Foodservice and U.S. Foodservice's Agents with access to such financial records and supporting documentation as may be reasonably requested by U.S. Foodservice and U.S. Foodservice may audit the Fees charged to U.S. Foodservice to determine that such Fees are accurate and in accordance with this Agreement. -26- Section 17.2 Other Audits and Inspections U.S. Foodservice shall be entitled to audit and inspect the Services and facilities being provided pursuant to this Agreement by Lockheed Martin with five (5) days notice and inspection to be conducted during normal working hours; provided, however, that U.S. Foodservice shall not be entitled to audit or inspect (a) services and facilities that have no impact on U.S. Foodservice's data or processing, (b) data or information of other customers of Lockheed Martin, or (c) (except as provided pursuant to Section 17.1) financial, ------------ personnel or similar records of Lockheed Martin. Such audits and inspections will include, as appropriate, audits of (i) application and operating systems, (ii) operating software maintenance practices and procedures, (iii) general controls and security practices and procedures, and (iv) disaster recovery and back-up procedures. Lockheed Martin will provide to such auditors and inspectors as U.S. Foodservice designates in writing reasonable access to the Lockheed Martin facilities at which Lockheed Martin is performing the Services, to Lockheed Martin's personnel, to the U.S. Foodservice data, and to reasonable related documentation for the purpose of performing such audits and inspections. Lockheed Martin will provide to such auditors and inspectors such assistance that they reasonably require in connection therewith, including installing and operating audit software. The parties will review any report of U.S. Foodservice's auditors and work together in good faith to mutually agree on any appropriate adjustments to Lockheed Martin's operating practices and procedures. Section 17.3 Record Retention As part of the Designated Services, Lockheed Martin shall (1) retain records and supporting documentation sufficient to document the Services and the Fees paid or payable by U.S. Foodservice under this Agreement in accordance with all laws and regulations applicable to U.S. Foodservice or its customers and (2) upon notice from U.S. Foodservice, provide U.S. Foodservice and U.S. Foodservice Agents with reasonable access to such records and documentation. Section 17.4 Overcharges/Undercharges If any audit or examination reveals that Lockheed Martin's invoices for the audited period have resulted in any overcharge to U.S. Foodservice, Lockheed Martin shall promptly reimburse U.S. Foodservice for the amount of any overcharge, implement measures to prevent reoccurrence and, if the overcharge exceeds amounts due hereunder by ten percent (10%) or more, promptly reimburse U.S. Foodservice for the cost of the audit. If any audit or examination reveals that Lockheed Martin's invoices for the audited period have resulted in any undercharge to U.S. Foodservice, U.S. Foodservice shall promptly pay Lockheed Martin for the amount of any undercharge to the extent, if any, that the amount of such undercharge exceeds the cost of the audit. -27- ARTICLE 18 CONFIDENTIALITY Section 18.1 General Obligations All Confidential Information relating to a party shall be held in confidence by the other party. Neither party shall disclose, publish, release, transfer, or otherwise make available Confidential Information of the other party in any form to, or for the use or benefit of, any person or entity without the other party's consent. Each party shall, however, be permitted to disclose relevant aspects of the other party's Confidential Information to its officers, agents, subcontractors, and employees and to the officers, agents, subcontractors, and employees of its corporate affiliates or subsidiaries to the extent that such disclosure is reasonably necessary for the performance of its duties and obligations under this Agreement; provided, however, that such party shall take all necessary measures to ensure that Confidential Information of the other party is not disclosed, duplicated or used in contravention of the provisions of this Agreement by such officers, agents, subcontractors, and employees. The obligations in this Article 18.1 shall not apply with respect to information that (1) is developed by the other party without violating the disclosing party's proprietary rights, (2) is or becomes publicly known (other than through unauthorized disclosure), (3) is disclosed by the owner of such information to a third party free of any obligation of confidentiality, (4) is already known by such party without an obligation of confidentiality other than pursuant to this Agreement or any confidentiality agreements entered into before the Effective Date between U.S. Foodservice and Lockheed Martin, or (5) is rightfully received by a party free of any obligation of confidentiality. Section 18.2 U.S. Foodservice Confidential Information All U.S. Foodservice Confidential Information shall be held in confidence by Lockheed Martin. Lockheed Martin shall not disclose, publish, release, transfer, or otherwise make available U.S. Foodservice Confidential Information in any form to, or for the use or benefit of, any person or entity. Lockheed Martin shall, however, be permitted to disclose relevant aspects of the U.S. Foodservice Confidential Information to its employees and Lockheed Martin Agents to the extent that such disclosure is reasonably necessary for the performance of its duties and obligations under this Agreement; provided, however, that Lockheed Martin shall take all necessary measures to ensure that U.S. Foodservice Confidential Information is not disclosed, duplicated or used in contravention of the provisions of this Agreement by such employees or Lockheed Martin Agents. The obligations in this Article 18.2 shall not apply with respect to information that (1) is developed by Lockheed Martin without violating the U.S. Foodservice's proprietary rights, (2) is or becomes publicly known (other than through unauthorized disclosure), (3) is disclosed by the owner of such information to a third party free of any obligation of confidentiality, (4) is already known by Lockheed Martin without an obligation of confidentiality other than pursuant to this Agreement or any confidentiality agreements entered into before the Effective Date between U.S. Foodservice and Lockheed Martin, or (5) is rightfully received by a party free of any obligation of confidentiality. -28- Section 18.3 Legal Action Lockheed Martin shall (1) notify U.S. Foodservice promptly of any material unauthorized possession, use, or knowledge, or attempt thereof, of the U.S. Foodservice Confidential Information by any person or entity that may become known to Lockheed Martin, (2) promptly furnish to U.S. Foodservice full details of the unauthorized possession, use, or knowledge, or attempt thereof, and use reasonable efforts to assist U.S. Foodservice in investigating or preventing the recurrence of any unauthorized possession, use, or knowledge, or attempt thereof, of U.S. Foodservice Confidential Information or the U.S. Foodservice Confidential Information, (3) use reasonable efforts to cooperate with U.S. Foodservice in any litigation and investigation against third parties deemed necessary by U.S. Foodservice to protect its proprietary rights, and (4) promptly use all reasonable efforts to prevent a recurrence of any such unauthorized possession, use, or knowledge of U.S. Foodservice Confidential Information or U.S. Foodservice Confidential Information. U.S. Foodservice shall (1) notify Lockheed Martin promptly of any material unauthorized possession, use, or knowledge, or attempt thereof, of the Lockheed Martin Confidential Information by any person or entity that may become known to U.S. Foodservice, (2) promptly furnish to Lockheed Martin full details of the unauthorized possession, use, or knowledge, or attempt thereof, and use reasonable efforts to assist Lockheed Martin in investigating or preventing the recurrence of any unauthorized possession, use, or knowledge, or attempt thereof, of Lockheed Martin Confidential Information, (3) use reasonable efforts to cooperate with Lockheed Martin in any litigation and investigation against third parties deemed necessary by Lockheed Martin to protect its proprietary rights, and (d) promptly use all reasonable efforts to prevent a recurrence of any such unauthorized possession, use, or knowledge of Lockheed Martin Confidential Information. Each party shall bear the costs it incurs as a result of compliance with this Section 18.3. Section 18.4 Reserved Section 18.5 Disclosure Protection The obligations in this Article 18 shall not restrict any disclosure by either party pursuant to any applicable law, or by order of any court or government agency provided that the disclosing party shall give prompt notice to the nondisclosing party of any such proposed disclosure and the nondisclosing party will be given as much time as possible before disclosure to seek a protective order or other appropriate relief. The disclosing party shall cooperate with the nondisclosing party's efforts to preclude, quash, limit, or impose protective orders on such disclosure or with respect to any other appropriate action taken by the nondisclosing party. In addition, U.S. Foodservice or its Affiliates may file this Agreement with the Securities and Exchange Commission in the event that U.S. Foodservice determines in good faith that such disclosure is required. ARTICLE 19 REPRESENTATIONS AND WARRANTIES; COVENANT Section 19.1 U.S. Foodservice U.S. Foodservice represents and warrants that: (l) It is a corporation duly incorporated, validly existing, and in good standing under the laws of Delaware. -29- (2) It has all requisite corporate power and authority to execute, deliver, and perform its obligations under this Agreement. (3) U.S. Foodservice is duly licensed, authorized, or qualified to do business and is in good standing in every jurisdiction in which a license, authorization, or qualification is required for the ownership or leasing of its assets or the transaction of business of the character transacted by it except where the failure to be so licensed, authorized, or qualified would not have a material adverse effect on U.S. Foodservice's ability to fulfill its obligations under this Agreement. (4) The execution, delivery, and performance of this Agreement have been duly authorized by U.S. Foodservice. (5) U.S. Foodservice shall comply with all applicable federal, state, and local laws and regulations applicable to U.S. Foodservice and shall obtain all applicable permits and licenses required of U.S. Foodservice in connection with its obligations under this Agreement. (6) U.S. Foodservice has not disclosed any Lockheed Martin Confidential Information in breach of this Agreement. (7) The U.S. Foodservice Proprietary Software does not and will not infringe upon the proprietary rights of any third party (except such infringements as may result from modifications by Lockheed Martin or Lockheed Martin Agents). Section 19.2 Lockheed Martin Lockheed Martin represents and warrants that: (1) It is a corporation duly incorporated, validly existing, and in good standing under the laws of Maryland. (2) It has all requisite corporate power and authority to execute, deliver, and perform its obligations under this Agreement. (3) Lockheed Martin is duly licensed, authorized, or qualified to do business and is in good standing in every jurisdiction in which a license, authorization, or qualification is required for the ownership or leasing of its assets or the transaction of business of the character transacted by it except where the failure to be so licensed, authorized, or qualified would not have a material adverse effect on Lockheed Martin's ability to fulfill its obligations under this Agreement. (4) The execution, delivery, and performance of this Agreement have been duly authorized by Lockheed Martin. (5) Lockheed Martin shall comply with all applicable federal, state, and local laws and regulations applicable to Lockheed Martin and shall obtain all applicable permits and licenses required of Lockheed Martin in connection with its obligations under this Agreement. (6) Lockheed Martin has not disclosed any U.S. Foodservice Confidential Information or U.S. Foodservice Confidential Information in breach of this Agreement. -30- (7) The Lockheed Martin Proprietary Software does not and will not, and the Custom Software and the Services will not, infringe upon the proprietary rights of any third party. (8) It is either the owner or authorized by the owner of the Lockheed Martin Machines to use such Lockheed Martin Machines in accordance with the terms of this Agreement. (9) There is no suit, action, arbitration or other legal or administrative proceeding or investigation existing, pending or, to Lockheed Martin's knowledge, threatened against or relating to Lockheed Martin that would impact the ability of Lockheed Martin to enter into or perform its obligations under this Agreement. (10) (a) Lockheed Martin has, and each of the Lockheed Martin Agents has, the necessary knowledge, skills, experience, qualifications, rights and resources to provide and perform the Services in accordance with the Agreement; (b) Lockheed Martin has successfully provided and performed the Services or services that are substantially equivalent to the Services for other customers of Lockheed Martin; (c) the Services will be performed for U.S. Foodservice in a diligent, professional, workmanlike manner in accordance with industry standards applicable to the performance of such Services; and (d) the Systems Software is capable of performing the Services in accordance with the provisions of this Agreement. Section 19.3 DISCLAIMER EXCEPT AS SPECIFIED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES IN RESPECT OF THE SERVICES, THE SOFTWARE, OR THE SYSTEMS AND EACH EXPLICITLY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE IN RESPECT OF THE SERVICES, THE SOFTWARE, AND THE SYSTEMS. Section 19.4 Non-Competition Covenant Due to the trade secret nature of the U.S. Foodservice