-----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, UX1IbiryiA7aCZc1IF/T2s0yWttlePCHDrN0yoFhEb7hKxZwJPgk1cP9a/1fk575 KGEZv7BA0pz5wrWaSEtvug== 0000950124-98-002250.txt : 19980422 0000950124-98-002250.hdr.sgml : 19980422 ACCESSION NUMBER: 0000950124-98-002250 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980421 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS SHOESOURCE INC CENTRAL INDEX KEY: 0001008802 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 480674097 STATE OF INCORPORATION: MO FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11633 FILM NUMBER: 98597559 BUSINESS ADDRESS: STREET 1: 3231 E 6TH ST CITY: TOPEKA STATE: KS ZIP: 66607-2207 BUSINESS PHONE: 9132335171 MAIL ADDRESS: STREET 1: 3231 E 6TH ST CITY: TOPEKA STATE: KS ZIP: 66607-2207 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number 1-11633 PAYLESS SHOESOURCE, INC. (Exact name of registrant as specified in its charter) MISSOURI 48-0674097 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3231 SOUTHEAST SIXTH STREET, TOPEKA, KANSAS 66607-2207 (Address of principal executive offices) (Zip Code) (785) 233-5171 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ----------------------- Common Stock, par value $.01 per share New York Stock Exchange Preferred stock 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 ----- ----- 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Registrant's common stock held by non-affiliates based on the closing price of $75.50 on April 3, 1998 was $2,817,101,829. The number of the Registrant's $.01 par value common stock as of April 3, 1998 was 37,312,607. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Registrant's Annual Report to Shareowners for the fiscal year ended January 31, 1998 (the "1997 Annual Report") are incorporated into Part II, as described herein. 2. Portions of Registrant's 1998 Proxy Statement for the Annual Meeting to be held on May 22, 1998, are incorporated into Part III, as described herein. Such proxy statement will be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K. This report contains, and from time to time Registrant may publish, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, future store openings, possible strategic alternatives and similar matters. Also, statements including the words "expects," "anticipates," "intends," "plans," "believes," "seeks," or variations of such words and similar expressions are forwarding-looking statements. Registrant notes that a variety of factors could cause its actual results and experience to differ materially from the anticipated results or other expectations expressed in its forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Registrant's business include, but are not limited to, the following: changes in consumer spending patterns; changes in consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; the financial condition of the suppliers and manufacturers from whom the Registrant sources its merchandise; changes in existing or potential duties, tariffs or quotas; availability of suitable store locations and appropriate terms; the ability to hire and train associates; and general economic, business and social conditions. 2 3 Payless ShoeSource, Inc. Form 10-K Annual Report For the fiscal year ended January 31, 1998 PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Company Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Signatures 3 4 PART I ITEM 1. BUSINESS GENERAL Payless ShoeSource, Inc. ("Payless" or the "Company" or the "Registrant") is the largest family footwear retailer in the United States with more than $2.5 billion in sales in 1997. The Company sold approximately 210 million pairs of shoes in 1997, and served more than 150 million customers. As of January 31, 1998, the Company operated 4,256 Payless ShoeSource stores in 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, Saipan, and Canada. Payless ShoeSource stores feature fashionable, quality footwear for men, women and children, including athletic, casual, dress, sandals, work boots and slippers. In addition, the Company operated 175 Parade of Shoes stores in 14 states. Parade of Shoes offers fashionable women's footwear and accessories at moderate prices. DEVELOPMENTS In March 1997, the Company purchased inventory, property, and trademarks, and assumed leases on 186 stores from J. Baker, Inc. which it holds as the Parade of Shoes division ("Parade"). The purchase price was equal to approximately $28 million in cash, which it funded from operating cash flows. The acquisition has been accounted for as a purchase, and accordingly, the operating results of the acquired stores have been included in the Company's consolidated results of operations for the period following the purchase. During 1997, the Company opened 158 new Payless ShoeSource stores, including stores in Canada, Guam and Saipan, and closed 138 underperforming stores. During 1997, Parade of Shoes opened eight stores, in addition to the 186 stores acquired, and closed 19 underperforming stores. In January 1997, the Board of Directors of the Company authorized the repurchase of up to $150 million of outstanding common stock of Payless in open-market transactions. In September 1997, the Company completed this $150 million repurchase (having purchased approximately 2.8 million shares). In September 1997, the Board of Directors of the Company authorized the repurchase of up to an additional $150 million of outstanding common stock in open-market transactions, subject to market 4 5 conditions and receipt of a favorable ruling from the Internal Revenue Service (IRS). The Company received the favorable IRS ruling in March 1998. The Company expects that any purchased shares will be held in treasury for general corporate purposes. HISTORY The Company was founded in Topeka, Kansas in 1956 with a strategy of selling low cost, high quality family footwear on a self-service basis. In 1962, Volume Distributors, as the Company was known at the time, became a public company. In 1979, the Company (then called Volume Shoe Corporation) was acquired by The May Department Stores Company of St. Louis, Missouri. The Company changed its name to Payless ShoeSource, Inc. in 1991. On May 4, 1996, Payless became an independent public company incorporated in Missouri as a result of its spin-off from The May Department Stores Company. The Company is listed for trading on the New York Stock Exchange under the symbol "PSS." PAYLESS SHOESOURCE STORES The average size of the Company's Payless ShoeSource stores is approximately 3,400 square feet. Each store carries approximately 9,000 pairs of shoes in more than 600 styles. Payless ShoeSource stores operate in a variety of real estate formats, including shopping malls, central business districts, free-standing buildings and strip centers. Of the 4,256 Payless locations open at the end of 1997, 740 incorporated a "Payless Kids" area which consists of approximately an additional 1,000 square feet of selling space devoted to an expanded assortment of children's shoes. The stores that include a Payless Kids area are located throughout the country and also have wider aisles, children-friendly seating and an entertainment center for children. The Company's Payless ShoeSource stores operate in rural, suburban and urban environments. The 10 states with the largest concentration of the Company's Payless ShoeSource stores are identified below (along with the total number of Payless ShoeSource stores): 5 6
NO. OF PAYLESS SHOESOURCE STATE STORES ----- ------ California 647 Texas 372 Florida 272 New York 271 Pennsylvania 199 Illinois 196 Ohio 183 Michigan 154 New Jersey 121 Washington 106 Other (including 8 non-U.S. stores) 1,735 ----- Total 4,256
The Company's Payless ShoeSource stores are highly automated, each with an electronic point of sale register and a back office computer which not only records transactions from the register, but also serves many other store supporting functions including price look-up, accumulation of associate hours worked and communications with the Company's headquarters in Topeka, Kansas. Store associates receive regular weekly communications from the Company's headquarters describing promotional and display requirements. The Company's Payless ShoeSource operations are directed centrally by a senior officer and a small support staff. The retail operations organization is subdivided into seven divisions headquartered in the cities of Atlanta, Baltimore, Chicago, Dallas, Denver, Los Angeles and Toronto. Divisions are directed by a vice president, two to four operations directors and a small support staff. Each Payless ShoeSource store has a manager and approximately five associates. The stores are organized into districts. District managers, to whom the store managers report, themselves report to the division offices and have full responsibility for the stores in their district. Division offices also have loss prevention and inventory control functions. Human resources, merchandising support and other more general support services, are provided from the Company's headquarters. 6 7 PARADE OF SHOES STORES The Company's Parade division, which was acquired in March, 1997, from J. Baker, Inc., of Canton, Massachusetts, emphasizes the retail sale of fashionable, quality, primarily leather, women's shoes. The Company operates the 175 Parade stores as a separate division supported by Payless sourcing, distribution, information systems, real estate, human resource and financial operations. EMPLOYEES During 1997, the Company's average number of employees was approximately 25,000, including approximately 14,000 full-time associates and 11,000 part-time associates. Approximately 550 of the Company's distribution center general warehouse associates are covered by collective bargaining agreements. Management believes it has a good relationship with all employees. The Company is led by a team of senior management executives who have an average of 16 years of retail industry experience, including an average of eight years with the Company. PRODUCTS The Company's Payless ShoeSource stores offer a broad assortment of fashionable, quality footwear for men, women and children, including athletic, casual, dress, sandals, work boots and slippers. Shoes are constructed with leather, canvas and man-made materials. Styling is updated regularly in an effort to remain current with proven fashion trends. During 1997, shoes sold at the Company's Payless ShoeSource stores sold at an average retail price of $11.35/pair. In addition to shoes, Payless ShoeSource stores offer accessories, including handbags, shoe polish and hosiery. Parade stores are self-service and feature fashionable women's dress, casual and athletic footwear priced in the $20 to $40/pair range. Major markets include Boston, New York City, Chicago, Philadelphia and Washington, D.C. The average size of a Parade store is approximately 2,300 square feet. These stores operate in a variety of real estate formats including shopping malls, central business districts and strip centers. The Company's merchandising effort is led by the President and three general merchandise managers with an average of 26 years of retail experience. They direct teams of buyers, planners and distributors that interact with agents and factory representatives to design, select, produce, inspect and distribute footwear and 7 8 accessories to Payless ShoeSource and Parade stores. CUSTOMERS The Company sells footwear to women, men and children of all age groups. The Company has significant market penetration with its target customers: women between the ages of 18 and 64. The Company believes that more than 48% of its target customers, regardless of household income, purchased at least one pair of shoes from the Company last year. In 1997, the Company sold more pairs of children's shoes than any other U.S. footwear retailer. COMPETITION The Company operates in a highly competitive retail market competing primarily with national and regional discount mass-merchandisers, as well as with other self-service discount shoe stores and off-price outlet stores. Competition is based on product selection, quality and availability, price, store location, customer service and promotional activities. The Company has generally operated profitably for many years and believes that it has market share. SEASONALITY The retail footwear market is characterized by four high volume seasons: Easter, early Summer, back-to-school and Christmas. The Company must increase inventory levels during these periods to support the increased demand for seasonal styles. Unseasonable weather patterns may affect planned sales of seasonal products such as sandals and boots. PURCHASING The Company utilizes a network of agents and factories in the United States and 14 foreign countries to obtain its products. These products are manufactured to meet the Company's specifications and standards. The strength of the Company's relationships with agents and factories, some dating back over 40 years, has allowed the Company to revise its sourcing strategies to reflect changing political and economic environments. In the past, many of the Company's agents and factory owners have played significant roles in developing production in new factories and in new countries without compromising production capacity or product quality. Factories in the People's Republic of China are a source of approximately 80% of the Company's merchandise and there can be no assurance that a change in political climate with or in China would not have a material adverse effect on the Company. The 8 9 Company does not purchase "seconds" or "overruns" and does not own any manufacturing facilities. The Company closely integrates its merchandise purchasing requirements with various manufacturers through its sourcing organization which has offices in Topeka, Kansas, Taiwan, China and Brazil. Management believes it has good relationships with the entities from which it sources, although there can be no assurance that such relationships will remain good or that such entities believe that such relationships are good. On a worldwide basis, approximately two-thirds of the Company's merchandise is acquired through a network of third-party agents. Payless ShoeSource International, the Company's Taipei, Taiwan office, arranges directly with factories for the design, selection, production management, inspection and distribution of approximately one-third of the shoes acquired for the Company. Risks inherent in foreign manufacturing (i.e., manufacturing outside the United States) include economic and political instability, transportation delays and interruptions, restrictive actions by foreign governments, the laws and policies of the United States affecting importation of goods, including duties, quotas and taxes, trade and foreign tax laws and fluctuations in currency exchange rates. While the Company has not historically experienced material adverse effects resulting from the occurrence of these types of risks, there is no assurance that in the future the occurrence of these risks will not result in increased costs and delays or disruption in product deliveries that could cause loss of revenue and damage to customer relationships and have a material adverse effect on the Company. China currently enjoys "most favored nation" ("MFN") status under United States tariff laws, which provides the most favorable category of United States import duties. China's MFN status is annually reviewed by the United States Congress. The Company believes that extension of this status is subject to uncertainty every year. The loss of MFN status for China would likely result in substantially increased costs to the Company in the purchase of merchandise from China. The Company believes, however, that its competitors in the footwear industry would be similarly affected. QUALITY ASSURANCE The Company's quality assurance organization sets standards and specifications for product manufacture, performance and appearance. It communicates those standards and specifications through its copyrighted quality assurance manual. The Company stands behind the quality of the shoes it sells to its customers by permitting return of purchased merchandise with proper documentation 9 10 evidencing purchase. The quality assurance organization also provides technical design support for the Company's direct purchasing function. It is responsible for review and approval of agent and factory technical design, for worldwide laboratory testing of materials and components, and for performing in-factory product inspections to ensure that materials and factory production techniques are consistent with Company specifications. The Company locates its field inspection personnel close to the factories and freight consolidation facilities it uses throughout the world. PRODUCTION MANAGEMENT The production management organization manages an ongoing process to qualify and approve new factories, while continually assessing existing factory service and quality of performance. New factories must meet specified quality standards for shoe production and minimum capacity requirements. They must also agree to the Company's production control processes and certify that neither they nor their suppliers use forced or child labor. Factory performance must continually improve or the factory runs the risk of being removed from the list of approved factories. The production management organization utilizes a unique, internally developed production control process by which the Company is electronically linked to the factories and agents. This process is designed to ensure on-time deliveries of merchandise with minimum lead time and without unnecessary costs. The Company believes that maintaining strong factory relationships, improving key factory performance factors and improving factory profitability is critical to long-term sourcing stability. Its manufacturing services group, based in Asia, provides direction and leadership to key factories in the areas of overall productivity improvement and lead time reduction. MERCHANDISE DISTRIBUTION The Company believes that its distribution system provides it with a competitive advantage. The Company's merchandise distribution teams are able to track shoes by the pair from order placement through sale to the customer by the use of perpetual inventory, product planning and retail price management systems. These systems are maintained by experienced information systems personnel and are enhanced regularly to improve the product distribution process. Distribution analysts review sales and inventory by size and style to maintain availability of product within the Company's stores. 10 11 The Company operates a single 765,000 square foot distribution center in Topeka, Kansas, capable of replenishing in-store product levels by style, color and size. This facility, which currently handles 65 percent of the Company's distribution center needs, operates seven days-a-week. Management believes this facility is one of the most highly-automated and cost-efficient distribution facilities in the footwear industry. The remaining 35 percent of the Company's distribution center needs are handled by a third party facility in Los Angeles, California. The Company believes its distribution center system has sufficient capacity to support more than 5,000 stores. Stores generally receive new merchandise at least once a week, in an effort to maintain a constant flow of new and replenished merchandise. INDUSTRY SEGMENTS The retail footwear industry can be divided into high, moderate and value-priced segment. The high priced segment is controlled by department stores. The moderate priced segment, which includes specialty shoe chains, mass merchandisers, and junior department stores, has no single dominant competitor. The value-priced segment is dominated by the Company and national discount mass-merchandisers. Based on industry data, the United States footwear market is estimated to be $34 billion/year comprising one billion pairs of footwear, and has remained relatively constant in each respect over the past several years. Industry data suggests that the quality offered in the value-priced segment has improved significantly over the last 15 years which appears to be the primary cause of the near doubling of this segment's share of the market. The Company considers itself part of the value-priced segment of the footwear industry. In 1996, the Company's sales accounted for approximately 7 percent of the total sales of the estimated $34 billion United States footwear market; this percentage has grown consistently over the past four decades. TRADEMARKS The Company owns certain trademarks which it uses in its business and which it regards as valuable assets. These trademarks include Payless(R), Payless ShoeSource(R), Payless Kids(R), and Parade of Shoes(R). The Company owns all rights to the yellow and orange logo used in its Payless ShoeSource signs and advertising. In the United States, the Company has registered over 100 key marks and owns over 50 common law marks under which it markets private label merchandise in its Payless ShoeSource stores. In addition, the Company owns 11 12 over 30 registered and common law marks under which it markets private label merchandise in its Parade stores. All of the Company's registered trademarks may be renewed indefinitely. MARKETING The Company's marketing efforts are multi-dimensional, including nationally broadcast television advertising, local market radio and newspaper inserts in support of major promotional periods. In addition to media support, the Company utilizes in-store promotional materials, including posters, signs and point of sale items. Also, the Company advertises its business through promotional funds, media funds, merchants' associations and similar efforts offered by various landlords from whom the Company leases its stores. The Company's marketing staff is augmented by a full-service advertising concern that provides creative services, media purchase and consumer research. ENVIRONMENT Compliance with federal, state and local statutes, rules, ordinance, laws and other provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have, a material effect on capital expenditures, earnings or the competitive position of the Company. DIRECTORS OF THE COMPANY Listed below are the names and present principal occupations or, if retired, most recent present occupations of the Company's Directors: NAME PRINCIPAL OCCUPATION ---- -------------------- Steven J. Douglass Chairman of the Board and Chief Executive Officer of the Company Richard A. Jolosky President of the Company Daniel Boggan Jr. Chief Operating Officer of the National Collegiate Athletic Association, Howard R. Fricke Chairman of the Board and Chief Executive Officer of The Security Benefit Group of Companies (life and other insurance) Thomas A. Hays Retired, formerly Deputy Chairman of The May Department Stores Company Mylle B. Mangum Senior Vice President - Carlson Wagonlit Travel 12 13 Michael E. Murphy Retired, Formerly Vice Chairman and Chief Administrative Officer of Sara Lee Corporation (food and consumer products) Robert L. Stark Retired, Formerly Executive Vice President Hallmark Cards, Inc. EXECUTIVE OFFICERS OF THE COMPANY Listed below are the names and ages of the executive officers of the Company and offices held by them with the Company. NAME AGE POSITION AND TITLE ---- --- ------------------ Steven J. Douglass 48 Chairman of the Board and Chief Executive Officer Richard A. Jolosky 63 President and Director of the Company Duane L. Cantrell 42 Executive Vice President-Retail Operations Bryan P. Collins 44 Senior Vice President and Division Director for Parade of Shoes Stephen Farley 43 Senior Vice President-Marketing Gerald F. Kelly, Jr. 50 Senior Vice President-Logistics/ Information Services Harris Mustafa 44 Senior Vice President-Merchandise Distribution Jed L. Norden 47 Senior Vice President-Human Resources JoAnn Ogee 43 Senior Vice President, General Merchandise Manager-Women's Ullrich E. Porzig 52 Senior Vice President and Chief Financial Officer William J. Rainey 51 Senior Vice President, General Counsel and Secretary Thomas L. Rinehart 43 Senior Vice President and General Merchandise Manager-Men's Gary M. Stone 49 Senior Vice President-Store Development Larry M. Strecker 39 Senior Vice President of the Company and Managing Director of Payless ShoeSource International 13 14 Michael S. Wilkes 44 Senior Vice President and General Merchandise Manager-Children's STEVEN J. DOUGLASS has served as Chairman of the Board, Chief Executive Officer and Director of the Company since May, 1996, the date on which the Company's shares were distributed in a spin-off by The May Department Stores Company to its shareowners. Mr. Douglass has been Chairman and Chief Executive Officer of the Company since April, 1995. He joined the Company in 1993 and served as Senior Vice President-Director of Retail Operations from 1993 to January, 1995 and as Executive Vice President-Director of Retail Operations from January, 1995 to April, 1995. Prior to his association with the Company, Mr. Douglass held several positions at divisions of The May Department Stores Company since 1976, serving as Chairman of May Company, Ohio (1990-1993) and Senior Vice President and Chief Financial Officer of J.W. Robinsons (1986-1990). Mr. Douglass is also a director of Security Benefit Group of Companies. Mr. Douglass has served as a Director of the Company since April 30, 1996. RICHARD A. JOLOSKY has served as President of the Company since January, 1996. He initially joined the Company in September, 1982, serving as Executive Vice President-Merchandising (1982-1984) and then as President (1985-1988). Prior to rejoining the Company in 1996, Mr. Jolosky was President and Chief Executive Officer of Silverman Jewelry Company (1995-1996), and Chief Executive Officer of the Richard Allen Company (1992-1995). Mr. Jolosky is a director of Stage Stores, Inc. Mr. Jolosky has served as a Director of the Company since April 30, 1996. DUANE L. CANTRELL has served as Executive Vice President-Retail Operations since April, 1997 and as Senior Vice President-Retail Operations (1995-1997). He was the Company's Senior Vice President-Merchandise Distribution and Planning (1992-1995) and Senior Vice President-Merchandise Distribution (1990-1992). Mr. Cantrell has been employed by the Company since 1978. BRYAN P. COLLINS has served as Senior Vice President and Division Director for Parade of Shoes since December, 1996. Prior to that he was Senior Vice President and General Merchandise Manager-Women's since January, 1994. He also served the Company as Senior Vice President-General Merchandise Manager-Women's Seasonal/Leisure (October, 1991- January, 1994). Mr. Collins has been employed by the Company since 1991 and was previously employed by the Company (1975-1985). 14 15 STEPHEN FARLEY has served as Senior Vice President-Marketing since July, 1994. Prior to that he was Vice President-Marketing (1993-1994) and Vice President-Advertising (1992-1993). Prior to joining the Company, Mr. Farley was employed by Earl Palmer Brown as Executive Vice President of Client Services (1989-1992). GERALD F. KELLY, JR. has served as Senior Vice President-Logistics/Information Services since February, 1996. Prior to that he was Senior Vice President-Information Services and Chief Financial Officer (1990-1996) and Senior Vice President-Information Services (1986-1990). HARRIS MUSTAFA has served as Senior Vice President-Merchandise Distribution since May, 1995. Prior to that he was Vice President-Financial Planning/Purchasing (1990-1995). Mr. Mustafa has been employed by the Company since 1987. JED L. NORDEN has served as Senior Vice President-Human Resources since July, 1985. JOANN OGEE has served as Senior Vice President and General Merchandise Manager-Women's since May, 1997. Ms. Ogee served as Vice President and General Merchandise Manager, Intimate Apparel, Accessories, Footwear, Menswear and Children's for Charming Shoppes, Inc. from October, 1993 to May, 1997. She also worked as Senior Merchandiser for Victoria's Secret from June, 1990 to October, 1993 and held several leadership positions during her fifteen years with Macy's. ULLRICH E. PORZIG has served as Senior Vice President and Chief Financial Officer since February, 1996. Between 1993 and 1996, Mr. Porzig was Senior Vice President-Chief Financial Officer and Treasurer of Petro Stopping Centers L.P. From 1982 to 1993 he was employed by The May Department Stores Company in various capacities including Senior Vice President-Chief Financial Officer of Payless ShoeSource from 1986 to 1988 and Senior Vice President-Finance and Chief Financial Officer of Foley's (1988-1993). WILLIAM J. RAINEY has served as Senior Vice President, General Counsel and Secretary since April, 1996. Prior to joining the Company, Mr. Rainey served as Executive Vice President, General Counsel and Secretary of Fourth Financial Corporation (1994-1996) and Vice President, General Counsel of Cabot Corporation (1991-1993). THOMAS L. RINEHART has served as Senior Vice President and General Merchandise Manager-Men's since December, 1992. Before joining the Company, he was employed by the Custom Shop, Inc. as President and 15 16 Chief Operating Officer (1992) and by Club International, Inc. as President and Chief Executive Officer (1991-1992). GARY M. STONE has served as Senior Vice President-Store Development since February, 1997. Prior to joining the Company, Mr. Stone was employed by Pepsi Co., Inc. as Senior Vice President and General Manager, Restaurant Services (1995-1997) and Vice President, Asset Development, Pizza Hut (1990-1995). LARRY M. STRECKER has served as Senior Vice President of the Company and Managing Director of Payless ShoeSource International since April, 1996. Prior to that, he was Vice President of Worldwide Sourcing (1993-1996). Before joining the Company, Mr. Strecker was employed by Frito-Lay, Inc. as Director of Service and Distribution (1991-1993). MICHAEL S. WILKES has served as Senior Vice President and General Merchandise Manager-Children's since January, 1994. Prior to that he was Senior Vice President-General Merchandise Manager-Women's Dress/Casual (1990-1994). Mr. Wilkes has been employed by the Company since 1986. ITEM 2. PROPERTIES The Company leases substantially all of its stores. The leases typically have a primary term of 5 or 10 years, with one or two five-year renewal options. During 1998, approximately 654 of the Company's leases, including 176 leases which are currently month-to-month tenancies, are due to expire. Leases usually require payment of base rent, applicable real estate taxes, common area expenses and, in some cases, percentage rent based on the stores' sales volume. Its Payless ShoeSource stores average approximately 3,400 square feet; its Parade stores average approximately 2,300 square feet. The Company owns and operates a 305,000 square foot central office building and a 765,000 square foot distribution facility both of which are located in Topeka, Kansas. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, to which the company or any of its subsidiaries is a party or of which any of their property is the subject. The Company and its subsidiaries are parties to ordinary private litigation incidental to their business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the 13 weeks ended January 31, 1998. 16 17 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS There were approximately 60,000 shareowners of the Company's common stock as of January 31, 1998. The information set forth under the headings "Common Stock and Market Prices" and "Shareowner Information - Common Stock" in the Company's 1997 Annual Report is incorporated herein by reference pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL DATA The information set forth under the heading "Summary of Selected Historical Financial Information" of the Company's 1997 Annual Report is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the heading "Management's Discussion and Analysis" of the Company's 1997 Annual Report is incorporated herein by reference pursuant to General Instruction G(2). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement of Earnings for the fiscal years 1995, 1996 and 1997, the Consolidated Balance Sheet as of January 31, 1998 and February 1, 1997, the Consolidated Statement of Cash Flows for fiscal years 1995, 1996, 1997 and the Consolidated Statement of Shareowners' Equity, the Financial Statements, "Notes to Consolidated Financial Statements" and "Report of Independent Public Accountants" of the Company's 1997 Annual Report to Shareowners are incorporated herein by reference pursuant to General Instruction G(2). 17 18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY a) Directors - The information set forth in the Company's definitive proxy statement to be filed in connection with its Annual Meeting to be held on May 22, 1998 under the captions "Election of Directors - Directors and Nominees for Directors" and "Other Matters - Section 16 Filing" is incorporated herein by reference pursuant to General Instruction G(3). b) Executive Officers - Information regarding the Executive Officers of the Company is as set forth in Item 1 of this report under the caption "Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION The information set forth in the Company's definitive proxy statement to be filed in connection with its Annual Meeting to be held on May 22, 1998 under the captions "Election of Directors - The Payless Board and Committees of the Payless Board -- Compensation of Directors," "Compensation Committee Interlocks and Insider Participation," "Compensation and Nominating Committee Report -- Bonus Opportunities (discussion in third and fourth paragraphs relating to long term awards) and "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth in the Company's definitive proxy statement to be filed in connection with its Annual Meeting to be held on May 22, 1998 under the caption "Election of Directors" is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 18 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) Financial Statements. The following financial statements are incorporated herein by reference to the Company's 1997 Annual Report to Shareowners:
Page in Annual Report ------------- Financial Statements- Consolidated Statement of Earnings for the three fiscal years ended January 31, 1998 16 Consolidated Statement of Shareowners' Equity for the three fiscal years ended January 31, 1998 16 Consolidated Balance Sheet - January 31, 1998 and February 1, 1997 17 Consolidated Statement of Cash Flows for the three fiscal years ended January 31, 1998 18 Notes to Consolidated Financial Statements 19-24 Report of Independent Public Accountants 25
(2) Exhibits. Number Description - ------ ----------- 2.1 Distribution Agreement, dated as of April 2, 1996, between The May Department Stores Company and the Registrant.(1) 3.1 Amended and Restated Articles of Incorporation of the Registrant.(2) 3.2 Amended and Restated Bylaws of the Registrant.* 4.1 Rights Agreement, dated as of April 2, 1996, between the Registrant and The Bank of New York, as Rights Agent.(1) 10.1 Tax Sharing Agreement, dated April 2, 1996, between The May Department Stores Company and the Registrant.(3) 19 20 10.2 Sublease, dated as of April 2, 1996, between The May Department Stores Company and the Registrant.(1) 10.3 Multi-Currency Credit Agreement, among the Registrant, several financial institutions and Bank of America National Trust and Savings Association, and Amendment No. 1 of December 16, 1996 and Amendment No. 2 of November 10, 1997.* 10.4 Administrative Services Agreement, dated as of April 2, 1996, between The May Department Stores Company and the Registrant.(1) 10.5 1996 Stock Incentive Plan, Payless ShoeSource, Inc. as amended as of March 19, 1998.* 10.6 Spin-Off Stock Plan, Payless ShoeSource, Inc.(1) 10.7 Spin-Off Cash Plan, Payless ShoeSource, Inc.(1) 10.8 Restricted Stock Plan for Non-Management Directors, Payless ShoeSource, Inc. as amended as of July 17, 1997.(4) 10.9 Form of Employment Agreement between the Registrant and certain executives of the Registrant. The Registrant has entered into Employment Agreements in the form contained in this exhibit with each of the named executive officers which expire at various dates on or before May 31, 2001, and which provide for annual base salaries at rates not less than the amounts presently paid to them.(1) 10.10 Supplementary Retirement Plan of Payless ShoeSource, Inc.(1) 10.11 Profit Sharing Plan of Payless ShoeSource, Inc.(5) 10.12 Deferred Compensation Plan of Payless ShoeSource, Inc., as amended as of March 19, 1998.* 10.13 Executive Incentive Compensation Plan for Payless Executives of Payless ShoeSource, Inc.(1) 10.14 Form of Management Severance Agreement. The Registrant has entered into Severance Agreements with the named executive officers in the form contained in this exhibit.1 The agreement with Mr. Douglass also provides for a "tax gross-up" payment to ensure that the above-mentioned payments are not 20 21 subject to net reduction due to imposition of excise taxes which are payable under Section 4999 of the Internal Revenue Code. The agreement with Mr. Jolosky provides for 50% of such payment. 10.15 Form of Indemnification Agreement.(1) 10.16 Deferred Compensation Plan for Non-Management Directors of Payless ShoeSource, Inc.(6) 10.17 Executive Incentive Compensation Plan for Business Unit Management of Payless ShoeSource, Inc.(7) 10.18 The Stock Appreciation and Phantom Stock Unit Plan of Payless ShoeSource, Inc. and its Subsidiaries for Payless ShoeSource International Employees.(8) 11.1 Computation of Net Earnings Per Share.* 12.1 Computation of Ratio of Earnings to Fixed Charges.* 13.1 1997 Annual Report to Shareowners of Payless ShoeSource, Inc. (only those portions specifically incorporated by reference shall be deemed filed with the Commission).* 21.1 Subsidiaries of Registrant* 23.1 Consent of Arthur Andersen, LLP.* 24.1 Power of Attorney* 27.1 Financial Data Schedule* * Filed herewith 1) Incorporated by reference from the correspondingly numbered Exhibit to Registrant's Registration Statement on Form 10 Dated February 23, 1996 as amended through April 15, 1996. 2) Incorporated by reference from Exhibit 3.1 of the Registrant's Form 10-Q (file Number 1-11633) for the quarter ended May 4, 1996. 3) Incorporated by reference from Exhibit 10.1 of the Registrant's Form 10-Q (file Number 1-11633) for the quarter ended May 4, 1996. 4) Incorporated by reference from Exhibit 10.8 of the Registrant's Form 10-Q (file Number 1-11633) for the quarter ended November 1, 1997. 5) Incorporated by reference from Exhibit 10.11 of Registrant's Form 10-Q (File Number 1-11633) for the quarter ended February 1, 1997. 6) Incorporated by reference from Exhibit 10.16 of the Registrant's Form 10-Q (file Number 1-11633) for the quarter ended November 1, 1997. 7) Incorporated by reference from Exhibit 10.17 of Registrant's Form 10-Q (File Number 1-11633) for the quarter ended November 1, 1997. 8) Incorporated by reference from Exhibit 10.18 of the Registrant's Form 10-Q (file Number 1-11633) for the quarter ended November 1, 1997. (b) Reports on Form 8-K: 21 22 The Company will furnish to shareowners upon request, and without charge, a copy of the 1997 Annual Report and the proxy statement, portions of which are incorporated by reference in the Form 10-K. The Company will furnish any other exhibit at cost. On March 9, 1998, the Company filed a Current Report on Form 8-K, reporting on Item 5, Other Events and Item 7, Exhibits. In the Report, the Company provided its press release on March 2, 1998, which announced that the Company had received a tax ruling from the Internal Revenue Service enabling it to proceed with its planned repurchase of $150 million worth of the common stock of the Company. All other schedules and exhibits of the Company for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted, as they are not required or are inapplicable or the information required thereby has been given otherwise. 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. PAYLESS SHOESOURCE, INC. Date: By: /s/ Ullrich E. Porzig --------------- ------------------------------------- Ullrich E. Porzig Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant and in the capacities and on the dates indicated. Principal Executive Officer: Date: By: /s/ Steven J. Douglass --------------- ------------------------------------- Steven J. Douglass Chairman and Chief Executive Officer 22 23 Principal Financial and Accounting Officer: Date: By: /s/ Ullrich E. Porzig --------------- ------------------------------------- Ullrich E. Porzig Senior Vice President and Chief Financial Officer Directors: Date: By: /s/ Steven J. Douglass* --------------- ------------------------------------- Steven J. Douglass Chairman and Chief Executive Officer Date: By: /s/ Richard A. Jolosky* --------------- ------------------------------------- Richard A. Jolosky President and Director Date: By: /s/ Daniel Boggan Jr.* --------------- ------------------------------------- Daniel Boggan Jr. Director Date: By: /s/ Howard R. Fricke* --------------- ------------------------------------- Howard R. Fricke Director Date: By: /s/ Thomas A. Hays* --------------- ------------------------------------- Thomas A. Hays Director Date: By: /s/ Mylle B. Mangum* --------------- ------------------------------------- Mylle B. Mangum Director Date: By: /s/ Michael E. Murphy* --------------- ------------------------------------- Michael E. Murphy Director Date: By: /s/ Robert L. Stark* --------------- ------------------------------------- Robert L. Stark Director *Executed by William J. Rainey, attorney-in-fact, on behalf of the indicated Director pursuant to Power of Attorney dated March 19, 1998, with Thomas A. Hays granting Power of Attorney dated March 24, 1998. 23 24 EXHIBIT INDEX Exhibit Number Description ------ ----------- 2.1 Distribution Agreement 3.1 Amended and Restated Articles of Incorporation of the Company 3.2 Amended and Restated Bylaws of the Company 4.1 Rights Agreement 10.1 Tax Sharing Agreement 10.2 Sublease 10.3 Multi-Currency Credit Agreement 10.4 Administrative Services Agreement 10.5 1996 Stock Incentive Plan 10.6 Spin-Off Stock Plan 10.7 Spin-Off Cash Plan 10.8 Restricted Stock Plan for Non-Management Directors 10.9 Employment Agreement 10.10 Supplementary Retirement Plan 10.11 Profit Sharing Plan 10.12 Deferred Compensation Plan of Payless ShoeSource, Inc. 10.13 Executive Incentive Compensation Plan for Payless Executives 10.14 Management Severance Agreement 10.15 Indemnification Agreement 10.16 Deferred Compensation Plan for Non-Management 24 25 Directors of Payless ShoeSource, Inc. 10.17 Executive Compensation Plan for Business Unit Management 10.18 Stock Appreciation and Phantom Stock Unit Plan 11.1 Computation of Net Earnings Per Share 12.1 Computation of Ratio of Earning to Fixed Charges 13.1 1997 Annual Report to Shareowners 21.1 Subsidiaries of Registrant 23.1 Consents of Arthur Andersen, LLP 24.1 Power of Attorney 27.1 Financial Data Schedule 25 EX-3.2 2 EX-3.2 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF PAYLESS SHOESOURCE, INC. (Amended and Restated as of April __, 1998) ARTICLE I OFFICES Section 1. The registered office of the Corporation shall be in the City of St. Louis, State of Missouri, or at such other place within the State of Missouri as the Board of Directors may at any time and from time to time designate. Section 2. The Corporation may also have offices at such other places both within and without the State of Missouri as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. All meetings of the shareholders shall be held either within or without the State of Missouri as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. The annual meeting of shareholders shall be held at such place within or without the State of Missouri, at such hour and on such date, not earlier than May 1 and not later than July 10 in each year as the Board of Directors may specify in the call of such meeting, at which meeting the shareholders shall elect directors as described in Article III below by a majority of shares entitled to vote thereon and represented in person or by proxy at the meeting, and transact such other business as may properly be brought before the meeting. Section 3. Except as otherwise required by law, written notice of the annual meeting stating the place, date and hour of the meeting shall be given by mail, postage prepaid, not less than ten or more than seventy days before the date of the meeting, to each shareholder entitled to vote at such meeting at such address as shall appear on the books of the Corporation. Section 4. The Secretary of the Corporation shall prepare and make, at least ten days before every meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period 2 of at least ten days prior to the meeting, at the registered office of the Corporation. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. Section 5. Special meetings of the shareholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors, or the President. Special meetings of shareholders may not be called by any other person or persons. The business transacted at a special meeting of shareholders shall be confined to the purpose or purposes specified in the notice therefor. Section 6. Except as otherwise required by law, written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given by mail, postage prepaid, not less than ten nor more than seventy days before the date of the meeting, to each shareholder entitled to vote at such meeting at such address as shall appear on the books of the Corporation. Section 7. The holders of a majority of the stock issued and outstanding and entitled to vote at any meeting, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business except as otherwise provided by law or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy even though less than a quorum, shall have the power successively to adjourn the meeting to a specified date not longer than ninety days after such adjournment, without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. For purposes of determining a quorum, shares represented by a proxy which directs that the shares abstain from voting or that a vote be withheld on a matter shall be deemed to be represented at the meeting; shares as to which voting instructions are given as to at least one of the matters be voted on shall also be deemed to be so represented; if the proxy states how shares will be voted in the absence of instructions by the shareholder, such shares shall be deemed to be represented at the meeting. Section 8. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of law or the Articles of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Shares represented by a proxy which directs that the shares abstain from voting on a matter shall not be deemed to be represented at the meeting as to such matter. Shares represented by a proxy as to which voting instructions are not given as to one or more matters to be voted on shall not be deemed to be represented at the meeting for purposes of 2 3 the vote as to such matter or matters. A proxy which states how shares will be voted in the absence of instructions by the shareholder as to any matter shall be deemed to give voting instructions as to such matter. Section 9. Except as otherwise provided by the Articles of Incorporation, each shareholder of record shall at every meeting of the shareholders be entitled to one vote for each share of capital stock of the Corporation entitled to vote thereat held by such shareholder. Such votes may be cast in person or by proxy, but no proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. Subject to applicable law, the Board of Directors shall prescribe the rules and regulations for voting at all meetings of the shareholders; provided, however, the vote for the election of directors, and upon the direction of the presiding officer of the meeting, the vote on any other question before the meeting, shall be by written ballot. Section 10. Except as otherwise provided by the Articles of Incorporation, any action required or permitted to be taken at any annual or special meeting of shareholders may be taken without a meeting of the shareholders only if consents in writing, setting forth the action so taken, are signed by all of the shareholders entitled to vote with respect to the subject matter thereof. Section 11. To be properly brought before the annual or any special shareholders' meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual or any special shareholders' meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 75 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 90 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of common stock of the Corporation which are beneficially owned by the shareholder and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual or any special meeting except in accordance with the procedures set forth in this Section 11, provided, however, that nothing in this Section 11 shall be deemed to preclude discussion by any shareholder of any business properly brought before the meeting. 3 4 The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 11, and if he should so determine and declare, any such business not properly brought before the meeting shall not be transacted. Section 12. Except as provided in Section 3 of Article III, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation at the annual meeting may be made at the meeting by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 12. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 75 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 90 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of common stock of the Corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder and (ii) the class and number of shares of common stock of the Corporation which are beneficially owned by the shareholder. Such notice shall be accompanied by the executed consent of each nominee to serve as a director if so elected. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine and declare, the defective nomination shall be disregarded. ARTICLE III DIRECTORS Section 1. Except as otherwise required by law or the Articles of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. 4 5 Section 2. The number of directors of the Corporation shall be fixed in the manner provided in the Articles of Incorporation. Except as otherwise provided in Section 3 of this Article III, the directors of the Corporation shall be elected by the shareholders of the Corporation, and at each such election the nominees receiving the greatest number of votes, up to the number of directors then to be elected, shall be the persons then elected. Section 3. Except as otherwise required by the Articles of Incorporation, any vacancy in the Board of Directors resulting from any increase in the number of directors and any other vacancy occurring in the Board of Directors may be filled by the Board of Directors acting by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and any director so elected to fill a vacancy shall hold office until the next election of directors by the shareholders of the Corporation (subject, however, to such director's earlier death, resignation, disqualification or removal from office). In no event shall a decrease in the number of directors shorten the term of any incumbent director. Section 4. The Board of Directors may hold its meetings, both regular and special, and cause the books of the Corporation to be kept, either within or without the State of Missouri at such place or places as they may from time to time determine or as otherwise may be provided in these Bylaws.. Section 5. Subject to Section 8 of this Article III there shall be an annual meeting of the Board of Directors on the day of the annual meeting of shareholders in each year or as soon thereafter as convenient, such annual meeting to be at such place and time (and, if applicable, on such date) as the Chairman of the Board or the Chief Executive Officer shall designate by written notice to the directors, and regular meetings shall be held on such dates and at such times and places either as the directors shall by resolution provide or as the Chairman of the Board or the Chief Executive Officer shall designate by written notice to the directors. Except as above provided, no notice of said annual meeting or such regular meetings of the Board of Directors need be given. Section 6. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer, the President, the Secretary or the Treasurer and shall be called by one of the foregoing officers on the written request of a majority of the entire Board of Directors specifying the object or objects of such special meeting. In the event that one of the foregoing officers shall fail to call a meeting within two days after receipt of such request, such meeting may be called in like manner by the directors making such request. The person or persons calling the special meeting may fix the place, either within or without the State of Missouri, as a place for holding the meeting. Notice of each special meeting, stating the date, place and time of the meeting and the purpose or purposes for which it is called, shall be deposited in the regular or overnight mail, sent by telecopy, telegram or delivered by hand to each director not later than the day preceding the date of such meeting, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 7. At all meetings of the Board of Directors a majority of the entire Board of Directors in office shall constitute a quorum for the transaction of business and the act of a majority 5 6 of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law, the Articles of Incorporation or by these Bylaws. If a quorum, shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 8. Except as otherwise required by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken by the Board of Directors at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing. The Secretary shall file the consents with the minutes of proceedings of the Board of Directors or the committee as the case may be. Section 9. Any one or more members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting. Section 10. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent allowed by law and as provided in the resolution, shall have and may exercise all of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 11. Each committee of the Board shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 12. Directors and members of committees may receive such compensation for their services, and such reimbursement of expenses, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 13. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted 6 7 for such purpose if (a) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee and the Board of Directors or the committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized or approved by the Board of Directors, a committee thereof or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 14. As used in these Bylaws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. ARTICLE IV NOTICES Section 1. Whenever written notice is required by law, the Articles of Incorporation or these Bylaws, to be given to any director, committee member or shareholder, such requirement shall not be construed to mean personal notice, but such notice may be given in writing, by mail addressed to such director, committee member or shareholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telecopy, telegram, telex or cable or by overnight mail. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Section 2. Whenever any notice is required by law, the Articles of Incorporation or these Bylaws, to be given to any director, committee member or shareholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the Corporation elected by the Board of Directors shall consist of the Chairman of the Board, a President and a Secretary and such other officers as the Board of Directors may deem necessary and proper, including, without limitation, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, and one or more Assistant Secretaries or Assistant Treasurers. The Board of Directors shall elect the Chairman of the Board, the President and the Secretary at its first meeting held after each annual meeting of shareholders and may elect such other officers from time to time as it deems necessary 7 8 or advisable. Any two or more of such offices, excepting the offices of President and Secretary, may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument on behalf of the Corporation in more than one capacity. Section 2. The Chairman of the Board, the President and such other officer or officers as the Board may from time to time by resolution designate may appoint one or more Vice Presidents, a Controller, and one or more Assistant Controllers, Assistant Secretaries and Assistant Treasurers, who shall also be officers of the Corporation. Section 3. The Board of Directors may determine or provide the method of determining the compensation of all officers. Section 4. The officers of the Corporation shall hold office until their successors are chosen and qualify, or until their earlier resignation or removal. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the Corporation that was filled by the Board of Directors pursuant to Article V, Section 1 also shall be filled by the Board of Directors. Section 5. Each officer of the Corporation shall be subject to the control of the Board of Directors and shall have such duties in the management of the Corporation as may be provided by appropriate resolution of the Board of Directors and/or provided in these Bylaws. Section 6. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 7. Any officer, if required by the Board of Directors, shall give bond in such sum and with such security as the Board of Directors may require for the faithful performance of duties. Section 8. In the case of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board of Directors may delegate the powers or duties of such officer to any other officer or to any other director, or to any other person for the time being. 8 9 ARTICLE VI CERTIFICATES OF STOCK Section 1. Every holder of stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman of the Board, the President or a Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. Such certificate shall certify the number of shares owned by such holder in the Corporation. Section 2. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issuance of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct and with such surety as it may approve, as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment or postponement thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than seventy days before the date of such meeting, nor more than seventy days prior to any other action; provided, however that if the Board of Directors does not set a record date for the determination of the shareholders entitled to notice of, and to vote at, a meeting of shareholders, only the shareholders of record at the close of business on the twentieth day preceding the date of the 9 10 meeting shall be entitled to notice of, and to vote at, the meeting and any adjournment or postponement of the meeting. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment or postponement of the meeting. Section 6. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Pursuant to law, dividends may be paid in cash, in property, or in shares of the capital stock. Section 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors may from time to time, in their absolute discretion, deem proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 3. All checks or demands for money and all notes and other obligations of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may at any time and from time to time designate. Section 4. The fiscal year of the Corporation shall end on the Saturday closest to the 31st day of January in each year. Section 5. The corporate seal shall consist of the words "PAYLESS SHOESOURCE, INC. MISSOURI" arranged in a circular form around the words and figures "Corporate Seal 1961" and shall be kept by the Secretary. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 10 11 ARTICLE VIII AMENDMENTS These Bylaws may be amended, altered, changed or rescinded, in whole or in part, or new Bylaws may be adopted, in the manner provided in the Articles of Incorporation. The substance of such amendment, alteration, change, rescission or adoption or the subject matter thereof shall be submitted in writing at a preceding meeting of the Board of Directors or notice thereof shall be given to the directors at least ten days before; waiver of notice by any director being deemed equivalent to such notice to him. 11 EX-10.3 3 EX-10.3 1 EXHIBIT 10.3 ================================================================================ $200,000,000 MULTICURRENCY CREDIT AGREEMENT DATED AS OF APRIL 22, 1996 AMONG PAYLESS SHOESOURCE, INC., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, THE BANK OF NEW YORK AND THE FIRST NATIONAL BANK OF CHICAGO, AS CO-AGENTS, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO ARRANGED BY BA SECURITIES, INC. ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS..............................................................................................1 1.01 Certain Defined Terms...........................................................................1 1.02 Other Interpretive Provisions..................................................................19 1.03 Accounting Principles..........................................................................20 1.04 Currency Equivalents Generally.................................................................20 ARTICLE II THE CREDITS.............................................................................................20 2.01 Amounts and Terms of Commitments...............................................................20 2.02 Notes..........................................................................................20 2.03 Procedure for Borrowing........................................................................21 2.04 Conversion and Continuation Elections..........................................................22 2.05 Utilization of Commitments in Offshore Currencies..............................................23 2.06 Voluntary Termination or Reduction of Commitments..............................................24 2.07 Optional Prepayments...........................................................................25 2.08 Currency Exchange Fluctuations.................................................................25 2.09 Mandatory Prepayments of Loans.................................................................25 2.10 Repayment......................................................................................25 2.11 Interest.......................................................................................26 2.12 Fees...........................................................................................26 (a) Arrangement, Agency Fees..............................................................26 (b) Commitment Fees.......................................................................26 2.13 Computation of Fees and Interest...............................................................27 2.14 Payments by the Company........................................................................28 2.15 Payments by the Banks to the Agent.............................................................28 2.16 Sharing of Payments, Etc.......................................................................29 ARTICLE III THE LETTERS OF CREDIT...................................................................................30 3.01 The Letter of Credit Subfacility...............................................................30 3.02 Issuance, Amendment and Renewal of Letters of Credit...........................................31 3.03 Risk Participations, Drawings and Reimbursements...............................................33 3.04 Repayment of Participations....................................................................34 3.05 Role of the Issuing Bank.......................................................................35 3.06 Obligations Absolute...........................................................................35 3.07 Letter of Credit Fees..........................................................................36 3.08 Uniform Customs and Practice...................................................................37
3 ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY..................................................................37 4.01 Taxes..........................................................................................37 4.02 Illegality.....................................................................................38 4.03 Increased Costs and Reduction of Return........................................................39 4.04 Funding Losses.................................................................................40 4.05 Inability to Determine Rates...................................................................40 4.06 Reserves on Offshore Rate Loans................................................................41 4.07 Certificates of Banks..........................................................................41 4.08 Survival.......................................................................................41 4.09 Replacement of Certain Banks...................................................................41 ARTICLE V CONDITIONS PRECEDENT....................................................................................43 5.01 Conditions of Initial Credit Extensions........................................................43 (a) Credit Agreement and Notes............................................................43 (b) Resolutions; Incumbency...............................................................43 (c) Organization Documents; Good Standing.................................................43 (d) Legal Opinions........................................................................43 (e) Payment of Fees.......................................................................43 (f) Certificate...........................................................................44 (g) Subsidiary Guaranty...................................................................44 (h) Other Documents.......................................................................44 5.02 Conditions to All Credit Extensions............................................................44 (a) Notice of Borrowing or Issuance.......................................................44 (b) Continuation of Representations and Warranties........................................44 (c) No Existing Default...................................................................44 ARTICLE VI REPRESENTATIONS AND WARRANTIES..........................................................................45 6.01 Corporate Existence and Power..................................................................45 6.02 Corporate Authorization; No Contravention......................................................45 6.03 Governmental Authorization.....................................................................45 6.04 Binding Effect.................................................................................45 6.05 Litigation.....................................................................................46 6.06 No Default.....................................................................................46 6.07 ERISA Compliance...............................................................................46 6.08 Use of Proceeds; Margin Regulations............................................................47 6.09 Taxes..........................................................................................47 6.10 Financial Condition............................................................................47 6.11 Environmental Matters..........................................................................47 6.12 Regulated Entities.............................................................................48
-ii- 4 6.13 Subsidiaries...................................................................................48 6.14 Insurance......................................................................................48 6.15 Swap Obligations...............................................................................48 6.16 Full Disclosure................................................................................48 ARTICLE VII AFFIRMATIVE COVENANTS...................................................................................48 7.01 Financial Statements...........................................................................48 7.02 Certificates; Other Information................................................................49 7.03 Notices........................................................................................50 7.04 Preservation of Corporate Existence, Etc.......................................................50 7.05 Maintenance of Property........................................................................51 7.06 Insurance......................................................................................51 7.07 Payment of Tax Obligations.....................................................................51 7.08 Compliance with Laws...........................................................................51 7.09 Compliance with ERISA..........................................................................51 7.10 Inspection of Property and Books and Records...................................................51 7.11 Environmental Laws.............................................................................52 7.12 Use of Proceeds................................................................................52 7.13 Additional Guarantors..........................................................................52 ARTICLE VIII NEGATIVE AND FINANCIAL COVENANTS........................................................................52 8.01 Limitation on Liens............................................................................52 8.02 Disposition of Assets..........................................................................54 8.03 Consolidations and Mergers.....................................................................55 8.04 Loans and Investments..........................................................................55 8.05 Limitation on Indebtedness.....................................................................56 8.06 Transactions with Affiliates...................................................................56 8.07 Contingent Obligations.........................................................................57 8.08 Restricted Payments............................................................................57 8.09 ERISA..........................................................................................58 8.10 Change in Business.............................................................................58 8.11 Accounting Changes.............................................................................58 8.12 Financial Covenants............................................................................58 (a) Fixed Charge Coverage Ratio...........................................................58 (b) Leverage Ratio........................................................................58 (c) Consolidated Tangible Net Worth.......................................................58
-iii- 5 ARTICLE IX EVENTS OF DEFAULT.......................................................................................58 9.01 Event of Default...............................................................................58 (a) Non-Payment...........................................................................58 (b) Representation or Warranty............................................................58 (c) Specific Defaults.....................................................................59 (d) Other Defaults........................................................................59 (e) Cross-Default.........................................................................59 (f) Insolvency; Voluntary Proceedings.....................................................59 (g) Involuntary Proceedings...............................................................59 (h) ERISA.................................................................................60 (i) Monetary Judgments....................................................................60 (j) Change of Control.....................................................................60 9.02 Remedies.......................................................................................60 9.03 Rights Not Exclusive...........................................................................61 ARTICLE X THE AGENT...............................................................................................61 10.01 Appointment and Authorization; "Agent".........................................................61 10.02 Delegation of Duties...........................................................................62 10.03 Liability of Agent.............................................................................62 10.04 Reliance by Agent..............................................................................62 10.05 Notice of Default..............................................................................62 10.06 Credit Decision................................................................................63 10.07 Indemnification of Agent.......................................................................63 10.08 Agent in Individual Capacity...................................................................64 10.09 Successor Agent................................................................................64 10.10 Withholding Tax................................................................................64 10.11 Co-Agents......................................................................................66 ARTICLE XI MISCELLANEOUS...........................................................................................66 11.01 Amendments and Waivers.........................................................................66 11.02 Notices........................................................................................67 11.03 No Waiver; Cumulative Remedies.................................................................67 11.04 Costs and Expenses.............................................................................67 11.05 Company Indemnification........................................................................68 11.06 Payments Set Aside.............................................................................68 11.07 Successors and Assigns.........................................................................68 11.08 Assignments, Participations, etc...............................................................69 11.09 Confidentiality................................................................................70 11.10 Set-off........................................................................................71
-iv- 6 11.11 Notification of Addresses, Lending Offices, Etc................................................71 11.12 Counterparts...................................................................................71 11.13 Severability...................................................................................71 11.14 No Third Parties Benefited.....................................................................71 11.15 Governing Law and Jurisdiction.................................................................71 11.16 Waiver of Jury Trial...........................................................................72 11.17 Judgment.......................................................................................72 11.18 Entire Agreement...............................................................................73
-v- 7 SCHEDULES Schedule 2.01 Commitments and Pro Rata Shares Schedule 6.07 ERISA Schedule 6.10 Permitted Liabilities Schedule 6.11 Environmental Matters Schedule 6.13 Subsidiaries and Minority Interests Schedule 8.01 Permitted Liens Schedule 8.04 Permitted Investments Schedule 8.05 Permitted Indebtedness Schedule 8.07 Contingent Obligations Schedule 11.02 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D-1 Form of Legal Opinion of Counsel to the Company and the Guarantors Exhibit D-2 Form of Legal Opinion of General Counsel of The May Department Stores Company Exhibit E Form of Assignment and Acceptance Agreement Exhibit F Form of Promissory Note Exhibit G Form of Subsidiary Guaranty -vi- 8 MULTICURRENCY CREDIT AGREEMENT This MULTICURRENCY CREDIT AGREEMENT is entered into as of April 22, 1996, among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a revolving multicurrency credit facility with a letter of credit subfacility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.01 Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 10.09. "Agent-Related Persons" means, at any time, the Agent at such time, together with its Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means (a) in respect of payments in Dollars, the address for payments set forth on Schedule 11.02 or such other address as the Agent may from time to time specify in accordance with Section 11.02, and (b) in the case of payments in any Offshore Currency, such address as the Agent may from time to time specify in accordance with Section 11.02. 9 "Agreed Alternative Currency" has the meaning specified in subsection 2.05(d). "Agreement" means this Multicurrency Credit Agreement, as the same may be amended, supplemented, restated or otherwise modified from time to time. "Agreement Currency" has the meaning specified in Section 11.17. "Applicable Commitment Fee Percentage" means, subject to the last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period:
Applicable Commitment Fixed Charge Coverage Ratio Fee Percentage --------------------------- -------------- Level I Status .15% Level II Status .1875% Level III Status .225%
The Fixed Charge Coverage Ratio shall be calculated by the Company as of the end of each of its fiscal quarters commencing with the first fiscal quarter ending after the date hereof and shall be reported to the Agent pursuant to the Compliance Certificate delivered in accordance with subsection 7.02(b). The Applicable Commitment Fee Percentage shall be adjusted, if necessary, quarterly as of the tenth day after the delivery of the Compliance Certificate referred to above; provided that, if such certificate, together with the financial statements to which such certificate relates, are not delivered by the date required pursuant to Section 7.01 and subsection 7.02(b), then from and after such date until such certificate is so delivered, the Applicable Commitment Fee Percentage shall be equal to .225%. Until adjusted as described above, the Applicable Commitment Fee Percentage shall be equal to .1875%. "Applicable Currency" means, as to any particular payment or Loan, Dollars or the Offshore Currency in which it is denominated or is payable. "Applicable Margin" means, subject to the second to last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period:
Fixed Charge Coverage Ratio Applicable Margin --------------------------- ----------------- Level I Status .40% Level II Status .50% Level III Status .75%
The Fixed Charge Coverage Ratio shall be calculated by the Company as of the end of each of its fiscal quarters commencing with the first fiscal quarter ending after the date hereof and shall be reported to the Agent pursuant to the Compliance Certificate delivered in accordance with -2- 10 subsection 7.02(b). The Applicable Margin shall be adjusted, if necessary, quarterly as of the tenth day after the delivery of the Compliance Certificate referred to above; provided that, if such certificate, together with the financial statements to which such certificate relates, are not delivered by the date required pursuant to Section 7.01 and subsection 7.02(b), then from and after such date until such certificate is so delivered, the Applicable Margin shall be equal to .75%. Until adjusted as described above, the Applicable Margin shall be equal to .50%. The Applicable Margin for any Interest Period shall be the Applicable Margin in effect on the first day of such Interest Period and shall not change during such Interest Period. "Arranger" means BA Securities, Inc., a Delaware corporation. "Assignee" has the meaning specified in subsection 11.08(a). "Assignment and Acceptance" has the meaning specified in subsection 11.08(a). "Attorney Costs" means and includes all reasonable out-of-pocket fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Banking Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Chicago or San Francisco are authorized or required by law to close and (a) with respect to disbursements and payments in Dollars, a day on which dealings are carried on in the applicable offshore Dollar interbank market, and (b) with respect to any disbursements and payments in and calculations pertaining to any Offshore Currency Loan, a day on which commercial banks are open for foreign exchange business in London, England, and on which dealings in the relevant Offshore Currency are carried on in the applicable offshore foreign exchange interbank market in which disbursement of or payment in such Offshore Currency will be made or received hereunder. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. -3- 11 "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type and in the same Applicable Currency made to the Company on the same day by the Banks under Article II and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Chicago or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means a Banking Day. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Lease" has the meaning specified in the definition of "Capital Lease Obligations." "Capital Lease Obligations" means the principal component of all monetary obligations of the Company or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease ("Capital Lease"). "Cash Collateralize" means to pledge and deposit with or deliver to the Agent, for the benefit of the Agent, the Issuing Bank and the Banks, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance reasonably satisfactory to the Agent and the Issuing Bank (which documents are hereby consented to by the Banks). Derivatives of such term shall have corresponding meanings. "Certificate Bank" has the meaning specified in subsection 4.09(a). "Change in Control" means (a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Company, or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Company's board of directors (together with any new directors whose election by the Company's board of directors or whose nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reasons other than death or disability to constitute a majority of the directors then in office. -4- 12 "Closing Date" means the date on which all conditions precedent set forth in Section 5.01 are satisfied or waived by all Banks (or, in the case of subsection 5.01(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder, in each case, as amended from time to time. "Commitment", as to each Bank, has the meaning specified in Section 2.01. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Computation Date" has the meaning specified in subsection 2.05(a). "Consolidated Interest Expense" means, for any period, the sum of total interest expense (including that attributable to Capital Leases in accordance with GAAP) of the Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of the Company and its Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, all as determined on a consolidated basis for the Company and its consolidated Subsidiaries in accordance with GAAP. "Consolidated Net Income" means, for any period for any Person, the aggregate of the net income of such Person for such period, determined in accordance with GAAP on a consolidated basis, provided that (i) the net income of any other Person which is not a Subsidiary of such Person shall be included in the Consolidated Net Income of such Person only to the extent of the amount of cash dividends or distributions paid to such Person or to a consolidated Subsidiary of such Person and (ii) the net income of any other Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded from the Consolidated Net Income of such Person . There shall be excluded in computing Consolidated Net Income for any Person the excess (or the deficit), if any, of (i) any gain which must be treated as an extraordinary item under GAAP or any gain realized upon the sale or other disposition of any real property or equipment that is not sold in the ordinary course of business or of any capital stock owned by such Person or a Subsidiary of such Person over (ii) any loss which must be treated as an extraordinary item under GAAP or any loss realized upon the sale or other disposition of any real property or equipment that is not sold in the ordinary course of business or of any capital stock owned by such Person or a Subsidiary of such Person. Without limiting the foregoing, all costs and expenses of the Company relating to management retention incentive payments which are treated as extraordinary items shall be excluded in computing Consolidated Net Income of the Company. "Consolidated Rental Expense" means, for any period, the sum of the aggregate payments of the Company and its Subsidiaries on a consolidated basis under agreements to rent or lease any real or personal property (exclusive of Capital Lease Obligations), all as determined on a consolidated basis for the Company and its consolidated Subsidiaries in accordance with GAAP. -5- 13 Consolidated Tangible Net Worth" of a Person means, without duplication, (a) total stockholders' equity of such Person less (b) the net book value of all assets of such Person and its consolidated Subsidiaries which would be treated as intangibles under GAAP, including, without limitation, goodwill and trademarks, but excluding, however, lease rights associated with acquisitions of below-market leases. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof; provided that if any Guaranty Obligation (a) is limited to an amount less than the obligations guaranteed or supported the amount of the corresponding Contingent Obligation shall be equal to the lesser of the amount determined pursuant to the initial clause of this sentence and the amount to which such guaranty is so limited or (b) is limited to recourse against a particular asset or assets of such Person the amount of the corresponding Contingent Obligation shall be equal to the lesser of the amount determined pursuant to the initial clause of this sentence and the fair market value of such asset or assets at the date for determination of the amount of the Contingent Obligation. In the case of other Contingent Obligations other than in respect of Swap Contracts, such Contingent Obligations shall be equal to the maximum reasonably anticipated liability in respect thereof and, in the case of Contingent Obligations in respect of Swap Contracts, such Contingent Obligations shall be equal to the Swap Termination Value. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. -6- 14 "Conversion/Continuation Date" means any date on which, under Section 2.04, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Credit Extension" means and includes (a) the making of any Loans hereunder and (b) the Issuance of any Letters of Credit hereunder. "Default" means any event or circumstance which, with the giving of notice pursuant to this Agreement, the expiration of any cure period specified herein, or both, would (if not cured or otherwise remedied during such cure period) constitute an Event of Default. "Disposition" has the meaning specified in Section 8.02. "Dollar Equivalent" means, at any time, (a) as to any amount denominated in Dollars, the amount thereof at such time, (b) as to any amount denominated in an Offshore Currency, the equivalent amount in Dollars as determined by the Agent at such time on the basis of the Spot Rate for the purchase of Dollars with such Offshore Currency on the most recent Computation Date provided for in subsection 2.05(a) and (c) as to any amount denominated in an Offshore L/C Currency, the equivalent amount in Dollars as determined by the Issuing Bank at such time on the basis of the Spot Rate for the purchase of Dollars with such Offshore L/C Currency. "Dollars", "dollars" and "$" each mean lawful money of the United States. "EBITR" means, for any period, for the Company and its Subsidiaries on a consolidated basis, determined in accordance with GAAP, the sum of (a) Consolidated Net Income for such period plus (b) all amounts treated as expenses for taxes to the extent included in the determination of such Consolidated Net Income plus (c) Consolidated Interest Expense to the extent included in the determination of such Consolidated Net Income plus (d) Consolidated Rental Expense to the extent included in the determination of such Consolidated Net Income. "Effective Amount" means (a) with respect to any Loans on any date, the aggregate outstanding principal Dollar Equivalent amount thereof after giving effect to any Borrowings and prepayments or repayments of Loans occurring on such date; and (b) with respect to any outstanding L/C Obligations on any date, the Dollar Equivalent amount of such L/C Obligations on such date after giving effect to any Issuances of Letters of Credit occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letters of Credit or any reductions in the maximum amount available for drawing under Letters of Credit taking effect on such date. "Eligible Assignee" means (a) a commercial bank or financial institution organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $200,000,000; (b) a commercial bank or financial institution organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $200,000,000, provided that such bank or financial institution is acting through -7- 15 a branch or agency located in the United States; and (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization the liability with respect to which has not been satisfied; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 9.01. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder, in each case, as amended from time to time. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. -8- 16 "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.12(a). "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Fixed Charge Coverage Ratio" means, for any period, the ratio of (a) EBITR to (b) the sum of Consolidated Interest Expense plus Consolidated Rental Expense, in each case, for such period. "FX Trading Office" means the Foreign Exchange Trading Center of the Agent, or such other of the Agent's offices as the Agent may designate from time to time. "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 4.01. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of (a) in the case of computations pursuant to Section 8.12, the date of this Agreement and (b) in all other cases, the applicable date. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantors" means, collectively, each of the Material Subsidiaries of the Company signatory to the Subsidiary Guaranty and such other Material Subsidiaries from time to time party to such Subsidiary Guaranty pursuant to Section 7.13. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." -9- 17 "Honor Date" has the meaning specified in subsection 3.03(b). "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all principal obligations with respect to Capital Leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. In the event any of the foregoing Indebtedness is limited to recourse against a particular asset or assets of such Person, the amount of the corresponding Indebtedness shall be equal to the lesser of the amount of such Indebtedness and the fair market value of such asset or assets at the date for determination of the amount of such Indebtedness. In addition, the amount of any Indebtedness which is also a Contingent Obligation shall be determined as provided in the definition of "Contingent Obligation." "Indemnified Liabilities" has the meaning specified in Section 11.05. "Indemnified Person" has the meaning specified in Section 11.05. "Independent Auditor" has the meaning specified in subsection 7.01(a). "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter; provided, however, that if any Interest Period for an Offshore Rate Loan exceeds three months the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. -10- 18 "Interest Period" means, with respect to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which a Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (b) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (c) no Interest Period shall extend beyond the scheduled Revolving Termination Date. "Investments" has the meaning specified in Section 8.04. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Issuance Date" has the meaning specified in subsection 3.01(a). "Issue" means, with respect to any Letter of Credit, to issue or to extend the expiry of, or to renew or increase the amount of, such Letter of Credit; and the terms "Issued," "Issuing" and "Issuance" have corresponding meanings. "Issuing Bank" means, with respect to any Letter of Credit, BofA or any Bank which at the request of the Company agrees, in such Bank's sole discretion, to become an Issuing Bank for purposes of Issuing Letters of Credit pursuant to Article III. "Judgment Currency" has the meaning specified in Section 11.17. "L/C Advance" means each Bank's participation in any L/C Borrowing in accordance with its Pro Rata Share. "L/C Amendment Application" means an application form for amendment of outstanding standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. -11- 19 "L/C Application" means an application form for issuances of standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made nor converted into a Borrowing of Loans under subsection 3.03(b). "L/C Commitment" means the commitment of the Issuing Bank to Issue, and the commitment of the Banks severally to participate in, Letters of Credit from time to time Issued or outstanding under Article III; provided that the L/C Commitment is a part of the combined Commitments, rather than a separate, independent commitment. "L/C Obligations" means, at any time, the sum of (a) the aggregate undrawn amount of all Letters of Credit then outstanding, plus (b) the amount of all unreimbursed drawings under all Letters of Credit, including all outstanding L/C Borrowings. "L/C-Related Documents" means the Letters of Credit, the L/C Applications, the L/C Amendment Applications and any other document relating to any Letter of Credit, including any of the Issuing Bank's standard form documents for letter of credit issuances. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 11.02, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Letters of Credit" means any letters of credit (whether standby letters of credit or commercial documentary letters of credit) Issued by the Issuing Bank pursuant to Article III. "Level I Status" exists at any date if at such date the Fixed Charge Coverage Ratio is greater than 2.0:1.0. "Level II Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 2.0:1.0 but greater than 1.6:1.0. "Level III Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 1.6:1.0. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other), conditional sale or other title retention agreement, the interest of a lessor under a Capital Lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) but, in any such case, not including the interest of a lessor under an operating lease. -12- 20 "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Fee Letter, the Subsidiary Guaranty, the L/C-Related Documents and all other documents delivered to the Agent or any Bank by the Company in connection herewith. "Margin Stock" means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties or financial condition of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform its obligations under any Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or any Guarantor of any of the Loan Documents. "Material Subsidiary" means, at any time, (a) Payless ShoeSource Merchandising, Inc., a Kansas corporation, Payless ShoeSource Distribution, Inc., a Kansas corporation, and Payless ShoeSource Worldwide, Inc., a Kansas corporation, and (b) any other domestic Subsidiary of the Company the total assets of which constitute 5% or more of the total consolidated assets of the Company and its Subsidiaries, in each case, determined in accordance with GAAP. "Minimum Tranche" means, in respect of Loans comprising part of the same Borrowing, or to be converted or continued under Section 2.04, (a) in the case of Base Rate Loans, $3,000,000 or any multiple of $1,000,000 in excess thereof, and (b) in the case of Offshore Rate Loans, the Dollar Equivalent amount of $3,000,000 or any multiple of 1,000,000 units of the Applicable Currency in excess thereof. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to Section 2.02, in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company or any Guarantor to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment pursuant to subsection 11.08(a), absolute or contingent, due or to become due, now existing or hereafter arising. -13- 21 "Offshore Currency" means, at any time, Italian lire, Canadian dollars, British pound sterling and French francs, and any Agreed Alternative Currency. "Offshore Currency Loan" means any Offshore Rate Loan denominated in an Offshore Currency. "Offshore L/C Currency" means, at any time, any Offshore Currency and, with respect to any Letter of Credit, any other currency agreed to by the Issuing Bank thereof. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day for any Interest Period (a) with respect to Offshore Rate Loans denominated in Dollars, the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") and (b) with respect to all other Offshore Rate Loans, zero; and "LIBOR" means the rate of interest per annum determined by the Agent to be the arithmetic mean of the rates of interest per annum notified to the Agent by each Reference Bank as the rate of interest at which deposits in the Applicable Currency in the approximate amount of the amount of the Loan to be made or continued as, or converted into, an Offshore Rate Loan by such Reference Bank and having a maturity comparable to such Interest Period would be offered to major banks in the London interbank market at their request at approximately 11:00 a.m. (London time) two Banking Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate, and may be an Offshore Currency Loan or a Loan denominated in Dollars. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of -14- 22 preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "originating Bank" has the meaning specified in subsection 11.08(d). "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Overnight Rate" means, for any day, the rate of interest per annum at which overnight deposits in the Applicable Currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by BofA's London Branch to major banks in the London or other applicable offshore interbank market. "Participant" has the meaning specified in subsection 11.08(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA (other than a Multiemployer Plan) which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Liens" has the meaning specified in Section 8.01. "Permitted Swap Obligations" means all obligations (contingent or otherwise) of the Company or any Subsidiary existing or arising under Swap Contracts, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. -15- 23 "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions (other than a Multiemployer Plan) and includes any Pension Plan. "Present Value" means, with respect to each lease of the Company and its Subsidiaries treated as an "operating" lease for purposes of external financial reporting, the periodic minimum or base rental payments due and payable during the primary term (giving effect to any extension terms as to which the Company or its Subsidiaries have become contractually obligated) of such lease on or after the date of determination discounted to an equivalent value as of the date of determination. For purposes of computing the Present Value: (a) the discount rate utilized to calculate the Present Value of any Existing Lease (as defined below) shall be the rate actually utilized by the Company prior to the date hereof for purposes of calculating the present value of such operating lease for disclosure of the present value of all operating leases in the consolidated external financial reports of the Company and its Affiliates; (b) the discount rate utilized to calculate the Present Value of any Additional Lease (as defined below) during the fiscal year in which the term of such lease commences (its "First Lease Year") shall be the Year-To-Date Rate (as defined below) as of the end of the fiscal quarter for which the computation is made; and (c) the discount rate for any Additional Lease during any fiscal year other than its First Lease Year shall be the Year-To-Date Rate as of the end of its First Lease Year. For purposes of this definition: (i) "Existing Lease" means any operating lease with a term commencing before February 4, 1996; (ii) "Additional Lease" means any operating lease with a term commencing after February 3, 1996; and (iii) "Year-To-Date Rate" means the weekly year-to-date average of the Friday rates of the Merrill Lynch Bond Index for corporate issues of "medium" quality with terms of 10 years or more ("Index") as published in The Wall Street Journal (or similar publication). In the event that the Index ceases to be published, the Index shall be replaced by a similar index reflecting rates applicable to corporate issues with similar terms and credit quality as the Index as jointly selected by the Company and the Agent. The discount rate applied to any extension of any Existing Lease or Additional Lease shall be: (A) if the dollar amount of base rent payable during such extension is prescribed in the original operating lease, the discount rate originally applicable to such Existing Lease or Additional Lease, as applicable; and (B) in all other cases, the discount rate determined as if such extension period constituted an Additional Lease. "Present Value of Operating Leases" means, at any time, the sum of the Present Value of each operating lease of the Company and its Subsidiaries. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Reference Banks" means BofA, The First National Bank of Chicago and The Bank of New York. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. -16- 24 "Required Banks" means (a) at any time prior to the Revolving Termination Date, Banks then holding at least 51% of the then aggregate unpaid principal amount of the Loans, or, if no Loans are outstanding, Banks then having at least 51% of the aggregate amount of the Commitments and (b) at all other times, Banks then holding at least 51% of the then aggregate unpaid principal amount of the Credit Extensions. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer, president or any vice president of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility. "Revolving Termination Date" means the earlier to occur of: (a) April 22, 2001; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "Same Day Funds" means (a) with respect to disbursements and payments in Dollars, immediately available funds, and (b) with respect to disbursements and payments in an Offshore Currency, same day or other funds as may be reasonably determined by the Agent to be customary in the place of disbursement or payment for the settlement of international banking transactions in the relevant Offshore Currency. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Spot Rate" for a currency means the rate quoted by the Agent as the spot rate for the purchase by the Agent of such currency with another currency through its FX Trading Office at approximately 11:00 a.m. (Chicago time) on the date two Banking Days prior to the date as of which the foreign exchange computation is made. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. -17- 25 "Subsidiary Guaranty" means the Subsidiary Guaranty, in substantially the form of Exhibit G, executed and delivered by the Guarantors in favor of the Agent and the Banks, as the same may be amended, supplemented, restated or otherwise modified from time to time in accordance with its terms and the terms hereof. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds, performance bonds and similar instruments. "Swap Contract" means any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swaption, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined by the Company based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank.) "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Total Capitalization" means, at any time, the sum at such time of (a) the Company's total stockholders' equity plus (b) Total Debt plus (c) the consolidated non-current deferred taxes of the Company and its Subsidiaries. "Total Debt" means, at any time, the sum of (a) the current and long-term indebtedness obligations for money borrowed, drawn and unreimbursed letters of credit, drawn and unreimbursed surety bonds, the current portion of mandatory redeemable preferred stock of the Company, Capital Lease Obligations and, without duplication, Contingent Obligations in respect of any of the foregoing, in each case, of the Company and its Subsidiaries on a consolidated basis, plus (b) the Present Value of Operating Leases. "Type" has the meaning specified in the definition of "Loan." -18- 26 "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. 1.02 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. -19- 27 (g) This Agreement is the result of negotiations among and has been reviewed by counsel to the Agent, the Company and the other parties, and is the product of all parties. Accordingly, it shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in its preparation. 1.03 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. Currently, the fiscal year of the Company ends on the Saturday closest to January 31 of each year. 1.04 Currency Equivalents Generally. For all purposes of this Agreement (but not for purposes of the preparation of any financial statements delivered pursuant hereto), the equivalent in any Offshore Currency or other currency of an amount in Dollars, and the equivalent in Dollars of an amount in any Offshore Currency or other currency, shall be determined at the Spot Rate. ARTICLE II THE CREDITS 2.01 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company from time to time on any Business Day during the period from the Closing Date to, but not including, the Revolving Termination Date, in an aggregate principal Dollar Equivalent amount not to exceed at any time outstanding the amount set forth opposite the Bank's name in Schedule 2.01 under the heading "Commitment" (such amount as the same may be reduced pursuant to Section 2.06 or as a result of one or more assignments pursuant to Section 11.08, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing of Loans, the aggregate principal Dollar Equivalent amount of all outstanding Loans and L/C Obligations shall not exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay pursuant to Section 2.07 and reborrow pursuant to this Section 2.01. 2.02 Notes. The Loans made by each Bank shall be evidenced by one or more Notes. Each such Bank shall endorse on the schedules annexed to its Note the date, amount and maturity of each Loan made by it and the amount and Applicable Currency of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note and each Bank's record shall be rebuttably presumptive evidence of the matters set forth therein absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. -20- 28 2.03 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 12:00 noon (Chicago time) (i) four Business Days prior to the requested Borrowing Date, in the case of Offshore Currency Loans; (ii) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans denominated in Dollars; and (iii) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans, in any such case, specifying: (A) the amount of the Borrowing, which shall be in an aggregate amount not less than the Minimum Tranche; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; (D) the duration of the Interest Period applicable to any Offshore Rate Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be one month; and (E) in the case of a Borrowing comprised of Offshore Currency Loans, the Applicable Currency; provided, however, that with respect to any Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 12:00 noon (Chicago time) one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only. (b) The Dollar Equivalent amount of any Borrowing in an Offshore Currency will be determined by the Agent for such Borrowing on the Computation Date therefor in accordance with subsection 2.05(a). Upon receipt of the Notice of Borrowing, the Agent will promptly notify each Bank thereof and of the amount of such Bank's Pro Rata Share of the Borrowing. In the case of a Borrowing comprised of Offshore Currency Loans, such notice will provide the approximate amount of each Bank's Pro Rata Share of the Borrowing, and the Agent will, upon the determination of the Dollar Equivalent amount of the Borrowing as specified in the Notice of Borrowing, promptly notify each Bank of the exact Dollar Equivalent amount of such Bank's Pro Rata Share of the Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office on the Borrowing Date requested by the Company in Same Day Funds and in the requested currency (i) in the case of a Borrowing comprised of Loans in Dollars, by 12:00 noon (Chicago time) and (ii) in the case of a Borrowing comprised of Offshore Currency Loans, by such time as the Agent may specify. The proceeds of all such Loans will then be made available to the Company by the Agent -21- 29 at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. (d) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than nine different Interest Periods in effect. 2.04 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.04(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans denominated in Dollars, to convert any such Loans (or any part thereof in an amount not less than the Minimum Tranche) into Loans in Dollars of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than the Minimum Tranche). (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 12:00 noon (Chicago time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans denominated in Dollars; (ii) four Business Days in advance of the continuation date, if the Loans are to be continued as Offshore Currency Loans; and (iii) one Business Day in advance of the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans in Dollars, the Company has failed to timely select a new Interest Period to be applicable to such Offshore Rate Loans or if any Default or Event of Default then exists, unless, in either case, the Company has elected to and does repay such Loans on or prior to the expiration date of such Interest Period, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. If the Company has failed to select a new Interest Period to be applicable to Offshore Currency Loans prior to the fourth -22- 30 Business Day in advance of the expiration date of the current Interest Period applicable thereto as provided in subsection 2.04(b), or if any Default or Event of Default shall then exist, the Company shall be deemed to have elected to continue such Offshore Currency Loans on the basis of a one month Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Required Banks otherwise consent, during the existence of a Default or Event of Default, the Company may not elect to have a Loan in Dollars converted into or continued as an Offshore Rate Loan in Dollars or an Offshore Currency Loan continued on the basis of an Interest Period exceeding one month. (f) After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than nine different Interest Periods in effect. 2.05 Utilization of Commitments in Offshore Currencies. (a) The Agent will determine the Dollar Equivalent amount with respect to any (i) Borrowing comprised of Offshore Currency Loans as of the requested Borrowing Date, (ii) outstanding Offshore Currency Loans as of the last Banking Day of each month, (iii) outstanding Offshore Currency Loans as of any redenomination date pursuant to this Section 2.05 or Section 4.05, (iv) Issuance or renewal of any Letter of Credit denominated in an Offshore L/C Currency as of the requested date of Issuance or renewal and (v) outstanding Letter of Credit denominated in an Offshore L/C Currency as of the last Banking Day of each month (each such date under clauses (i) through (v) a "Computation Date"). (b) In the case of a proposed Borrowing comprised of Offshore Currency Loans, the Banks shall be under no obligation to make Offshore Currency Loans in the requested Offshore Currency as part of such Borrowing if the Agent has received notice from any of the Banks by 5:00 p.m. (Chicago time) four Business Days prior to the day of such Borrowing that such Bank cannot provide Loans in the requested Offshore Currency, in which event the Agent will give notice to the Company no later than 12:00 noon (Chicago time) on the third Business Day prior to the requested date of such Borrowing that the Borrowing in the requested Offshore Currency is not then available, and notice thereof also will be given promptly by the Agent to the Banks. If the Agent shall have so notified the Company that any such Borrowing in a requested Offshore Currency is not then available, the Company may, by notice to the Agent not later than 5:00 p.m. (Chicago time) three Business Days prior to the requested date of such Borrowing, withdraw the Notice of Borrowing relating to such requested Borrowing. If the Company does so withdraw such Notice of Borrowing, the Borrowing requested therein shall not occur and the Agent will promptly so notify each Bank. If the Company does not so withdraw such Notice of Borrowing, the Agent will promptly so notify each Bank and such Notice of Borrowing shall be deemed to be a Notice of Borrowing that requests -23- 31 a Borrowing comprised of Base Rate Loans in an aggregate amount equal to the amount of the originally requested Borrowing as expressed in Dollars in the Notice of Borrowing; and in such notice by the Agent to each Bank the Agent will state such aggregate amount of such Borrowing in Dollars and such Bank's Pro Rata Share thereof. (c) In the case of a proposed continuation of Offshore Currency Loans for an additional Interest Period pursuant to Section 2.04, the Banks shall be under no obligation to continue such Offshore Currency Loans if the Agent has received notice from any of the Banks by 5:00 p.m. (Chicago time) four Business Days prior to the day of such continuation that such Bank cannot continue to provide Loans in the relevant Offshore Currency, in which event the Agent will give notice to the Company not later than 12:00 noon (Chicago time) on the third Business Day prior to the requested date of such continuation that the continuation of such Offshore Currency Loans in the relevant Offshore Currency is not then available, and notice thereof also will be given promptly by the Agent to the Banks. If the Agent shall have so notified the Company that any such continuation of Offshore Currency Loans is not then available, any Notice of Continuation/Conversion with respect thereto shall be deemed withdrawn and such Offshore Currency Loans shall be redenominated into Base Rate Loans in Dollars with effect from the last day of the Interest Period with respect to any such Offshore Currency Loans. The Agent will promptly notify the Company and the Banks of any such redenomination and in such notice by the Agent to each Bank the Agent will state the aggregate Dollar Equivalent amount of the redenominated Offshore Currency Loans as of the Computation Date with respect thereto and such Bank's Pro Rata Share thereof. (d) The Company shall be entitled to request that Loans hereunder also be permitted to be made in any other lawful currency (other than Dollars), in addition to the currencies specified in the definition of "Offshore Currency" herein, that in the opinion of the Required Banks is at such time freely traded in the offshore interbank foreign exchange markets and is freely transferable and freely convertible into Dollars (an "Agreed Alternative Currency"). The Company shall deliver to the Agent any request for designation of an Agreed Alternative Currency in accordance with Section 11.02, to be received by the Agent not later than 12:00 noon (Chicago time) at least 10 Business Days in advance of the date of any Borrowing hereunder proposed to be made in such Agreed Alternative Currency. Upon receipt of any such request the Agent will promptly notify the Banks thereof, and each Bank will use its best efforts to respond to such request within two Business Days of receipt thereof. Each Bank may grant or accept such request in its sole discretion. The Agent will promptly notify the Company of the acceptance or rejection of any such request. 2.06 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than three Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum Dollar Equivalent amount of $5,000,000 or any Dollar Equivalent multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then outstanding principal Dollar Equivalent amount of the Loans and L/C Obligations would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section 2.06, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each -24- 32 Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.07 Optional Prepayments. Subject to Section 4.04, the Company may, at any time or from time to time, upon irrevocable notice to the Agent as described below, ratably prepay Loans in whole or in part, in minimum Dollar Equivalent amounts of $3,000,000 or any Dollar Equivalent multiple of $1,000,000 in excess thereof or such other amount necessary to repay any Offshore Currency Loan in full. The Company shall deliver a notice of prepayment in accordance with Section 11.02 to be received by the Agent not later than 12:00 noon (Chicago time) (a) at least four Business Days in advance of the prepayment date if the Loans to be prepaid are Offshore Currency Loans, (b) at least three Business Days in advance of the prepayment date if the Loans to be prepaid are Offshore Rate Loans in Dollars, and (iii) at least one Business Day in advance of the prepayment date if the Loans to be prepaid are Base Rate Loans. Such notice of prepayment shall specify the date and amount of such prepayment and whether such prepayment is of Base Rate Loans or Offshore Rate Loans, or any combination thereof, and the Applicable Currency. Such notice shall not thereafter be revocable by the Company and the Agent will promptly notify each Bank thereof and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 4.04. 2.08 Currency Exchange Fluctuations. Subject to Section 4.04, if on any Computation Date the Agent shall have determined that the aggregate Dollar Equivalent principal amount of all Loans and L/C Obligations then outstanding exceeds the combined Commitments of the Banks by more than $500,000, due to a change in applicable rates of exchange between Dollars and Offshore Currencies, then the Agent shall give notice to the Company that a prepayment is required under this Section 2.08, and the Company agrees thereupon to make prepayments of Loans within one Business Day of such notice such that, after giving effect to such prepayment the aggregate Dollar Equivalent amount of all Loans does not exceed the combined Commitments. 2.09 Mandatory Prepayments of Loans. Subject to Section 4.04, if on any date the Effective Amount of all Loans then outstanding plus the Effective Amount of all L/C Obligations exceeds the aggregate Commitments (other than as a result of currency exchange fluctuations), the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Loans in an amount equal to the lesser of such excess and the amount of the outstanding Loans and, if any excess shall still remain, shall Cash Collateralize the L/C Obligations to the extent of such remaining excess. 2.10 Repayment. The Company shall repay to the Banks on April 22, 2001 or on such earlier date as such Loans may become due and payable pursuant to subsection 9.02(b) the aggregate principal amount of Loans outstanding on such date. -25- 33 2.11 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate plus the Applicable Margin or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.04). (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.07, 2.08 or 2.09 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Banks. (c) Notwithstanding subsections 2.11(a) and 3.03(d), while any Event of Default exists, for the period commencing after the Company's receipt of notice from the Agent at the request, or with the consent, of the Required Banks or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans and other Obligations, at a rate per annum which is determined by adding 2% per annum to the Applicable Margin then in effect for such Loans and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 2%; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default for the period commencing after the Company's receipt of notice from the Agent at the request, or with the consent, of the Required Banks or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus 2%. (d) Anything herein to the contrary notwithstanding, the Obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.12 Fees. (a) Arrangement, Agency Fees. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated March 13, 1996. (b) Commitment Fees. The Company shall pay to the Agent for the account of each Bank a commitment fee equal to the Applicable Commitment Fee Percentage times the average daily unused portion of such Bank's Commitment, computed on a quarterly basis in arrears on the -26- 34 last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent. For purposes hereof, each Bank's Commitment shall be deemed utilized to the extent of its Pro Rata Share of all outstanding Loans and L/C Obligations. Such commitment fee shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing with the first calendar quarter ending after the date hereof through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.06, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fees provided in this subsection shall accrue at all times after the above- mentioned commencement date, including at any time during which one or more conditions in Article V are not met. 2.13 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans and of fees shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All computations of interest for Offshore Rate Loans shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) For purposes of determining utilization of each Bank's Commitment in order to calculate the commitment fee due under subsection 2.12(b), the amount of any outstanding Offshore Currency Loan on any date shall be determined based upon the Dollar Equivalent amount as of the most recent Computation Date with respect to such Offshore Currency Loan. (c) Each determination of an interest rate or a Dollar Equivalent amount by the Agent shall be rebuttably presumptive evidence thereof in the absence of manifest error. The Agent will, at the request of the Company or any Bank, deliver to the Company or the Bank, as the case may be, a statement showing the quotations used by the Agent in determining any interest rate or Dollar Equivalent amount. (d) If any Reference Bank's Commitment terminates (other than on termination of all the Commitments), or for any reason whatsoever such Reference Bank ceases to be a Bank hereunder, such Reference Bank shall thereupon cease to be a Reference Bank, and the Offshore Rate shall be determined on the basis of the rates as notified by the remaining Reference Bank(s). In such event, the Company (with the consent of the Agent) may designate another Bank as a Reference Bank hereunder. (e) Each Reference Bank shall use its best efforts to furnish quotations of rates to the Agent as contemplated hereby. If any of the Reference Banks fails to supply such rates to the Agent upon its request, the rate of interest shall be determined on the basis of the quotations of the remaining Reference Bank(s). -27- 35 2.14 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and, with respect to principal of, interest on, and any other amounts relating to, any Offshore Currency Loan, shall be made in the Offshore Currency in which such Loan is denominated or payable, and, with respect to all other amounts payable hereunder, shall be made in Dollars. Such payments shall be made in Same Day Funds, and (i) in the case of Offshore Currency payments, no later than such time on the dates specified herein as may be determined by the Agent to be necessary for such payment to be credited on such date in accordance with normal banking procedures in the place of payment, and (ii) in the case of any Dollar payments, no later than 12:00 noon (Chicago time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such principal, interest, fees or other amounts, in like funds as received. Any payment which is received by the Agent later than 12:00 noon (Chicago time), or later than the time specified by the Agent as provided in clause (i) above (in the case of Offshore Currency payments), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in Same Day Funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate or, in the case of a payment in an Offshore Currency, the Overnight Rate, for each day from the date such amount is distributed to such Bank until the date repaid. 2.15 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in Same Day Funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in Same Day Funds -28- 36 and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate or, in the case of any Borrowing consisting of Offshore Currency Loans, the Overnight Rate, for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection 2.15(a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.16 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 11.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section 2.16 and will in each case notify the Banks following any such purchases or repayments. -29- 37 ARTICLE III THE LETTERS OF CREDIT 3.01 The Letter of Credit Subfacility. (a) On the terms and conditions set forth herein (i) the Issuing Bank agrees, (A) from time to time on any Business Day during the period from the Closing Date to, but not including, the Revolving Termination Date to issue Letters of Credit denominated in Dollars or an Offshore L/C Currency for the account of the Company, and to amend or renew Letters of Credit previously issued by it, in accordance with subsections 3.02(c) and 3.02(d), and (B) to honor drafts under the Letters of Credit; and (ii) the Banks severally agree to participate in Letters of Credit Issued for the account of the Company; provided that the Issuing Bank shall not be obligated to Issue, and no Bank shall be obligated to participate in, any Letter of Credit if as of the date of Issuance of such Letter of Credit (the "Issuance Date"): (A) the Effective Amount of all L/C Obligations plus the Effective Amount of all Loans exceeds the aggregate Commitments or (B) the participation of any Bank in the Effective Amount of all L/C Obligations plus the Effective Amount of the Loans of such Bank exceeds such Bank's Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company's ability to obtain Letters of Credit shall be fully revolving, and, accordingly, the Company may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. (b) The Issuing Bank shall be under no obligation to Issue any Letter of Credit if: (i) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Bank from Issuing such Letter of Credit, or any Requirement of Law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the Issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Bank in good faith deems material to it and for which the Issuing Bank is not compensated hereunder. (ii) the Issuing Bank has received written notice from any Bank, the Agent or the Company, on or prior to the Business Day prior to the requested date of Issuance of such Letter of Credit, that one or more of the applicable conditions contained in Article V is not then satisfied; -30- 38 (iii) the expiry date of any requested Letter of Credit is (A) more than 360 days after the date of Issuance, unless the Required Banks and the Issuing Bank have approved such expiry date in writing, or (B) after five Business Days prior to the scheduled Revolving Termination Date, unless all of the Banks have approved such expiry date in writing; (iv) any requested Letter of Credit is not in a form reasonably acceptable to the Issuing Bank, or the Issuance of a Letter of Credit shall violate any applicable policies of the Issuing Bank; or (v) any standby Letter of Credit is for the purpose of supporting the issuance of any letter of credit by any other Person. 3.02 Issuance, Amendment and Renewal of Letters of Credit. (a) Each Letter of Credit shall be issued upon the irrevocable written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least two Business Days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of issuance. Each such request for issuance of a Letter of Credit shall be by facsimile or electronic transmission, confirmed immediately in an original writing, in the form of an L/C Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the proposed date of issuance of the Letter of Credit (which shall be a Business Day); (ii) the face amount of the Letter of Credit; (iii) the expiry date of the Letter of Credit; (iv) the name and address of the beneficiary thereof; (v) the documents to be presented by the beneficiary of the Letter of Credit in case of any drawing thereunder; (vi) the full text of any certificate to be presented by the beneficiary in case of any drawing thereunder; (vii) the currency (which shall be Dollars or an Offshore L/C Currency) in which the Letter of Credit is to be denominated; and (viii) such other matters as the Issuing Bank may reasonably require. (b) If the Agent is not the Issuing Bank, by 12:00 noon (Chicago time) on the Business Day next preceding the requested date of issuance of a Letter of Credit, the Issuing Bank will confirm with the Agent (by telephone or in writing) that the Agent has received a copy of the L/C Application or L/C Amendment Application from the Company and, if not, the Issuing Bank will provide the Agent with a copy thereof. Unless the Issuing Bank has received notice on or before the Business Day immediately preceding the date the Issuing Bank is to issue a requested Letter of Credit from the Agent (i) directing the Issuing Bank not to issue such Letter of Credit because such issuance is not then permitted under subsection 3.01(a)(ii) as a result of the limitations set forth in clauses (A) and (B) thereof or subsection 3.01(b)(ii); or (ii) that one or more conditions specified in Article V are not then satisfied; then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, issue a Letter of Credit for the account of the Company in accordance with the Issuing Bank's usual and customary business practices. (c) From time to time while a Letter of Credit is outstanding and prior to the Revolving Termination Date, the Issuing Bank will, upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least two Business -31- 39 Days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of amendment, amend any Letter of Credit issued by it. Each such request for amendment of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Letter of Credit to be amended; (ii) the proposed date of amendment of the Letter of Credit (which shall be a Business Day); (iii) the nature of the proposed amendment; and (iv) such other matters as the Issuing Bank may reasonably require. The Issuing Bank shall be under no obligation to amend any Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue such Letter of Credit in its amended form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed amendment to the Letter of Credit. (d) The Issuing Bank and the Banks agree that, while a Letter of Credit is outstanding and prior to the Revolving Termination Date, at the option of the Company and upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least two Business Days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of notification of renewal, the Issuing Bank shall be entitled to authorize the automatic renewal of any Letter of Credit issued by it; provided that the Issuing Bank shall not be entitled to authorize such automatic renewal if, at least one Business Day prior to the proposed date of notification of renewal, it shall have received notice from the Agent (i) directing the Issuing Bank not to renew such Letter of Credit because such renewal is not then permitted under subsection 3.01(a)(ii) as a result of the limitations set forth in clauses (A) and (B) thereof or subsection 3.01(b)(ii); or (ii) that one or more conditions specified in Article V are not then satisfied. Each such request for renewal of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Letter of Credit to be renewed; (ii) the proposed date of notification of renewal of the Letter of Credit (which shall be a Business Day); (iii) the revised expiry date of the Letter of Credit; and (iv) such other matters as the Issuing Bank may require. The Issuing Bank shall be under no obligation to renew, and no Bank shall be obligated to participate in, any Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue or amend, and no Bank would be obligated to participate in, such Letter of Credit in its renewed form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed renewal of the Letter of Credit. If any outstanding Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the Issuing Bank that such Letter of Credit shall not be renewed, and if at the time of renewal the Issuing Bank would be required to authorize the automatic renewal of such Letter of Credit in accordance with this subsection 3.02(d) upon the request of the Company but the Issuing Bank shall not have received any L/C Amendment Application from the Company with respect to such renewal or other written direction by the Company with respect thereto, the Issuing Bank shall nonetheless renew such Letter of Credit, and the Company and the Banks hereby authorize such renewal, and, accordingly, the Issuing Bank shall be deemed to have received an L/C Amendment Application from the Company requesting such renewal. (e) The Issuing Bank may, at its election (or as required by the Agent at the direction of the Required Banks), deliver any notices of termination or other communications to any -32- 40 Letter of Credit beneficiary or transferee, and take any other action as necessary or appropriate, at any time and from time to time, in order to cause the expiry date of such Letter of Credit to be a date not later than the scheduled Revolving Termination Date. (f) This Agreement shall control in the event of any conflict with any L/C-Related Document (other than any Letter of Credit). In addition, unless the Company and the Issuing Bank shall otherwise expressly agree in writing, any purported grant of a Lien (or any requirement to do so) contained in any L/C Related Document shall be ineffective and null and void. (g) The Issuing Bank will also deliver to the Agent, concurrently or promptly following its delivery of a Letter of Credit, or amendment to or renewal of a Letter of Credit, to an advising bank or a beneficiary, a true and complete copy of each such Letter of Credit or amendment to or renewal of a Letter of Credit. (h) Within five Business Days after the end of each month, the Agent will send to each Bank a statement reflecting the outstanding Letters of Credit as of the end of such month. 