Proprietary Software and the access Lockheed Martin will have to other U.S. Foodservice Proprietary Information, Lockheed Martin hereby covenants and agrees, for the term of this Agreement and **** thereafter, that it shall not (a) assign or otherwise authorize any Lockheed Martin Project Staff member (other than non- management data center personnel who do not have access to U.S. Foodservice Confidential Information) to perform any professional or consulting services of any nature for, or (b) license, disclose or otherwise make available any U.S. Foodservice Proprietary Software to, any other entity engaged in the distribution of food products on a statewide, regional or nationwide basis. -31- ARTICLE 20 DISPUTE RESOLUTION Section 20.1 Project Executives All disputes shall be referred to the Lockheed Martin Project Executive and the U.S. Foodservice Project Executive. If the U.S. Foodservice Project Executive and the Lockheed Martin Project Executive are unable to resolve the dispute within 10 business days after referral of the matter to them, the parties shall submit the dispute to the Management Committee for immediate review and resolution. Section 20.2 Management Committee As part of its duties, the Management Committee shall initially meet within five business days of notice of a dispute under this Agreement. The Management Committee shall consider disputes in the order such disputes are brought before it. In the event the Management Committee is unable to resolve a dispute within 10 business days of the date of the meeting during which such dispute was considered, the Management Committee shall immediately notify the senior management of each party pursuant to Section 20.3. Section 20.3 Senior Management Either party may, upon notice and within 10 business days of receipt of a notice from the Management Committee pursuant to Section 20.2, elect to use a nonbinding resolution procedure whereby each presents its case at a hearing before a panel consisting of a senior executive of each of the parties and, if such executives can agree upon such an individual, a mutually acceptable neutral adviser. If a party elects to use the procedure set forth in this Section 20.3, the other party shall participate. The hearing shall occur no more than 10 business days after a party serves notice to use the procedure set forth in this Section 20.3. Each party may be represented at the hearing by attorneys. If the matter cannot be resolved at such hearing by such senior executives, a neutral adviser, if one has been agreed upon, may be asked to assist such senior executives in evaluating the strengths and weaknesses of each party's position on the merits of the dispute. Thereafter, such senior executives shall meet within five business days and try again to resolve the matter. If the matter cannot be resolved at such meeting, such senior executives shall inform their respective senior management and the proceedings occurring pursuant to this Section 20.3 shall have been without prejudice to the legal position of either party. The parties shall each bear their respective costs incurred in connection with the procedures set forth in this Section 20.3, except that they shall share equally the fees and expenses of the neutral advisor, if any, and the cost of the facility for the hearing. Section 20.4 Arbitration Lockheed Martin and U.S. Foodservice stipulate and agree that if they are unable to resolve any dispute as contemplated by this Article 20, then such dispute shall be resolved by final and binding arbitration by a panel of three arbitrators in accordance with and subject to the Commercial Arbitration Rules of the American Arbitration Association ("AAA") then in effect as modified herein. Following notice of a party's election to require arbitration, each party shall within thirty -32- days select and identify in writing to the other party one arbitrator, and those two arbitrators shall within thirty days thereafter select a third arbitrator. If the two arbitrators are unable to agree on a third arbitrator within thirty days, the AAA shall within thirty days thereafter select such third arbitrator. The arbitrators shall be impartial and disinterested and unless otherwise mutually agreed shall be U.S. citizens who are active or retired (1) lawyers or professionals familiar with food distribution and/or data processing technology and services and/or software development services, or (2) active or former officers or management employees of food distribution and/or data processing firms and/or software development companies. The person selected by the two respective arbitrators appointed by the parties (or, if they are unable to agree, AAA) shall be the umpire or chief arbitrator and must be a lawyer. Discovery as permitted by the Federal Rules of Civil Procedure then in effect shall be allowed in connection with the arbitration to the extent consistent with the purpose of the arbitration and as allowed by the arbitrators. The arbitration shall be conducted in Maryland. With respect to any matter brought before the arbitrators or in accordance with the provisions of this Section 20.4, the arbitrators shall make a decision having regard to the intentions of the parties, the terms of this Agreement, and custom and usage of the food distribution and data processing industry. Such decisions shall be in writing and shall state the findings of fact and conclusions of law upon which the decision is based and may include an order enjoining any party to take or refrain from taking specific action with respect to the matter in dispute, provided that such decision may not: (1) award Consequential Damages except as permitted by this Agreement; or (2) include a suspension of this Agreement or any provisions hereof. The award may include interest from the date of any damages incurred for breach or other violation of this Agreement at a rate to be fixed by the arbitrators. The decision shall be based exclusively upon the evidence presented by the parties at a hearing in which evidence shall be allowed. The arbitrators shall have the authority to include in such award a decision binding upon the parties, enjoining them to take or refrain from taking specific action with respect to the matter in dispute or disagreement. The parties agree that the arbitrators shall be required to render their decision in writing within thirty days of the conclusion of the proceedings, unless such time shall be extended by mutual agreement of the parties. The award of the arbitrators shall be final and binding on the parties and the parties hereby irrevocably exclude any right of application or appeal to any court in any jurisdiction whatsoever in connection with any question arising in the course of any arbitration or in respect of any award made, but only to the extent that the award of the arbitrators complies with this Section 20.4. Judgment upon the award rendered in any arbitration may be entered in any court of competent jurisdiction, or application may be made to such court for a judicial acceptance of the award and an enforcement, as the law of South Carolina may require or allow. The cost of the arbitration shall be borne equally by the parties pending the arbitrators' award. Each party shall bear its own expenses and attorneys' fees. The prevailing party in any arbitration proceeding hereunder shall be entitled, in addition to such other relief as may be granted, to -33- recover the portion of the costs of the arbitration (excluding the prevailing party's attorneys' fees and expenses) incurred by that party in connection with arbitration under this Agreement prior to the award. The fact that arbitration is or may be allowed shall not impair the exercise of any termination rights under this Agreement. Section 20.5 Exceptions The provisions of this Article 20 shall not apply to (1) actions for a temporary restraining order, preliminary injunction or other equitable relief, or (2) disputes relating to breach of the confidentiality, non-disclosure, trade secret or similar provisions of this Agreement. Section 20.6 Continuity of Services U.S. Foodservice and Lockheed Martin each acknowledge that the provision of the Services is critical to the business and operations of U.S. Foodservice and Lockheed Martin. Accordingly, in the event of a dispute between U.S. Foodservice and Lockheed Martin pursuant to which U.S. Foodservice in good faith believes it is entitled to withhold payment or for which either party in good faith believes payment is due, Lockheed Martin shall continue to provide the Services and U.S. Foodservice shall continue to pay Lockheed Martin the Fees due as set forth in Article 15. ARTICLE 21 TERMINATION Section 21.1 Termination for Convenience U.S. Foodservice may, at its sole discretion terminate this Agreement at any time during the Term without cause upon at least 180 days notice to Lockheed Martin and in accordance with Exhibit 9. Section 21.2 Termination for Cause If either U.S. Foodservice or Lockheed Martin (1) fails to perform any of its material obligations or breaches any representations under this Agreement and such failure is not cured within 30 days after written notice is given to the defaulting party specifying the nature of the default or (2) repeatedly fails to perform any of its material obligations, or breaches any representations under this Agreement regardless of whether such failures or breaches are cured, the nondefaulting party may, upon further notice to the defaulting party, terminate this Agreement as of the date specified in such notice of termination; provided, however, that, if, after the defaulting party's commercially reasonable efforts such default could not be cured within such 30- day period (e.g., in the event of a breach of the confidentiality provisions contained herein), the nondefaulting party may then, by giving notice to the defaulting party, terminate this Agreement as of the date specified in such notice of termination. In addition, U.S. Foodservice may terminate this Agreement in accordance with the provisions of Section 13.3. -34- Section 21.3 Termination Rights for Downtime (a) U.S. Foodservice shall have the right to terminate the mainframe processing as defined in Exhibit 1a of this Agreement, as it determines in its sole discretion, if any of the following occurs: (i) on at least **** occasions during any **** period, there is Downtime (as defined in Exhibit 1a) of (A) at least **** during the Critical Window (as defined in Exhibit 8, Section III(5)); or (B) at least **** during the Noncritical Window (as defined in Exhibit 8, Section III(5)) or spanning both the Critical and Noncritical Windows; or (ii) there is a total of at least **** of Downtime during any **** period; or (iii) there is a total of at least **** of Downtime during any **** period. (b) For purposes of Section 21.3(a)(i), the number of occasions on which there is Downtime under subparagraphs (A) and (B) thereof during any **** period shall be added together (rather than counted separately) in determining whether there has been Downtime under those Sections on at least **** occasions. For example, if there is Downtime of **** during the Critical Window on **** occasions during a **** period and Downtime of **** during the Noncritical Window on **** occasion during that **** period, then there would be Downtime under Section 4.12(a) on **** occasions during that **** period and U.S. Foodservice would have the right to terminate this Agreement. (c) To exercise a termination right under this Section, U.S. Foodservice shall notify Lockheed Martin in writing of its intention to terminate this Agreement within **** after the date on which the event giving rise to the termination right occurs. U.S. Foodservice's notice shall specify the date on which this Agreement shall terminate. ARTICLE 22 TERMINATION FEE In the event of a termination of this Agreement pursuant to Section 21.1 and 21.3, U.S. Foodservice shall pay Lockheed Martin the termination fee per Exhibit 9, as of the termination date of this Agreement. ARTICLE 23 TERMINATION ASSISTANCE At U.S. Foodservice's request, Lockheed Martin shall provide the Termination Assistance Services upon the expiration or termination of this Agreement. The Termination Assistance Services and Lockheed Martin exit plan are intended to minimize the costs and effort of U.S. Foodservice's migration from Lockheed Martin to U.S. Foodservice or another third party at the end or termination of this Agreement and for the reconstruction of the data center with U.S. Foodservice or -35- another third party provider in the most efficient, cost effective manner and shall be construed and interpreted accordingly. Regardless of the reason that this Agreement is terminated, Lockheed Martin agrees to use its best efforts to ensure that the goals set forth in the preceding sentence are met. The Termination Assistance Services and Lockheed Martin exit plan are set forth in Exhibit 6. ARTICLE 24 INDEMNITIES Section 24.1 Indemnity by U.S. Foodservice U.S. Foodservice shall indemnify and hold harmless Lockheed Martin from, and defend Lockheed Martin against, any and all Losses arising out of or relating to any claim: (1) That the U.S. Foodservice Proprietary Software, U.S. Foodservice Third Party Software (excluding the U.S. Foodservice Customer Software) and U.S. Foodservice Machines, provided to Lockheed Martin by U.S. Foodservice, or U.S. Foodservice's Agents infringe upon the proprietary rights of any third party. (2) Relating to any duties or obligations of U.S. Foodservice, or U.S. Foodservice Agents accruing after the Effective Date in respect of a third party; unless such claim involves the Services provided hereunder. (3) Relating to the inaccuracy, or untruthfulness of any representation or warranty made by U.S. Foodservice under this Agreement. (4) Relating to U.S. Foodservice's failure to obtain the Consents as required by this Agreement. (5) Relating to (a) a violation of federal, state, or other laws or regulations for the protection of persons or members of a protected class or category of persons by U.S. Foodservice, U.S. Foodservice employees, or U.S. Foodservice Agents; (b) sexual discrimination or harassment by U.S. Foodservice, U.S. Foodservice employees, or U.S. Foodservice Agents; (c) work-related injury or death caused by U.S. Foodservice, U.S. Foodservice employees, or U.S. Foodservice Agents; and (d) any employment decisions relating to U.S. Foodservice employees. (6) Relating to any amounts, including taxes, interest, and penalty, assessed against Lockheed Martin that are the obligations of U.S. Foodservice pursuant to Article 16. (7) Relating to personal or bodily injury or property damage resulting from U.S. Foodservice's or U.S. Foodservice Agents' acts or omissions. (8) Relating to violations of the Retained Resources Agreements, unless caused by an act or omission of Lockheed Martin or Lockheed Martin's Agents. (9) Relating to the physical and data security controls at the U.S. Foodservice Service Locations to the extent the same (a) are controlled or provided by U.S. Foodservice after the Effective Date and (b) relate to Lockheed Martin's provision of the Services. -36- (10) Relating to U.S. Foodservice noncompliance with legal or regulatory requirements applicable to U.S. Foodservice, unless caused by an act or omission of Lockheed Martin or Lockheed Martin Agents. (11) Relating to any claims by Designated Employees or based on an event occurring, or claim arising, before such employee became an employee of Lockheed Martin. U.S. Foodservice shall indemnify and hold harmless Lockheed Martin from any and all costs and expenses incurred in connection with the enforcement of this Section 24.1. Section 24.2 Indemnity by Lockheed Martin Lockheed Martin shall indemnify and hold harmless U.S. Foodservice from, and defend U.S. Foodservice against, any Losses arising out of or relating to any claim: (1) That the Services, its employees, or Lockheed Martin Agents or any other resources or items, including, but not limited to, the Lockheed Martin Software, Lockheed Martin Machines and Custom Software, provided to U.S. Foodservice by Lockheed Martin, its employees, or Lockheed Martin Agents infringe upon the proprietary rights of any third party. (2) For breach of this Agreement by Lockheed Martin, its employees, or Lockheed Martin Agents in connection with the Services provided to U.S. Foodservice or a third party under this Agreement. (3) Relating to any duties or obligations of Lockheed Martin, its employees, or Lockheed Martin Agents accruing after the Effective Date in respect of a third party or any subcontractor of Lockheed Martin. (4) Relating to the inaccuracy or untruthfulness of any representation or warranty made by Lockheed Martin under this Agreement. (5) Relating to Lockheed Martin's failure to obtain the Consents as required by this Agreement. (6) Relating to (a) a violation of federal, state, or other laws or regulations for the protection of persons or members of a protected class or category of persons by Lockheed Martin, its employees, or Lockheed Martin Agents; (b) sexual discrimination or harassment by Lockheed Martin, its employees, or Lockheed Martin Agents; and (c) work-related injury or death caused by Lockheed Martin, its employees, or Lockheed Martin Agents. (7) Relating to the improper maintenance of the facilities or inadequacies in the physical and data security controls at the Service Location to the extent the same (a) are controlled or provided by Lockheed Martin after the Effective Date and (b) relate to Lockheed Martin's provision of the Services. (8) Relating to any amounts including taxes, interest, and penalties assessed against U.S. Foodservice that are obligations of Lockheed Martin pursuant to Article 16. -37- (9) Relating to Lockheed Martin's noncompliance with legal or regulatory requirements applicable to Lockheed Martin. (10) Relating to personal or bodily injury or property damage resulting from Lockheed Martin's, or Lockheed Martin Agents' acts or omissions. (11) Relating to any claims by Designated Employees and based on an event occurring, or claim arising, after such employee became an employee of Lockheed Martin. (12) Relating to any claim by a third party in respect of services or systems provided by Lockheed Martin to a third party. (13) Relating to a failure by Lockheed Martin to properly administer U.S. Foodservice's agreements in respect of the Retained Resources in accordance with Article 5. (14) Relating to any claim arising out of Lockheed Martin's breach or violation of Lockheed Martin's agreements with Lockheed Martin Agents. Lockheed Martin shall indemnify and hold harmless U.S. Foodservice from any costs and expenses incurred in connection with the enforcement of this Section 24.2. The indemnification provisions contained in this Section 24.2 are in addition to any indemnification provisions, if any, contained in the Ancillary Agreements. Section 24.3 Indemnification Procedures If any claim is made against an Indemnified Party by a third party, notice thereof shall be given to the Indemnifying Party as promptly as practicable but no later than three business days after receipt of notice of the claim. After such notice, if the Indemnifying Party shall acknowledge in writing to such Indemnified Party that this Agreement applies with respect to such claim, the Indemnifying Party shall then be entitled, if it so elects, in a notice delivered to the Indemnified Party not less than 10 days prior to the date on which a response to such claim is due, to immediately take control of the defense and investigation of such claim and to employ and engage attorneys of its sole choice to handle and defend the same, at the Indemnifying Party's sole cost and expense. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial, and defense of such claim and any appeal arising therefrom; provided, however, that the Indemnified Party may, at its own cost and expense, participate, through its attorneys or otherwise, in such investigation, trial, and defense of such claim and any appeal arising therefrom. No settlement of a claim that involves a remedy other than the payment of money by the Indemnifying Party shall be entered into without the consent of the Indemnified Party. After notice by the Indemnifying Party to the Indemnified Party of its election to assume full control of the defense of any such claim, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses incurred thereafter by such Indemnified Party in connection with the defense of that claim. If the Indemnifying Party does not assume full control over the defense of a claim subject to such defense as provided in this Section 24.3, the Indemnifying Party may participate in such defense, at its sole cost and expense, and the Indemnified Party shall have the right to defend the claim in such manner as it may deem appropriate, at the cost and expense of the Indemnifying Party. -38- ARTICLE 25 DAMAGES Section 25.1 Damages U.S. Foodservice and Lockheed Martin each shall be liable to the other party for any direct damages arising out of or relating to its performance under this Agreement. Section 25.2 Consequential Damages Except as otherwise provided in this Agreement, neither U.S. Foodservice nor Lockheed Martin shall be liable for, nor will the measure of damages include, any Consequential Damages. Section 25.3 Exclusions The limitations or exculpations of liability set forth in this Agreement are not applicable to (a) indemnification claims as set forth in Article 24 or (b) liability resulting from the gross negligence or willful misconduct of a party. ARTICLE 26 INSURANCE Section 26.1 Insurance During the Term, Lockheed Martin shall maintain at its own expense, and require each of the Lockheed Martin Agents, excluding Lockheed Martin's vendors, to maintain at their own expense or Lockheed Martin's expense, insurance of the type and in the amounts specified below: (1) Statutory workers' compensation in accordance with all federal, state, and local requirements; (2) Employer's liability insurance in an amount not less than $1,000,000.00 per occurrence, covering bodily injury by accident or disease, including death; (3) Comprehensive public liability (including world wide coverage and contractual liability insurance including coverage for the indemnification obligations contained herein) in an amount not less than $1,000,000.00 per occurrence for each occurrence of personal or bodily injury and property damage together with a $1,000,000.00 umbrella; (4) Comprehensive automobile liability covering all owned, non-owned, hired, or leased vehicles in an amount not less than $1,000,000.00 per occurrence (combined single limit for bodily injury and property damages). -39- Section 26.2 Insurance Documentation Upon request Lockheed Martin shall furnish to U.S. Foodservice certificates of insurance or other appropriate documentation (including evidence of renewal of insurance) evidencing coverage in accordance with this Article, and with respect to the comprehensive public liability policy. Each insurance policy (including renewals thereof) or Certificate of Insurance required hereunder shall contain an agreement by the insurer that the insurer shall endeavor to provide U.S. Foodservice with at least thirty days prior written notice that such policy will be canceled or nonrenewed. Each party hereto shall provide the other party with at least ten days' prior written notice of any cancellation, intent not to renew, reduction, or material change in any of the insurance coverage maintained by it in accordance with this Section. Each Certificate of Insurance required hereby shall be delivered to the appropriate party within ten business days after the Effective Date or renewal of the respective policy, as applicable. ARTICLE 27 MISCELLANEOUS PROVISIONS Section 27.1 Assignment Neither party shall assign this Agreement without prior written consent of the other party; except that: (a) U.S. Foodservice may assign this Agreement to any wholly-owned Affiliate or in connection with a stock sale, merger, consolidation, asset sale or other transaction involving the sale or other transfer of all or substantially all of the business or assets or controlling interest of U.S. Foodservice, and (b) Lockheed Martin may assign this Agreement to a wholly-owned Affiliate. This written consent shall not be unreasonably withheld. This Agreement shall be binding on the parties and their respective successors and permitted assigns. Any assignment in violation of this Section 27.1 shall be void. -40- Section 27.2 Notices Except as otherwise specified in this Agreement, all notices, requests, consents, approvals, and other communications required or permitted under this Agreement shall be in writing and shall be sent by electronic mail (e-mail) to the e-mail address specified below (to be confirmed by an e-mail receipt). A copy of any such notice shall also be sent by registered express mail or courier with the capacity to verify receipt of delivery on the date such notice is transmitted by e-mail to the address specified below: In the case of U.S. Foodservice: Address: U.S. Foodservice, Inc. 9755 Patuxent Woods Drive Columbia, Maryland 21046 Attention: Leslie Bauer Phone Number: 410/312-7159 Telecopy Number: 410/312-7140 E-mail Address: lbauer@hq.usfood.com With a required copy to: Address: U.S. Foodservice, Inc. 9755 Patuxent Woods Drive Columbia, Maryland 21046 Attention: David M. Abramson, General Counsel Phone Number: 410/312-7208 Telecopy Number: 410/312-7149 E-mail Address: dabramso@hq.usfood.com In the case of Lockheed Martin: Lockheed Martin Corporation Integrated Business Solutions 12506 Lake Underhill Road, MP-867 Orlando, FL 32825 Attention: Rick N. Sprole Manager of Contracts Phone Number: (407) 306-3177 Telecopy Number: (407) 306-4515 E-mail Address: rick.n.sprole@lmco.com Either party may change any of the above information for notification purposes by giving the other party notice information and the date upon which it will become effective. Section 27.3 Relationship The parties intend to create an Information Technology Services Agreement and nothing contained in this Agreement shall be construed to make either Lockheed Martin or U.S. -41- Foodservice partners, joint ventures, principals, agents, or employees of the other. No officer, director, employee, agent, affiliate, or contractor retained by Lockheed Martin to perform work on U.S. Foodservice's behalf hereunder shall be deemed to be an employee, agent, or contractor of U.S. Foodservice. Neither party shall have any right, power, or authority, express or implied, to bind the other. Section 27.4 Consents, Approvals, Notices, and Requests Unless specified otherwise in this Agreement, all consents, approvals, notices, and requests, acceptances or similar actions to be given by either party under this Agreement shall not be unreasonably withheld or delayed and each party shall make only reasonable requests under this Agreement. Section 27.5 Severability If any term or provision of this Agreement is held by a court of competent jurisdiction to be contrary to law, then the remaining provisions of this Agreement or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each such provision of this Agreement shall be valid and enforceable to the extent permitted by law. Section 27.6 Waiver No delay or omission by either party to exercise any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by any party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant All waivers must be in writing and signed by the party waiving its rights. Section 27.7 Publicity Neither party shall use the other party's name or refer to the other party directly or indirectly in any media release, public announcement, or public disclosure relating to this Agreement or their subject matter, including in any promotional or marketing materials, customer lists or business presentations without consent from the other party for each such use or release. Neither party may use any trademark or service mark of the other party without that party's consent, which shall be given in its sole discretion. Section 27.8 Entire Agreement; Counterparts This Agreement is the entire agreement between the parties with respect to its subject matter, and there are no other representations, understandings, or agreements between the parties relative to such subject matter. This Agreement shall include all exhibits, any conflicts between this Agreement the