3.03 Risk Participations, Drawings and Reimbursements. (a) Immediately upon the Issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) the Pro Rata Share of such Bank, times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. For purposes of Section 2.01, each Issuance of a Letter of Credit shall be deemed to utilize the Commitment of each Bank by an amount equal to the amount of such participation for so long as any related L/C Obligations shall be outstanding. (b) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Issuing Bank will promptly notify the Company and the Agent. Provided that it shall have received such notice, the Company shall reimburse the Issuing Bank prior to 12:00 noon (Chicago time) on each date that any amount is paid by the Issuing Bank under any Letter of Credit (each such date, an "Honor Date") in an amount equal to the amount so paid by the Issuing Bank; provided that, if such Letter of Credit is denominated in an Offshore L/C Currency, the Company shall pay to the Issuing Bank the Dollar Equivalent of the amount of such Offshore L/C Currency paid by the Issuing Bank under such Letter of Credit. In the event the Company fails to reimburse the Issuing Bank for the full amount of any drawing under any Letter of Credit by 12:00 noon (Chicago time) on the Honor Date, the Issuing Bank will promptly notify the Agent and the Agent will promptly notify each Bank thereof, and the Company shall be deemed to have requested that Base Rate Loans be made by the Banks to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the Commitment and subject to the conditions set forth in Section 5.02 other than any notice requirements. Any notice given by the Issuing Bank or the Agent pursuant to this subsection 3.03(b) may be oral if immediately confirmed in writing (including by facsimile); provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. -33- 41 (c) Each Bank shall upon any notice pursuant to subsection 3.03(b) make available to the Agent for the account of the relevant Issuing Bank an amount in Dollars and in immediately available funds equal to its Pro Rata Share of the amount of the Dollar Equivalent of the drawing, whereupon the participating Banks shall (subject to subsection 3.03(d)) each be deemed to have made a Loan consisting of a Base Rate Loan to the Company in that amount. If any Bank so notified fails to make available to the Agent for the account of the Issuing Bank the amount of such Bank's Pro Rata Share of such amount by no later than 2:00 p.m. (Chicago time) on the Honor Date, then interest shall accrue on such Bank's obligation to make such payment, from the Honor Date to the date such Bank makes such payment, at a rate per annum equal to the Federal Funds Rate in effect from time to time during such period. The Agent will promptly give notice of the occurrence of the Honor Date, but failure of the Agent to give any such notice on the Honor Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligations under this Section 3.03. (d) With respect to any unreimbursed drawing that is not converted into Loans consisting of Base Rate Loans to the Company in whole or in part as contemplated by subsection 3.03(b), because of the Company's failure to satisfy the conditions set forth in Section 5.02 other than any notice requirements or for any other reason, the Company shall be deemed to have incurred from the Issuing Bank an L/C Borrowing in the amount of such drawing, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at a rate per annum equal to the Base Rate, and each Bank's payment to the Issuing Bank pursuant to subsection 3.03(c) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Bank in satisfaction of its participation obligation under this Section 3.03. (e) Each Bank's obligation in accordance with this Agreement to make the Loans or L/C Advances, as contemplated by this Section 3.03, as a result of a drawing under a Letter of Credit, shall be absolute and unconditional and without recourse to the Issuing Bank and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Bank, the Company or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default, an Event of Default or a Material Adverse Effect; or (iii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided, however, that each Bank's obligation to make Loans under this Section 3.03 is subject to the conditions set forth in Section 5.02. 3.04 Repayment of Participations. (a) Upon (and only upon) receipt by the Agent for the account of the Issuing Bank of immediately available funds from the Company (i) in reimbursement of any payment made by the Issuing Bank under the Letter of Credit with respect to which any Bank has paid the Agent for the account of the Issuing Bank for such Bank's participation in the Letter of Credit pursuant to Section 3.03 or (ii) in payment of interest thereon, the Agent will pay to each Bank, in the same funds as those received by the Agent for the account of the Issuing Bank, the amount of such Bank's Pro Rata Share of such funds, and the Issuing Bank shall receive the amount of the Pro Rata Share of such funds of any Bank that did not so pay the Agent for the account of the Issuing Bank. -34- 42 (b) If the Agent or the Issuing Bank is required at any time to return to the Company, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by the Company to the Agent for the account of the Issuing Bank pursuant to subsection 3.04(a) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent or the Issuing Bank the amount of its Pro Rata Share of any amounts so returned by the Agent or the Issuing Bank plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent or the Issuing Bank, at a rate per annum equal to the Federal Funds Rate in effect from time to time. 3.05 Role of the Issuing Bank. (a) Each Bank and the Company agree that, in paying any drawing under a Letter of Credit, the Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft and certificates expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or the authority of the Person executing or delivering any such document. (b) No Agent-Related Person nor any of the respective correspondents, participants or assignees of the Issuing Bank shall be liable to any Bank for: (i) any action taken or omitted in connection herewith at the request or with the approval of the Banks (including the Required Banks, as applicable); (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any L/C-Related Document. (c) The Company hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Company's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Agent-Related Person, nor any of the respective correspondents, participants or assignees of the Issuing Bank, shall be liable or responsible for any of the matters described in clauses (a) through (g) of Section 3.06; provided, however, anything in such clauses to the contrary notwithstanding, that the Company may have a claim against the Issuing Bank, and the Issuing Bank may be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Company which the Company proves were caused by the Issuing Bank's willful misconduct or gross negligence or the Issuing Bank's wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing: (i) the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation; and (ii) the Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. 3.06 Obligations Absolute. The obligations of the Company under this Agreement and any L/C-Related Document to reimburse the Issuing Bank for a drawing under a Letter of Credit, -35- 43 and to repay any L/C Borrowing and any drawing under a Letter of Credit converted into Loans, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and each such other L/C-Related Document under all circumstances, including the following: (a) any lack of validity or enforceability of this Agreement or any L/C-Related Document; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Company in respect of any Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C-Related Documents; (c) the existence of any claim, set-off, defense or other right that the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C-Related Documents or any unrelated transaction; (d) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (e) any payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of any Letter of Credit; or any payment made by the Issuing Bank under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any Insolvency Proceeding; (f) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the obligations of the Company in respect of any Letter of Credit; or (g) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Company or a guarantor. 3.07 Letter of Credit Fees. (a) The Company shall pay to the Agent for the account of each of the Banks a letter of credit fee with respect to the Letters of Credit equal to the Applicable Margin times the average daily maximum amount available to be drawn on the outstanding Letters of Credit, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon Letters of Credit outstanding for that quarter as calculated by the Agent. Such letter of credit -36- 44 fees shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter during which Letters of Credit are outstanding, commencing on the first such quarterly date to occur after the Closing Date, through the Revolving Termination Date (or such later date upon which the outstanding Letters of Credit shall expire), with the final payment to be made on the Revolving Termination Date (or such later expiration date). (b) The Company shall pay to the Issuing Bank a letter of credit fronting fee for each Letter of Credit Issued by the Issuing Bank in an amount agreed to by the Company and the Issuing Bank. Such Letter of Credit fronting fee shall be due and payable on each date of Issuance of a Letter of Credit or at such other time as may be agreed upon between the Company and the Issuing Bank. (c) The Company shall pay to the Issuing Bank from time to time on demand the normal issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the Issuing Bank relating to letters of credit as from time to time in effect. 3.08 Uniform Customs and Practice. The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in the Letters of Credit) apply to the Letters of Credit. ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY 4.01 Taxes. (a) Any and all payments by the Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section 4.01), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; -37- 45 (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of (i) Taxes, (ii) Other Taxes, and (iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If the Company is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section 4.01, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. (f) Notwithstanding anything to the contrary contained in this Agreement, in no event shall the Company be either (i) obligated to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section 4.01 or (ii) prohibited from deducting or withholding for any applicable Taxes pursuant to subsection (a) of this Section 4.01, if the Bank or Agent fails to deliver forms to the Company in accordance with Section 10.10 on a timely basis, unless such failure would not have occurred but for a change in law or regulation or in the interpretation thereof by any governmental or regulatory agency or body charged with the administration or interpretation thereof, or the introduction of any law or regulation, that occurs on or after the date hereof. 4.02 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans (including Offshore Rate Loans in any Applicable Currency), then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make -38- 46 Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 4.04, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall (without regard to whether the conditions specified in Section 5.02 have been satisfied) borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) Before giving any notice to the Agent under this Section 4.02, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 4.03 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in the interpretation of any law or regulation after the date of this Agreement or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) after the date of this Agreement, there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans or participating in Letters of Credit, or, in the case of the Issuing Bank, any increase in the cost to the Issuing Bank of agreeing to issue, issuing or maintaining any Letter of Credit or of agreeing to make or making, funding or maintaining any unpaid drawing under any Letter of Credit, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, in any such case, after the date of this Agreement affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under -39- 47 this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 4.04 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation except as set forth in subsection 2.05(b) or (c); (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.07; (d) the prepayment (including pursuant to Section 2.07 or 2.08) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.04 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained or from charges relating to any Offshore Currency Loans. For purposes of calculating amounts payable by the Company to the Banks under this Section 4.04 and under subsection 4.03(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 4.05 Inability to Determine Rates. If any two of the three Reference Banks determine that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or the Required Banks determine that the Offshore Rate applicable pursuant to subsection 2.11(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Required Banks revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount -40- 48 specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. In the case of any Offshore Currency Loans, the Borrowing or continuation shall be in an aggregate amount equal to the Dollar Equivalent amount of the originally requested Borrowing or continuation in the Offshore Currency, and to that end any outstanding Offshore Currency Loans which are the subject of any continuation shall be redenominated and converted into Base Rate Loans in Dollars with effect from the last day of the Interest Period with respect to any such Offshore Currency Loans. 4.06 Reserves on Offshore Rate Loans. The Company shall pay to each Bank, in respect of any Offshore Currency Loans, additional costs arising under any applicable regulations of the central bank or other relevant Governmental Authority in the country in which the Offshore Currency of such Offshore Rate Loan circulates on the unpaid principal amount of each Offshore Rate Loan equal to the actual costs of such reserves allocated to such Loan by the Bank (as determined by the Bank in good faith, which determination shall be conclusive), payable on each date on which interest is payable on such Loan, provided the Company shall have received at least 15 days' prior written notice (with a copy to the Agent) of such additional interest from the Bank. If a Bank fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be payable 15 days from receipt of such notice. 4.07 Certificates of Banks. Any Bank or any Bank's participant claiming reimbursement or compensation under this Article IV shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. Notwithstanding anything to the contrary contained in this Agreement, no amounts shall be payable by the Company pursuant to Section 4.03, 4.04 or 4.06 with respect to any period commencing more than 180 days before the delivery of the certificate contemplated by this Section 4.07 unless such amounts are claimed as a result of the retroactive effect of any newly enacted or adopted law, rule or regulation and such certificate is delivered within 180 days after such enactment or adoption. 4.08 Survival. The agreements and obligations of the Company in this Article IV shall survive the payment of all other Obligations. 4.09 Replacement of Certain Banks. (a) Notwithstanding any other provision of this Agreement, the Company, at any time after any Bank or any Bank's participant has (i) delivered a certificate pursuant to Section 4.07 or notified the Agent that it is unable to extend or maintain any Offshore Rate Loans (including Offshore Currency Loans) or (ii) failed to fund a Loan at any time that such Bank shall have been committed to make such Loan or in the event such Bank may be replaced pursuant to the provisions of subsection 11.08(e) (in any such case, a "Certificate Bank"), shall have the right to replace the Certificate Bank in accordance with this Section 4.09. Notwithstanding the foregoing, in no event may the Company replace the Certificate Bank pursuant to this Section 4.09 if (i) the Agent shall have received notice from the Required Banks specifying that a Default or an Event of Default shall have occurred and be continuing and (ii) such Default or Event of Default shall not have been subsequently cured or waived. -41- 49 (b) The Company, in exercising its right to replace the Certificate Bank, shall (i) reduce the Commitment of such Bank to zero and (ii) (A) agree with one or more Banks to concurrently increase the respective Commitments of such Bank or Banks by an aggregate amount not in excess of the amount of the Commitment of the Certificate Bank prior to the exercise of this Section 4.09, in full substitution of the Certificate Bank, (B) add one or more additional Eligible Assignees as signatories to this Agreement for Commitments equal to the amount of the Commitment of the Certificate Bank prior to the Company's exercise of this Section 4.09, in full substitution of the Certificate Bank or (C) any combination of increases in Commitments pursuant to (A) above and additional new lenders pursuant to (B) above, so long as the aggregate sum of the increases in Commitments plus the additional Commitments of the additional lenders equals the amount of the Commitment of the Certificate Bank prior to the exercise of this Section 4.09 and no new lender has a Commitment of less than $5,000,000. Any new lender becoming a signatory to this Agreement shall, without further action, be considered a Bank for all purposes of this Agreement at the time of execution of an appropriate Assignment and Acceptance. (c) The Company shall have the right to select any additional Eligible Assignee or Eligible Assignees to become signatories to this Agreement pursuant to subsection 4.09(b) above, subject to the consent of the Agent, which consent shall not be unreasonably withheld. (d) The Company shall give the Agent and any Certificate Bank being replaced not less than five Business Days' notice of the date (which shall be a Business Day) on which such Certificate Bank shall be replaced. (e) Each Bank or additional lender which replaces a Certificate Bank pursuant to this Section 4.09 shall acquire all (or if more than one Bank or lender is replacing a Certificate Bank the aggregate shall severally acquire all) of the then outstanding Loans and L/C Obligations of the Certificate Bank. (f) At the time of replacement, the Certificate Bank shall have been paid in full the principal of, and interest accrued and unpaid to the date of replacement on, all outstanding Loans and unreimbursed L/C Obligations of the Certificate Bank, and all accrued and unpaid to the date of replacement fees owing to the Certificate Bank. (g) After a Certificate Bank is replaced pursuant to this Section 4.09, it shall have no further rights (other than rights which by the terms hereof survive the termination hereof) or obligations hereunder (and shall no longer be a "Bank" for purposes hereof); provided that a replaced Certificate Bank shall retain its rights and obligations as a Bank hereunder with respect to the period before it was so replaced (except to the extent that it shall have assigned or otherwise transferred such rights). -42- 50 ARTICLE V CONDITIONS PRECEDENT 5.01 Conditions of Initial Credit Extensions. The obligation of each Bank to make its initial Credit Extension hereunder is subject to the condition that the Agent shall have received on or before the date of the initial Credit Extension all of the following, in form and substance reasonably satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; (b) Resolutions; Incumbency. (i) copies of the resolutions of the board of directors of the Company and each Guarantor authorizing the transactions contemplated hereby, certified by the Secretary or an Assistant Secretary of the Company and such Guarantor; and (ii) a certificate of the Secretary or Assistant Secretary of the Company and each Guarantor certifying the names and true signatures of the officers of the Company and such Guarantor authorized to execute, deliver and perform, as applicable, this Agreement and all other Loan Documents to be delivered by such Person hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of the Company and each Guarantor as in effect on the date hereof, certified by the Secretary or Assistant Secretary of the Company and such Guarantor as of such date; and (ii) a good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of the states of Missouri, its state of incorporation, and Kansas and for each Guarantor from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation as of a recent date, together with bring-down certificates by facsimile, dated the date hereof;; (d) Legal Opinions. An opinion of each of (i) Latham & Watkins, counsel to the Company and the Guarantors, substantially in the form of Exhibit D-1, and (ii) Louis J. Garr, Jr., general counsel of The May Department Stores Company, substantially in the form of Exhibit D-2, addressed to the Agent and the Banks; (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees to the extent then due and payable on the Closing Date; -43- 51 (f) Certificate. A certificate signed by a Responsible Officer on behalf of the Company, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article VI are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Credit Extension; (iii) there has occurred since February 3, 1996, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (iv) as of February 3, 1996, the Present Value of Operating Leases was $885,500,000; (g) Subsidiary Guaranty. The Subsidiary Guaranty executed and delivered by a duly authorized officer of each of the Guarantors party thereto; and (h) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may reasonably request. 5.02 Conditions to All Credit Extensions. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) and the obligation of the Issuing Bank to issue, and of each Bank to participate in, any Letter of Credit are subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Issuance Date: (a) Notice of Borrowing or Issuance. The Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing or in the case of any Issuance of any Letter of Credit, the Agent and the Issuing Bank shall have received an L/C Application or L/C Amendment Application, as required under Section 3.02; (b) Continuation of Representations and Warranties. The representations and warranties in Article VI shall be true and correct on and as of such Borrowing Date or Issuance Date with the same effect as if made on and as of such Borrowing Date or Issuance Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or Issuance. Each Notice of Borrowing and L/C Application or L/C Amendment Application submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date or Issuance Date, that the conditions in subsection 5.02(a), (b) and (c) are satisfied. -44- 52 ARTICLE VI REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 6.01 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (d) is in compliance with all Requirements of Law; except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. 6.02 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company and the Guarantors of this Agreement and each other Loan Document have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of such Person's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any material Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its property is subject; or (c) violate any Requirement of Law applicable to such Person. 6.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company or any Guarantor of the Agreement or any other Loan Document. 6.04 Binding Effect. This Agreement and each other Loan Document constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, -45- 53 or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.05 Litigation. There are no actions, suits, proceedings, claims or disputes pending, or, to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) may reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 6.06 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under subsection 9.01(e). 6.07 ERISA Compliance. Except as specifically disclosed in Schedule 6.07: (a) Each Plan is in compliance with the applicable provisions of ERISA, the Code and other federal or state law except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and, to the best knowledge of the Company, nothing has occurred which would cause the loss of such qualification. The Company and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with -46- 54 respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 6.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 7.12. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. 6.09 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Company or any Subsidiary that would, if made, have a Material Adverse Effect. 6.10 Financial Condition. (a) The audited consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended February 3, 1996 and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 6.10, show all material indebtedness and other liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) Since February 3, 1996, there has been no Material Adverse Effect. 6.11 Environmental Matters. The Company conducts in the ordinary course of business a review of the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof the Company has reasonably concluded that, except as specifically disclosed in Schedule 6.11, such Environmental Laws and Environmental -47- 55 Claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.12 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 6.13 Subsidiaries. As of the date of this Agreement, the Company has no Subsidiaries other than those specifically disclosed in part (a) of Schedule 6.13. The Company has no Material Subsidiaries other than those specifically disclosed in part (b) of Schedule 6.13 or as disclosed pursuant to subsection 7.03(e) (including their jurisdictions of incorporation). As of the date of this Agreement, the Company has no equity investments in any other corporation or entity other than those specifically disclosed in part (c) of Schedule 6.13. 6.14 Insurance. The properties of the Company and its Subsidiaries are insured as required by Section 7.06. 6.15 Swap Obligations. Neither the Company nor any of its Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. 6.16 Full Disclosure. None of the representations or warranties made by the Company in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Company to the Banks prior to the Closing Date) taken as a whole, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VII AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid, unless the Required Banks waive compliance in writing: 7.01 Financial Statements. The Company shall deliver to the Agent, with sufficient copies for each Bank: (a) as soon as available, but not later than 120 days after the end of each fiscal year (commencing with fiscal year ending January 1997), a copy of the audited consolidated balance -48- 56 sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Arthur Andersen LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a consistent basis. Such opinion shall not be qualified or limited, in either case, because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records; and (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the first fiscal quarter ending after the date hereof, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments and the absence of notes thereto), the financial position and the results of operations of the Company and the Subsidiaries. To the extent included therein, the information required to be delivered pursuant to this Section 7.01 may be delivered by delivery of the financial statements and reports required to be delivered pursuant to subsection 7.02(c). 7.02 Certificates; Other Information. The Company shall furnish to the Agent, with sufficient copies for each Bank: (a) concurrently with the delivery of the financial statements referred to in subsection 7.01(a), a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 7.01(a) and (b), a Compliance Certificate executed by a Responsible Officer; (c) promptly, but not later than five days after the date of filing with the SEC, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10-K, 10-Q and 8-K) that the Company or any Subsidiary may make to, or file with, the SEC; (d) promptly after the creation or acquisition of any Material Subsidiary, the name of such Material Subsidiary, a description of its business, its net worth and the value of its assets; and -49- 57 (e) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the Agent, at the request of any Bank, may from time to time request. 7.03 Notices. The Company shall promptly notify the Agent: (a) upon any Responsible Officer becoming aware of the occurrence of any Default or Event of Default; (b) of any matter that has resulted, or may, in the judgment of the Company, reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary, including pursuant to any applicable Environmental Laws; (c) upon any Responsible Officer becoming aware of the occurrence of any ERISA Event (but in no event more than 10 days after such ERISA Event), and deliver to the Agent and each Bank a copy of any notice with respect to such ERISA Event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such ERISA Event; (d) of any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries; and (e) of any Subsidiary (including its jurisdiction of incorporation) which is not a Guarantor being or becoming a Material Subsidiary. Each notice under this Section 7.03 shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time (although the failure to take any such action shall not constitute a Default or Event of Default under this Agreement). Each notice under subsection 7.03(a) shall describe the provisions of this Agreement or other Loan Document that have been breached or violated. 7.04 Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Material Subsidiary to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation except as otherwise permitted by this Agreement; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal -50- 58 conduct of its business except in connection with transactions permitted by Section 8.03 and sales of assets permitted by Section 8.02 and except for any of the foregoing the expiration or termination of which could not reasonably be expected to have a Material Adverse Effect; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. 7.05 Maintenance of Property. The Company shall maintain, and shall cause each Subsidiary to maintain, and preserve all its material property which is used in its business in good working order and condition, ordinary wear and tear excepted except where the failure to so maintain or preserve could not reasonably be expected to have a Material Adverse Effect. 7.06 Insurance. The Company shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons, provided that the Company and its Subsidiaries may self-insure against such risks and in such amounts as is usually self-insured by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company and its Subsidiaries operate. 7.07 Payment of Tax Obligations. The Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary. 7.08 Compliance with Laws. The Company shall comply, and shall cause each Subsidiary to comply, with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business, except where the failure to so comply could not reasonably be expected to cause a Material Adverse Effect. 7.09 Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 7.10 Inspection of Property and Books and Records. The Company shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial -51- 59 transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall permit, and shall cause each Subsidiary to permit, representatives and independent contractors of the Agent and representatives of any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and, in the presence of the Company if the Company shall so request, independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company. 7.11 Environmental Laws. The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. 7.12 Use of Proceeds. The Company shall use the proceeds of the Loans for general corporate purposes and not in contravention of any Requirement of Law (including Regulation G, T, U and X of the FRB) or of any Loan Document. 7.13 Additional Guarantors. In the event any Person shall hereafter become a Material Subsidiary, the Company shall promptly cause such Material Subsidiary to become a party to the Subsidiary Guaranty. ARTICLE VIII NEGATIVE AND FINANCIAL COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid, unless the Required Banks waive compliance in writing: 8.01 Limitation on Liens. The Company shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien existing on property of the Company or any Subsidiary on the Closing Date and set forth in Schedule 8.01 securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 7.07; provided that no notice of lien has been filed or recorded under the Code; -52- 60 (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent for more than 90 days or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens on the property of the Company or any Subsidiary securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business and treating as non-delinquent any delinquency which is being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (g) Liens consisting of judgment or judicial attachment liens with respect to judgments that do not constitute an Event of Default and in the aggregate do not exceed $10,000,000; (h) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and its Subsidiaries; (i) Liens on assets of corporations which become Subsidiaries after the date of this Agreement; provided, however, that such Liens existed at the time the respective corporations became Subsidiaries and were not created in anticipation thereof; (j) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Company or any Subsidiary to provide collateral to the depository institution; (k) Liens securing reimbursement obligations incurred in the ordinary course of business for letters of credit, which Liens encumber only goods, or documents of title covering goods, which are purchased in transactions for which such letters of credit are issued; (l) any extension, renewal or substitution of or for any of the foregoing Liens; provided that (i) the Indebtedness or other obligation or liability secured by the applicable Lien shall -53- 61 not exceed the Indebtedness or other obligation or liability existing immediately prior to such extension, renewal or substitution and (ii) the Lien securing such Indebtedness or other obligation or liability shall be limited to the property which, immediately prior to such extension, renewal or substitution, secured such Indebtedness or other obligation or liability; and (m) other Liens securing Indebtedness or other obligations not at any time exceeding $50,000,000 in aggregate principal amount. 8.02 Disposition of Assets. The Company shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (collectively, a "Disposition") (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) Dispositions of inventory, or used, worn-out, obsolete or surplus equipment and other assets, all in the ordinary course of business; (b) Dispositions of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; (c) Dispositions of assets (including leasehold interests and related assets) in connection with sale/leasebacks of stores developed by the Company or any of its Subsidiaries in the ordinary course of business in amounts and under circumstances consistent with past practices; (d) Dispositions of assets received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (e) Dispositions of assets between and among the Company and its Wholly-Owned Subsidiaries and the Disposition of assets from any other Subsidiary to the Company or a Wholly-Owned Subsidiary of the Company; and (f) Dispositions not otherwise permitted hereunder which are made for fair market value; provided that (i) at the time of any Disposition, no Event of Default shall exist or shall result from such Disposition and (ii) the aggregate sales price of all assets so sold by the Company and its Subsidiaries, together, shall not exceed in any fiscal year 5% (but for the fiscal year ending January 1997, 10%) of the total consolidated assets of the Company and its Subsidiaries, determined in accordance with GAAP, as of the beginning of such fiscal year. Upon the permitted Disposition by any Guarantor of all or substantially all of its assets to any Person (and after the subsequent distribution of the consideration received therefor by such Guarantor to the Company or another Guarantor), such Guarantor shall be automatically released from its obligations under the Subsidiary Guaranty. The Agent shall provide written confirmation of such release to the Company upon the Company's request therefor. -54- 62 8.03 Consolidations and Mergers. The Company shall not, and shall not suffer or permit any Subsidiary to, merge with or consolidate into any Person, except: (a) the Company or any Subsidiary may merge with or consolidate into any Person, provided that (i) at the time of such merger or consolidation, no Event of Default shall exist or result from the consummation of such merger or consolidation and (ii) the Company or such Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary may merge with or consolidate into the Company, provided that the Company shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation and if any transaction shall be between a Subsidiary and a Guarantor, the Guarantor shall be the continuing or surviving corporation or the surviving Subsidiary becomes a Guarantor; and (c) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Wholly-Owned Subsidiary or as otherwise permitted by Section 8.02. Any Disposition of assets which would be permitted by Section 8.02 may also be accomplished via a merger or consolidation of a Subsidiary and such merger or consolidation shall be permitted pursuant to this Section 8.03. 8.04 Loans and Investments. The Company shall not purchase or acquire, or suffer or permit any Subsidiary to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person (other than the Company), or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, any Person (other than the Company) including any Affiliate of the Company (together, "Investments"), except for: (a) Investments held by the Company or Subsidiary in the form of cash equivalents or short term marketable securities; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) extensions of credit by the Company to any of its Wholly-Owned Subsidiaries or by any of its Subsidiaries to the Company or one of its Wholly-Owned Subsidiaries; (d) advances to employees for moving, relocation and travel expenses, drawing accounts and similar expenditures and loans to employees in the ordinary course of business; -55- 63 (e) Investments received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, suppliers and customers arising in the ordinary course of business; (f) Investments of the Company and its Subsidiaries in existence as of the Closing Date and set forth on Schedule 8.04; (g) any extension or renewal of any of the foregoing; (h) Investments incurred in order to consummate an Acquisition of any Person principally engaged in a business substantially similar to the business of the Company; provided that (i) such Acquisition is undertaken in accordance with all applicable Requirements of Law and (ii) the prior, effective written consent or approval to such Acquisition of the board of directors or equivalent governing body of the acquiree is obtained; and (i) other Investments made in any fiscal year not exceeding $5,000,000 in the aggregate in such fiscal year. 8.05 Limitation on Indebtedness. The Company shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness except: (a) Indebtedness incurred pursuant to this Agreement; (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 8.07; (c) Indebtedness existing on the Closing Date and set forth in Schedule 8.05; (d) Indebtedness constituting an Investment permitted pursuant to Section 8.04; and (e) Other Indebtedness of the Company and its Subsidiaries so long as after giving pro forma effect to the incurrence of such Indebtedness as if such Indebtedness had been incurred on the last date of the most recently completed fiscal quarter the ratio of (i) Total Debt to (ii) Total Capitalization would not have been greater than 60%; provided, however, that not more than $10,000,000 of such other Indebtedness outstanding at any time shall be Indebtedness of the Subsidiaries; provided further, however, that solely for purposes of computations under this subsection 8.05(e), all such other Indebtedness outstanding at the time of such incurrence shall be included in the definitions of "Total Debt" and "Total Capitalization". 8.06 Transactions with Affiliates. The Company shall not, and shall not suffer or permit any Subsidiary to, enter into any transaction with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a -56- 64 comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary. 8.07 Contingent Obligations. The Company shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the ordinary course of business; (b) Permitted Swap Obligations; (c) Contingent Obligations of the Company and its Subsidiaries existing as of the Closing Date and listed in Schedule 8.07; (d) Contingent Obligations with respect to Surety Instruments incurred in the ordinary course of business; (e) in addition to other Contingent Obligations permitted hereunder, Contingent Obligations which do not exceed $1,000,000 in the aggregate at any one time outstanding; (f) Guaranty Obligations of the Company or of any Guarantor with respect to any Indebtedness permitted pursuant to subsection 8.05(e); and (g) the Subsidiary Guaranty. 8.08 Restricted Payments. The Company shall not, and shall not suffer or permit any Subsidiary to, declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding, except that: (a) any Wholly-Owned Subsidiary may pay dividends and make distributions to the Company or to any other Wholly-Owned Subsidiary; (b) the Company and any Subsidiary may declare and make dividend payments or other distributions payable solely in its common stock; and (c) the Company may declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire any such shares for cash in an aggregate amount not in excess of 50% of Consolidated Net Income of the Company and its Subsidiaries arising after the date hereof, and computed on a cumulative consolidated basis; provided that, immediately after giving effect to such proposed action (or, in the case of dividends declared not earlier than 45 days prior to the payment thereof, at the time of such declaration), no Default or Event of Default would exist. -57- 65 8.09 ERISA. The Company shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Company in an aggregate amount in excess of $10,000,000; or (b) engage in a transaction that could be reasonably expected to be subject to Section 4069 or 4212(c) of ERISA. 8.10 Change in Business. The Company shall not, and shall not suffer or permit any Subsidiary to, engage in any material line of business substantially different from those lines of business carried on by the Company and its Subsidiaries on the date hereof. The Company shall (a) cause assets generating at least 90% of the consolidated revenues of the Company and its Subsidiaries to be owned or leased by the Company at all times and (b) cause assets generating at least 90% of Consolidated Net Income of the Company and its Subsidiaries to be owned or leased by the Company and the Material Subsidiaries existing as of the date of this Agreement at all times. 8.11 Accounting Changes. The Company shall not, and shall not suffer or permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as permitted by GAAP or SEC reporting requirements, or change the fiscal year of the Company or of any Subsidiary. 8.12 Financial Covenants. (a) Fixed Charge Coverage Ratio. For the period of four consecutive fiscal quarters ending on the last day of each fiscal quarter, the Company shall not permit the Fixed Charge Coverage Ratio to be less than 1.5:1.0. (b) Leverage Ratio. The Company shall not permit the ratio of (i) Total Debt to (ii) Total Capitalization to be greater than 60% as of the last day of any fiscal quarter. (c) Consolidated Tangible Net Worth. The Company shall not permit Consolidated Tangible Net Worth to be less than $600,000,000 as of the last day of any fiscal quarter. ARTICLE IX EVENTS OF DEFAULT 9.