exhibits or referenced material shall be bound by the following order of preference: 1) -42- Agreement; 2) Exhibits; and 3) Referenced Material. This Agreement may be signed in any number of counterparts. Section 27.9 Amendments No amendment to, or change, waiver, or discharge of, any provision of this Agreement shall be valid unless in writing and signed by an authorized representative of the party against which such amendment, change, waiver; or discharge is sought to be enforced. Section 27.10 Governing Law This Agreement shall be interpreted in accordance with and governed by the laws of Maryland without regard to choice of law principles. Section 27.11 Jurisdiction Each party irrevocably agrees that any legal action, suit, or proceeding brought by it in any way arising out of the Agreement may be brought in Maryland and each party irrevocably accepts and submits to non-exclusive jurisdiction of such courts in personam, generally and unconditionally with respect to any action, suit, or proceeding brought by it or against it by the other party. Section 27.12 Survival The provisions of Article 10, Section 11.1 and Articles 20, 23, 24, 25 and 27 of this Agreement shall survive the expiration or termination of this Agreement in whole or in part for any reason. Sections 17.1, 17.3 and 17.4 shall survive the expiration or termination of this Agreement in whole or in part for any reason for ninety (90) days from U.S. Foodservice's receipt of the final invoice issued pursuant to this Agreement. Section 27.13 Third Party Beneficiaries Each party intends that this Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person or entity other than U.S. Foodservice or Lockheed Martin. Section 27.14 Acknowledgment U.S. Foodservice and Lockheed Martin each acknowledge that the limitations and exclusions contained in this Agreement have been the subject of active and complete negotiation between the parties and represent the parties' agreement based upon the level of risk to U.S. Foodservice and Lockheed Martin associated with their respective obligations under this Agreement. The parties agree that the terms and conditions of this Agreement shall not be construed in favor of or against any party by reason of the extant to which any party or its professional advisors participated in the preparation of this Agreement. -43- Section 27.15 Covenant of Further Assurances U.S. Foodservice and Lockheed Martin covenant and agree that, subsequent to the execution and delivery of this Agreement without any additional consideration, U.S. Foodservice and Lockheed Martin will each execute and deliver (a) any further legal instruments and perform any acts that are or may become necessary to effectuate the purposes of this Agreement, and (b) promptly upon the request of the other party, reasonable written assurance that the party receiving the request will duly perform its obligations under this Agreement in a timely manner. Section 27.16 Performance U.S. Foodservice's failure to perform any of the responsibilities set forth in Section 4, or in Exhibit 1, will not constitute a material breach of this Agreement or grounds for termination by Lockheed Martin; provided, however, that Lockheed Martin's nonperformance of its obligations under this Agreement will be excused if and to the extent: (a) such Lockheed Martin nonperformance results from U.S. Foodservice's failure to perform its responsibilities; and (b) Lockheed Martin uses commercially reasonable efforts to perform notwithstanding U.S. Foodservice's failure to perform. IN WITNESS WHEREOF, U.S. Foodservice and Lockheed Martin have each caused this Agreement to be signed and delivered by its duly authorized representative. U.S. FOODSERVICE, INC. By:/s/ Lewis Hay, III --------------------------- LOCKHEED MARTIN CORPORATION By:/s/ Rick N. Sprole --------------------------- -44- Exhibit 1a ---------- SOW for Baseline Services ------------------------- PART I SOW for Outsourcing Services ---------------------------- Article 1: RESERVED Article 2: DEFINITIONS For the purpose of this Part I of Exhibit 1a and related documents as referenced herein, the following definitions apply: 2.1 Agreement. The Information Technology Services Agreement --------- between the parties to which this Exhibit is attached. 2.2 Baseline Services. All Outsourcing Services and all Support and ----------------- Maintenance Services. 2.3 Beltsville Data Center: The Service Location in Beltsville, ----------------------- Maryland which Lockheed Martin will use to provide Outsourcing Services to U.S. Foodservice before the Migration Date. 2.4 Support and Maintenance Services. All services described in -------------------------------- Part II of this Exhibit 1a. 2.5 U.S. Foodservice Processing System: The data processing and ---------------------------------- telecommunications system operated or supported by Lockheed Martin under this Agreement. 2.6 Migration: The process of moving the U.S. Foodservice --------- Processing System from the Beltsville Data Center to the Orlando Data Center, as provided in Article 4. 2.7 Migration Date: The date when the U.S. Foodservice Processing -------------- System is running in production in the Orlando Data Center. 2.8 Migration Period. The period identified in Section 4.1. ---------------- 2.9 Orlando Data Center (ODC): The Service Center in Orlando, ------------------------- Florida owned and operated by Lockheed Martin, which Lockheed Martin will use to provide the Outsourcing Services to U.S. Foodservice beginning on the Migration Date. 2.10 Outsourcing Services: All data processing, network management, --------------------- systems operations and other information technology services currently provided by Lockheed Martin to U.S. Foodservice, including but not necessarily limited to the services described in Attachment A and elsewhere in Part I of this SOW (including services in connection with the Migration), but not including any Additional Services provided by Lockheed Martin pursuant to Article 5. Exhibit 1A-1 Article 3: OUTSOURCING SERVICES TO BE FURNISHED 3.1 General: During the Term, Lockheed Martin will provide -------- Outsourcing Services to U.S. Foodservice by remote access to the Beltsville Data Center before the Migration Date and to the Orlando Data Center beginning on the Migration Date. Attachment A includes a description of certain duties, obligations and responsibilities of Lockheed Martin, and certain responsibilities of U.S. Foodservice, relating to Lockheed Martin's performance of the Outsourcing Services. Article 4: MIGRATION 4.1 General: During the period beginning on the Effective Date and ------- ending **** or such longer period as the parties may agree upon in writing (the "Migration Period"), Lockheed Martin will migrate the U.S. Foodservice Processing System from the Beltsville Data Center to the Orlando Data Center. Lockheed Martin will make a best effort to (a) extend the lease term for the Beltsville Data Center through **** and (b) manage Migration **** in a manner that permits U.S. Foodservice to allocate its resources in a manner that assigns the highest priority to ensuring the continued performance of the U.S. Foodservice Processing System. 4.2 Migration Plan: Lockheed Martin will create a comprehensive -------------- migration plan (the "Migration Plan") based on our proven migration methodology and input from U.S. Foodservice, and the Migration Plan shall be subject to approval by U.S. Foodservice. The Migration Plan shall include, without limitation, a description of the methods and procedures Lockheed Martin will use to perform the migration of the U.S. Foodservice Processing System from the Beltsville Data Center to the Orlando Data Center. During the Migration any service interruptions or degradations that can be reasonably anticipated, during the process, will require approval in advance by U.S. Foodservice. The Migration Plan will also include a detailed project schedule and completion dates. Lockheed Martin shall provide all services required to perform the Migration except for migrating those services which are normally provided by U.S. Foodservice under this Agreement (i.e. communications, non-mainframe equipment, etc). 4.3 Implementation: Lockheed Martin and U.S. Foodservice will each -------------- perform the tasks required of it by the Migration Plan so that the Migration will be completed in accordance with the schedule set forth in the Migration Plan. Lockheed Martin will be responsible for overall management of the Migration and will use diligent efforts to keep the Migration on schedule and to identify and resolve any problems encountered in the timely completion of each conversion task, whether such task is the responsibility of Lockheed Martin or U.S. Foodservice. 4.4 Migration Manager: Lockheed Martin will assign a Migration ----------------- Manager to the migration effort. The Migration Manager will have complete responsibility for the project and will ensure the success of the migration. Weekly status meetings will be held with U.S. Foodservice to Exhibit 1A-2 report on project progress and discuss any open issues that have potential to impact the migration schedule. Article 5: ADDITIONAL SERVICES Computer consulting, programming and other services requested by U.S. Foodservice which are materially different from, and in addition to, the Outsourcing Services shall be considered to be "Additional Services." Lockheed Martin will provide a response, to U.S. Foodservice request for Additional Services according to the provisions outlined in Article 8 of the Agreement. Article 6: RESERVED Article 7: RESERVED Article 8: RESERVED Article 9: EQUIPMENT AND SOFTWARE 9.1 Lockheed Martin Equipment: Lockheed Martin will provide, ------------------------- procure, install, operate and maintain all Service Location hardware, communications devices and other equipment required to provide the Outsourcing Services during the Term (the "Lockheed Martin Equipment"). 9.2 U.S. Foodservice Equipment: Except as may otherwise be provided --------------------------- in this Agreement, U.S. Foodservice will provide, procure, install, operate, and maintain suitable and fully compatible terminal equipment and communications devices, other than those at the Service Location, required to access the U.S. Foodservice Processing System from remote locations. U.S. Foodservice may also provide server and communications equipment at the Service Location that will interface with the U.S. Foodservice Processing System. U.S. Foodservice provided equipment at the Service Location will remain under the control of and the responsibility of U.S. Foodservice unless Lockheed Martin is requested to and agrees to provide support for such equipment, at which time a modification to This Exhibit 1a shall be initiated stating the specific details. 9.3 Leased Equipment: U.S. Foodservice will have the option of ---------------- leasing some or all of the terminal equipment and communications devices described in Section 9.2 from Lockheed Martin. If U.S. Foodservice elects to lease any such equipment, the equipment shall be listed in Exhibit 7 Attachment B, the rental payments shall be defined in Exhibit 8 and other terms and conditions on which such equipment is leased to U.S. Foodservice shall be set forth in a Lease, executed by authorized representatives of both parties, substantially in the form of Exhibit 13 to the Agreement. Exhibit 1A-3 9.4 Lockheed Martin Software. Following the operating system ------------------------ upgrade services provided in accordance with Exhibit 1b, Lockheed Martin, at its expense, shall provide, procure (where Lockheed Martin is designated as the "Party Responsible for Software License Fees"), install, operate and maintain the software described in [Attachment A to Exhibit 1b], and any additional operating system software, including operating systems, systems utilities, data security software and monitors required to provide the Outsourcing Services during the Term (collectively, the "Lockheed Martin Software"). Lockheed Martin will pay any license, maintenance or upgrade charges related to the Lockheed Martin Software (where Lockheed Martin is designated as the "Party Responsible for Software License Fees"). Lockheed Martin shall keep the Lockheed Martin Software sufficiently current so that the Lockheed Martin Software is eligible for vendor-supplied maintenance support. U.S. Foodservice agrees not to withhold approval of software upgrades to maintain eligibility for vendor-supplied maintenance support without Lockheed Martin's concurrence. 9.5 U.S. Foodservice Customer Software: ---------------------------------- (a) The parties believe that the U.S. Foodservice Customer Software described in Exhibit 7 of the Agreement includes all of the application software currently required to operate U.S. Foodservice's business. U.S. Foodservice will be responsible for providing any additional application software it desires in operating its business. With regard to any U.S. Foodservice Customer Software which is not described in Exhibit 7, U.S. Foodservice will work with Lockheed Martin to ensure the compatibility of such U.S. Foodservice Customer Software with the operating environment on which such software will run. (b) Lockheed Martin will be responsible for managing the technical support interface with, and obtaining necessary technical support from, third party providers of U.S. Foodservice Software beginning on the Effective Date, providing that U.S. Foodservice has a current maintenance agreement with the third party provider. (c) Lockheed Martin will comply with all license restrictions and nondisclosure obligations imposed upon U.S. Foodservice under any license of U.S. Foodservice Software to the extent made known to Lockheed Martin (by receipt from U.S. Foodservice of a copy of any license or selected license clauses or by written characterization). Article 10: ACCURACY OF DATA 10.1 U.S. Foodservice: U.S. Foodservice will use commercially ---------------- reasonable efforts to ensure U.S. Foodservice software, other than U.S. Foodservice software residing at the Service Location, is free of any virus. Lockheed Martin shall use reasonable tools, processes and procedures to control the integrity of U.S. Foodservice's data and U.S. Foodservice Customer Software residing at the Service Location. In the event that U.S. Foodservice's data or U.S. Foodservice Customer Software residing at the Exhibit 1A-4 Service Location is corrupted due to Lockheed Martin error, Lockheed Martin will restore the data as soon as possible and in any event within **** after the data is corrupted. Both parties will use their best efforts to restore all data within **** after the data is corrupted. Subject to the foregoing, U.S. Foodservice shall, at the time of submission, be solely and exclusively responsible for the accuracy and adequacy of any new U.S. Foodservice Software it submits to Lockheed Martin, and all U.S. Foodservice data and other information submitted for processing and the resultant output, regardless of the form in which the U.S. Foodservice Software and data may have been submitted. 10.2 Lockheed Martin: Lockheed Martin warrants that Lockheed Martin --------------- will use best efforts to ensure Lockheed Martin Software is free of any virus. Lockheed Martin shall be responsible for the accuracy and adequacy of Lockheed Martin Software. 10.3 Liability Limitation: The total liability of each party for --------------------- any and all breaches of the warranty of such party regarding viruses shall in no event exceed **** dollars ($****). Article 11: DOWNTIME 11.1 Definition of Downtime: For purposes of this Article, the term ---------------------- "Downtime" shall mean the time during which the host processor, front end processor, operating system or protocol converter is unavailable to U.S. Foodservice (including one or more of its branches) for running one or more applications, for any reason other than a force majeure condition (as defined in section 2.1.29 and 13.1 of the Agreement). Downtime shall not include times during which the U.S. Foodservice Processing System is scheduled to be unavailable pursuant to Section 11.7 below. In addition, Downtime shall not include unavailability caused by third party vendors which is not eligible for vendor-supplied maintenance support because U.S. Foodservice, after having received written notice from Lockheed Martin informing U.S. Foodservice that such software would not be eligible for continued support unless upgraded, requested Lockheed Martin in writing to delay upgrading such software to a supported level. 11.2 Reserved 11.3 Reserved 11.4 Reserved 11.5 Reserved 11.6 Reserved 11.7 Scheduled Unavailability: The U.S. Foodservice Processing System is ------------------------ scheduled to be unavailable (a) ****, and (b) for up to **** each year on a date mutually acceptable to U.S. Foodservice and Lockheed Martin. The schedule of any other times Exhibit 1A-5 during the U.S. Foodservice Processing System will be unavailable must be approved in writing by U.S. Foodservice. Lockheed Martin will use its best efforts to work with U.S. Foodservice to reduce the length of scheduled unavailability. Article 12: STANDARDS 12.1 General: Lockheed Martin agrees that its performance of the ------- Outsourcing Services will meet or exceed each of the applicable Performance Standards set forth in Exhibit 3. Article 13: PROJECT MANAGEMENT 13.1 Lockheed Martin Outsourcing Services Manager: Lockheed Martin will -------------------------------------------- assign an individual (the "Lockheed Martin Outsourcing Services Manager") who will, as his or her sole responsibility (except as otherwise agreed upon by U.S. Foodservice), oversee and manage the performance of Lockheed Martin's obligations under this SOW other than the Migration, and serve as Lockheed Martin's primary point of contact with U.S. Foodservice for Outsourcing Services. Lockheed Martin will also assign one or more individuals to serve as acting Lockheed Outsourcing Services Managers during periods in which the Lockheed Martin Outsourcing Services Manager is unavailable. 13.2 Lockheed Martin Migration Manager: Lockheed Martin will assign an --------------------------------- individual (the "Lockheed Martin Migration Manager") who will, as his or her primary responsibility, oversee and manage the Migration, and serve as Lockheed Martin's primary point of contact with U.S. Foodservice with regards to the Migration. 13.3 U.S. Foodservice Project Manager: U.S. Foodservice will assign an --------------------------------- individual (the " U.S. Foodservice Project Manager") who will serve as U.S. Foodservice's point of contact for the Migration and day-to- day operations and communications with Lockheed Martin. 13.4 U.S. Foodservice Approval of Managers: Before finalizing the -------------------------------------- assignment of an individual to the positions of Lockheed Martin Outsourcing Services Manager or Lockheed Martin Migration Manager, whether as an initial assignment or as a replacement, Lockheed Martin will notify U.S. Foodservice of the proposed assignment, will introduce the individual to appropriate U.S. Foodservice representatives, and will provide U.S. Foodservice with information about the individual reasonably requested by U.S. Foodservice. If U.S. Foodservice in good faith objects to the proposed assignment within fifteen (15) working days of notification of such proposed assignment and introduction to such individual, then Lockheed Martin will not assign the individual to that position and will propose to U.S. Foodservice the assignment of another individual. 13.5 Removal of Personnel: In the event that U.S. Foodservice finds the -------------------- performance of a Lockheed Martin employee in providing Outsourcing Services to be unsatisfactory, U.S. Foodservice may request in writing the transfer of that employee from U.S. Foodservice's contract. Such request will indicate what is unsatisfactory about the employee's performance. Exhibit 1A-6 U.S. Foodservice agrees to provide Lockheed Martin a reasonable opportunity to correct such unsatisfactory performance, and, if Lockheed Martin is unable to do so, U.S. Foodservice. will allow Lockheed Martin a reasonable amount of time to transfer such employee from U.S. Foodservice's contract. 13.6 Periodic meetings: The Lockheed Martin Outsourcing Services Manager ----------------- and the U.S. Foodservice Project Manager will meet as often as necessary, but at least weekly, to review the current status of the Services provided under this Agreement. 13.7 Outsourcing Services Management Plan: Within 60 days after the ------------------------------------ effective date, Lockheed Martin and U.S. Foodservice will jointly develop an Outsourcing Services Management Plan describing the operating processes and procedures relating to the Outsourcing Services that Lockheed Martin will provide under this Agreement. At a minimum, the Outsourcing Services Management Plan will include (a) a description of the procedures Lockheed Martin proposes to undertake in order to perform the Outsourcing services, (b) contacts for both Lockheed Martin and U.S. Foodservice, (c) change approval authorization, (d) change control procedures consistent with Article 9.8 of the Agreement and lead times, (e) network management tools and trouble reporting procedures, (f) escalation procedures, (g) resource usage, statistics and other reporting requirements, and (h) problem analysis. The Outsourcing Services Management Plan will be updated periodically by the parties to reflect any changes in the operations or procedures described therein. Lockheed Martin shall perform all Outsourcing Services in accordance with the Outsourcing Services Management Plan. In the event of any inconsistency between the Outsourcing Services Management Plan and this Agreement, this Agreement shall control. Article 14: DESIGNATED FEES 14.1 The Outsourcing Services are included within the fees set forth in Section IV.A of Exhibit 8. Article 15: RESERVED Article 16: RESERVED Article 17: RESERVED Article 18: RESERVED Article 19: RESERVED Article 20: RESERVED Article 21: RESERVED Article 22: RESERVED Exhibit 1A-7 Article 23: RESERVED Article 24: RESERVED Article 25: RESERVED Article 26: ATTACHMENTS 26.1 General: The attachments listed below are incorporated herein by ------- reference. Attachment A: Outsourcing Services Exhibit 1A-8 Exhibit 1a - ATTACHMENT A OUTSOURCING SERVICES This Attachment A describes: (a) certain duties obligations and responsibilities of Lockheed Martin, including, but not limited to, data processing, network management, systems operations and other information technology services comprising the Outsourcing Services; (b) certain responsibilities of U.S. Foodservice, Inc. relating to Lockheed Martin's performance of the Outsourcing Services 1. OPERATIONAL SUPPORT ------------------- Lockheed Martin will provide operational support services, including the following: **** Exhibit 1A-9 2. TAPE MANAGEMENT --------------- Lockheed Martin will provide tape management services, including the following: **** U.S. Foodservice, Inc. will be responsible for the following: **** 3. **** MANAGEMENT --------------- Lockheed Martin will provide **** management services, including the following: Exhibit 1A-10 **** U.S. Foodservice, Inc. will be responsible for the following: **** 4. PRODUCTION SCHEDULING AND CONTROL --------------------------------- Lockheed Martin will perform production-scheduling functions, including the functions described below **** through **** from **** through **** and **** from **** through **** at ****: **** Exhibit 1A-11 U.S. Foodservice, Inc. will be responsible for the following: **** 5. SERVICE DESK AND PROBLEM MANAGEMENT ----------------------------------- Lockheed Martin will provide service desk and problem management services for the mainframe Outsourcing Services described herein, including the following: **** Exhibit 1A-12 6. TECHNICAL SUPPORT ----------------- Lockheed Martin will provide technical support for the U.S. Foodservice, Inc. Processing System, including the following: **** Exhibit 1A-13 U.S. Foodservice, Inc. will be responsible for the following: **** Exhibit 1A-14 7. DISASTER RECOVERY ----------------- In accordance with Section 13.3 of the Agreement, Lockheed Martin will assume responsibility for overall disaster recovery planning and management, including the following disaster recovery activities: **** U.S. Foodservice, Inc. will be responsible for the following: **** Exhibit 1A-15 8. COMPUTER RESOURCE SECURITY -------------------------- Lockheed Martin will provide computer resource security services, including the following: **** U.S. Foodservice, Inc. will be responsible for implementing security for access to application level resources. 9. PERFORMANCE AND CAPACITY MANAGEMENT ----------------------------------- Lockheed Martin will provide performance and capacity management services, including the following: **** Exhibit 1A-16 U.S. Foodservice, Inc. will be responsible for the following: **** 10. NETWORK MANAGEMENT ------------------ Lockheed Martin will provide network management services, including the following: **** Exhibit 1A-17 U.S. Foodservice, Inc. is primarily responsible for problem determination related to connectivity to U.S. Foodservice, Inc. for the data communications network. 11. MIGRATION PLANNING AND IMPLEMENTATION ------------------------------------- Lockheed Martin will manage the Migration to Orlando. Lockheed Martin's Migration services will include the following: **** U.S. Foodservice, Inc. will be responsible for the following: **** Exhibit 1A-18 12. ADMINISTRATIVE SERVICES ----------------------- Lockheed Martin will provide administrative services, including the following: **** U.S. Foodservice, Inc. will be responsible for the following: **** 13. CHANGE MANAGEMENT ----------------- Lockheed Martin and U.S. Foodservice, Inc. will maintain and operate the existing mainframe systems software/hardware change control system. In connection with the change control system, Lockheed Martin will provide the following services: **** Exhibit 1A-19 U.S. Foodservice, Inc. will be responsible for the following: **** 14. QUALITY ASSURANCE ----------------- **** Exhibit 1A-20 Exhibit 1a ---------- SOW for Baseline Services ------------------------- PART II SOW for Support and Maintenance of U.S. Foodservice Software ------------------------------------------------------------ 1.0 RESERVED 2.0 PROJECT OVERVIEW U.S. Foodservice and Lockheed Martin recognize that the provision of the Outsourcing Services by Lockheed Martin as provided in Part I of this Exhibit 1a will, during the term of the Agreement, require Lockheed Martin to (1) provide certain analysis of applications and other production objects as mutually determined (the "Applications Inventory") in order to assess the continuing functionality of the Applications Inventory during the term of the Agreement, (2) take such action as necessary to provide for the continued functionality of such Applications Inventory as to which the analysis described in clause (1), above, reveals deficiencies and (3) test the sufficiency of the corrective actions taken pursuant to clause (2), above. The parties shall agree from time to time upon specific work plans in connection with functionality issues identified from time to time during the term of the Agreement. 3.0 PROJECT DEFINITIONS For the purpose of this Part II of Exhibit 1a and related documents as referenced herein, the following definitions apply: 3.0.1 "Agreement" means the Information Technology Services Agreement --------- between the parties to which this Exhibit is attached. 3.0.2 "Support and Maintenance Services" has the meaning given in -------------------------------- Section 2. 4.0 FEES The Support and Maintenance Services are included within the fees set forth in Section IV.A of Exhibit 8. Exhibit 1A-21 Exhibit 1b Statement of Work for Operating System and Utility Upgrade SOW ATTACHMENTS: A. Attachment A to Exhibit 1b is a list of all operating system and utility software which is operated by Lockheed Martin at the Service Location and to which this SOW applies. B. Attachment B to Exhibit 1b is a detailed schedule showing all major tasks to be performed under this SOW and their estimated dates. SOW DEFINITIONS A. All capitalized terms used in this Exhibit 1b, unless otherwise defined herein, shall have the definitions given in the Agreement or in Exhibit 1a. B. "Attachment A Software" means the operating system and utility software listed on Attachment A. - -------------------------------------------------------------------------------- SECTION 1. Statement of Work: 1.1 **** Exhibit 1b-1 1.2 **** 1.3 **** 1.4 **** 1.5 **** 1.6 U.S. Foodservice shall make its employees and staff available to Lockheed Martin as needed to support the Project Plan schedule. 