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within five days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company or any Subsidiary made or deemed made herein, in any other Loan Document, or which is contained -58- 66 in any certificate, document or financial or other statement by the Company, any Subsidiary, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement (i) contained in Section 8.01, 8.04 or 8.07 and such failure continues unremedied for five Business Days or (ii) contained in either subsection 7.03(a) or Section 7.12 or in any other provision of Article VIII; or (d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 20 days after the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. The Company or any Subsidiary (i) fails to make any payment in respect of any Indebtedness or Contingent Obligation having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii)fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (f) Insolvency; Voluntary Proceedings. The Company or any Material Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Material Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Material Subsidiary's properties, and any such proceeding or petition shall not be dismissed, 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; (ii) the Company or any Material Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any -59- 67 Insolvency Proceeding; or (iii) the Company or any Material Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $10,000,000; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $10,000,000; or (iii) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $10,000,000; or (i) Monetary Judgments. One or more final judgments, final orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $10,000,000 or more (determined after allowance for the application of any insurance proceeds to such judgment or order), and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 10 days after the entry thereof; or (j) Change of Control. There occurs any Change of Control; or (k) Subsidiary Guaranty. The Subsidiary Guaranty shall fail to remain in full force and effect (except, with respect to any Material Subsidiary, upon the merger or consolidation of such Material Subsidiary with and into the Company or any other Material Subsidiary which is a Guarantor), or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Subsidiary Guaranty (after giving effect to any applicable grace period set forth therein), or any Guarantor shall fail to comply with any of the terms or provisions of the Subsidiary Guaranty, or any Guarantor denies that it has any further liability under the Subsidiary Guaranty, or gives notice to such effect other than as a consequence of the satisfaction of its obligations thereunder. 9.02 Remedies. If any Event of Default occurs and is continuing, the Agent shall, at the request of, or may, with the consent of, the Required Banks, (a) declare the commitment of each Bank to make Loans and to issue and participate in Letters of Credit to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and -60- 68 (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence and during the continuance of any Event of Default specified in subsection (f) or (g) of Section 9.01 with respect to the Company, the obligation of each Bank to make Loans and the obligation of any Issuing Bank to issue Letters of Credit shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. In addition, following the occurrence and during the continuance of an Event of Default, so long as any Letter of Credit has not been fully drawn and has not been canceled or expired by its terms, upon demand by the Agent, the Company shall, upon the request of the Required Banks, Cash Collateralize the dollar amount of the aggregate undrawn amount of all Letters of Credit. Such funds shall be promptly applied by the Agent to reimburse the Issuing Bank for drafts drawn from time to time under the Letters of Credit. Such funds, if any, remaining following the payment of all Obligations in full or the earlier termination of all Events of Default shall, unless the Agent is otherwise directed by a court of competent jurisdiction, be promptly paid over to the Company. 9.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE II THE AGENT 10.01 Appointment and Authorization; "Agent". Each Bank hereby irrevocably (subject to Section 10.09) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. -61- 69 10.02 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 10.03 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 10.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 5.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 10.05 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment -62- 70 of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Banks in accordance with Article IX; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 10.06 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 10.07 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section 10.07 shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. -63- 71 10.08 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. 10.09 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article X and Sections 11.04 and 11.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 10.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent and the Company, to deliver to the Agent and the Company: (i) if such Bank claims an exemption from, or a reduction of, withholding tax undera United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exemptfrom United States withholding tax because it is effectively connected with the conduct of a United States trade or business by such Bank, two properly completed and executed copies -64- 72 of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent and the Company of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent and the Company of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent and the Company will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent or the Company may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section 10.10 are not delivered to the Agent or the Company, then the Agent or the Company may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent or the Company did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent or the Company of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent and the Company fully for all amounts paid, directly or indirectly, by the Agent or the Company as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent or the Company under this Section 10.10, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. -65- 73 10.11 Co-Agents. None of the Banks identified on the facing page or signature pages of this Agreement as a "co-agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as a "co-agent" shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE III MISCELLANEOUS 11.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any Guarantor therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company or any Guarantor, as applicable, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 9.02); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest other than default interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; (e) release (other than a release provided for in the last paragraph of Section 8.02) any Guarantor from the Subsidiary Guaranty; or (f) amend this Section 11.01, or Section 2.14, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights -66- 74 or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 11.02 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 11.02, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 11.02; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or X to the Agent shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 11.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 11.04 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse the Agent promptly after demand for all reasonable out-of-pocket costs and expenses incurred by the Agent in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or -67- 75 not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by the Agent with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank promptly after demand for all reasonable out-of-pocket costs and expenses (including reasonable Attorney Costs) incurred by them in connection with the exercise, enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 11.05 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any Loan Document, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, or related to any Offshore Currency transactions entered into in connection herewith, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities to the extent resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section 11.05 shall survive payment of all other Obligations. 11.06 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 11.07 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the -68- 76 Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 11.08 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Company (which consent shall not be unreasonably withheld) at all times other than during the existence of an Event of Default, the Agent and the Issuing Bank, if applicable, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company, the Agent or the Issuing Bank, if applicable, shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $5,000,000; provided, however, that the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $3,500. (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with subsection 11.08(a)), the Company shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. The Agent shall not deliver any new Notes executed by the Company unless the Agent shall have received the old Notes to be replaced or customary indemnification in favor of the Agent and the Company with respect to lost or destroyed notes. Such old Notes shall be promptly returned to the Company. -69- 77 (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 11.01. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 4.01, 4.03 and 11.05 as though it were also a Bank hereunder. Notwithstanding the immediately preceding sentence, all amounts payable by the Company or any Subsidiary under this Agreement and each other Loan Document shall be determined as if no such participation had been sold. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Sections 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. Notwithstanding any such pledge, such Bank shall remain liable to the Company and the Issuing Bank as if such pledge had not been made. In the event of any enforcement or proposed enforcement of such pledge the Company shall have the right to replace such Bank pursuant to the provisions of Section 4.09. 11.09 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Company and provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (a) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (b) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (i) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (ii) pursuant to subpoena or other court process; (iii) when required to do so in accordance with the provisions of any applicable Requirement of Law; (iv) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (v) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (vi) to such Bank's -70- 78 independent auditors and other professional advisors; (vii) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (viii) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (ix) to its Affiliates, provided that such Affiliate uses such information only in connection with this Agreement and agrees in writing to keep such information confidential. 11.10 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 11.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 11.12 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 11.13 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 11.14 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 11.15 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; -71- 79 PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. 11.16 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION 11.16 AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.17 Judgment. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Company in respect of any such sum due from it to the Agent hereunder or under the other Loan Documents shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be -72- 80 discharged only to the extent that on the Business Day following receipt by the Agent of any sum adjudged to be so due in the Judgment Currency, the Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Agent in the Agreement Currency, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement currency so purchased is greater than the sum originally due to the Agent in such currency, the Agent agrees to return the amount of any excess to the Company (or to any other Person who may be entitled thereto under applicable law). 11.18 Entire Agreement. This Agreement, together with the other Loan Documents supersedes the commitment letter dated March 13, 1996 among the Company, BofA and the Arranger and embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. [signature pages follow] -73- 81 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in Chicago, Illinois by their proper and duly authorized officers as of the day and year first above written. PAYLESS SHOESOURCE, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 82 BANK IV, N.A. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE FIRST NATIONAL BANK OF BOSTON By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE BANK OF NEW YORK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- COMMERCE BANK, N.A. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- CORESTATES BANK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- S-2 83 THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- WELLS FARGO BANK, N.A. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- THE FUJI BANK, LIMITED By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- PNC BANK, NATIONAL ASSOCIATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- S-3 84 UNION BANK, a division of Union Bank of California, N.A. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- UMB BANK, n.a. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- S-4 85 EXHIBIT A FORM OF NOTICE OF BORROWING(1) Date ---------------------- Bank of America National Trust and Savings Association, as Agent 1455 Market Street 12th Floor San Francisco, California 94103 Attention: Felix Bayani Telecopy: 415/436-2700 Dear Sir or Madam: Reference is made to that certain Multicurrency Credit Agreement, dated as of April 22, 1996 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Payless ShoeSource, Inc., Bank of America National Trust and Savings Association, as Agent, and the Banks named therein. Capitalized terms used but not otherwise defined herein have the meanings assigned to such tam in the Credit Agreement. The undersigned hereby gives notice pursuant to Section 2.03 of the Credit Agreement of its request for the Banks to make Loans as follows: 1. Amount of the Borrowing (in an aggregate amount ---------------- not less than the Minimum Tranche)(2) 2. Borrowing Date (a Business Day) ---------------- 3. Type of Loans comprising the Borrowing ---------------- - --------------------- (1) Such irrevocable notice shall be given to the Agent prior to 12:00 noon, Chicago time, four Business Days prior to the requested Borrowing Date, in the case of Offshore Currency Loans, three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans denominated in Dollars, and one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans; provided however, that with respect to the Borrowing to be made on the closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 12:00 noon, Chicago time, on the Closing Date and such Borrowing shall consist of Base Rate Loans only. (2) In the case of a Borrowing comprised of Offshore Currency Loans, specify the Applicable Currency. 86 4. Duration of the __________ Interest Period applicable to any Offshore Rate Loans (3) The undersigned represents and warrants that the Borrowing requested hereby complies with the requirements of Section 2.03, and the undersigned confirms that it has satisfied the conditions set forth in Section 5.02 of the Credit Agreement. PAYLESS SHOESOURCE, INC. By:_____________________________ Name:___________________________ Title:__________________________ _________________ (3) If this Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be one month. -2- 87 EXHIBIT B FORM OF NOTICE OF CONVERSION/CONTINUATION(1) --------------------------------------------- Date:__________________ Bank of America National Trust and Savings Association, as Agent 1455 Market Street 12th Floor San Francisco, California 94103 Attention: Felix Bayani Telecopy: 415/436-2700 Dear Sir or Madam: Reference is made to that certain Multicurrency Credit Agreement, dated as of April 22, 1996 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Payless ShoeSource, Inc., Bank of America National Trust and Savings Association, as Agent, and the Banks named therein. Capitalized terms used but not otherwise defined herein have the meanings assigned to such terms in the Credit Agreement. The undersigned hereby gives notice pursuant to subsection 2.04(b) of the Credit Agreement that it (i) elects, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans denominated in Dollars, to convert any such Loans (or any part thereof in an amount not less than the Minimum Tranche) into Loans in Dollars of any other Type; or (ii) elects, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than the Minimum Tranche), and sets forth below the terms on which such conversion or continuation is requested to be made. __________________ (1) This Notice of Conversion/Continuation must be received by the Agent not later than 12:00 noon, Chicago time, (i) at least three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans denominated in Dollars, (ii) at least four Business Days in advance of the Conversion/Continuation Date, if the Loans are to be continued as Offshore Currency Loans; and (iii) at least one Business Day in advance of the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans. 88 (A) Proposed Conversion/Continuation Date __________ (B) Aggregate amount of Loans to be converted or continued __________ (C) Type of Loans resulting from proposed conversion or continuation __________ (D) Duration of the requested Interest Period applicable to any Offshore Rate Loans __________ PAYLESS SHOESOURCE, INC. By:___________________________________ Name:_________________________________ Title:________________________________ -2- 89 EXHIBIT C FORM OF COMPLIANCE CERTIFICATE ------------------------------ The undersigned, being the ____________ of Payless ShoeSource, Inc. (the "Company"), pursuant to subsection 7.02(b) of that certain Multicurrency Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used but not otherwise defined herein have the meanings ascribed to such terms in the Credit Agreement) dated as of April 22, 1996 by and among the Company, Bank of America National Trust and Savings Association, as Agent, and the Banks party thereto, hereby certifies that: (i) The Company has complied and is in compliance with all the terms, covenants and conditions of the Credit Agreement, except as set forth on Schedule I hereto or as described below; (ii) There exists no Default or Event of Default under the Credit Agreement, except as set forth below; and (iii) Schedule I attached hereto sets forth financial data and computations evidencing compliance with the covenants set forth in Sections 8.01, 8.02, 8.04, 8.05, 8.07, 8.08, 8.09, 8.10 and 8.12 of the Credit Agreement, all of which data and computations are true, complete and correct. Described below are the exceptions, if any, to paragraph (ii), listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Company has taken, is taking or proposes to take with respect to each such condition or event: _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ 90 The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Compliance Certificate in support hereof, are made and delivered this ________ day of ___________, ________. PAYLESS SHOESOURCE, INC. By:________________________________ Name:______________________________ Title:_____________________________ -2- 91 Schedule I SECTION 8.01 - LIENS SUBSECTION 8.01(G) 1. Permitted aggregate Liens consisting of judgment or judicial $10,000,000 attachment liens 2. Actual aggregate Liens consisting of judgment or judicial $__________ attachment liens pursuant to subsection 8.01(g) SUBSECTION 8.01(M) 1. Permitted aggregate Indebtedness secured by other Liens $50,000,000 2. Actual aggregate Indebtedness secured by other Liens $__________ pursuant to subsection 8.01(m) SUBSECTION 8.02(F) - DISPOSITION OF ASSETS 1. Permitted aggregate dispositions of assets consummated during $__________ the applicable fiscal year* 2. Actual aggregate dispositions of assets consummated during the $__________ applicable fiscal year pursuant to subsection 8.02(f) *Note: Each such sale must be in an amount at least equal to the fair market value thereof and the aggregate sales price of all assets so sold by the Company and its Subsidiaries in such fiscal year must not exceed 5% (other than the fiscal year ending January 1997 for which the aggregate sales price of all assets so sold by the Company and its Subsidiaries in such fiscal year must not exceed 10%) of the consolidated assets of the Company and its Subsidiaries, determined in accordance with GAAP, as of the beginning of such fiscal year. 92 SUBSECTION 8.04(I) -- LOANS AND INVESTMENTS 1. Permitted aggregate other Investments during the applicable $5,000,000 fiscal year 2. Actual aggregate other Investments pursuant to subsection $__________ 8.04(i) during the applicable fiscal year SUBSECTION 8.05(E) -- LIMITATION ON INDEBTEDNESS 1. Permitted aggregate other Indebtedness of the Company and its $__________ Subsidiaries for the applicable fiscal quarter* 2. Actual aggregate other Indebtedness of the Company and its $__________ Subsidiaries for the applicable fiscal quarter pursuant to subsection 8.05(e) *Note: After giving pro forma effect to the incurrence of such other Indebtedness as if such other Indebtedness had been incurred on the last day of the applicable fiscal quarter, the ratio of (a) Total Debt to (b) Total Capitalization shall not have been greater than 60%. (a) Permitted aggregate other Indebtedness of the $10,000,000 Subsidiaries (b) Actual aggregate other Indebtedness of the $__________ Subsidiaries pursuant to the first proviso of subsection 8.05(e) SECTION 8.07 -- CONTINGENT OBLIGATIONS SUBSECTION 8.07(E) 1. Permitted aggregate other Contingent Obligations $1,000,000 2. Actual aggregate other Contingent Obligations pursuant to $__________ subsection 8.07(e) -2- 93 SUBSECTION 8.07(F) 1. Permitted aggregate Guaranty Obligations of the Company or $___________ any Guarantor with respect to any Indebtedness permitted pursuant to subsection 8.05(e) 2. Actual aggregate Guaranty Obligations of the Company or any $___________ Guarantor with respect to any Indebtedness permitted pursuant to subsection 8.05(e) SUBSECTION 8.08(C) -- RESTRICTED PAYMENTS 1. Permitted aggregate amount of payments of cash dividends and $___________ purchases, redemptions or acquisitions by the Company of shares of its capital stock or warrants, rights or options to acquire any such shares (50% of Consolidated Net Income of the Company and its Subsidiaries) 2. Actual aggregate amount of payments of cash dividends and $___________ purchases, redemptions or acquisitions by the Company of shares of its capital stock or warrants, rights or options to acquire any such shares pursuant to subsection 8.08(c) SECTION 8.09 -- ERISA 1. Permitted aggregate ERISA liability $10,000,000 2. Actual aggregate ERISA liability pursuant to Section 8.09 $__________ Section 8.10 -- Change in Business SECTION 8.10(A) 1. Required ownership or leasing by the Company of assets of the $__________ Company and its Subsidiaries which generate at least 90% of consolidated revenues 2. Actual ownership or leasing by the Company of assets of, $__________ Company and its Subsidiaries pursuant to Section 8.10(a) -3- 94 SECTION 8.10(b) 1. Required ownership or leasing by the Company and the Material Subsidiaries in existence as of the date of the Credit $ Agreement of assets of the Company and -------------------- its Subsidiaries which generate at least 90% of Consolidated Net Income 2. Actual ownership or leasing by the $ Company and the Material Subsidiaries in -------------------- existence as of the date of the Credit Agreement of assets of the Company and its Subsidiaries pursuant to Section 8.10(b) SECTION 8.12 - FINANCIAL COVENANTS SECTION 8.12(a) - FIXED CHARGE COVERAGE RATIO 1. Required Fixed Charge Coverage Ratio for the applicable period 1.5 to 1.0 2. Actual Fixed Charge Coverage Ratio for the applicable period (a) EBITR $ -------------------- (b) Consolidated Interest Expense plus Consolidated Rental Expense $ -------------------- (c) Ratio of (a) to (b) to 1.0 -------------- SUBSECTION 8.12(b) - LEVERAGE RATIO 1. Required Coverage Ratio for the applicable fiscal quarter 60% 2. Actual Leverage Ratio for the applicable$ fiscal quarter (a) Total Debt $ -------------------- (b) Total Capitalization $ -------------------- (c) Ratio of (a) to (b) % ------------------- SUBSECTION 8.12(c) - MAINTENANCE OF CONSOLIDATED TANGIBLE NET WORTH 1. Required Consolidated Tangible Net Worth $600,000,000 2. Actual Consolidated Tangible Net Worth $ -------------------- -4- 95 EXHIBIT E FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and Acceptance") dated as of ____________, _____ is made between __________ _____ (the "Assignor") and _________________________ (the "Assignee"). RECITALS: WHEREAS, the Assignor is party to that certain Multicurrency Credit Agreement dated as of April 22, 1996 (as amended, restated, supplemented, renewed or otherwise modified from time to time, the "Credit Agreement") among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), the several financial institutions from time to time party thereto (including the Assignor, the "Banks"), and Bank of America National Trust and Savings Association as agent for the Banks (the "Agent"). Any terms defined in the Credit Agreement and not defined in this Assignment and Acceptance are used herein as defined in the Credit Agreement; WHEREAS, as provided under the Credit Agreement, the Assignor has committed to making Loans to the Company and to issuing or participating in Letters of Credit in an aggregate amount not to exceed $___________ (the "Commitment"); WHEREAS, [the Assignor has acquired a participation in the Issuing Bank's liability under Letters of Credit in an aggregate principal amount of $_________ (the "L/C Obligations")] [no Letters of Credit are outstanding under the Credit Agreement]; and WHEREAS, the Assignor wishes to assign to the Assignee [part of the] [all] rights and obligations of the Assignor under the Credit Agreement in respect of its Commitment, [together with a corresponding portion of each of its outstanding Loans and L/C Obligations,] in an amount equal to $__________ (the "Assigned Amount") on the terms and subject to the conditions set forth herein and the Assignee wishes to accept assignment of such rights and to assume such obligations from the Assignor on such terms and subject to such conditions; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Assignment and Acceptance. (a) Subject to the terms and conditions of this Assignment and Acceptance, (i) the Assignor hereby sells, transfers and assigns to the Assignee, and (ii) the Assignee hereby purchases, assumes and undertakes from the Assignor, without recourse and without representation or warranty (except as provided in this Assignment and Acceptance) __% (the "Assignee's Percentage Share") of (A) the Commitment and the Loans and the L/C Obligations of the Assignor 96 and (B) all related rights, benefits, obligations, liabilities and indemnities of the Assignor under and in connection with the Credit Agreement and the Loan Documents. [IF APPROPRIATE, ADD PARAGRAPH SPECIFYING PAYMENT TO ASSIGNOR BY ASSIGNEE OF OUTSTANDING PRINCIPAL OF, ACCRUED INTEREST ON, AND FEES WITH RESPECT TO, LOANS AND L/C OBLIGATIONS ASSIGNED.] (b) With effect on and after the Effective Date (as defined in Section 5 hereof), the Assignee shall be a party to the Credit Agreement and succeed to all of the rights and be obligated to perform all of the obligations of a Bank under the Credit Agreement, including the requirements concerning confidentiality and the payment of indemnification, with a Commitment in an amount equal to the Assigned Amount. The Assignee agrees that it will perform in accordance with its terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. It is the intent of the parties hereto that the Commitment of the Assignor shall, as of the Effective Date, be reduced by an amount equal to the Assigned Amount, and the Assignor shall relinquish its rights and be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee; provided, however, the Assignor shall not relinquish its rights under Sections 11.04 and 11.05 of the Credit Agreement to the extent such rights relate to the time prior to the Effective Date. (c) After giving effect to the assignment and assumption set forth herein, on the Effective Date the Assignee's Commitment will be $____________. (d) After giving effect to the assignment and assumption set forth herein, on the Effective Date the Assignor's Commitment will be $____________. 2. Payments. (a) As consideration for the sale, assignment and transfer contemplated in Section 1 hereof, the Assignee shall pay to the Assignor on the Effective Date in immediately available funds an amount equal to $____________, representing the Assignee's Pro Rata Share of the principal amount of all Loans. (b) The [Assignor] [Assignee] further agrees to pay to the Agent a processing fee in the amount of $3,500 as specified in subsection 11.08(a) of the Credit Agreement. 3. Reallocation of Payments. Any interest, fees and other payments accrued to the Effective Date with respect to the Commitment, Loans and L/C Obligations shall be for the account of the Assignor. Any interest, fees and other payments accrued on and after the Effective Date with respect to the Assigned Amount shall be for the account of the Assignee. Each of the Assignor and the Assignee agrees that it will hold in trust for the other party any interest, fees and other amounts which it may receive to which -2- 97 the other party is entitled pursuant to the preceding sentence and pay to the other party any such amounts which it may receive promptly upon receipt. 4. Independent Credit Decision. The Assignee (a) acknowledges that it has received a copy of the Credit Agreement and the Schedules and Exhibits thereto, together with copies of the most recent financial statements referred to in Section 7.01 of the Credit Agreement, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to enter into this Assignment and Acceptance; and (b) agrees that it will, independently and without reliance upon the Assignor, the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit and legal decisions in taking or not taking action under the Credit Agreement. 5. Effective Date; Notices. (a) As between the Assignor and the Assignee, the effective date for this Assignment and Acceptance shall be _____________, ____ (the "Effective Date"); provided that the following conditions precedent have been satisfied on or before the Effective Date: (i) this Assignment and Acceptance shall be executed and delivered by the Assignor and the Assignee; (ii) the consent of the Company, the Issuing Bank (if applicable) and the Agent required for an effective assignment of the Assigned Amount by the Assignor to the Assignee under subsection 11.08(a) of the Credit Agreement shall have been duly obtained and shall be in full force and effect as of the Effective Date; (iii) the Assignee shall pay to the Assignor all amounts due to the Assignor under this Assignment and Acceptance; (iv) the processing fee referred to in subsection 2(b) hereof and in subsection 11.08(a) of the Credit Agreement shall have been paid to the Agent; and (v) the Assignor shall have assigned and the Assignee shall have assumed a percentage equal to the Assignee's Percentage Share of the rights and obligations of the Assignor under the Credit Agreement (if such agreement exists). (b) Promptly following the execution of this Assignment and Acceptance, the Assignor shall deliver to the Company, the Issuing Bank (if applicable) and the Agent for acknowledgment by the Agent, a Notice of Assignment substantially in the form attached hereto as Schedule 1. -3- 98 6. Agent. (a) The Assignee hereby appoints and authorizes the Assignor to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the Banks pursuant to the terms of the Credit Agreement. (b) The Assignee shall assume no duties or obligations held by the Assignor in its capacity as Agent under the Credit Agreement.] [INCLUDE ONLY IF ASSIGNOR IS AGENT] 7. Withholding Tax. The Assignee (a) represents and warrants to the Assignor, the Agent and the Company that under applicable law and treaties no tax will be required to be withheld by the Assignor with respect to any payments to be made to the Assignee hereunder, (b) agrees to furnish (if it is organized under the laws of any jurisdiction other than the United States or any State thereof) to the Agent and the Company prior to the time that the Agent or Company is required to make any payment of principal, interest or fees hereunder, duplicate executed originals of either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 (wherein the Assignee claims entitlement to the benefits of a tax treaty that provides for a complete exemption from U.S. federal income withholding tax on all payments hereunder) and agrees to provide new Forms 4224 or 1001 upon the expiration of any previously delivered form or comparable statements in accordance with applicable U.S. law and regulations and amendments thereto, duly executed and completed by the Assignee, and (c) agrees to comply with all applicable U.S. laws and regulations with regard to such withholding tax exemption. 8. Representations and Warranties. (a) The Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any Lien or other adverse claim; (ii) it is duly organized and existing and it has the full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance and to fulfill its obligations hereunder, (iii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance, and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; and (iv) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignor, enforceable against the Assignor in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles. -4- 99 (b) The Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto. The Assignor makes no representation or warranty in connection with, and assumes no responsibility with respect to, the solvency, financial condition or statements of the Company, or the performance or observance by the Company, of any of its respective obligations under the Credit Agreement or any other instrument or document furnished in connection therewith. (c) The Assignee represents and warrants that (i) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance, and to fulfill its obligations hereunder; (ii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance; and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; (iii) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignee, enforceable against the Assignee in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles; and (iv) it is an Eligible Assignee. 9. Further Assurances. The Assignor and the Assignee each hereby agree to execute and deliver such other instruments, and take such other action, as either party may reasonably request in connection with the transactions contemplated by this Assignment and Acceptance, including the delivery of any notices or other documents or instruments to the Company or the Agent, which may be required in connection with the assignment and assumption contemplated hereby. 10. Miscellaneous. (a) Any amendment or waiver of any provision of this Assignment and Acceptance shall be in writing and signed by the parties hereto. No failure or delay by either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof and any waiver of any breach of the provisions of this Assignment and Acceptance shall be without prejudice to any rights with respect to any other or further breach thereof. (b) All payments made hereunder shall be made without any set-off or counterclaim. -5- 100 (c) The Assignor and the Assignee shall each pay its own costs and expenses incurred in connection with the negotiation, preparation, execution and performance of this Assignment and Acceptance. (d) This Assignment and Acceptance may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. (e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. The Assignor and the Assignee each irrevocable submits to the non-exclusive jurisdiction of any State or Federal court sitting in Illinois over any suit, action or proceeding arising out of or relating to this Assignment and Acceptance and irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Illinois State or Federal court. Each party to this Assignment and Acceptance hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. (f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE CREDIT AGREEMENT, ANY RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER ORAL OR WRITTEN). [signature page follows] [OTHER PROVISIONS TO BE ADDED AS MAY BE NEGOTIATED BETWEEN THE ASSIGNOR AND THE ASSIGNEE, PROVIDED THAT SUCH PROVISIONS ARE NOT INCONSISTENT WITH THE CREDIT AGREEMENT.] -6- 101 IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Acceptance to be executed and delivered by their duly authorized officers as of the date first above written. [NAME OF ASSIGNOR] By:_________________________ Title:______________________ By:_________________________ Title:______________________ Address: [NAME OF ASSIGNEE] By:_________________________ Title:______________________ By:_________________________ Title:______________________ Address: -7- 102 SCHEDULE 1 NOTICE OF ASSIGNMENT AND ACCEPTANCE _____________, ____ Bank of America National Trust and Savings Association, as Agent 1455 Market Street 12th Floor San Francisco, California 94103 Attention: Felix Bayani Telecopy: 415/436-2700 [Name and Address of Issuing Bank] Payless ShoeSource, Inc. 3231 East 6th Street Topeka, Kansas 66601 Ladies and Gentlemen: We refer to the Multicurrency Credit Agreement dated as of April 22, 1996 (as amended, restated, supplemented, renewed or otherwise modified from time to time, the "Credit Agreement") among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), the Banks referred to therein and Bank of America National Trust and Savings Association, as agent for the Banks (the "Agent"). Terms defined in the Credit Agreement are used herein as therein defined. 1. We hereby give you notice of, and request your consent to, the assignment by __________ (the "Assignor") to ___________ (the "Assignee") of_____________ % of the right, title and interest of the Assignor in and to the Credit Agreement (including, without limitation, the right, title and interest of the Assignor in and to the Commitment of the Assignor, all outstanding Loans made by the Assignor and the Assignor's participation in the Letters of Credit) pursuant to the Assignment and Acceptance Agreement attached hereto (the "Assignment and Acceptance"). Before giving effect to such assignment, the Assignor's Commitment is $______________, the aggregate amount of its outstanding Loans is $_________ and its participation in L/C Obligations is $____________. 2. The Assignee agrees that, upon receiving the consent of the Agent, the Issuing Bank (if applicable) and the Company (if applicable) to such assignment, the Assignee will be bound by the terms of the Credit Agreement as fully and to the same extent as if the Assignee were the Bank originally holding such interest in the Credit Agreement. 103 3. The following administrative details apply to the Assignee: (A) Notice Address: Assignee name: ______________________________ Address: ______________________________ ______________________________ ______________________________ Attention: ______________________________ Telephone: ( ) ______________________________ Telecopier: ( ) ______________________________ Telex (Answerback): _________________________ (B) Payment Instructions: Account No.: ______________________________ At: ______________________________ ______________________________ ______________________________ Reference: ______________________________ Attention: ______________________________ 4. You are entitled to rely upon the representations, warranties and covenants of each of the Assignor and Assignee contained in the Assignment and Acceptance. [signature pages follow] -2- 104 IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned. Very truly yours, [NAME OF ASSIGNOR) By:______________________________ Title:___________________________ By:______________________________ Title:___________________________ [NAME OF ASSIGNEE] By:______________________________ Title:___________________________ By:______________________________ Title:___________________________ Acknowledged and Assignment consented to as of the date first above mentioned: PAYLESS SHOESOURCE, INC. By:______________________________ Title:___________________________ By:______________________________ Title:___________________________ -3- 105 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By:______________________________ Title:___________________________ [ISSUING BANK] By:______________________________ Title:___________________________ -4- 106 EXHIBIT F FORM OF PROMISSORY NOTE $__________________ (Dollar Equivalent) Chicago, Illinois _________,_______ FOR VALUE RECEIVED, the undersigned, PAYLESS SHOESOURCE, INC., a Missouri corporation (the "Company"), hereby promises to pay to the order of___________________, a ___________________ _______________________ (the "Bank") at the Agent's Payment Office (as defined in the Credit Agreement referred to below) in the Applicable Currency in which each Loan was made, in funds customary for the settlement of international transactions in such Applicable Currency and in immediately available funds, the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to Section 2.01 of the Credit Agreement (as hereinafter defined). The Company acknowledges that Loans, subject to the terms and conditions of the Credit Agreement, may be made in currencies other than Dollars and agrees to repay or prepay, as the case may be, all such Loans in the Applicable Currency in which each such Loan was made in the manner set forth in the Credit Agreement, regardless of whether the Dollar Equivalent thereof at the time of payment is less than, equal to or greater than the Commitment of the Bank or the Dollar Equivalent of such Loans at any other time. Except as expressly provided by the Credit Agreement with respect to currency fluctuations, the Company agrees that the Dollar Equivalent of all Loans made by such Bank shall not exceed __________ ($__________). The Company further agrees to pay interest in such Applicable Currency at such office on the unpaid principal amount hereof from time to time outstanding at the applicable interest rate per annum determined as provided in, and payable as specified in, Article II of the Credit Agreement. The holder of this Note is authorized to record the date, Type, currency and amount of each Loan made by the Bank pursuant to Section 2.01 of the Credit Agreement, each continuation thereof, the date of each interest rate conversion pursuant to Sections 2.04 and 2.05 of the Credit Agreement and the Dollar Equivalent principal amount subject thereto, the date and amount of each payment or prepayment of principal hereof and, in the case of each Offshore Rate Loan, the length of the Interest Period with respect thereto on the Schedules annexed hereto and made a part hereof (or on any other record customarily maintained by such Bank with respect to this Note) or otherwise on the records of the Bank, and any such recordation shall (in the absence of manifest error) constitute rebuttably presumptive evidence of the accuracy of the information recorded; provided, however, that the failure to make any such recordation shall not affect the obligations of the Company in respect of such Loan. This Note is one of the Notes referred to in that certain Multicurrency Credit Agreement dated as of April 22, 1996 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement") among the Company, Bank of America National Trust and Savings Association, as Agent, and the Banks named therein, and is subject to the provisions thereof and to optional and mandatory prepayment in whole or in part as provided therein. Terms 107 defined in the Credit Agreement are used herein with their defined meanings unless otherwise defined herein. Upon the occurrence and during the continuance of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note may become, or may be declared to be, immediately due and payable, all as provided therein. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. PAYLESS SHOESOURCE, INC. By:__________________________ Name:________________________ Title:_______________________ -2- 108 SCHEDULE A TO PROMISSORY NOTE BASE RATE LOANS AND REPAYMENTS OF BASE RATE LOANS -----------------------------
UNPAID AMOUNT AMOUNT PRINCIPAL CONVERTED CONVERTED BALANCE AMOUNT OF TO AMOUNT OF TO OF BASE RATE BASE RATE PRINCIPAL OFFSHORE RATE BASE RATE NOTATION DATE LOANS LOANS REPAID LOANS LOANS MADE BY ---- ------- ------- -------- ------- ------- -------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- -------
109 SCHEDULE B TO PROMISSORY NOTE OFFSHORE RATE LOANS AND REPAYMENTS OF OFFSHORE RATE LOANS ---------------------------------
INTEREST UNPAID AMOUNT PERIOD AND AMOUNT PRINCIPAL AMOUNT OF CONVERTED OFFSHORE RATE CONVERTED BALANCE OF OFFSHORE TO WITH AMOUNT OF TO OFFSHORE RATE OFFSHORE RATE RESPECT PRINCIPAL BASE RATE RATE NOTATION DATE LOANS LOANS THERETO REPAID LOANS LOANS MADE BY ---- ------- ------- -------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- -------
110 SCHEDULE C TO PROMISSORY NOTE OFFSHORE CURRENCY LOANS AND REPAYMENTS OF OFFSHORE CURRENCY LOANS -------------------------------------
INTEREST UNPAID PERIOD AND PRINCIPAL AMOUNT OF OFFSHORE RATE BALANCE OF OFFSHORE AGREED WITH AMOUNT OF OFFSHORE CURRENCY ALTERNATIVE RESPECT PRINCIPAL CURRENCY NOTATION DATE LOANS CURRENCY THERETO REPAID LOANS MADE BY ---- ------- -------- -------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- ------- - ------- ------- ------- ------- ------- ------- -------