1.7 **** 1.8 **** - -------------------------------------------------------------------------------- SECTION 2. Applicable General/Special Clauses: 2.1 U.S. Foodservice Software. The Parties acknowledge and agree that all ------------------------- software other than Attachment A Software, including but not limited to applications software used by U.S. Foodservice (for example: General Ledger, etc.), remains the responsibility of U.S. Foodservice and is not included or provided for as part of this SOW. Exhibit 1b-2 2.2 Warranty. Lockheed Martin shall perform the Upgrade Services in a -------- professional manner and makes no representation or warranty concerning the functionality, performance, or availability of OEM software products necessary to make Attachment A Software Year 2000 Compliant. U.S. Foodservice warrants and represents that it has the full power and authority to enter into this SOW, grant Lockheed Martin the right to perform Lockheed Martin obligations under this SOW with respect to Attachment A Software which is licensed to U.S. Foodservice and to perform U.S. Foodservice's obligations under this SOW. 2.3 Claims of Infringement. Lockheed Martin shall have no liability or ---------------------- obligation for any third party claim of infringement of its intellectual property arising from or in connection with the Upgrade Services to the extent any such claim is based upon (a) modifications of the Attachment A Software by parties other than Lockheed Martin or its subcontractors or use of such modified product or services, or (b) use of the products and services in combination with materials or products not supplied by Lockheed Martin, unless consented to by Lockheed Martin. - -------------------------------------------------------------------------------- SECTION 3. Schedule: 3.1 Start work on ****. 3.2 **** 3.3 Complete SOW by ****. 3.4 A detailed schedule showing all major tasks and their planned dates is attached hereto as Attachment B. - -------------------------------------------------------------------------------- SECTION 4. Designated Fees 4.1 The Upgrade Services are included within, and are to be provided in return for, the fixed monthly charges set forth in Section IV.B of Exhibit 8. Exhibit 1b-3 Exhibit 1b -- Attachment A Software To Be Upgraded
Party Responsible for Manufacturer Product Name Software License Fees ------------ ------------ --------------------- **** **** ****
Exhibit 1b -- Attachment A Software To Be Upgraded
Party Responsible for Manufacturer Product Name Software License Fees ------------ ------------ --------------------- **** **** ****
ATTACHMENT B Performance Schedule Exhibit 1b-5 Page 1 of 21
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Page 3 Exhibit 1c Statement of Work for Branch Conversion Program Support and Applications Upgrade SOW ATTACHMENTS Appendix 1 to Exhibit 1c is a list of the modifications to the application software at the Service Location which will be necessary for conversion of data processing from the U.S. Foodservice branch locations to the U.S. Foodservice Processing System. Modifications listed in Appendix 1 are those which Lockheed Martin has primary responsibility for managing the work being performed. The addition of modifications to the application software to Appendix 1 of Exhibit 1c is subject to the provisions of Article 8 of the Agreement. A "Work Authorization" as provided for in Exhibit 8 will be executed to authorize Lockheed Martin to perform modifications to the application software. In addition, Lockheed Martin will provide applications programming and other support, as requested by U.S. Foodservice, for modifications to the applications software which are being managed by U.S. Foodservice. This support is authorized by Work Authorization #1 and these modifications will not be listed in Appendix 1. SOW DEFINITIONS A. All capitalized terms used in this Exhibit 1c, unless otherwise defined herein, shall have the definitions given in the Agreement or in Exhibit 1a. 1. Overview 1.1. Purpose Lockheed Martin shall provide assistance in organizing and managing the execution of the Branch Conversion Program. 1.2 Requirement Definition Lockheed Martin currently operates the U.S. Foodservice Processing System at the Service Location for U.S. Foodservice; however, U.S. Foodservice has a number of branch operations which do not process data through the U.S. Foodservice Processing System but instead process data on separate software applications at such branch locations. U.S. Foodservice desires to convert all data processing by its branch locations to the U.S. Foodservice Processing System on a schedule to be mutually agreed upon by the parties in order to enhance reliability, reduce cost and gain the competitive advantages afforded by the U.S. Foodservice Processing System. Conversion of the **** branch locations shall be completed by ****. Conversion of data processing from the branch locations is Exhibit 1c - 1 expected to require modification of the application software at the Service Location to accommodate unique processing needs of individual branches which are currently processing data internally. A listing of the modifications to the application software at the Service Location is attached hereto as Appendix 1. The services to be provided by Lockheed Martin under this SOW, which shall include identification of the modifications to the application software at the Service Location in order to accommodate the needs of the U.S. Foodservice branches, the preparation and implementation of modifications to the application software at the Service Location agreed upon by U.S. Foodservice, including the modifications listed on Appendix 1, and the migration of data processing services from individual U.S. Foodservice branch locations to the Service Location are referred to herein as the "Branch Conversion Services." Lockheed Martin support is required beginning December 1998 through completion of the conversion of all branch locations for the Branch Conversion Services. 1.3 Scope . **** . **** . **** 1.4 Ownership of the Results of the Branch Conversion Services As part of the Branch Conversion Services, it is anticipated that Lockheed Martin will modify applications software that is part of the U.S. Foodservice Processing System. Lockheed Martin hereby assigns to U.S. Foodservice all of Lockheed Martin's rights, title and interest, including any and all patent, copyright, trademark and trade secret rights, in and to any and all modifications and additions to any component of the U.S. Foodservice Processing System prepared, developed or otherwise provided by Lockheed Martin as part of the Branch Conversion Services, and all ideas and inventions, whether or not patentable, which may be embodied in such modifications. Lockheed Martin agrees that it shall execute any and all documents which may be reasonably requested by U.S. Foodservice in order to enable U.S. Foodservice to perfect the rights assigned to it by this Section 1.4. 1.5 Warranty For modifications listed in Appendix 1 to Exhibit 1c, Lockheed Martin represents and warrants to U.S. Foodservice that each modification to the U.S. Foodservice Processing System made by Lockheed Martin pursuant to this Statement of Work shall be Year 2000 Compliant. Exhibit 1c - 2 2. Services to be provided 2.1. Services Supporting Branch Conversion 2.1.1 **** 2.1.2 **** 2.1.3 **** 2.2 Non-Mainframe Support Lockheed Martin will assist U.S. Foodservice in maintaining and supporting the performance and functionality of U.S. Foodservice's non-mainframe systems at the U.S. Foodservice Exhibit 1c - 3 branch locations until such systems are successfully converted to the U.S. Foodservice Processing System. Such assistance will include, but not be limited to, the following: . **** . **** . **** . **** . **** 3.0 Branch Conversion Deliverables For application modifications listed in Appendix 1 to Exhibit 1c where Lockheed Martin has primary management responsibility: (a) The Work Authorization prepared for each application modification will define the work to be performed including, but not limited to, requirements to be satisfied by the modification, procedures for modifying the requirements, responsibilities of both parties, estimated development and implementation schedule, deliverables, and the procedure for acceptance, rejection, and correction of each deliverable. For application modifications not listed in Appendix 1 to Exhibit 1c where U.S. Foodservice has primary management responsibility, U.S. Foodservice is responsible for deliverables. 4.0 U.S. Foodservice Responsibilities 4.1 Personnel U.S. Foodservice and Lockheed Martin will jointly determine the division of work as tasks are defined. U.S. Foodservice will provide personnel to support tasks assigned to U.S. Foodservice. The successful completion of the tasks in this SOW and deliverables related to these tasks will depend on both U.S. Foodservice and Lockheed Martin executing their respective tasks in a timely and accurate manner. 5.0 Designated Fees Exhibit 1c - 4 The Branch Conversion Services are to be provided on a time and materials basis in accordance with Section IV.C of Exhibit 8. Exhibit 1c - 5 APPENDIX 1 Lockheed Martin Managed Software Modifications Work Authorization # Description - -------------------- ----------- Exhibit 1c - 6 EXHIBIT 2 REPORTS Following are samples of reports that will be provided to U.S. Foodservice, Inc. as part of the designated services. The content and format of the reports may vary over the term of the agreement as agreed to by both parties. Exhibit 2-1 **** Reports - ------------ Purpose: The **** reports are used to assist U.S. Foodservice, Inc. management in determining whether ****. Frequency: The **** reports will be published weekly. Exhibit 2-2 **** Reports - ------------ Purpose: The **** reports are used to assist in setting priorities within the U.S. Foodservice, Inc. **** and in determining whether ****. Frequency: The **** reports will be published monthly. Exhibit 2-3 **** Reports - ------------ Purpose: The **** reports are the basis for ****. Frequency: The **** reports will be published monthly. Exhibit 2-4 Exhibit 3 - PERFORMANCE STANDARDS Lockheed Martin agrees that its performance of the Outsourcing Services at each Service Center will meet or exceed each of the Performance Standards set forth below: 1. Delivered Monthly Availability (a) **** (b) **** (c) **** (d) **** (e) **** With regard to paragraphs (a) through (d) above, availability will be measured by dividing (i) the number of hours during the month in which the ****, as applicable, is available (excluding, however, any hours during which the ****, as applicable, is available during periods of scheduled unavailability), by (ii) the difference between (A) the total number of hours during the month and (B) the number of hours of scheduled unavailability. Schedule unavailability will be determined under Section 11.7 of this Agreement. 2. End-to-End Response Times Online system end-to-end response time performance will be measured for the period of **** (the "Critical Response Time Window"). The end-to-end response time each month for at least ****% of all on-line transactions during the Critical Response Time Window in that month will be completed within ****. The parties acknowledge that the actions of each of Lockheed Martin and U.S. Foodservice, Inc. will impact Lockheed Martin's ability to meet such performance levels for end-to-end response times. In addition, the parties acknowledge that Lockheed Martin's ability to meet the performance levels for on-line end-to-end response times is dependent upon U.S. Foodservice, Inc. purchasing sufficient **** capacity to support the volume of transactions and types of applications run by U.S. Foodservice, Inc. to the extent that they are different from that which U.S. Foodservice, Inc. was running in December 1998. As a result, the parties agree that Lockheed Martin and U.S. Foodservice, Inc. will work together to identify and resolve any failure to meet such performance levels. ****. Exhibit 3-1 EXHIBIT 4 Key Employees Employee Title -------- ----- **** **** Key employees are all long term employees. As long term employees, Lockheed Martin will charge these employees at long term rates as defined in Exhibit 8 and U.S. Foodservice, Inc. commits to these positions for a period of 9 months or longer. EXHIBIT 6 Termination Assistance Services Termination Assistance Services - ------------------------------- Upon the expiration or termination of this Agreement, Lockheed Martin shall, upon U.S. Foodservice, Inc.'s request, during the 90 day Termination Assistance Period, provide the Termination Assistance Services at Lockheed Martin **** except to the extent that resources included in the Designated Fees being paid by U.S. Foodservice, Inc. to Lockheed Martin after such expiration or termination can be used to provide Termination Assistance Services without requiring Lockheed Martin to acquire or provide resources not included in the Designated Fees. The quality and level of the Services shall not be degraded during the Termination Assistance Period. After the expiration of the Termination Assistance Period, Lockheed Martin shall answer questions from U.S. Foodservice, Inc. regarding the Services on an "as needed" basis at Lockheed Martin then standard commercial billing rates. Exit Plan - --------- Upon the later of expiration or termination of this Agreement and the last day of the Termination Assistance Period: (1) U.S. Foodservice, Inc. will allow Lockheed Martin to use, at no charge, those U.S. Foodservice, Inc. facilities being used to perform the services for up to 30 days following the effective date of expiration or termination of this Agreement (or from the last day of any Termination Assistance Period) to enable Lockheed Martin to effect an orderly transition of U.S. Foodservice, Inc. resources. (2) Upon U.S. Foodservice, Inc. request, with respect to any Third Party Contracts applicable to services being provided to U.S. Foodservice, Inc. for maintenance, disaster recovery services or other necessary third party services being used by Lockheed Martin to perform the Services as of the date of such expiration or termination, Lockheed Martin shall, to the extent permitted by the third party contracts, transfer or assign such contracts to U.S. Foodservice, Inc. or its assignee, on terms and conditions acceptable to all applicable Parties. (3) As part of the Termination Assistance Services, upon the expiration or termination of this Agreement, Lockheed Martin shall identify and assist U.S. Foodservice, Inc. in procuring suitable functionally equivalent replacements for any shared hardware or software then used by Lockheed Martin to provide the Services. Exhibit 6-1 EXHIBIT 7 Mainframe Software List, Modem Hardware List Attachment A to Exhibit 7 lists all mainframe software and denotes whether payment of the license fee is the responsibility of Lockheed Martin or U.S. Foodservice, Inc. **** Attachment B to Exhibit 7 lists all modems provided by Lockheed Martin. These modems will be invoiced on a monthly basis as per the pricing schedule in Exhibit 8. Exhibit 7-1
Exhibit 7 -- Attachment A Software License Responsibility 5/6/99 Responsible Manufacturer Product Name Party Notes/Comments - ------------ ------------ ----------- -------------- **** **** **** ****
Exhibit 7 -- Attachment A Software License Responsibility 5/6/99 Responsible Manufacturer Product Name Party Notes/Comments - ------------ ------------ ----------- -------------- **** **** **** ****
Exhibit 7 -- Attachment A Software License Responsibility 5/6/99 Responsible Manufacturer Product Name Party Notes/Comments - ------------ ------------ ----------- -------------- **** **** **** ****
U.S. Foodservice, Inc. Modem Inventory May 6, 1999 Exhibit 7 -- Attachment B Page 1 Central and Remote Modems by Branch - ------------------------------------------------------------------------------------------------------------------------------------ Branch & Central Modem or Central Mux Central Back-up Remote Modem Remote Mux Remote Back-up Sungard Modem Location DSU & s/n & s/n Modems & s/n's or DSU & s/n & s/n Modem & s/n & s/n - ------------------------------------------------------------------------------------------------------------------------------------ **** **** **** **** **** **** **** **** Exhibit 7 Attachment B-1
U.S. Foodservice, Inc. Modem Inventory May 6, 1999 Exhibit 7 -- Attachment B Page 2 Central and Remote Modems by Branch - ------------------------------------------------------------------------------------------------------------------------------------ Branch & Central Modem or Central Mux Central Back-up Remote Modem Remote Mux Remote Back-up Sungard Modem Location DSU & s/n & s/n Modems & s/n's or DSU & s/n & s/n Modem & s/n & s/n - ------------------------------------------------------------------------------------------------------------------------------------ **** **** **** **** **** **** **** **** Dial up Modems Provided by Lockheed Martin - ------------------------------------------------------------------------------------------------------------------------------------ Modem Central Modem or Central Mux Central Back-up Remote Modem Remote Mux Remote Back-up Sungard Modem Type DSU & s/n & s/n Modems & s/n's or DSU & s/n & s/n Modem & s/n & s/n - ------------------------------------------------------------------------------------------------------------------------------------ **** **** **** **** **** **** **** **** Exhibit 7 Attachment B-2
U.S. Foodservice, Inc. Modem Inventory May 6, 1999 Exhibit 7 -- Attachment B Page 3 Dial up Modems Provided by Lockheed Martin - ------------------------------------------------------------------------------------------------------------------------------------ Modem Central Modem or Central Mux Central Back-up Remote Modem Remote Mux Remote Back-up Sungard Modem Type DSU & s/n & s/n Modems & s/n's or DSU & s/n & s/n Modem & s/n & s/n - ------------------------------------------------------------------------------------------------------------------------------------ **** **** **** **** **** **** **** **** Exhibit 7 Attachment B-3
EXHIBIT 8 Designated Fees I. General A. Overview - The Designated Fees described in this Exhibit 08 represent all the fees agreed upon between the Parties and are the only fees that will be collected by Lockheed Martin for the Services. B. Changes to the Designated Fees defined herein are subject to mutual agreement by the parties. C. The level of resources for Baseline Services described in Exhibit 1a is provided for a monthly minimum fee. This fee will be charged monthly throughout the contract term as long as U.S. Foodservice requires the Baseline Services. D. The fees shown in Section IV, Baselines & Fees, of this Exhibit ---------------- reflect all work specified in the Statements of Work. E. Travel and lodging expenses as required in support of services other than the Baseline Services will be reimbursed ****. II. Definitions A. Planned Periods of Performance 1) Baseline Services **** 2) Operating System and Utility Upgrade **** 3) Branch Conversion Program Support and Applications Upgrade **** B. Labor Pricing 1) "Long Term" is considered to be full time, 9 months or more. Pricing is based on 167 hours per month (2000 hrs. / year). **** 2) "Short Term" pricing is considered less than 9 months and more sporadic in nature. 3) Economic Price Adjustment. The Designated Fees and all other charges payable by U.S. Foodservice under this agreement include protection against reasonable inflation rates. However, in order to provide a reasonable balance between price and risk, extraordinary inflation has not been included in the Designated Fees. Should economic conditions result in extraordinary inflation, the parties will mutually agree on an appropriate pricing adjustment. C. Termination Fees are detailed in Exhibit 9. The purpose of these fees is to provide Lockheed Martin equitable and appropriate compensation, determined at the time of termination, for costs of shedding the resources that are no longer required to provide the services. III. Pricing Notes and Assumptions ----------------------------- 1. **** 2. **** 3. **** 4. **** 5. **** 6. **** 7. **** 8. **** 9. **** 10. **** 11. **** IV. Baselines & Fees ---------------- A. Mainframe Operations Base Package of provided resources: **** Additional Charges for Usage Above Baseline **** B. Operating System and Utility Upgrade Fixed monthly charges. **** C. Branch Conversion Program Support **** D. Additional Variable Unit Rates **** E. Charges for Software to Support Branch Printing **** F. Professional Services Fees
- ------------------------------------------------------------------------------------------------------------------------------- 1999 Short Term 1999 Long Term Title Rate/Hour Rate/Hour Position Description - ------------------------------------------------------------------------------------------------------------------------------- Senior Account Manager $ **** $ **** Senior manager who has broad based knowledge and experience in all disciplines of Project Management, Data Center Operations, Management Information Systems and Communications. Capable of leading, structuring, and advising on Information Systems projects within an organization. (Minimum 10 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Senior Systems Architect $ **** $ **** Senior manager who has broad based knowledge and experience in all disciplines of Project Management, Data Center Operations, Management Information Systems and Communications. Capable of leading, structuring, and advising on Information Systems projects within an organization. (Minimum 10 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Account Manager $ **** $ **** Manager with strong project management skills, customer liaison skills, user-interface skills and team management skills. (Minimum 10 years experience) - ------------------------------------------------------------------------------------------------------------------------------- System Architect $ **** $ **** Manager/technical lead with a broad technical background in mainframe, client/server, operations and data administration to develop the program technical architecture and alternative technology and predict solution. (Minimum 10 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Principal Consultant $ **** $ **** Consultant within a functional area (systems, operations, communications, applications, database) who is capable of advising senior management within the technical or functional disciplines. (Minimum 10 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Project Manager $ **** $ **** Manager who monitors performance against scope of work, contract schedules, and plans. Field and Project Managers provide the principal interface with the customer on project-related issues of contract performance and staffing. (Minimum 7 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Project Facilitator $ **** $ **** Provides user and team facilitation toward requirements, consensus, and design decisions. Prepares materials, facilitation process, and outputs from the process. (Minimum 5 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Senior Consultant $ **** $ **** Consultant within any function or discipline. This position is oriented towards technical specialties. (Minimum 7 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Consultant $ **** $ **** Consultant within any function or discipline. This position is oriented towards technical specialties. (Minimum 5 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Senior Programmer Analyst $ **** $ **** Individual who is capable of defining requirements, developing and/or modifying existing procedures, and/or computer systems, leading programmers, advising and supervising a group of programmers. Responsible for projects where heavy analysis and design effort is required and where operator functions need to be defined. (Minimum 7 years experience) - -------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- 1999 Short Term 1999 Long Term Title Rate/Hour Rate/Hour Position Description - ------------------------------------------------------------------------------------------------------------------------------- Programmer Analyst $ **** $ **** Individual who provides advice, evaluation, lead operator functions, design support in developing and/or modifying Functional Systems Design and taking programming specifications to perform the programming and testing functions. (Minimum 5 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Programmer $ **** $ **** Category for individuals responsible for taking programming specifications and performing the programming and testing function. (2 to 5 years experience or equivalent) - ------------------------------------------------------------------------------------------------------------------------------- Associate Programmer $ **** $ **** Category for individuals responsible for taking programming specifications and performing the programming and testing function. (Up to 2 years experience or equivalent) - ------------------------------------------------------------------------------------------------------------------------------- Telecommunications/LAN $ **** $ **** The communications specialist installs, maintains, troubleshoots Specialist and accounts for a wide variety of telecommunications hardware. Diagnoses and solves difficult operating problems using sophisticated testing equipment. The Local Area Network (LAN) specialist responsibilities include software installation and support. (Minimum 7 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Computer Architecture $ **** $ **** Prepares, reviews and implements detailed documentation and Technician plans for installation, removal or customization of computing equipment and peripheral hardware. (Up to 5 years experience or equivalent) - ------------------------------------------------------------------------------------------------------------------------------- Senior Documentation $ **** $ **** Technical writer with experience in planning, research, writing Specialist and layout of technical manuals, user guides, installation guides and other publications pertaining to the system specified by the customer. (Minimum 5 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Documentation/Senior $ **** $ **** Technical writer with experience in writing/editing technical Word Processing documentation. Works under direct supervision on a project Specialist team. (Minimum 3 years experience) - ------------------------------------------------------------------------------------------------------------------------------- Word Processor $ **** $ **** Word processor with experience in various software packages and works under direct supervision. (Minimum 1 year experience) - -------------------------------------------------------------------------------------------------------------------------------
Note: ****. Professional Services Fees beyond calendar year 1999 will be adjusted annually for consideration of inflation. Professional Services Fees hours will be authorized through a work authorization document. Exhibit 8 - Attachment 1 ------------------------ US Foodservice **** ------------------- (****) ------ Total Over Approved Approved Date **** Base **** US Foodservice Lockheed Martin - ---- ---- ---- ---- -------------- --------------- **** **** **** **** **** **** Exhibit 8 - Attachment 2 ------------------------ US Foodservice **** ------------------- (****) ------
Added Total Over Total Approved Approved Date Additional Volumes GB Base GB US Foodservice Lockheed Martin - ---- ------------------ ---- ---- ---- -------------- --------------- **** **** **** **** **** **** ****
INTEGRATED BUSINESS SOLUTIONS WORK AUTHORIZATION (WA) This Work Authorization is issued pursuant to AGREEMENT Number between ----- U.S. Foodservice, Inc. ("Client") and Lockheed Martin Corporation ("Lockheed Martin").