111 EXHIBIT G FORM OF SUBSIDIARY GUARANTY This Subsidiary Guaranty (as amended, restated, supplemented, renewed or otherwise modified from time to time, this "Guaranty") is entered into as of April 22, 1996, by Payless ShoeSource Merchandising, Inc., a Kansas corporation, Payless ShoeSource Distribution, Inc., a Kansas corporation, and Payless ShoeSource Worldwide, Inc., a Kansas corporation (each a "Guarantor" and, collectively, the "guarantors") in favor of Bank of America National Trust and Savings Association, as agent for the financial institutions from time to time party to the Credit Agreement described below (the "Banks") (in such capacity, the "Agent"), and such Banks. RECITALS: A. Payless ShoeSource, Inc., a Missouri corporation (the "Company"), the Agent and the Banks entered into a Credit Agreement dated as of April 22, 1996. The Credit Agreement as now in effect or hereafter extended, renewed, modified, supplemented, amended or restated is hereinafter called the "Credit Agreement". B. The Banks are willing to make certain Loans to the Company and the Issuing Bank is willing to issue Letters of Credit for the account of the Company as provided in the Credit Agreement on the condition (among others) that the Guarantors enter into this Guaranty. C. Each Guarantor, as a wholly-owned Subsidiary of the Company, will derive substantial and direct benefits (which benefits are hereby acknowledged by the Guarantors) from the Loans and the Letters of Credit and other benefits to be provided to the Company under the Credit Agreement. D. In order to induce the Banks to make such Loans available to the Company and to induce the Issuing Bank to issue such Letters of Credit for the account of the Company, and for other valuable consideration, the Guarantors issue this Guaranty. 1. Definitions. Unless otherwise defined herein, capitalized terms used in this Guaranty have the meanings given to such terms from time to time in the Credit Agreement. References to the Banks or any Bank herein shall include the Issuing Bank in its capacity as a Bank and as Issuing Bank. 2. Guaranty. 2.1 Guaranty. Each Guarantor hereby irrevocably, absolutely and unconditionally jointly and severally guarantees the full and punctual payment or performance when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all of the Obligations, including (a) Obligations in respect of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code or the operation of Sections 502(b) and 506(b) of the Bankruptcy Code and (b) Obligations to 112 deliver and pledge cash collateral upon certain events. This Guaranty constitutes a guaranty of payment and performance when due and not of collection, and each Guarantor specifically agrees that it shall not be necessary or required that the Agent or any Bank exercise any right, assert any claim or demand or enforce any remedy whatsoever against the Company (or any other Person) before or as a condition to the obligations of such Guarantor hereunder. The Agent or any Bank may permit the indebtedness of the Company to the Agent or any Bank to include indebtedness other than the Obligations and may apply any amounts received from any source, other than from the Guarantors, to that portion of the Company's indebtedness to the Agent or any Bank which is not a part of the Obligations. 2.2 Obligations Independent. The obligations hereunder are independent of the obligations of the Company, and a separate action or actions may be brought and prosecuted against the Guarantors whether action is brought against the Company or whether the Company be joined in any such action or actions. 2.3 Authorization of Renewals Etc. Each Guarantor authorizes the Agent and each Bank without notice or demand and without affecting its liability hereunder, from time to time: (a) to renew, compromise, extend, accelerate or otherwise change the time for payment, or otherwise change the terms, of the Obligations, including any increase or decrease of the rate of interest thereon, or otherwise change the terms of the Credit Agreement or any other Loan Document; (b) to receive and hold security for the payment of this Guaranty or the Obligations and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) to apply such security and direct the order or manner of sale thereof as the Agent, or any Bank, as the case may be, in its or their discretion may determine; and (d) to release or substitute any one or more of any endorsers or guarantors of the Obligations. Each Guarantor further agrees the performance or occurrence of any of the acts or events described in clauses (a), (b), (c) and (d) above with respect to indebtedness or other obligations of the Company, other than the Obligations, to the Agent or any Bank, shall not affect the liability of such Guarantor hereunder. 2.4 Waiver of Certain Rights. Each Guarantor waives any right to require the Agent or any Bank: (a) to proceed against the Company or any other Person; (b) to proceed against or exhaust any security for the Obligations or any other indebtedness of the Company to the Agent or any Bank; or -2- 113 (c) to pursue any other remedy in the Agent's or any such Bank's power whatsoever. 2.5 Waiver of Certain Defenses. Each Gurantor waives any defense arising by reason of any disability or other defense of the Company, or the cessation from any cause whatsoever of the liability of the Company, whether consensual or arising by operation of law or any bankruptcy, insolvency or debtor relief proceeding, or from any other cause, or any claim that such Guarantor's obligations exceed or are more burdensome than those of the Company. Each Guarantor waives any benefit of, and any right to participate in, any security or other guaranty now or hereafter held by the Agent or any Bank securing the Obligations. 2.6 Waiver of Presentments, Etc. Each Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor and notices of acceptance of this Guaranty and of the existence, creation or incurring of new or additional Obligations or any other indebtedness of Company to the Agent or any Bank. 2.7 Information Relating to Company. Each Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from the Company such information concerning the Company's financial condition or business operations as such Guarantor may require and that neither the Agent nor any Bank has any duty at any time to disclose to any Guarantor any information relating to the business operations or financial condition of the Company. 2.8 Right of Set-off. In addition to any rights and remedies of the Banks provided by law, if any Guarantor has failed to make any payment due hereunder upon demand, each Bank is authorized at any time and from time to time, without prior notice to such Guarantor, any such notice being waived by such Guarantor to the fullest extent permitted by law, to set-off and apply any and all Guarantor deposits (general or special time or demand, provisional or final) at any time held and other indebtedness at anytime owing by such Bank to or for the credit or the account of such Guarantor against any and all obligations of such Guarantor now or hereafter existing under this Guaranty or any other Loan Document, irrespective of whether or not the Agent or such Bank shall have made demand under this Guaranty or any other Loan Document and although such obligations may be contingent or unmatured. Each Bank agrees promptly to notify such Guarantor and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 2.8 are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have. 2.9 Reinstatement of Guaranty. If any payment or/transfer of any interest in property by the Company to the Agent or any Bank in fulfillment of any Obligation is rescinded or must at any time (including after the return or cancellation (other than by written release herefrom) of this Guaranty) be returned, in whole or in part, by the Agent or any Bank to the Company or any other Person, upon the insolvency, bankruptcy or reorganization of the Company or otherwise, this Guaranty shall be reinstated with respect to any such payment or transfer, regardless of any such prior return or cancellation. -3- 114 2.10 Powers. It is not necessary for the Agent or any Bank to inquire into the powers of the Company or of the officers, directors, partners or agents acting or purporting to act on its behalf, and any Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 2.11 Taxes. (a) Any and all payments by any Guarantor to each Bank or the Agent under this Guaranty shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, such Guarantor shall pay all Other Taxes. (b) If any Guarantor shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section 2.11), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) such Guarantor shall make such deductions and withholdings; (iii) such Guarantor shall pay the full amount deducted or withheld to the relevant taxing authority) or other authority in accordance with applicable law; and (iv) such Guarantor shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) Each Guarantor agrees to indemnify and hold harmless each Bank and the Agent for the full amount of (i) Taxes, (ii) Other Taxes and (iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes Other Taxes or Further Taxes have not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising thereform or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made with 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by any Guarantor of Taxes, Other Taxes or Further Taxes, such Guarantor shall furnish to each Bank or the Agent -4- 115 the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If any Guarantor is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section 2.11, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by such Guarantor which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. (f) Notwithstanding anything to the contrary contained in this Guaranty, in no event shall any Guarantor be either (i) obligated to pay any amount to any Bank or the Agent pursuant to subsection (b) 'or (c) of this Section 2.11 or (ii) prohibited from deducting or withholding for any applicable Taxes pursuant to subsection (a) of this Section 2.11, if the Bank or Agent fails to deliver forms to such Guarantor in accordance with Section 10.10 of the Credit Agreement on a timely basis, unless such failure would not have occurred but for a change in law or regulation or in the interpretation thereof by any governmental or regulatory agency or body charged with the administration or interpretation thereof, or the introduction of any law or regulation, that occurs on or after the date hereof. (g) For purposes of this Section, (i) "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by such Bank's or the Agent's net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office; (ii) "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, execution or registration of, or otherwise with respect to, this Guaranty; and (iii) "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to this Guaranty. 2.12 Subrogation. None of the Guarantors shall have any right of subrogation, indemnification or recourse to any Obligations or collateral or other guarantees therefor or against the Company or any of its assets or property until the Obligations shall have been paid in full. -5- 116 3. Representations and Warranties. Each Guarantor represents and warrants to the Agent and each Bank as follows: 3.1 Corporate Existence and Power. Such Guarantor (a) is a corporation duly organized, validly existing and, in good standing under the laws of the jurisdiction of its incorporation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver and perform its obligations under this Guaranty and any other Loan Document to which it is a party, (c) is duly qualified as a foreign corporation, and licensed and in good standing, under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect; and (d) is in compliance with all Requirements of Law except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. 3.2 Corporate Authorization; No Contravention. The execution, delivery and performance by such Guarantor of his Guaranty and any other Loan Document to which it is party, have been duly authorized by all necessary corporate action, and do not and will not (a) contravene the terms of any of such Guarantor's Organization Documents; (b) conflict with or result in any breach or contravention of or the creation of, any lien under any document evidencing any Contractual Obligation to which such Guarantor is a party or any order, injunction, writ or decree of any Governmental Authority to which such Guarantor or its property is subject, or (c) violate any Requirement of Law applicable to such Guarantor. 3.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, ion, delivery or performance by, or enforcement against, such Guarantor of this Guaranty or any other Loan Document to which it is a party. 3.4 Binding Effect. This Guaranty and each other Loan Document to which such Guarantor is a party constitute the legal, valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 3.5 Regulated Entities. None of such Guarantor, any Person controlling such Guarantor or any Subsidiary of such Guarantor is (a) an "Investment Company" within the meaning of the Investment Company Act of 1940; or (b) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur or guarantee Indebtedness. 3.6 Other Representations. Each of the Guarantors represents and warrants as to itself that all representations and warranties relating to it contained in the Credit Agreement are true and correct in all material respects as of the date hereof. -6- 117 4. Miscellaneous. 4.1 Application of Payments on Guaranty. All payments required to be made by any Guarantor hereunder shall, unless otherwise expressly provided herein, be made to the Agent for the account of the Banks at the Agent's Payment Office and, with respect to principal of, interest on, and any other amounts relating to, any Offshore Currency Loan, shall be made in the Offshore Currency in which such Loan is denominated or payable and, with respect to all other amounts payable hereunder, shall be made in Dollars. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided in the Credit Agreement) of such principal, interest, fees or other amounts in like funds as received. Payments received from any Guarantor shall, unless otherwise expressly provided herein, be applied to costs, fees or other expenses due under the Loan Documents, any interest (including interest due under subsection 2.11(c) of the Credit Agreement), any principal due under the Loan Documents and any other Obligations, in such order as the Agent, with the consent of or at the request of the Required Banks, shall determine. 4.2 Assignment, Participations, Confidentiality. Any Bank may from time to time, without notice to the Guarantors and without affecting the Guarantors' obligations hereunder, transfer its interest in the Obligations to Participants and Assignees as provided in the Credit Agreement. Each Guarantor agrees that each such transfer will give rise to a direct obligation of such Guarantor to each Assignee to which the Company, if required, shall have consented to and that each Assignee shall have the same rights and benefits under this Guaranty as it would have if it were a Bank party to the Credit Agreement and this Guaranty. The Guarantors, the Agent and each Bank agree that the provisions of Section 11.09 of the Credit Agreement shall apply to all information identified as "confidential" or "secret" by any Guarantor and provided to the Agent or such Bank by any Guarantor or any Subsidiary of a Guarantor under this Guaranty or any other Loan Document to which such Guarantor is a party. 4.3 Successors and Assigns. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of; and shall be enforceable by, the Agent and the Banks and their respective successors and assigns pursuant to the Credit Agreement. 4.4 Loan Document. This Guaranty is a Loan Document executed and delivered pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. Without limiting the generality of the foregoing, the provisions of Sections 1.02 and 1.03 of the Credit Agreement shall apply to the interpretation and administration of this Guaranty as if such provisions were incorporated herein, with all references to the "Agreement" in such Sections 1.02 and 1.03 being deemed to be references to this Guaranty. 4.5 Waivers; Writing Required. No delay or omission by the Agent or any Bank to exercise any right under this Guaranty shall impair any such right, nor shall it be construed to be a waiver thereof. No waiver of any single breach or default under this Guaranty shall be deemed a waiver of any other breach or default. Any amendment or waiver of any provision of this Guaranty must be in writing and signed by the Guarantors and the Agent, with the written consent -7- 118 of the Required Banks or all of the Banks, in accordance with the terms of Section 11.01 of the Credit Agreement. 4.6 Remedies. All rights and remedies provided in this Guaranty and any instrument or agreement referred to herein are cumulative and are not exclusive of any rights or remedies otherwise provided by law. Any single or partial exercise of any right or remedy shall not preclude the further exercise thereof or the exercise of any other right or remedy. 4.7 Costs and Expenses. Each Guarantor agrees to pay or reimburse the Agent and each Bank promptly after demand for all reasonable out-of-pocket costs and expenses (including reasonable Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Guaranty during the existence of an Event of Default or after acceleration of the Loans (including all costs and expenses incurred in connection with any "workout" or restructuring regarding amounts due under this Guaranty, and including all costs and expenses incurred in any Insolvency Proceeding or appellate proceeding). 4.8 Severability. The illegality or unenforceability of any provision of this Guaranty or any instrument or agreement referred to herein shall not in anyway affect or impair the legality or enforceability of the remaining provisions of this Guaranty or any instrument or agreement referred to herein. 4.9 GOVERNING LAW AND JURISDICTION. (a) THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE with, the LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY AND ANY OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS GUARANTY, EACH OF THE GUARANTORS, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE GUARANTORS, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS GUARANTY OR ANY DOCUMENT RELATED HERETO. EACH OF THE GUARANTORS, THE GUARANTORS. THE AGENT AND THE BANKS WAIVERS PERSONAL SERVICE OR ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. -8- 119 4.10 WAIVER OF JURY TRIAL. THE GUARANTORS, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS GUARANTY, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE GUARANTORS, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS GUARANTY OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY AND THE OTHER LOAN DOCUMENTS. 4.11 Nature of Obligations. All obligations and liabilities of the Guarantors hereunder shall be joint and several. 4.12 Certain Limitations. Anything contained in this Guaranty to the contrary notwithstanding, the obligations of each Guarantor hereunder shall be limited to a maximum aggregate amount equal to the greatest amount that would not render such Guarantor's obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the Bankruptcy Code or any provisions of applicable state law. 4.13 Entire Agreement. This Guaranty (a) integrates all the terms and conditions mentioned herein or incidental hereto, (b) supersedes all oral negotiations and prior writings with respect to the subject matter hereof, and (c) is intended by the parties as the final expression of the agreement with respect to the terms and conditions set forth in this Guaranty and as the complete and exclusive statement of the terms agreed to by the parties. -9- 120 IN WITNESS WHEREOF, the Guarantors have executed this Guaranty by its duly authorized officers as of the day and year first above written. PAYLESS SHOESOURCE MERCHANDISING, INC. By:___________________________________ Name:_________________________________ Title:________________________________ PAYLESS SHOESOURCE DISTRIBUTION, INC. By:___________________________________ Name:_________________________________ Title:________________________________ PAYLESS SHOESOURCE WORLDWIDE, INC. By:___________________________________ Name:_________________________________ Title:________________________________ Acknowledged and Agreed to as of the day and year first above written. PAYLESS SHOESOURCE, INC. By:___________________________________ Name:_________________________________ Title:________________________________ -10- 121 AMENDMENT NO. 1 TO CREDIT AGREEMENT This Amendment (this "Amendment") is entered into as of December 16, 1996, among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), the several financial institutions signatory hereto, and Bank of America National Trust and Savings Association, individually and as agent (the "Agent"). RECITALS A. The Company, the Agent and the Banks are party to that certain credit agreement dated as of April 22, 1996 ( the "Credit Agreement"). Unless otherwise specified herein, capitalized terms used in this Amendment shall have the meanings ascribed to them by the Credit Agreement. B. The Company, the Agent and the undersigned Banks wish to amend the Credit Agreement on the terms and conditions set forth below. Now, therefore, in consideration of the mutual execution hereof and other good and valuable consideration, the parties hereto agree as follows: 1. Amendment to Credit Agreement. Upon the "Effective Date" (as defined below), Section 8.08(c) of the Credit Agreement shall be amended in its entirety to read as follows: "(c) the Company may declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire any such shares for cash in an aggregate amount (i) not in excess of $200,000,000 during the period from the effective date of Amendment No. 1 to this Credit Agreement to and including January 31, 1998 and (ii) thereafter not in excess of an amount equal to 75% of Consolidated Net Income of the Company and its Subsidiaries arising on or after February 1, 1998, and computed on a cumulative consolidated basis; provided that, immediately after giving effect to such proposed action (or, in the case of dividends declared not earlier than 45 days prior to the payment thereof, at the time of such declaration), no Default or Event of Default would exist." 2. Representations and Warranties of the Company. The Company represents and warrants that: (a) The execution, delivery and performance by the Company of this Amendment have been duly authorized by all necessary corporate action and that this Amendment constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability; 1 122 (b) Each of the representations and warranties contained in the Credit Agreement is true and correct in all material respects on and as of the date hereof as if made on the date hereof (except to the extent such representations and warranties expressly refer to an earlier date, in which case they are true and correct as of such earlier date); and (c) After giving effect to this Amendment, no Default or Unmatured Default has occurred and is continuing. 3. Effective Date. Section 1 of this Amendment shall become effective upon the date (the "Effective Date") of the execution and delivery hereof by the Company, the Agent and the Required Banks (without respect to whether it has been executed and delivered by all Banks). 4. Reference to and Effect Upon the Credit Agreement. (a) Except as specifically amended above, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent or any Bank under the Credit Agreement or any Loan Document, nor constitute a waiver of any provision of the Credit Agreement or any Loan Document, except as specifically set forth herein. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of similar import shall mean and be a reference to the Credit Agreement as amended hereby. 5. Costs and Expenses. (a) The Company hereby affirms its obligation under Section 11.04 of the Credit Agreement to reimburse the Agent for all reasonable out-of-pocket costs and expenses incurred by the Agent in connection with the preparation and execution of this Amendment, including but not limited to the attorneys' fees and time charges of attorneys for the Agent with respect thereto. 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. 7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purposes. 8. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all such counterparts shall constitute one and the same instrument. [Signature Pages Follow] 2 123 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PAYLESS SHOESOURCE, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ By:______________________________________ Name:____________________________________ Title:___________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By:______________________________________ Name:____________________________________ Title:___________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By:______________________________________ Name:____________________________________ Title:___________________________________ 3 124 BANK IV, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ THE FIRST NATIONAL BANK OF BOSTON By:______________________________________ Name:____________________________________ Title:___________________________________ THE BANK OF NEW YORK By:______________________________________ Name:____________________________________ Title:___________________________________ COMMERCE BANK, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ CORESTATES BANK By:______________________________________ Name:____________________________________ Title:___________________________________ 4 125 THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH By:______________________________________ Name:____________________________________ Title:___________________________________ THE FIRST NATIONAL BANK OF CHICAGO By:______________________________________ Name:____________________________________ Title:___________________________________ WELLS FARGO BANK, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ THE FUJI BANK, LIMITED By:______________________________________ Name:____________________________________ Title:___________________________________ PNC BANK, NATIONAL ASSOCIATION By:______________________________________ Name:____________________________________ Title:___________________________________ 5 126 UNION BANK, a division of Union Bank of California, N.A. By:______________________________________ Name:____________________________________ Title:___________________________________ UMB BANK, n.a. By:______________________________________ Name:____________________________________ Title:___________________________________ TOYO TRUST AND BANKING COMPANY LTD. By:______________________________________ Name:____________________________________ Title:___________________________________ 6 127 AMENDMENT NO. 2 TO CREDIT AGREEMENT This Amendment (this "Amendment") is entered into as of November 10, 1997 among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), the several financial institutions signatory hereto, and Bank of America National Trust and Savings Association, individually and as agent (the "Agent"). RECITALS A. The Company, the Agent and certain financial institutions (the "Existing Banks") are party to that certain credit agreement dated as of April 22, 1996 ( as previously amended, the "Credit Agreement"). Unless otherwise specified herein, capitalized terms used in this Amendment shall have the meanings ascribed to them by the Credit Agreement. B. The Company, the Agent and the Existing Banks wish to amend the Credit Agreement on the terms and conditions set forth below. C. The undersigned financial institutions which are not Existing Banks (the "New Banks" and, together with the Existing Banks, the "Banks") wish to become parties to the Credit Agreement, as amended hereby. Now, therefore, in consideration of the mutual execution hereof and other good and valuable consideration, the parties hereto agree as follows: 1. Amendment to Credit Agreement. Upon the "Effective Date" (as defined below), the Credit Agreement shall be amended as follows: (a) The table within the definition of "Applicable Commitment Fee Percentage" in Section 1.01 is amended in its entirety to read as follows: Applicable Commitment Fixed Charge Coverage Ratio Fee Percentage --------------------------- --------------------- Level I Status .075% Level II Status .10% Level III Status .125% Level IV Status .15% (b) The table within the definition of "Applicable Margin" in Section 1.01; amended in its entirety to read as follows: Fixed Charge Coverage Ratio Applicable Margin --------------------------- ----------------- Level I Status .225% 1 128 Level II Status .30% Level III Status .375% Level IV Status .45% (c) The definition of "Change in Control" in Section 1.01 is amended in its entirety to read as follows: "Change in Control" means (a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 25% or more of the outstanding shares of voting stock of the Company, or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Company's board of directors (together with any new directors whose election by the Company's board of directors or whose nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reasons other than death or disability to constitute a majority of the directors then in office. (d) The definitions of "Level I Status", "Level II Status" and "Level III Status" in Section 1.01 are amended in their entirety to read as follows and a new definition is added immediately thereafter as follows: "Level I Status" exists at any date if at such date the Fixed Charge Coverage Ratio is greater than 2.25:1.0. "Level II Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 2.25:1.0 but greater than 2.0:1.0. "Level III Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 2.0:1.0 but greater than 1.75:1.0. "Level IV Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 1.75:1.0. (e) The date "April 22, 2001" in part (a) of the definition of Revolving Termination Date in Section 1.01 of the Credit Agreement is deleted and replaced by a reference to "November 9, 2002." (f) Section 8.02 of the Credit Agreement is amended by deleting the word "and" at the end of Section 8.02(e), substituting ";and" for the "." at the end of Section 8.02(f) and adding a new Section 8.02(g) as follows: "(g) Dispositions of Investments in joint ventures made pursuant to Section 8.04(i)." 2 129 (g) Section 8.04(i) of the Credit Agreement shall be amended in its entirety to read as follows: "(i) other Investments made during the term of this Agreement not exceeding $50,000,000 in the aggregate." (h) Section 8.05(e) of the Credit Agreement shall be amended in its entirety to read as follows: "(e) Other Indebtedness of the Company and its Subsidiaries so long as after giving pro forma effect to the incurrence of such Indebtedness as if such Indebtedness had been incurred on the last date of the most recently completed fiscal quarter the ratio of (i) Total Debt to (ii) Total Capitalization would not have been greater than 60%; provided, however, that the amount of such other Indebtedness which is Indebtedness of Subsidiaries (exclusive of Indebtedness owing to the Company or a Subsidiary) shall at no time exceed an amount equal to 5% of the Company's Consolidated Tangible Net Worth at such time; provided further, however, that solely for purposes of computations under this subsection 8.05(e), all such other Indebtedness outstanding at the time of such incurrence shall be included in the definitions of "Total Debt" and "Total Capitalization"." (i) Section 8.08(a) of the Credit Agreement shall be amended in its entirety to read as follows: "(a) any Subsidiary may pay ratable dividends and make ratable distributions to its equity holders;" (j) Section 8.08(c) of the Credit Agreement shall be amended in its entirety to read as follows: "(c) the Company may declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire any such shares for cash; provided that, immediately after giving effect to such proposed action (or, in the case of dividends declared not earlier than 45 days prior to the payment thereof, at the time of such declaration), no Default or Event of Default would exist." (k) Section 8.10 of the Credit Agreement shall be amended in its entirety to read as follows: "Conduct of Business. The Company will, and will cause each of its Subsidiaries to, carry on and conduct its business in substantially the same manner and in substantially the same, related or, in the Company's reasonable business judgement, materially synergistic fields of enterprise as it is presently conducted. The Company shall (a) cause assets (including rights as franchisor 3 130 under franchising arrangements (but not including the assets of franchisees)) generating at least 90% of the consolidated revenues of the Company and its Subsidiaries to be owned or leased by the Company at all times and (b) cause assets (including right as franchisor under franchising arrangements (but not including the assets of franchisees)) generating at least 90% of Consolidated Net Income of the Company and its Subsidiaries to be owned or leased by the Company and the Material Subsidiaries existing as of the date of this Agreement at all times." (l) Section 8.12(c) of the Credit Agreement shall be amended in its entirety to read as follows: "(c) Consolidated Tangible Net Worth. The Company shall not permit Consolidated Tangible Net Worth as of the last day of any fiscal quarter to be less than $650,000,000." (m) Schedule 2.01 to the Credit Agreement is amended in its entirety to read as set forth on Exhibit A hereto. (n) Schedule 11.02 to the Credit Agreement is amended by (i) deleting all information pertaining to the Exiting Banks and (ii) adding the information set forth on Exhibit B hereto with respect to the New Banks. 2. New Banks: Exiting Bank Consents. Upon the effectiveness of this Amendment, each "New Bank" shall become a "Bank" under the Credit Agreement, as amended hereby. Upon the effectiveness of this Amendment, the Commitments of each of the Banks listed on Exhibit C hereto (each an "Exiting Bank") shall be reduced to zero and each Exiting Bank shall cease to have any rights or duties as a "Bank" under the Credit Agreement, as amended, (other than indemnification rights which survive the termination of the Credit Agreement). Each Exiting Bank's execution hereof shall be deemed to evidence only its agreement with the preceding sentence and its consent, in its capacity as a "Bank" under the Credit Agreement, to the amendments set forth in Section 1 above. 3. Pricing Agreement. Notwithstanding any provision to the contrary in the Credit Agreement, the Company and the Banks agree that the Applicable Commitment Fee Percentage shall be .125% and the Applicable Margin shall be .375% from and after the Effective Date until further adjusted in accordance with the terms of the Credit Agreement. 4. Representations and Warranties of the Company. The Company represents and warrants that: (a) The execution, delivery and performance by the Company of this Amendment have been duly authorized by all necessary corporate action and that this Amendment constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may 4 131 be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability; (b) Each of the representations and warranties contained in the Credit Agreement is true and correct in all material respects on and as of the date hereof as if made on the date hereof (except to the extent such representations and warranties expressly refer to an earlier date, in which case they are true and correct as of such earlier date); and (c) After giving effect to this Amendment, no Default or Unmatured Default has occurred and is continuing. 5. Effective Date. Sections 1, 2 and 3 of this Amendment shall become effective upon the date (the "Effective Date") of (a) the execution and delivery hereof by the Company, the Agent and each of the Banks and (b) the Company's payment in full to the Agent for the ratable benefit of the Existing Banks (before giving effect to this Amendment) of all outstanding Loans and accrued commitment fees under the Credit Agreement. 6. Reference to and Effect Upon the Credit Agreement. (a) Except as specifically amended above, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent or any Bank under the Credit Agreement or any Loan Document, nor constitute a waiver of any provision of the Credit Agreement or any Loan Document, except as specifically set forth herein. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of similar import shall mean and be a reference to the Credit Agreement as amended hereby. 7. Costs and Expenses. (a) The Company hereby affirms its obligation under Section 11.04 of the Credit Agreement to reimburse the Agent for all reasonable out-of-pocket costs and expenses incurred by the Agent in connection with the preparation and execution of this Amendment, including but not limited to the attorneys' fees and time charges of attorneys for the Agent with respect thereto. 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. 9. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purposes. 5 132 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all such counterparts shall constitute one and the same instrument. [Signature Pages Follow] 6 133 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PAYLESS SHOESOURCE, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 7 134 NATIONSBANK, N.A. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- THE FIRST NATIONAL BANK OF BOSTON By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- THE BANK OF NEW YORK By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- COMMERCE BANK, N.A. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CORESTATES BANK, N.A. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 8 135 THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- WELLS FARGO BANK, N.A. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- MITSUI TRUST AND BANKING COMPANY, LTD. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- PNC BANK, NATIONAL ASSOCIATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 9 136 UNION BANK OF CALIFORNIA, N.A. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- UMB BANK, n.a. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- TOYO TRUST AND BANKING COMPANY LTD. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- ROYAL BANK OF CANADA By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- MARINE MIDLAND BANK By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 10 EX-10.5 4 EX-10.5 1 EXHIBIT 10.5 PAYLESS SHOESOURCE, INC. 1996 STOCK INCENTIVE PLAN EFFECTIVE MAY 4, 1996 LAST AMENDED MARCH 19, 1998 2 1996 STOCK INCENTIVE PLAN I. GENERAL 1. PURPOSE. The purpose of the Plan is to aid the Company and its Subsidiaries in attracting, retaining, and motivating management employees. 2. DEFINITIONS. Whenever used herein, the following terms shall have the meanings set forth below: a. "Board" means the Board of Directors of the Company. b. "Code" means the Internal Revenue Code of 1986, as amended. c. "Committee" means a committee designated by the Board, which shall consist of not less than two members of the Board who shall be appointed by and serve at the pleasure of the Board and who shall be "non-employee directors" within the meaning of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and who shall be "outside" directors within the meaning of Section 162(m) of the Code. d. "Company" means Payless ShoeSource, Inc. e. "Disability" means a permanent and total disability which enables the Participant to be eligible for and receive a disability benefit under the Federal Social Security Act. f. "Fair Market Value" means the average of the high and low prices of the Stock on the New York Stock Exchange on the date in question, or, if no sale or sales of the Stock occurred on such Exchange on that day, the average of the high and low prices of the Stock on the last preceding day when the Stock was sold on the New York Stock Exchange; with respect to a Stock Appreciation Right, the term means the average of the high and low prices of the Stock on the New York Stock Exchange on such date or dates as may be provided in the Stock Appreciation Right Agreement; provided, however, that with respect to Options granted as of the effective date of the spin-off (the "Effective Date") of the Company by The May Department Stores Company ("May") with respect to options previously granted by May which were waived by the Participant or which were not yet exercisable and therefore lapsed on the Effective Date, the "Fair Market Value" means the arithmetic average of the high and low trading prices of the Stock on the New York Stock Exchange for each of the first 30 trading days on which trading in the Stock on that exchange occurs. g. "Incentive Stock Option" means an Option granted under the Plan which constitutes and shall be treated as an "incentive stock option" as defined in Section 422 of the Code. h. "Non-Qualified Stock Option" means an Option granted under the Plan which shall not constitute or be treated as an Incentive Stock Option. i. "Non-Tandem Stock Appreciation Right" means a Right described in Part III, Section 3. j. "Option" means a right or rights to purchase shares of Stock described in Part II. k. "Option Agreement" means the agreement between the Company and a Participant evidencing the grant of an Option and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Option. 2 3 l. "Participant" means an individual to whom an Option, Right or Performance Unit is granted or Restricted Stock Grant is made. m. "Performance Restricted Stock" means Restricted Stock whose provisions include the restrictions described in Part IV, Section 3(b). n. "Performance Unit" means a right, described in Part V, to receive up to 100% of the value of shares of Stock. o. "Plan" means the 1996 Stock Incentive Plan of the Company, as amended from time to time. p. "Related Option" means the Option in relation to which a Tandem Stock Appreciation Right is granted. q. "Restricted Stock Grant" means a grant described in Part IV. r. "Retirement" means retirement as that word is defined in the Company's Profit Sharing Plan. s. "Stock" means the Common Stock of the Company. t. "Stock Appreciation Right" or "Right" means a right described in Part III which provides for the payment of an amount in cash or Stock in accordance with such terms and conditions as are provided in the Stock Appreciation Right Agreement applicable to such Right; provided however, that in Part III, Section 2, "Right" shall refer only to a "Tandem Stock Appreciation Right" and that in Part III, Section 3, "Right" shall refer only to a "Non-Tandem Stock Appreciation Right". u. "Stock Appreciation Right Agreement" means the agreement between the Company and a Participant evidencing the grant of a Stock Appreciation Right and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Right. v. "Subsidiary" means a subsidiary of the Company or an unincorporated organization controlled, directly or indirectly, by the Company. With respect to Incentive Stock Options, the term "Subsidiary" shall have the meaning set forth in Section 424(f) of the Code. w. "Tandem Stock Appreciation Right" means a Right described in Part II I, Section 2. 3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to all applicable provisions of the Plan, the Committee is authorized to approve grants of Options, Rights or Performance Units or the making of Restricted Stock Grants in accordance with the Plan, to construe and interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan and to make all determinations and take all actions necessary or advisable for the Plan's administration. The Committee shall act by vote or written consent of a majority of its members. Whenever the Plan authorizes or requires the Committee to take any action, make any determination or decision or form any opinion, then any such action, determination, decision or opinion by or of the Committee shall be in the absolute discretion of the Committee. 4. SHARES SUBJECT TO THE PLAN. (a) Maximum Number of Shares. Stock issued under the Plan shall be treasury shares subject to the following limitations: 3 4 (i) Plan Maximum. The maximum number of shares of Stock which may be issued under the Plan is 5,200,000, of which no more than 400,000 may be issued pursuant to Restricted Stock Grants. (ii) Participant Maximum. The maximum number of Options and Stock Appreciation Rights which may be granted to any Participant during the term of the Plan is 500,000; provided, however, that if a Stock Appreciation Right is issued in substitution for an existing stock option or in tandem with a stock option, then the grant of such a Stock Appreciation Right shall not count against the limit. The maximum number of shares of Stock which may be issued to each Participant free from restrictions pursuant to a grant of Performance Restricted Stock is 50,000 per year. The maximum number of shares of Stock which may be granted to each Participant pursuant to Performance Units is 50,000 per year. (b) Expired Options or Rights. If an Option or Right expires, terminates, ceases to be exercisable or is surrendered without having been exercised in full, then the shares relating to the Option or Right shall, unless the Plan has been terminated, again become available under the Plan. (c) Lapse of Restrictions on Restricted Stock. If any shares of Stock shall be returned to the Company pursuant to the provisions of Sections 2 or 3 of Part IV or in the instruments evidencing the making of Restricted Stock Grants, then such shares shall, unless the Plan has been terminated, again become available under the Plan. (d) Expired Performance Units. If a Performance Unit expires, terminates, is surrendered or otherwise ceases to exist, so that no further shares of Stock may be issued pursuant to such Performance Unit, then the shares of Stock which could have been issued but were not issued pursuant thereto shall, unless the Plan has been terminated, again become available under the Plan. 5. PARTICIPANTS. Participants in the Plan shall be determined as follows: (a) Eligibility. The individuals who are eligible to receive Options, Rights, Performance Units or Restricted Stock Grants hereunder shall be limited to management employees of the Company and its Subsidiaries (including employees who are directors and/or officers). (b) Determination. From time to time the Committee shall, in its sole discretion, but subject to all of the provisions of the Plan, determine which of those eligible employees shall receive Option(s), Stock Appreciation Right(s), Performance Unit(s) or Restricted Stock Grant(s) under the Plan and the size, terms, conditions and/or restrictions of the Option(s), Right(s), Performance Unit(s) or Restricted Stock Grant(s). (c) Differing Terms; Effect of Grant. The Committee may approve the grant of Option(s) Right(s), or Performance Unit(s) or the making of Restricted Stock Grant(s) subject to differing terms, conditions and/or restrictions to any eligible employee in any year. The Committee's decision to approve the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant to an eligible employee in any year shall not require the Committee to approve the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant to that employee in any other year or to any other employee in any year; nor shall the Committee's decision with respect to the size, terms, conditions and/or restrictions of any Option, Right or Performance Unit to be granted to an employee or any Restricted Stock Grant to be made to an employee in any year require the Committee to approve the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant of the same size or with the same terms, conditions and/or restrictions to that employee in any other year or to any other employee in any year. The Committee shall not be precluded from approving the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant to any eligible employee solely because such employee may previously have been granted an Option, Right or Performance Unit or may previously have received a Restricted Stock Grant. 4 5 6. RIGHTS WITH RESPECT TO SHARES OF STOCK. A Participant who has exercised an Option or Right (payable all or in part in Stock) or to whom a Restricted Stock Grant has been made or to whom shares of Stock have been issued pursuant to Performance Units shall have, after a certificate or certificates for the number of shares of Stock granted have been issued in his name, absolute ownership of such shares including the right to vote the same and receive dividends thereon; provided, however that rights with respect to shares issued in connection with a Restricted Stock Grant shall be subject to the terms, conditions and restrictions described in the Plan and in the instrument evidencing the making of the Restricted Stock Grant to such Participant. 7. EMPLOYMENT. In the absence of any specific agreement to the contrary, no grant of an Option, Right or Performance Unit or making of a Restricted Stock Grant to a Participant under the Plan shall affect any right of the Company or its Subsidiaries to terminate the Participant's employment at any time. II. OPTIONS 1. GENERAL. Each employee chosen to receive an Option(s) may be granted an Incentive Stock Option, a Non-Qualified Stock Option or both, subject to the following terms, conditions and restrictions. Each Option granted under the Plan shall be evidenced by an Option Agreement which shall contain such terms and conditions consistent with the Plan as the Committee shall determine; provided, however, that each Option shall satisfy the following requirements and each Incentive Stock Option shall satisfy the requirement of Part II, Section 2: (a) Option Price. The option price for each share purchased under any Option shall be specified in the Option Agreement and, subject to the provisions of paragraph (b) below and Part VII, Section 3, shall not be less than Fair Market Value on the date the Option is granted; provided, however, that in no event shall the option price per share be less than the par value thereof. (b) Option Period. (i) General. The period in which an Option may be exercised shall not exceed ten years from the date the Option is granted; provided, however, that the Option may be sooner terminated in accordance with the provisions of this paragraph (b). Subject to the foregoing, the Committee may provide that any Option may be exercised, in whole or in part, at such time or times as the Committee may in its discretion determine. (ii) Termination of Employment. If the Participant ceases to be an employee of the Company or a Subsidiary for any reason other than Retirement, Disability, or death, all of such Participant's outstanding Options shall immediately terminate. (iii) Retirement or Disability. If a Participant's employment is terminated by Retirement or Disability, the term of any then outstanding Option held by the Participant shall extend for a period specified by the Committee in the agreement pertaining to such Option, and the number of shares in respect of which the Option may be exercised after the Participant's Retirement or Disability shall be determined by the agreement pertaining to such Option; provided, however, that such agreement shall provide that the Committee may cancel the Participant's Option during such period if the Participant's Retirement was without the consent of the Company, or if the Participant engages during such period of Retirement or Disability in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company. 2. INCENTIVE STOCK OPTIONS. Each Option Agreement evidencing an Incentive Stock Option shall satisfy the requirement that to the extent that the aggregate Fair Market Value of Stock with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under the Plan and all stock option plans of the Company and its Subsidiaries) exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options. For purposes of this Section 2, aggregate Fair Market Value of Stock shall be determined as of the time the Option with respect to such Stock is granted. 5 6 3. DEATH. If a Participant's employment is terminated by death at a time when he or she has not fully exercised any then outstanding Option, or if a Participant dies after Retirement or Disability without having fully exercised any then outstanding Option, the beneficiary designated by the Participant (or, in the absence of such designation, the executors or administrators or legatees or distributees of the Participant's estate) shall have the right to exercise such Option in whole or in part during such period following the Participant's death as is set forth in the Option Agreement. The Company shall prescribe the procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 4. NONASSIGNABILITY. Each Option shall not be transferable (other than, upon the death of the Participant, by beneficiary designation, by last will and testament or by the laws of descent and distribution) and shall be exercisable during the Participant's lifetime only by the Participant. 5. PAYMENT FOR STOCK. Full payment in cash or, if the Committee approves, in Stock, for shares purchased shall be made at the time of exercising the Option in whole or in part. No certificates for shares so purchased shall be issued until full payment therefor has been made, and a Participant shall have none of the rights of a shareowner until such certificates are issued to him or her. If the Committee approves, a Participant may elect to pay all or part of the purchase price for shares pursuant to an exercise of a Non-Qualified Stock Option by requesting the Company to reduce the number of shares otherwise issuable to the Participant upon the exercise of the Non-Qualified Stock Option by the number of shares with a Fair Market Value sufficient to pay the exercise price. In addition, if the Committee approves, the Option Agreement may provide that the Participant may elect, on terms set forth in the Option Agreement, to have the Company withhold from the shares of Stock payable to the Participant upon exercise of an Option the number of shares of Stock having a Fair Market Value equal to the amount of any required withholding taxes. In addition, if the Committee approves, a Participant may elect to pay all or part of the purchase price for shares through simultaneous sale through a broker of shares acquired on exercise, as permitted under Regulation T of the Federal Reserve Board or, at the discretion of the Committee and to the extent permitted by law, by such other methods as the Committee may from time to time prescribe. 6. USE OF PROCEEDS. The proceeds received by the Company from the sale of Stock pursuant to the exercise of an Option may be used for general corporate purposes. 7. RESTRICTIONS UPON EXERCISE OF OPTION. The exercise of each Option shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities under any state or Federal law, or that the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or Federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares thereunder, then in any such event such exercise shall not be effective unless such withholding, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 8. REPRICING PROHIBITED. There shall be no grant of an Option(s) to a Participant in exchange for a Participant's agreement to cancellation of a higher-priced Option(s) that was previously granted to such Participant. 6 7 III. STOCK APPRECIATION RIGHTS 1. GENERAL. Each employee chosen to receive a Stock Appreciation Right(s) may be granted a Tandem Stock Appreciation Right, a Non-Tandem Stock Appreciation Right or both, subject to the following terms, conditions and restrictions and subject to such additional terms, conditions and restrictions as may be determined by the Committee from time to time hereafter; provided however, that no Right shall be subject to additional terms, conditions or restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth in the Plan. 2. TANDEM STOCK APPRECIATION RIGHTS. Each Tandem Stock Appreciation Right may be granted only with respect to a share(s) of Stock for which an Option(s) has been granted under the Plan, and may be awarded concurrently with the grant of such Option or at any time thereafter while the Option is outstanding. If the Committee so determines, a Tandem Stock Appreciation Right may also be granted with respect to a share(s) of Stock for which an option has been granted and is outstanding under any other plan of the Company. A Stock Appreciation Right shall be evidenced by a Stock Appreciation Right Agreement which shall contain such terms and conditions (which may include limitations as to the time when such Stock Appreciation Right becomes exercisable and when it ceases to be exercisable that are more restrictive than the limitations applicable to the Related Option(s)) not inconsistent with the Plan as the Committee shall determine; provided, however, that each Tandem Stock Appreciation Right shall satisfy the following requirements: (a) Termination of a Right. If the Related Option is exercised, in whole or in part, then the Right with respect to the shares of Stock purchased pursuant to such exercise (but not with respect to any unpurchased shares of Stock) shall terminate as of the date of the exercise. If an unexercised Right is otherwise exercisable on the date that the Related Option expires, and if the Fair Market Value of the shares of Stock with respect to which such Right was granted, determined as of the date of such expiration, exceeds the Option price of such shares, then, notwithstanding Section 2(b), the Right shall automatically be deemed to have been exercised as of the date of such expiration; otherwise, on the date that the Related Option expires, any outstanding Right related thereto shall be terminated as of the date of such expiration. (b) Exercise. Tandem Stock Appreciation Rights may be exercised (i) only at such time or times as, and to the extent that, the Related Options shall be exercisable, (ii) only upon surrender of the Related Options with respect to the shares for which the Rights are then being exercised, and (iii) subject to the terms and conditions set forth in the Stock Appreciation Right Agreement; provided that no Tandem Stock Appreciation Right may be exercised prior to the expiration of six (6) months from the date of the grant and can only be exercised during the ten-day period beginning on the third business day following the release of the Company's quarterly or annual statement of sales and earnings. 3. NON-TANDEM STOCK APPRECIATION RIGHTS. Each Non-Tandem Stock Appreciation Right may be granted with respect to a share(s) of Stock or, if the Committee so determines, in exchange for an outstanding Option or an outstanding stock option granted under any other plan of the Company. A Non-Tandem Stock Appreciation Right shall be evidenced by a Stock Appreciation Right Agreement which shall contain such terms and conditions not inconsistent with the Plan as the Committee shall determine; provided, however, that each Non-Tandem Stock Appreciation Right shall satisfy the following requirements: (a) Termination of a Right. A Non-Tandem Stock Appreciation Right shall terminate as of the earlier of (i) the date of exercise of such Right, to the extent that it is exercised; or (ii) the termination date specified in the Stock Appreciation Right Agreement. If an unexercised Right is otherwise exercisable on the date that it expires, and if the Fair Market Value of the shares of Stock with respect to which such Right was granted, determined as of the date of such expiration, exceeds the exercise price of such Right (set forth in the Stock Appreciation Right Agreement), then the Right shall automatically be deemed to have been exercised as of the date of such expiration. (b) Exercise. Non-Tandem Stock Appreciation Rights may be exercised in accordance with the terms and conditions set forth in the Stock Appreciation Right Agreement; provided that (i) no Non-Tandem Stock 7 8 Appreciation Right that is payable all or in part in Stock may be exercised prior to the expiration of six (6) months from the date of the grant; (ii) the exercise price of any Non-Tandem Stock Appreciation Right granted in exchange for an outstanding Option or for an outstanding stock option granted under any other plan of the Company shall be the same exercise price as that outstanding Option or option and (iii) the exercise price of any Non-Tandem Stock Appreciation Right not granted in exchange for an outstanding Option or for an outstanding stock option granted under any other plan of the Company shall be the Fair Market Value of the Stock on the date of the grant of the Right(s). 4. PAYMENT. (a) Amount. Upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive the excess of the aggregate Fair Market Value of the shares of Stock with respect to which the Right is being exercised (determined as of the date of such exercise) over (i) the aggregate option price of such shares in the case of Tandem Stock Appreciation Rights; or (ii) the aggregate exercise price (set forth in the Stock Appreciation Right Agreement) in the case of Non-Tandem Stock Appreciation Rights. (b) Form. Any amount which becomes payable upon exercise of a Stock Appreciation Right under the Plan shall be paid entirely in cash, entirely in Stock or partly in cash and partly in Stock in accordance with such terms and conditions as are provided in the applicable Stock Appreciation Right Agreement; provided, however, that notwithstanding any provision in any Stock Appreciation Right Agreement, the Committee may determine in its sole and absolute judgment that any amount which may become payable upon exercise of a Right shall be paid entirely in cash. 5. TERMINATION OF EMPLOYMENT. (a) General. If a Participant ceases to be an employee of the Company or of a Subsidiary for any reason other than Retirement, Disability or death, all of such Participant's outstanding Rights shall immediately terminate. (b) Retirement or Disability. If a Participant's employment is terminated by Retirement or Disability, the Participant's right to exercise all or any portion of any Right after the date of such Retirement or Disability shall be determined by the provisions of the Stock Appreciation Right Agreement; provided, however, that such Agreement shall provide that the Committee may terminate the Participant's Right prior to the date on which the Right is exercised if the Participant's Retirement was without the consent of the Company, or if the Participant engages during such period of Retirement or Disability in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company. (c) Death. If a Participant's employment is terminated by death at a time when the Participant has not fully exercised any then outstanding Rights, or if a Participant dies after Retirement or Disability without having fully exercised any then outstanding Rights, the beneficiary designated by the Participant (or, in the absence of such designation, the executors or administrators or legatees or distributees of the Participant's estate) shall have the right to exercise such Right in whole or in part during such period following the Participant's death as set forth in the Stock Appreciation Right Agreement. The Company shall prescribe the procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 6. EXPIRATION. If the period in which a Stock Appreciation Right is exercisable expires and the Right has not been exercised, then such Right shall terminate as of the last day on which it was exercisable. 7. NONASSIGNABILITY. Each Right shall not be transferable (other than, upon the death of the Participant, by beneficiary designation, by last will and testament or by the laws of descent and distribution) and shall be exercisable during the Participant's lifetime only by the Participant. 8 9 8. RESTRICTIONS UPON EXERCISE OF RIGHTS. The exercise of each Right shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities under any state or Federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise, then, in any such event, such exercise shall not be effective unless such withholding, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. IV. RESTRICTED STOCK GRANTS 1. GENERAL. A Restricted Stock Grant made under the Plan shall contain the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Committee from time to time hereafter; provided, however, that no Restricted Stock Grant shall be subject to additional terms, conditions or restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth in the Plan. 2. RESTRICTIONS. Subject to the provisions of Part IV, Section 3, shares of Stock granted to a Participant pursuant to a Restricted Stock Grant: (i) shall not be sold, assigned, conveyed, transferred, pledged, hypothecated, or otherwise disposed of, and (ii) shall be returned to the Company forthwith, and all the rights of the Participant to such shares shall immediately terminate without any payment or consideration by the Company, if the Participant's continuous employment with the Company or any Subsidiary shall terminate for any reason, except as provided in Part IV, Section 4. Such return of such Stock shall be accomplished by the Participant's delivering or causing to be delivered to the Secretary or any Assistant Secretary of the Company the certificate(s) for such shares of Stock, accompanied by such endorsement(s) and/or instrument(s) of transfer as may be required by the Secretary or any Assistant Secretary of the Company. 3. LAPSE OF RESTRICTIONS. (a) General. Subject to the provisions of Part IV, Sections 3(b) and 4 and of Part VII, Section 4, the restrictions set forth in Part IV, Section 2 shall lapse on such date or dates on or after the first anniversary and on or before the tenth anniversary of the date as of which the Restricted Stock Grant is made, as the Committee shall determine at the time of the Restricted Stock Grant. (b) Performance Restricted Stock. If the Committee has designated the Stock covered by a Restricted Stock Grant as Performance Restricted Stock, then the lapse of restrictions set forth in Part IV, Section 2 that would otherwise occur on a specified date shall also be subject to the following: (i) if the Company meets or exceeds the Target Long-Term EPS Growth Objective (after adjustment for Relative Performance Rank) for the most recently ended Long-Term Performance Period, then the restrictions that would otherwise lapse on such date shall lapse as to 100% of the shares of such Performance Restricted Stock; and (ii) if the Company meets or exceeds the Threshold Long-Term EPS Growth Objective (after adjustment for Relative Performance Rank) but does not meet or exceed the Target Long-Term Growth Objective (after adjustment for Relative Performance Rank) for the most recently ended Long-Term Performance Period, then the restrictions on the shares of Performance Restricted Stock that would otherwise lapse on such date shall lapse as to (i) 50% of such shares plus (ii) 50% of such shares multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the Company's actual Long-Term EPS Growth for the most recently ended Long-Term Performance Period less the Threshold Long-Term EPS Growth Objective for such period and the denominator of which 9 10 is the Target Long-Term EPS Growth Objective for such period less the Threshold Long-Term EPS Growth Objective for such period, and the remaining shares of Performance Restricted Stock shall immediately forfeit to the Company; and (iii) if the Company does not meet or exceed the Threshold Long-Term EPS Objective (after adjustment for Relative Performance Rank) for the most recently ended Long-Term Performance Period, then 100% of the shares of such Performance Restricted Stock shall immediately forfeit to the Company. For purposes of this Section 3(b), the terms Long-Term Performance Period, Relative Performance Rank, Target Long-Term EPS Objective and Threshold Long-Term EPS Objective shall have the same meanings as in the Company's Executive Incentive Compensation Plan for Payless Executives. No restrictions shall lapse on any Performance Restricted Stock until the Committee certifies, in writing, that the requirements set forth in this Section 3(b) have been satisfied. (c) Forfeiture. All shares of Stock forfeited under this Section 3 shall be returned to the Company forthwith, and all the rights of the Participant to such shares shall immediately terminate without any payment or consideration by the Company. 4. TERMINATION OF EMPLOYMENT BY REASON OF DEATH OR DISABILITY. If a Participant who has been in the continuous employment of the Company or of a Subsidiary since the date as of which a Restricted Stock Grant was made to such Participant shall, while in such employment, die or become Disabled and such Participant's death or Disability shall occur more than one year after the date as of which the Restricted Stock Grant was made to such Participant, then the restrictions set forth in Part IV, Section 2 shall lapse as to all shares of Restricted Stock granted to such Participant pursuant to such Restricted Stock Grant on the date of such event. A Participant may file a written designation of beneficiary to receive, in the event of the Participant's death, any shares for which restrictions lapse on the date of death. The Company shall prescribe procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 5. AGREEMENT BY EMPLOYEE REGARDING WITHHOLDING TAXES. Each Participant shall agree that, subject to the provisions of Part IV, Section 6, (i) no later than the date as of which the restrictions mentioned in Part IV, Section 2 and in the instrument evidencing the making of the Restricted Stock Grant shall lapse, such Participant will pay to the Company in cash, or, if the Committee approves, in Stock, or make other arrangements satisfactory to the Committee regarding payment of, any Federal, state or local taxes of any kind required by law to be withheld with respect to the shares of Stock subject to such Restricted Stock Grant, and (ii) the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the Participant any Federal, state or local taxes of any kind required by law to be withheld with respect to the shares of Stock subject to such Restricted Stock Grant. 6. ELECTION TO RECOGNIZE GROSS INCOME IN THE YEAR OF GRANT. If any Participant properly elects, within thirty (30) days of the date of grant, to include in gross income for Federal income tax purposes an amount equal to the Fair Market Value of the shares of Stock granted on the date of grant, such Participant shall pay to the Company, or make arrangements satisfactory to the Committee to pay to the Company in the year of such grant, any Federal, state or local taxes required to be withheld with respect to such shares. If such Participant shall fail to make such payments, the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the employee any Federal, state or local taxes of any kind required by law to be withheld with respect to such shares. 7. RESTRICTIVE LEGEND; CERTIFICATES MAY BE HELD IN CUSTODY. Each certificate evidencing shares of Stock granted pursuant to a Restricted Stock Grant shall, (i) if issued to any person other than the Company for 10 11 safekeeping while the restrictions apply, bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock Grant and (ii) if issued to the Company for safekeeping while the restrictions apply, be noted as restricted on the records of the transfer agent. Any attempt to dispose of such shares of Stock in contravention of such terms, conditions and restrictions shall be ineffective. The Committee may adopt rules which provide that the certificates evidencing such shares may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody, until the restrictions thereon shall have lapsed. 8. RESTRICTIONS UPON MAKING OF RESTRICTED STOCK GRANTS. The listing upon the New York Stock Exchange or the registration or qualification under any Federal or state law of any shares of Stock to be granted pursuant to Restricted Stock Grants (whether to permit the making of Restricted Stock Grants or the resale or other disposition of any such shares of Stock by or on behalf of the employees receiving such shares) may be necessary or desirable as a condition of or in connection with such Restricted Stock Grants and if, in any such event, the Board in its sole discretion so determines, delivery of the certificates for such shares of Stock shall not be made until such listing, registration or qualification shall have been completed. In such connection, the Company agrees that it will use its best effort to effect any such listing, registration or qualification; provided, however, the Company shall not be required to use its best efforts to effect such registration under the Securities Act of 1933 other than on Form S-8, as presently in effect, or such other forms as may be in effect from time to time calling for information comparable to that presently required to be furnished under Form S-8. 9. RESTRICTIONS UPON RESALE OF STOCK. If the shares of Stock that have been granted to a Participant pursuant to the terms of the Plan are not registered under the Securities Act of 1933, as amended, pursuant to an effective registration statement, such Participant, if the Committee shall deem it advisable, may be required to represent and agree in writing that (i) any shares of Stock acquired by such employee pursuant to the Plan will not be sold except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or pursuant to an exemption from registration under said Act and (ii) such Participant is acquiring such shares of Stock for the Participant's own account and not with a view to the distribution thereof. V. PERFORMANCE UNITS 1. GENERAL. The Committee may, from time to time and upon such terms and conditions as it may determine, grant Performance Units which will become payable to a Participant upon the achievement of specified performance objectives. Each grant of Performance Units shall be evidenced by a Performance Unit Agreement which shall contain such terms and conditions consistent with the Plan as the Committee shall determine; provided, however that each grant of Performance Units shall satisfy the following requirements: (a) Each grant shall specify the number of Performance Units to which it pertains. (b) The performance period with respect to each Performance Unit shall be such period of time commencing with the date of grant as shall be determined by the Committee at the time of grant. (c) Each grant shall specify performance objectives, if any, that are to be achieved in order for payments to be made with respect to such Performance Units. (d) Each grant shall specify a minimum acceptable level of achievement in respect of the specified performance objective below which no payment will be made and shall set forth a formula for determining the amount of payment to be made if performance is at or above such minimum, but short of full achievement of the performance objectives. (e) Each grant shall specify the time and manner of payment (whether in cash, shares of Stock or a combination thereof) of Performance Units which have been earned. If the value of a Performance Unit is paid in whole or in part with Stock, the number of shares issued with respect to such Unit or portion thereof that is paid in Stock shall be based on the Fair Market Value of the Stock on the date the Performance Unit is earned. In no event shall the 11 12 total payment of a Performance Unit (whether in cash, shares of Stock or a combination thereof) exceed the amount earned based on the performance objectives established at the time of grant. (f) The Committee may adjust the performance objectives and the related minimum acceptable level of achievement if, in the sole judgment of the Committee, events or transactions, such as stock splits, recapitalizations, mergers, combinations, divestitures, spin-offs and the like, have occurred after the date of grant which are unrelated to the performance of the Participant and result in distortion of the performance objectives or the related minimum. 2. PAYMENT FOR PERFORMANCE UNITS. Full and/or partial payment of Performance Units will be made only upon certification by the Committee of the attainment by the Participant of the performance objectives. 3. TERMINATION OF EMPLOYMENT BY REASON OF DEATH, DISABILITY OR RETIREMENT. The Committee may, in its sole discretion, determine that Performance Units awarded to a Participant shall become partially or fully vested upon such Participant's termination of employment due to death, Disability or Retirement. VI. CANCELLATION AND RESCISSION. 1. COMPETITION; CONFIDENTIAL INFORMATION. (a) Unless an Option Agreement or a Stock Appreciation Right Agreement (any such agreement being referred to herein as an "Agreement") specifies otherwise, the Committee may (1) cancel at any time any unexercised Option or Right; or (2) rescind any exercise of an Option or Right; if the Participant is not in compliance with all other applicable provisions of the Agreement or the Plan or if, prior to any such exercise or within six months after such exercise, the Participant (i) engages in a Competing Business, as such term is defined in the Agreement; or (ii) solicits for employment, hires or offers employment to, or discloses information to or otherwise aids or assists any other person or entity other than the Company in soliciting for employment, hiring or offering employment to, any employee of the Company; or (iii) takes any action which is intended to harm the Company or its reputation, which the Company reasonably concludes could harm the Company or its reputation or which the Company reasonably concludes could lead to unwanted or unfavorable publicity to the Company; or (iv) discloses to anyone outside the Company, or uses in other than the Company's business, any "confidential information", as such term is defined in the Agreement. (b) Upon exercise of an Option or Right, the Participant shall certify on a form acceptable to the Committee that the Participant is in compliance with the terms and conditions of the Agreement and the Plan. (c) The Company shall immediately notify the Participant in writing of any cancellation of any unexercised Option or Right. Following receipt of such notice, the Participant shall have no further rights with respect to such Option or Right. (d) The Company shall notify the Participant in writing of any rescission of an exercise of an Option or Right within one year after the activity referred to in Part VI, Section 1(a). Within ten days after receiving such a notice from the Company, the Participant shall either (i) pay to the Company the excess of the Fair Market Value of the Stock on the date of exercise of an Option over the exercise price for the Option or the Fair Market Value of the Stock and/or cash distributed to the Participant as a result of the exercise of a Right or (ii) return the Stock received 12 13 upon the exercise of an Option (in which case the Company will return the exercise price to the Participant) or return the Stock and/or cash distributed upon the exercise of a Right. 2. AGREEMENT BY PARTICIPANT REGARDING DEDUCTION. The Participant shall agree and consent to a deduction from any amounts the Company owes to the Participant from time to time (including amounts owed as wages or other compensation, fringe benefits, or vacation pay, as well as any other amounts owed to the Participant by the Company), to the extent of the amounts the Participant owes the Company under this Article VI. Whether or not the Company elects to make any set-off in whole or in part, if the Company does not recover by means of set-off the full amount owed by the Participant, calculated as set forth in this Article VI, then the Participant agrees to pay immediately the unpaid balance to the Company. VII. MISCELLANEOUS 1. EFFECTIVE DATE. The Plan became effective on April 30, 1996, subject to approval by shareowners, and the Plan was approved by shareowners on April 30, 1996. 2. DURATION OF PLAN. Unless sooner terminated, the Plan shall remain in effect until April 30, 2006. Termination of the Plan shall not affect any Options or Rights previously granted, which Options or Rights shall remain in effect until exercised, surrendered, or canceled, or until they have expired, all in accordance with their terms. Termination of the Plan shall not affect any Restricted Stock Grants previously made, or Stock previously granted pursuant to a Restricted Stock Grant; the terms, conditions and restrictions applicable to shares issued pursuant to a Restricted Stock Grant shall remain in effect until such terms, conditions and restrictions shall have lapsed all in accordance with their terms. Termination of the Plan shall not affect any grant of Performance Units previously made; the terms and conditions applicable to such Performance Units shall remain in effect until the Performance Units are earned in accordance with their terms. 3. CHANGES IN CAPITAL STRUCTURE. In the event that there is any change in the capital structure of the Company through merger, consolidation, reorganization, recapitalization, spin-off or otherwise, or if there shall be any dividend on the Company's Stock, payable in such Stock, or if there shall be a Stock split or a combination of shares, then: (i) the number of shares reserved for Options (both in the aggregate and with respect to each Participant) and the number of shares subject to outstanding Options and the price per share of each such Option; (ii) the number of shares with respect to which Rights may be exercised (both in the aggregate and with respect to each Participant); and (iii) the number of shares of Stock reserved for Restricted Stock Grants under the Plan shall be proportionately adjusted by the Board as it deems equitable, in its absolute discretion, to prevent dilution or enlargement of the rights of a Participant and any shares issued pursuant to such change in capital structure shall be subject to the same terms, conditions and restrictions as the shares of Stock with respect to which newly issued shares are issued. The issuance of Stock for consideration and the issuance of Stock rights shall not be considered a change in the Company's capital structure. No adjustment provided for in this Section 3 shall require the issuance of any fractional share. 4. CHANGE IN CONTROL. If while unexercised Options, Rights, Restricted Stock Grants or Performance Units remain outstanding under the Plan: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement 13 14 with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the shareowners of the Company approve a merger or consolidation of the Company with any other Company, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, then from and after the date of the first of the foregoing events to occur, (a) all Options and Rights held by active employees on such date shall be exercisable in full, whether or not otherwise exercisable; (b) the restrictions set forth in Part IV, Section 2 on all outstanding Restricted Stock Grants, including Performance Restricted Stock Grants, shall lapse; and (c) Performance Units shall be earned and become fully payable. 5. AMENDMENT OR TERMINATION. The Board may, by resolution, amend or terminate the Plan at any time; provided, however, that (i) shareowner approval shall be required for (1) any changes to the Plan which would require shareowner approval under the New York Business Corporation Law, Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or Section 162(m) of the Code, and (2) except as otherwise provided herein or except for changes which do not otherwise involve in the aggregate more than 5% of the total shares authorized under the Plan, any other changes to the Plan that would (a) increase the maximum number of shares that may be issued under the Plan, (b) permit participation by persons who are not employees of the Company, (c) permit regranting or repricing of previously granted stock options, or (d) waive restrictions on previously granted restricted stock awards except in the case of retirement or other termination of employment; and (ii) the Board may not, without the written consent of the Participant, alter, impair or adversely affect any right of such Participant with respect to any Option, Right or Performance Unit previously granted, or Restricted Stock Grant grant previously made to such Participant under the Plan except as authorized herein. Notwithstanding the foregoing, the Board may, by resolution, amend the Plan in any way that it deems necessary or appropriate in order to make income with respect to the Plan deductible for Federal income tax purposes under Section 162(m) of the Code without regard to the foregoing provisos (i) and (ii), and any such amendment shall be effective as of such date as is necessary to make such income under the Plan so deductible. 7. UNFUNDED PLAN. The Plan shall be unfunded. Neither the Company nor the Committee shall be required to segregate any assets that may at any time be represented by Options or Rights under the Plan. Neither the Company nor the Committee shall be deemed to be a trustee of any amounts to be paid under the Plan. Any liability of the Company to any Participant with respect to a right shall be based solely upon any contractual obligations created by the Plan, a Performance Unit Agreement, a Stock Appreciation Right Agreement or an Option Agreement; no such obligation shall be deemed to be secured by any pledge or any encumbrance on any property of the Company. 14 15 15 8. GOVERNING LAW. The law of the State of Kansas shall apply to all awards and interpretations under the Plan without regard to the application of such state's conflict of laws principles. 15 EX-10.12 5 EX-10.12 1 EXHIBIT 10.12 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN LAST AMENDED MARCH 19, 1998 2 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN SECTION 1. PURPOSE. The purpose of this Plan is to provide an additional incentive to the key employees of Payless ShoeSource, Inc. to achieve superior performance. SECTION 2. DEFINITIONS. (a) Board means the Board of Directors of Payless, as hereinafter defined. (b) Committee means the Committee appointed to administer the Plan, as hereinafter defined, as provided in Section 8 hereof. (c) Common Stock means the Common Stock of Payless, as hereinafter defined. (d) Corporation means Payless, as hereinafter defined, or any subsidiary of Payless which is an employer of an Executive, as hereinafter defined, who is a Participant, as hereinafter defined, in the Plan, as hereinafter defined. (e) Executive means any individual employed by the Corporation in an executive capacity who receives regular stated compensation in respect of such employer-employee relationship other than a pension, retainer or fee under a contract. (f) Fiscal Year means the fiscal year of the Corporation as established from time to time. (g) Payless means Payless ShoeSource, Inc., a Missouri corporation, its successors and assigns. (h) Participant means an Executive who has been designated by the Committee as eligible, and who has elected to participate in the Plan, as hereinafter defined. (i) Plan means the Deferred Compensation Plan of the Corporation, as described herein. (j) Stock Unit means an accounting equivalent of one share of Common Stock. (k) Stock Unit Account means an account on the records of the Corporation in respect of Stock Units which have been and/or may be allocated to a Participant in the manner hereinafter set forth. SECTION 3. METHODS OF PAYMENT. (a) Except as hereinafter provided, prior to the commencement of the calendar year that includes the first day of a Fiscal Year, each Participant shall be afforded the opportunity of making an election to have any one or more of the following alternative methods of payment applied to all or a part of any portion (which such portion shall not exceed one-half, unless specifically provided for to the contrary in the participant's written contract of employment) of any compensation of which such Participant shall be the recipient in respect of his performance during such Fiscal Year: (i) Alternative (i): Payment of any such compensation that is paid in the form of a bonus on the first day of April next following the close of such Fiscal Year or on such subsequent date as the amount thereof is ascertainable. (ii) Alternative (ii): Payment thereof at a deferred date or dates either in a lump sum or in annual installments, as may be determined by the Committee, such payment when made to include interest, as hereinafter provided, from the first day of April next following the Fiscal Year in respect of which the compensation was payable to the date of payment. 