WA NUMBER: 1 --------- WA REVISION NUMBER: --------- WA EFFECTIVE DATE: 12/1/1998 --------- WA TERMINATION DATE: **** ---------
- -------------------------------------------------------------------------------- SECTION 1. Overview: See exhibit 1c "Branch Conversion Program Support in the Agreement. - -------------------------------------------------------------------------------- SECTION 2. Services to be provided: See exhibit 1c "Branch Conversion Program Support in the Agreement. - -------------------------------------------------------------------------------- SECTION 3. U.S. Foodservice Responsibilities: See exhibit 1c "Branch Conversion Program Support in the Agreement. - -------------------------------------------------------------------------------- SECTION 4. Branch Conversion: See exhibit 1c "Branch Conversion Program Support in the Agreement. - -------------------------------------------------------------------------------- SECTION 5. Designated Fees: See exhibit 1c "Branch Conversion Program Support in the Agreement. Lockheed Martin will provide the following staff to manage the delivery of the above services. The Lockheed Martin staff will travel, as required by U.S. Foodservice, to effectively support this work. - ---------------------------------------------------------------------------------------------------------------------- Estimated Labor Months by Category **** **** **** - ---------------------------------- Category (number of personnel) **** **** **** ****
Exhibit 8 - Attachment 3 Funding Notes: Labor for this Work Authorization will be billed on a **** basis in accordance with the rates specified in Exhibit 8 of the agreement. The estimated hours in Exhibit 8 of the agreement will constitute a funding limit for this Work Authorization. Funding for categories identified with an * is based on a rough order of magnitude estimate of the effort required. The actual funding levels will depend on the requirements agreed upon for the branch conversions and the number and skill level of the personnel provided by U.S. Foodservice. The U.S. Foodservice Vice President, Corporate Information Systems and the Lockheed Martin Program Manager shall jointly determine actual the staffing levels for these categories. Should funding be required in excess of the funding limits for these categories, this agreement will be amended. Funding for each category not identified with an * is provided by this SOW for the indicated number of personnel on a full time basis unless the U.S. Foodservice Vice President, Corporate Information Systems and the Lockheed Martin Program Manager determine that personnel within a category can be eliminated or reduced. Travel and lodging expenses as required will be reimbursed **** and are not included in the total estimated annual price. LOCKHEED MARTIN CORPORATION U.S. FOODSERVICE, INC. By /s/ Rick N. Sprole By /s/ Lewis Hay, III ------------------------ ------------------------- (authorized signature) (authorized signature) Rick N. Sprole Lewis Hay, III ------------------------ ------------------------- (name) (name) Manager of Contracts EVP & CFO ------------------------ ------------------------- (title) (title) 5-20-99 5/7/99 ------------------------ ------------------------- (date) (date) Exhibit 8 - Attachment 3 EXHIBIT 9 Termination Schedule The following termination schedule reflects the fees payable to Lockheed Martin in the event of a termination by U.S. Foodservice in accordance with Section 21.1 or 21.3, or in the event of termination by Lockheed Martin in accordance with Section 21.2. TERMINATION FEES ($K)
- ------------------------------------------------------------------------------------------------- Category 1999 2000 2001 2002 2003 - ------------------------------------------------------------------------------------------------- Termination of all $ **** $ **** $ **** $ **** $ **** Services - -------------------------------------------------------------------------------------------------
Note: Values above represent December 31 of each calendar year. Termination fees will be adjusted on a pro rata basis in the event that termination becomes effective on any other date. If U.S. Foodservice terminates the Agreement pursuant to Section 21.1 or Lockheed Martin terminates the Agreement pursuant to Section 21.2, then Lockheed Martin will also be entitled to receive from U.S. Foodservice, to the extent actually paid by Lockheed Martin, the severance payments made in accordance with Lockheed Martin's standard policies and procedures to those Lockheed Martin employees working primarily on providing the Services to U.S. Foodservice who are terminated directly as a result of the termination of the Agreement. Exhibit 9-1 Exhibit 13 LEASE, ADDITIONAL TERMS AND CONDITIONS Article 1: DEFINITIONS For the purpose of this Attachment and Agreement, these listed definitions will apply: 1.1 Lessor: Lockheed Martin 1.2 Lessee: U.S. Foodservice, Inc. 1.3 Installation Date: Article 2: LEASE 2.1 Lockheed Martin agrees to lease to U.S. Foodservice, Inc., and U.S. Foodservice, Inc. agrees to lease from Lockheed Martin, the Computer Equipment ("Equipment') described in Equipment Lease Schedule, Exhibit 7 Attachment B. The terms and conditions contained in this Exhibit, the Equipment Lease Schedule, and the Agreement shall govern the leasing and use of the Equipment. Article 3: TERM 3.1 Unless otherwise specified in the Equipment Lease Schedule Exhibit 7 Attachment B, the term of this Attachment shall commence on Installation Date and shall continue until the expiration or termination of the Agreement. Article 4: RENTAL 4.1 The monthly rental payable by U.S. Foodservice, Inc. to Lockheed Martin shall be set forth in the Equipment Lease Schedule Exhibit 7 Attachment B. Payments will be governed by Article 8 of the Agreement. Article 5: INSTALLATION AND USE OF EQUIPMENT 5.1 U.S. Foodservice, Inc. will at all times keep the Equipment in its sole possession and control. The Equipment shall not be moved from the locations) stated in the Equipment Schedule without prior written consent of Lockheed Martin, which consent shall not be unreasonably withheld. 5.2 Lockheed Martin will provide definition of facility interfaces required for connection of and operation of the Equipment, the environmental limitations identified for the Equipment by the manufacturer, and instruction manuals required for the Equipment's operational use. 5.3 U.S. Foodservice, Inc. agrees to provide suitable electric current to operate the Equipment and a suitable place of installation and environment for the Equipment and will comply with all appropriate installation requirements specified by the Equipment manufacturer. 5.4 U.S. Foodservice, Inc. agrees that the input/output and storage media used to operate the Equipment will suit the specifications of the Equipment manufacturer. Article 6: MAINTENANCE, REPAIRS AND RISK OF LOSS 6.1 U.S. Foodservice, Inc. shall during the terms of this lease, at its expense, maintain the Equipment in good working order through purchase of Lockheed Martin maintenance, priced separately on the Equipment Schedule. U.S. Foodservice, Inc. shall not use or permit the Equipment to be used for any purpose for which, in the opinion of the manufacturer, the Equipment is not designed or reasonably suitable. Failure of the U.S. Foodservice, Inc. to maintain and operate the Equipment as required by the equipment manufacturer so as to invalidate any warranty by the Equipment manufacturer shall require U.S. Foodservice, Inc. to be responsible for any repairs or replacement of parts normally covered by an Equipment manufacturer's warranty. 6.2 U.S. Foodservice, Inc. is responsible for all risk of loss and damage to the Equipment during the term of this lease. U.S. Foodservice, Inc. shall procure and maintain fire, extended coverage and theft insurance covering the Equipment. Such insurance shall be in an amount at least equal to the purchase price of the Equipment. All insurance policies shall be endorsed to protect the interest of Lockheed Martin by naming Lockheed Martin as an additionally named insured. 6.3 At the expiration or earlier termination of the Agreement, U.S. Foodservice, Inc. shall, at its expense, return the Equipment to Lockheed Martin, at the location specified by Lockheed Martin, in the same operating order, repair, condition, and appearance as on the Installation Date, reasonable wear and tear excepted. Article 7: OWNERSHIP AND INSPECTION 7.1 Equipment shall at all times remain the property of Lockheed Martin. Lockheed Martin may affix identification tags, decals or plates to the Equipment indicating Lockheed Martin's ownership, and U.S. Foodservice, Inc. shall not permit their removal or concealment. 7.2 U.S. Foodservice, Inc. shall keep the Equipment free and clear of all liens and encumbrances. 7.3 Lockheed Martin or its agent shall have free access to the Equipment at all reasonable time for the purpose of inspection. 7.4 U.S. Foodservice, Inc. shall immediately notify Lockheed Martin of all details concerning any damage or loss arising out of an alleged or apparent improper manufacture, functioning, or operation of the Equipment. Article 8: QUIET ENJOYMENT 8.1 Lockheed Martin agrees that the U.S. Foodservice, Inc. shall quietly possess the Equipment subject to and in accordance with the provisions in Agreement and this Attachment, so long as U.S. Foodservice, Inc. is not in default hereunder. LOCKHEED MARTIN CORPORATION U.S. FOODSERVICE, INC. /s/ Rick N. Sprole /s/ Lewis Hay, III - --------------------------- ----------------------------- (Signature) (Signature) Rick N. Sprole Lewis Hay, III - --------------------------- ----------------------------- (Printed/Typed Name) (Printed/Typed Name) Manager of Contracts EVP & CFO - --------------------------- ----------------------------- (Title) (Title) 5/20/99 5/7/99 - --------------------------- ----------------------------- (Dated) (Dated) Exhibit 13-3 EX-21 9 EXHIBIT 21 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 U.S. FoodService of Buffalo, Inc. New York John Sexton & Co. Delaware U.S. Foodservice of Illinois, Inc. Delaware J.H. Haar & Sons L.L.C. New Jersey Duke Associates (Partnership) (1) Sofco, Inc. New York SQP, Inc. New York S. & O. Property Corporation New York Sofco-Mead Internal Management Corp. New York Trans-Porte, Inc. Delaware 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 Joseph Webb Foods, Inc. Delaware ____________________ (1) 97% owned by John Sexton & Co.; 3% owned by U.S. Foodservice, Inc. EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 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 (Nos. 333-67553, 333-81323 and 333-84889) and Form S-8 (Nos. 33-88140, 33-88142, 33-88144, 33-88146, 33-81011, 333-37359, 333-43185, 333-47759, 333-73447 and 333-78209) of U.S. Foodservice of our report, dated August 16, 1999, with respect to the consolidated balance sheets of U.S. Foodservice and Subsidiaries as of June 27, 1998 and July 3, 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows and schedules for each of the years then ended, which report appears in the Form 10-K of U.S. Foodservice for the year ended July 3, 1999. /s/KPMG LLP Baltimore, Maryland September 29, 1999 EX-23.2 11 EXHIBIT 23.2 EXHIBIT 23.2 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 29, 1999, into U.S. Foodservice's (formerly JP Foodservice, 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 333-78209) and Form S-3 (File Nos. 333-67553, 333-81323 and 333-84889). /s/Arthur Andersen LLP Philadelphia, PA September 29, 1999 EX-27 12 FINANCIAL DATA SCHEDULE
5 YEAR YEAR JUN-27-1998 JUL-03-1999 JUN-29-1997 JUN-28-1998 JUN-27-1998 JUL-03-1999 57,817 79,660 0 0 339,022 336,476 (15,818) (15,162) 349,583 429,193 797,282 895,131 695,359 712,938 258,094 258,905 1,817,791 2,012,874 509,466 515,191 0 0 0 0 0 0 926 1,012 583,794 828,367 1,817,791 2,012,874 5,506,949 6,198,408 5,506,949 6,198,408 4,465,281 5,052,068 980,769 934,174 91,716 64,974 12,254 10,709 73,894 64,974 (30,817) 147,192 6,475 58,910 (37,292) 88,282 0 0 (9,712) (5,048) 0 0 (47,004) 83,234 0.52 0.87 0.52 0.86
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