1 3 (iii) Alternative (iii): Payment thereof at a deferred date or dates either in a lump sum or in annual installments, as may be determined by the Committee, and either in cash or in Common Stock or in both cash and Common Stock, as may be determined by the Committee, in respect of Stock Units to be allocated to the Participant as hereinafter provided. If any Participant shall fail to make an election with respect to any year, he shall be deemed to have elected not to defer any portion of his compensation for such year. Notwithstanding the requirements imposed by this paragraph (a) with respect to the time by which an election must be made, an employee who is designated by the Committee as a Participant for the first time may, within 60 days of such designation, make any election otherwise permitted under this paragraph (a) with respect to the Participant's compensation in respect of employment subsequent to the date on which the election is made. (b) In connection with all determinations to be made by the Committee as respects Alternative (ii) and, except for the determination of whether payment thereunder is to be made in cash or in Common Stock or in both cash and Common Stock (which determination shall be in the absolute discretion to the Committee), Alternative (iii), the Participant shall be given an opportunity at the time he makes his election of indicating his preferences, which preferences shall be taken into account by the Committee in making its determinations. Except as provided in Section 12 and Section 13 in no event shall payments under Alternative (ii) or (iii) commence prior to the earliest of the Participant's retirement, termination of employment or death (or prior to the occurrence of a severe financial hardship, as provided below). The Committee shall make its determination with respect to the payment schedule (i.e., a lump sum payment or payments in annual installments) under Alternative (ii) or (iii) prior to the commencement of the calendar year that includes the first day of the Fiscal Year for which such alternative is elected. Except in the event of a severe financial hardship, as provided below, the Committee's determination with respect to a payment schedule shall become irrevocable as of the first day of the calendar year that includes the first day of the Fiscal Year for which the determination is made. However, upon the written request of the Participant (or if applicable, the beneficiary or distributee) the payment schedule may be revised by the Committee, in its absolute discretion, in the event that the Participant (or if applicable, the beneficiary or distributee) incurs a severe financial hardship. Such severe financial hardship must have been caused by an accident, illness or other event which was beyond the control of the Participant (or, if applicable, the beneficiary or distributee); and the Committee shall revise the payment schedule that it had previously established only to the extent that the Committee considers necessary to eliminate the severe financial hardship. Notwithstanding the requirements imposed by this paragraph (b) regarding the date by which the Committee must make a determination with respect to the payment schedule under Alternative (ii) or (iii) and the date as of which such determination shall become irrevocable (except in the event of a severe financial hardship), when a Participant makes an election pursuant to the last sentence of paragraph (a) of this Section 3, the Committee shall make its determination with respect to the payment schedule at any time prior to the date as of which the Participant's election becomes effective, and its determination shall become irrevocable (except in the event of a severe financial hardship) as of such effective date. (c) In the case of a Participant who elects to have all or any part of his compensation for a particular Fiscal Year paid under Alternative (iii), Stock Units shall be allocated to such Participant by crediting the same to his Stock Unit Account, and the number of Stock Units to be so credited for such Fiscal Year shall be the sum of the following: (i) the quotient, disregarding fractions, resulting from dividing the dollar amount of such portion of the Participant's compensation as is to be so applied to Alternative (iii) by the average closing price of the Common Stock on the New York Stock Exchange during the month of February ending in the Fiscal Year next following the Fiscal Year in respect of which such compensation was payable; plus 2 4 (ii) the quotient, disregarding fractions, resulting from dividing the aggregate dollar amount of cash dividends which would have been paid to the Participant during such Fiscal Year had the Stock Units standing in his Stock Unit Account from time to time during such Fiscal Year been shares of Common Stock by the average dosing price of the Common Stock on the New York Stock Exchange during the month of February ending in the year next following such Fiscal Year; plus (iii) the number of shares of Common Stock, disregarding fractions, which would have been received by the Participant as stock dividends during such Fiscal Year had the Stock Units standing in his Stock Unit Account at the date or dates of payment of such stock dividend(s) been shares of Common Stock. Any allocation of Stock Units to a Participant's Stock Unit Account required to be made pursuant to this paragraph (c) shall be made as of the first day of April next following the Fiscal Year in respect of which such compensation was payable or such dividends were paid, as the case may be. The aggregate value of the fraction or fractions remaining after making the applicable calculations referred to in subparagraphs (c)(i), (c)(ii) and (c)(iii) of this Section 3 (based upon the average closing price of Common Stock on the New York Stock Exchange during the month of February next preceding such month of April), shall not be converted into Stock Units but shall be allocated and added to the amount elected by the Participant to be paid to him under Alternative (ii) above, or, if the Participant shall have made no such election under Alternative (ii), then such remaining amount shall be paid to the Participant as if he had made an election under Alternative (i) above to be so paid. (d) Notwithstanding the provisions of Section 3(c) to the contrary, in the event of a recapitalization of Payless pursuant to which the outstanding shares of Common Stock shall be changed into a greater or smaller number of shares (including, without limitation, a stock split or a stock dividend of 25% or more of the number of outstanding shares of Common Stock), the number of Stock Units credited to a Participant's Stock Unit Account shall be appropriately adjusted as of the effective date of such recapitalization. (e) Interest to be paid under Alternative (ii) shall be credited annually as of April 1 of each year and shall be at a rate shall be equal to the average yield on long-term United States Government Bonds (as determined by the Board of Governors of the Federal Reserve Board and published in the Federal Reserve Bulletin) for the calendar year prior to said April 1, compounded annually, provided, however, that if the method of calculation of such average yield shall be changed, or if the determination and/or the publication thereof be discontinued, then the Committee shall substitute therefor such alternative method of determining such interest rate as it, in its discretion, shall deem appropriate. (f) [In effect with respect to elections made with respect to the 1999 Fiscal Year and deleted thereafter.] At the same time and in the same manner as a Participant may elect an alternative method of payment under Section 3(a) for a Fiscal Year, any such Participant who has previously elected Alternative (ii) or (iii) for a prior Fiscal Year may indicate his preference to have all or a portion of his Cash Units reallocated and credited to his Stock Unit Account, or all or a portion of his Stock Unit Account reallocated and credited to Cash Units. Any reallocation from a Participant's Cash Units (to be invested in his Stock Unit Account) shall be based on the value of the Participant's Cash Units as of the April 1 following the Participant's election, and any crediting of a Participant's Cash Units (by reason of a reallocation from his Stock Unit Account) will be credited as of April 1. Any reallocation from a Participant's Stock Unit Account (to be invested in Cash Units) and any crediting of a Participant's Stock Unit Account (by reason of a reallocation 3 5 from his Cash Units) will be based on the value of Stock Units determined under paragraph (c) (i) and, if applicable, (c) (ii) and (iii) above, and such reallocation shall occur as of the April 1 following the Participant's election. The Committee's determination as to whether or not to honor a Participant's preference to reallocate Cash Units to Stock Units shall be subject to the limitation of Section 4. SECTION 4. LIMITATION OF STOCK UNITS. In no event shall the aggregate number of Stock Units allocated under this Plan in respect of compensation for any Fiscal Year exceed a number equal to 1/2 of 1% of the total number of shares of Common Stock outstanding at the close of such Fiscal Year. SECTION 5. DISTRIBUTION FROM THE STOCK UNIT ACCOUNT. (a) Distribution from a Participant's Stock Unit Account shall be made in accordance with the determinations made by the Committee, as provided in this Plan. Stock Units shall be adjusted from time to time in accordance with this Plan until all distributions to which a Participant is entitled hereunder shall have been made. (b) If the Committee determines that distribution to a Participant is to be made in annual installments, the Committee may determine from time to time whether each particular installment shall be distributed in cash or in Common Stock or in both cash and Common Stock. (c) If the Committee determines that a distribution to a Participant is to be made in a lump sum in Common Stock, the number of shares of Common Stock to be so distributed to such Participant shall equal the number of Stock Units then in his Stock Unit Account. For the purpose of determining the number of shares of Common Stock to be distributed on a particular annual installment distribution date, the Committee shall make its calculations as if that annual installment and all subsequent annual installments were in fact to be made in shares of Common Stock, as follows: the number of shares of Common Stock which would be then so distributable, except in the case of the last distribution, shall be equal to the product, disregarding fractions, of the total number of Stock Units then credited to the Participant's Stock Unit Account, multiplied by a fraction, the numerator of which shall be one and the denominator of which shall be the number of remaining installments; and in the case of the last distribution, shall be the number of shares of Common Stock equal to the Stock Units then remaining in the Participant's Stock Unit Account. The Participant's Stock Unit Account shall be decreased by one Stock Unit for each share of Common Stock distributed to a Participant. (d) If the Committee determines that a particular distribution to a Participant is to be made in cash, a computation shall first be made of the number of shares of Common Stock which would then be distributable pursuant to paragraph (c) of this Section 5 if such distribution were to be made in shares of Common Stock. The number of shares thus determined shall then be converted into cash in respect of each such distribution by valuing such shares at the average dosing price of the Common Stock on the New York Stock Exchange during the month of February next preceding the date of such distribution, and the resulting amount of cash shall be distributed to the Participant. The Participant's Stock Unit Account shall then be decreased by one Stock Unit for each share of Common Stock which would have been distributed to the Participant had such cash distribution been made in shares of Common Stock. (e) If the Committee determines that a distribution is to be made in part in Common Stock and in part in cash, paragraphs (c) and (d) of this Section 5 shall be applied separately to the respective parts of such distribution and to the respective parts of the Stock Unit Account with respect to which the distribution is to be made. 4 6 SECTION 6. DEATH OF PARTICIPANT. In the event of the death of a Participant prior to complete distribution under Alternatives (ii) and/or (iii) hereof, all cash and/or Stock Units then remaining undistributed, or which shall thereafter become distributable to him pursuant to such Alternatives, shall be distributed to such beneficiary as the Participant shall have designated in writing to the Corporation, or, in the absence of such designation, to his personal representative. Such distribution shall be made at such date or dates either in a lump sum or in annual installments, as may be determined by the Committee prior to the beginning of the calendar year that includes the first day of the Fiscal Year for which such alternative is elected (or, where applicable, the date specified by the last sentence of Section 3(b)); provided, however, that in the event of a severe financial hardship, the Committee may subsequently revise its determination in accordance with the applicable provisions of Section 3(b). SECTION 7. PARTICIPANT'S RIGHT UNSECURED; INVESTMENTS. The right of a Participant to receive any distribution hereunder shall be an unsecured claim against the general assets of the Corporation. Nothing in this Agreement shall require the Corporation to invest any amount, the payment of which has been deferred under Alternative (ii) or (iii), in Common Stock or in any other medium. SECTION 8. ADMINISTRATION OF THE PLAN COMMITTEE. (a) The Plan shall be administered by a Committee of not less than two nor more than five persons designated by the Board (which may, but need not, be the compensation committee of the Board), all of whom shall be directors of the Corporation and shall serve at the pleasure of the Board. In no event shall any member of the Committee be a Participant. The Committee shall act by vote or written consent of a majority of its members (except in the case of a two person Committee in which case any vote or written consent must be unanimous). The Plan may be amended, modified or terminated by the Board, except that no change may be made without the approval of the Common Shareowners of Payless (i) the maximum number of shares or Stock Units deliverable or allocable in respect of any Fiscal Year under the plan or (ii) in the provisions of subparagraphs (c)(i) and (c)(ii) of Section 3 of this Plan relating to the method of determining the number of Stock Units allocable to a Participant. (b) The Committee shall prescribe such forms as it considers appropriate for the administration of the Plan. The forms shall set forth such terms and conditions not inconsistent with the terms of the Plan as the Committee may determine and shall designate: (i) the alternative or alternatives elected by the Participant pursuant to Section 3(a); (ii) the Committee's determination of the time or times when payment of such compensation will be made to the Participant pursuant to Section 3(b)(in the absence of a severe financial hardship); (iii) the beneficiary (if any) designated by the Participant pursuant to Section 6; and (iv) the Committee's determination of the time or times when payment of such compensation will be made after the Participant's death pursuant to Section 6 (in the absence of a severe financial hardship). SECTION 9. SUCCESSORS. The provisions of the Plan with respect to each Participant shall bind the legatees, heirs, executors, administrators or other successors in interest of such Participant. SECTION 10. ALIENATION. (a) Subject to the provisions of Section 6 and paragraph (b) of this Section 10, no amount, the payment of which as been deferred under Alternative (ii) or (iii), shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to so anticipate, 5 7 alienate, sell, transfer, assign, pledge, encumber, levy or charge the same shall be void; nor shall any such amount be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit. (b) Nothing in this Section 10 shall prohibit the personal representative of a Participant from designating that any amount be distributed in accordance with the terms of the Participant's will or pursuant to the laws of descent and distribution. SECTION 11. WITHHOLDING. There shall be deducted from all amounts paid under this Plan any taxes required to be withheld by any federal, state or local government. The Participants and their beneficiaries, distributees and personal representatives will bear any and all federal, foreign, state, local or other income or other taxes imposed on amounts paid under this Plan as to which no amounts are withheld, irrespective of whether withholding is required. SECTION 12. DISCRETIONARY PAYMENT. (a) Notwithstanding any other provision in any other Section of the Plan to be contrary, the Committee may, in its sole and absolute discretion, direct an immediate payment of cash and/or distribution of Stock with respect to amounts (except those referred to in the next proviso) previously deferred under this Plan if the Committee determines that such action is in the best interests of Payless, the Participants and their beneficiaries. (b) In the event that the Committee shall so direct an immediate payment, distribution and/or release in accordance with Section 12(a), then (i) the amounts of cash and the numbers of shares of Stock to be so paid and/or distributed shall be determined by the Committee so as to reflect fairly and equitably appropriate interest and dividends since the preceding April 1 and so as to reflect fairly and equitably such other facts and circumstances as the Committee deems appropriate, including, without limitation, recent price of the Stock; (ii) amounts which were otherwise deferred or to be deferred with respect to the Fiscal Year or long-term period in which such payment or distribution occurs shall be paid when otherwise payable (such amounts which would otherwise have been payable prior to the date of such payment or distribution shall be paid as soon as practicable thereafter); (iii) in the event that cash is not paid or made available to a Participant when otherwise due or that shares of Stock are not distributed or otherwise made available to a Participant when otherwise due, then such Participant may file a claim for such payment or distribution and, if such Participant is successful, then the Corporation shall reimburse such Participant for reasonable attorneys' fees actually paid by the Participant in enforcing such Participant's rights to such payment or distribution; and (iv) in the event that cash is not paid or made available to a Participant when otherwise due, then interest will accrue with respect to such unpaid amount from the date it was otherwise due until the date it is actually paid at a rate equal to two percentage points over the prime rate as in effect from time to time, as determined in good faith the Committee based on the prime rate charged from time to time by major banks in the City of New York. SECTION 13. CHANGE IN CONTROL. Notwithstanding any other provision in any other Section of this Plan to the contrary, (i) the value of all amounts deferred by a Participant which have not yet been credited to the Participant's accounts under this Plan and (u) the value of all of a Participant's accounts under this Plan shall be paid to such Participant in each case in a lump sum cash payment on the occurrence of a Change in Control of the Corporation or as soon thereafter as practicable, but in no event later than five days after the Change in Control of the Corporation. The amounts of cash credited to each Participant's accounts prior to determining the amount of cash to be paid from these accounts shall be determined by the Committee (which, for this purpose, shall be comprised of members of the Board prior to the Change in Control of 6 8 the Corporation) so as to reflect fairly and equitably appropriate interest and dividends since the preceding April 1 and so as to reflect fairly and equitably such other facts and circumstances as the Committee deems appropriate, including, without limitation, recent price of the stock. For purposes of payments under this Section 13, the value of Stock Unit shall be computed as the greater of (a) the closing price of shares of Common Stock as reported on the New York Stock Exchange on or nearest the date on which the Change in Control is deemed to occur (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume in the Common Stock is highest) or (b) the highest per share price for shares of Common Stock actually paid in connection with any Change in Control. For purposes of this Plan, a Change in Control of the Corporation" shall be deemed to have occurred if (a) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any company owned, directly or indirectly, by the shareowners of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner. (as defined in Rule 13d-3 under Exchange Act), directly or indirectly of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Corporation's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; (c) the shareowners of the Corporation approve a merger or consolidation of the Corporation with any other Corporation, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Corporation's then outstanding securities; or (d) the shareowners of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 7 EX-11.1 6 EX-11.1 1 EXHIBIT 11.1 PAYLESS SHOESOURCE, INC. COMPUTATION OF NET EARNINGS PER SHARE FOR THE LAST THREE FISCAL YEARS
Jan. 31, Feb. 1, Feb. 3, (Thousands, except per share) 1998 1997 1996 ---------- --------- --------- Basic Computation: Net earnings $128,869 $107,702 $ 53,960 Common shares outstanding 38,443 40,220 40,365 -------- -------- -------- Net earnings per share $ 3.35 $ 2.68 $ 1.34 ======== ======== ======== Diluted Computation: Net earnings $128,869 $107,702 $ 53,960 Common shares outstanding 38,443 40,220 40,365 Net effect of dilutive stock options based on the treasury stock method 487 87 0 -------- -------- -------- Outstanding shares for diluted earnings per share 38,930 40,307 40,365 ======== ======== ======== Diluted earnings per share $ 3.31 $ 2.67 $ 1.34 ======== ======== ========
Note: The Company's fiscal 1995 outstanding shares was calculated on the number of Company shares issued and outstanding as of May 4, 1996, the date of the spin-off from The May Department Stores Company. EX-12.1 7 EX-12.1 1 EXHIBIT 12.1 PAYLESS SHOESOURCE, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE LAST THREE FISCAL YEARS
Jan. 31, Feb. 1, Feb. 3, (Thousands) 1998 1997 1996 Earnings Available for Fixed Charges: -------- ------- ------- Pretax earnings $214,348 $179,159 $ 88,932 Fixed Charges (Interest expense plus interest component of rent) 85,345 81,576 88,432 -------- -------- -------- $299,693 $260,735 $177,364 ======== ======== ======== Fixed Charges: Gross interest expense $ 1,246 $ 1,166 $ 979 Interest factor attributable to rent expense 84,099 80,410 87,453 -------- -------- -------- 85,345 81,576 88,432 ======== ======== ======== Ratio of Earnings to Fixed Charges 3.5 3.2 2.0 ======== ======== ========
Note: All costs and expenses of the Company relating to special retention costs and the special non-recurring charge associated with the spin-off are included in the above calculation. Excluding these costs, the fixed charge coverage would be 3.6x, 3.4x, and 2.8x, respectively. EX-13.1 8 EX-13.1 1 EXHIBIT 13.1 1997 ANNUAL REPORT TO SHAREHOLDERS OF PAYLESS SHOESOURCE, INC. (SELECTED PORTIONS TO BE INCORPORATED BY REFEFENCE) 2 1997 Annual Report Management's Discussion and Analysis In May 1996, Payless ShoeSource, Inc. (Payless, or the Company) was spun off from The May Department Stores Company (May Company). In the second year of reporting sales and earnings as an independent public company, we achieved improvements in total sales, same-store sales, net earnings, and earnings per share. Sales for Payless increased to $2.57 billion in fiscal 1997, from $2.33 billion in 1996, an increase of 10.0 percent. Same-store sales for 1997 increased 5.6 percent. Same-store sales were balanced and consistently positive for the four quarters of fiscal 1997 with increases of 6.4 percent, 7.2 percent, 5.2 percent and 3.4 percent, respectively. Payless generated $3.35 in basic earnings per share in 1997, a 25.0 percent increase over 1996 basic earnings per share of $2.68. Net earnings totaled $128.9 million compared with $107.7 million in 1996, an increase of 19.7 percent. Return on sales was 5.0 percent in 1997, up from 4.6 percent in 1996. Return on equity improved to 15.1 percent in 1997 from 14.3 percent in 1996. Return on net assets rose to 17.3 percent in 1997 from 15.5 percent in 1996. In March 1997 Payless acquired the Parade of Shoes division from J. Baker, Inc. for approximately $28 million in cash. Parade of Shoes sells women's footwear and accessories in 175 stores in 14 states. Parade of Shoes offers, in self-service stores, fashionable women's dress, casual and athletic footwear priced from $20 to $40 a pair. Payless operates Parade of Shoes as a separate division supported by existing Payless sourcing, distribution, information systems, real estate, human resources and financial organizations. The Parade of Shoes acquisition has been accounted for as a purchase, and accordingly, the operating results of the acquired stores have been included in the Company's consolidated results since the acquisition date. During 1997 Payless opened 158 Payless ShoeSource stores, including stores in Canada, Guam and Saipan, and closed 138 underperforming stores. During 1997 Parade of Shoes opened eight stores, in addition to the 186 stores acquired, and closed 19 underperforming stores. Year-end store count for 1997 was 4,256 Payless ShoeSource stores and 175 Parade of Shoes stores compared with 4,236 Payless ShoeSource stores a year earlier. The Company's expansion plans for 1998 include a net increase of 120 Payless ShoeSource stores. The Parade of Shoes 1998 expansion plans include a net increase of 65 stores. In addition, 125 Parade of Shoes stores are scheduled to be remodeled. By 2001 Payless plans to add 345 net Payless ShoeSource stores and 365 net Parade of Shoes stores. During this period, Payless plans to invest $236 million for new stores and plans to spend an additional $91 million to remodel existing stores. These are the major components of a projected $504 million capital plan. Payless intends to finance these expansions from operating cash flows. The following discussion summarizes the significant factors affecting operating results for the fiscal years ended January 31, 1998 (1997), February 1, 1997 (1996), and February 3, 1996 (1995). Results for 1995 have been presented as if Payless were an independent public company. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in this annual report. 3 Review of Operations Net Earnings Net earnings totaled $128.9 million in 1997 compared with $107.7 million in 1996 and $54.0 million in 1995. Return on sales was 5.0 percent, 4.6 percent and 2.3 percent for 1997, 1996 and 1995, respectively. Results for the past three years were as follows:
(dollars in 1997(1) 1996(1) 1995(1) millions, except % of % of % of per share) $ Sales $ Sales $ Sales - ---------------------------------------------------------------------------------------------------- Net retail sales $ 2,566.9 100.0 $ 2,333.7 100.0 $ 2,330.3 100.0 Cost of sales 1,796.8 70.0 1,660.9 71.1 1,693.4 72.7 Selling, general and administrative expenses 560.0 21.8 487.3 20.9 475.2 20.4 Special and nonrecurring items 4.7(2) 0.2 12.6(2) 0.5 71.8(3) 3.1 Interest (income) expense, net (8.9) (0.3) (6.2) (0.2) 1.0 -- - ---------------------------------------------------------------------------------------------------- Earnings before income taxes 214.3 8.3 179.1 7.7 88.9 3.8 - ---------------------------------------------------------------------------------------------------- Provision for income taxes 85.4 39.9(4) 71.4 3.9(4) 34.93 39.3(4) Net earnings $ 128.9 5.0 $ 107.7 4.6 $ 54.0(3) 2.3 - ---------------------------------------------------------------------------------------------------- Basic earnings per share $ 3.35 $ 2.68 $ 1.34 - ---------------------------------------------------------------------------------------------------- Diluted earnings per share $ 3.31 $ 2.67 $ 1.34 - ----------------------------------------------------------------------------------------------------
(1) The Payless fiscal year ends on the Saturday closest to January 31. Fiscal year 1995 contained 53 weeks. (2) Executive retention costs associated with the spin-off. (3) During the 1995 fourth quarter, in connection with the spin-off, Payless committed to close or relocate underperforming stores. (4) Effective income tax rate. Net Retail Sales Net retail sales, on a 52-week basis, represent the sales of stores operating during the period. Same-store sales represent sales of stores open during comparable periods. In 1997 total sales increased 10.0 percent from 1996, consisting of a 9.5 percent increase in unit volume and a 0.5 percent increase in average selling prices. Same-store sales increased 5.6 percent in 1997. In 1996 sales increased 1.4 percent from 1995, consisting of a 1.0 percent reduction in unit volume and a 2.4 percent increase in average selling prices. Same-store sales increased 3.6 percent in 1996. The sales and same-store sales increases in 1997 over 1996 were the result of achieving positive sales increases in all of the Company's geographic regions; delivery of validated fashion styles and balanced merchandise assortments to the Company's market segment faster than competitors; generally stronger responses to sales promotions based on more effective advertising strategies; and improvements in store operations due to a stronger base of experienced store managers. 4 The sales and same-store sales increases in 1996 over 1995 reflected a better balance in merchandise assortments, allowing Payless to meet the needs of both its traditional and fashion-oriented customers; the capture of customers from former competitors who went out of business in late 1995; the retention of Payless customers who previously shopped in stores that were closed during the Company's real estate repositioning program; generally stronger consumer spending and economic trends in most major markets; and a recovery in business along the U.S.-Mexico border due to the stabilization of the Mexican peso. Cost of Sales Cost of sales includes cost of merchandise sold, buying and occupancy costs. Cost of sales was $1.80 billion in 1997 compared with $1.66 billion in 1996, an 8.2 percent increase. As a percent of net retail sales, cost of sales was 70.0 percent in 1997 compared with 71.1 percent in 1996. Higher gross margins in 1997 reflect improved merchandise margins and leverage of occupancy costs gained through positive same-store sales. Cost of sales was $1.66 billion in 1996 compared with $1.69 billion in 1995, a 1.9 percent decrease. As a percent of net retail sales, cost of sales was 71.1 percent in 1996 compared with 72.7 percent in 1995. Higher gross margins in 1996 reflect improved markdown performance obtained by paring back promotions, while minimizing the impact on sales. Payless also reduced occupancy expense rates by closing underperforming stores. Selling, General and Administrative Expenses Selling, general and administrative expenses were $560.0 million in 1997 compared with $487.3 million in 1996, a 14.9 percent increase. As a percent of net retail sales, selling, general and administrative expenses were 21.8 percent for 1997 compared with 20.9 percent in 1996. A modest increase in advertising, start-up and operational costs associated with the Parade of Shoes division; increased stores payroll; and investments in infrastructure and systems to support future growth accounted for the majority of the increase. Selling, general and administrative expenses were $487.3 million in 1996 compared with $475.2 million in 1995, a 2.5 percent increase. As a percent of net retail sales, selling, general and administrative expenses were 20.9 percent for 1996 compared with 20.4 percent in 1995. The increase was due principally to increased payroll in stores to improve the retention of store managers, added costs associated with being an independent public company, higher costs related to the Payless performance-based compensation program as a result of the stronger same-store sales in 1996, and increased advertising in the fourth quarter of 1996 to support sales during the shortened holiday season. Interest (Income) Expense During 1997 and 1996, short-term investment of available cash balances generated interest income. In 1995 cash received by Payless in excess of store operating needs was transferred to May Company on a daily basis; therefore, no interest income was generated. Interest expense is related to capitalized lease obligations.
(dollars in millions) 1997 1996 1995 - -------------------------------------------------------- Interest expense $ 1.2 $ 1.2 $ 1.0 Interest income (10.1) (7.4) -- - -------------------------------------------------------- Interest (income) expense, net $ (8.9) $ (6.2) $ 1.0 - --------------------------------------------------------
Special and Nonrecurring Items During the 1995 fourth quarter, in connection with the spin-off from May Company, Payless committed to close or relocate underperforming stores and to (Alejandra Ramirez Selling Star Store Manager Western Divison) "Parents appreciate the special attention and help they get at our Payless Kids store, and, of course, they love our prices. [PHOTO] But children come to Payless for the latest fashions. We keep everyone happy with great values for the whole family." 5 implement a plan to reduce central office overhead by means of a personnel reduction program. A pretax special and nonrecurring charge of $71.8 million was recorded in 1995 for these initiatives. The original $71.8 million charge was sufficient for management to execute and complete the plans to close or relocate underperforming stores and restructure the central office during 1995, 1996 and 1997. No additional charges for these initiatives were recorded in 1996 or 1997. As of January 31, 1998, the entire special and nonrecurring charge of $71.8 million had been utilized. Also in connection with the spin-off from May Company, Payless initiated the Payless ShoeSource, Inc. Spin-off Stock Plan and the Payless ShoeSource, Inc. Spin-off Cash Plan as retention programs. Under these retention programs, Payless committed to pay out 408,558 shares of restricted stock and cash payments ranging from 10.0 percent to 37.5 percent of certain associates' base salaries. These retention incentives are contingent upon continued employment for up to two years after May 4, 1996. The costs related to these incentives are expensed as earned during the retention period. The amount of expense for retention incentives recorded as special and nonrecurring items was $4.7 million and $12.6 million in 1997 and 1996, respectively. The estimate of retention incentive expense for 1998 is $0.8 million. Net earnings, excluding the special and nonrecurring charges, would have been $131.6 million, $115.3 million and $97.5 million for 1997, 1996 and 1995, respectively. Income Taxes The effective income tax rates were 39.9 percent, 39.9 percent and 39.3 percent in 1997, 1996 and 1995, respectively. The 1997 effective income tax rate was consistent with 1996. The increase in the 1996 effective income tax rate to 39.9 percent from 39.3 percent in 1995 related to slightly higher state income tax rates and the discontinuation of the Federal Targeted Jobs Tax Credit. Impact of Inflation Historically, sales growth and earnings for Payless have not been materially impacted by inflation. Review of Financial Condition Return on Equity Return on equity (computed as net earnings divided by beginning shareowners' equity) is the Company's principal measure in evaluating performance for shareowners and its ability to invest shareowners' funds profitably. Return on beginning equity was 15.1 percent in 1997 compared with 14.3 percent in 1996 and 6.8 percent (12.3 percent excluding the special and nonrecurring items) in 1995. The 1995 return on beginning equity was computed using financial results stated as if Payless were an independent public company. The 1997 debt-to-capitalization ratio (including present value of future minimum rental payments under operating leases - PVOL) was 50.1 percent compared with 49.2 percent for 1996. Return on Net Assets Return on net assets measures performance independent of capital structure. Return on net assets represents pretax earnings before net interest expense and the interest component of operating leases, divided by beginning of year net assets (including PVOL). Return on net assets was 17.3 percent in 1997 compared with 15.5 percent in 1996 and 13.9 percent in 1995. Cash Flow At $242.8 million, cash flow from operations showed continuing strength during 1997. This figure represented 9.5 percent of net sales in 1997 compared with 10.3 percent in 1996 and 6.8 percent in 1995. Internally generated funds will continue to be the most important component of the Company's capital resources and are expected to fund capital expansion. Sources and (uses) of cash flows are summarized below: 6
(dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------- Net earnings and noncash items $ 215.1 $ 209.8 $ 192.6 Working capital increase (decrease) 27.7 30.7 (33.3) Investing activities (74.8) (32.9) (64.7) Purchase of common stock (150.0) (16.5) -- Net transactions with May Company -- -- (95.0) Other financing activity (1.6) (2.1) (1.6) - -------------------------------------------------------------------- Increase (Decrease) in cash and cash equivalents $ 16.4 $ 189.0 $ (2.0) - --------------------------------------------------------------------
Capital Expenditures In 1997 Payless capital expenditures totaled $85.4 million, including $33.4 million for new stores, $20.6 million to remodel existing stores and $31.4 million for other necessary improvements. These expenditures were offset by store disposals totaling $10.6 million. Payless expects that capital expenditures in 1998 will be approximately $143 million, including $68 million to open new stores, $29 million to remodel existing stores and $46 million to make other necessary improvements. Financing Activities In January 1997 the Payless Board of Directors authorized the repurchase of up to $150 million of outstanding Payless common stock in open-market transactions. In September 1997 Payless completed the $150 million repurchase (having purchased approximately 2.8 million shares). (Roosevelt Fleurimey Selling Star Store Manager Southeast Division) "Payless sells shoes for everyone. Young people know they can always find fashionable shoes [PHOTO] at affordable prices. Now, men shop more and more at payless for the same good values." In September 1997 the Payless Board of Directors authorized the repurchase of up to an additional $150 million of outstanding Payless common stock in open-market transactions, subject to market conditions and receipt of a favorable tax ruling from the Internal Revenue Service, which Payless received in March 1998. The purchased shares will be held in the treasury for general corporate purposes. Available Credit Payless has in place a $200 million unsecured revolving credit facility with a bank syndication group on which no amounts were drawn down as of January 31, 1998. Financial Condition Ratios The debt-to-capitalization ratio was 1.0 percent at the end of 1997, 1996 and 1995. For purposes of the debt-to-capitalization ratio, total debt is defined as current and long-term capital lease obligations. 7 Capitalization is defined as current and long-term capital lease obligations, noncurrent deferred income taxes and shareowners' equity. The debt-to-capitalization ratio, including the present value of future minimum rental payments under operating leases as debt and as capitalization, would be 50.1 percent, 49.1 percent and 54.1 percent in 1997, 1996 and 1995, respectively. Fixed charge coverage, excluding special and non-recurring items, was 3.6x, 3.4x and 2.8x in 1997, 1996 and 1995, respectively. Fixed charge coverage is defined as earnings before income taxes, gross interest expense and the interest component of rent expense, divided by gross interest expense and the interest component of rent expense. The fixed charge coverage, including special and nonrecurring items, was 3.5x, 3.2x and 2.0x in 1997, 1996 and 1995, respectively. Common Stock and Market Prices The Company's common stock is listed on the New York Stock Exchange under the trading symbol PSS. The quarterly per-share high and low closing prices for the common stock during each of the fiscal quarters of the 1997 and 1996 fiscal years were:
1997 1996 Market Price Market Price Quarter High Low High Low - --------------------------------------------------------------- First $44 $35 3/4 * * Second 62 7/8 44 1/8 $34 $25* Third 64 1/4 55 3/4 37 7/8 31 3/8 Fourth 69 5/8 56 1/2 41 3/4 33 1/4 - --------------------------------------------------------------- Year $69 5/8 $35 3/4 $41 3/4 $25 - ---------------------------------------------------------------
*May Company spun off Payless in the second fiscal quarter of 1996. Payless has not paid a dividend on its shares of common stock and has no present intention to commence dividend payments. As of January 31, 1998, there were approximately 60,000 Payless common shareowners. Year 2000 Many existing computer programs were designed and developed without regard for the year 2000 and beyond. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. For Payless, this could disrupt product purchasing and distribution, store operations, finance and other support areas and affect the Company's ability to timely deliver product to stores, thereby causing potential lost sales opportunities. Payless has evaluated and continues to evaluate the extent to which it believes modifications to its internally engineered computer systems will be necessary to accommodate the year 2000 and is modifying its internally engineered computer systems to enable continued processing of data into and beyond the year 2000. Payless is testing all new purchases of critical computer hardware and software and is obtaining, where feasible, contractual warranties from system vendors that their products are or will be year 2000 compliant. Payless is initiating formal communications with significant suppliers, banks and other business partners to either seek assurances that they will be year 2000 compliant or to formulate contingency plans to protect Payless against their failure to be year 2000 compliant. Payless is taking inventory of and will test critical non-computer equipment to determine whether it is data sensitive and, where appropriate, will seek contractual protections or make contingency plans in an effort to minimize any adverse effect on any such equipment due to the year 2000. Payless expects that all aspects of its year 2000 remedial strategy will be complete before the year 2000, although there can be no assurance that such strategy will be complete or that it will be effective. Spending for modifications is being expensed as incurred and is not expected to have a material impact on the Company's results of operations or cash flows. 8 Consolidated Statement of Earnings (dollars in millions, except per share data)
1997 1996 1995* - ----------------------------------------------------------------------------------------------------------- Net retail sales $2,566.9 $2,333.7 $2,330.3 - ----------------------------------------------------------------------------------------------------------- Cost of sales 1,796.8 1,660.9 1,693.4 Selling, general and administrative expenses 560.0 487.3 475.2 Special and nonrecurring items 4.7 12.6 71.8 Interest (income) expense, net (8.9) (6.2) 1.0 - ----------------------------------------------------------------------------------------------------------- Total cost of sales and expenses 2,352.6 2,154.6 2,241.4 - ----------------------------------------------------------------------------------------------------------- Earnings before income taxes 214.3 179.1 88.9 Provision for income taxes 85.4 71.4 34.9 - ----------------------------------------------------------------------------------------------------------- Net earnings $ 128.9 $ 107.7 $ 54.0 - ----------------------------------------------------------------------------------------------------------- Basic earnings per share $ 3.35 $ 2.68 $ 1.34 - ----------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 3.31 $ 2.67 $ 1.34 - -----------------------------------------------------------------------------------------------------------
*1995 contained 53 weeks. See Notes to Consolidated Financial Statements. Consolidated Statement of Shareowners' Equity (dollars in millions, shares in thousands, unless otherwise noted)
Outstanding Common Stock Additional Unearned Total ---------------- Paid-in Restricted Retained Shareowners' Shares Dollars Capital Stock Earnings Equity - --------------------------------------------------------------------------------------------------------------------------- Balance at January 28, 1995 -- $ -- $ -- $ -- $ 793.9 $ 793.9 Net earnings -- -- -- -- 54.0 54.0 Net transfers with May Company -- -- -- (95.0) (95.0) - --------------------------------------------------------------------------------------------------------------------------- Balance at February 3, 1996 -- -- -- -- 752.9 752.9 Net earnings -- -- -- 107.7 107.7 Shares issued, spin-off 39,971 0.4 -- -- (0.4) -- Stock issued under restricted stock plan, net 409 -- 12.0 (12.0) -- -- Amortization of unearned restricted stock -- -- -- 8.9 -- 8.9 Purchase of common stock (460) -- -- -- (16.5) (16.5) - --------------------------------------------------------------------------------------------------------------------------- Balance at February 1, 1997 39,920 0.4 12.0 (3.1) 843.7 853.0 Net earnings -- -- -- -- 128.9 128.9 Stock issued under restricted stock plan, net 197 -- 9.0 (9.0) -- -- Amortization of unearned restricted stock -- -- -- 4.5 -- 4.5 Purchase of common stock (2,785) -- -- -- (150.0) (150.0) - --------------------------------------------------------------------------------------------------------------------------- Balance at January 31, 1998 37,332 $0.4 $21.0 $ (7.6) $ 822.6 $ 836.4 - ---------------------------------------------------------------------------------------------------------------------------
Outstanding common stock excludes shares held in treasury. At January 31, 1998, 37.3 million shares were outstanding and 3.7 million shares were held in treasury. At February 1, 1997, 39.9 million shares were outstanding and 1.1 million shares were held in treasury. See Notes to Consolidated Financial Statements. 9 1997 Annual Report Consolidated Balance Sheet (dollars in millions, except shares)
January 31, February 1, 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 210.0 $ 193.6 Merchandise inventories 324.6 354.8 Current deferred income taxes 16.9 16.6 Other current assets 11.4 9.8 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 562.9 574.8 Property and equipment: Land 4.3 5.3 Buildings and leasehold improvements 559.3 545.1 Furniture, fixtures and equipment 279.7 275.7 Property under capital leases 7.5 8.0 - --------------------------------------------------------------------------------------------------------------------------- Total property and equipment 850.8 834.1 Accumulated depreciation and amortization (364.1) (331.6) - --------------------------------------------------------------------------------------------------------------------------- Property and equipment 486.7 502.5 Deferred income taxes 19.9 11.3 Other assets 3.5 3.2 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,073.0 $ 1,091.8 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareowners' Equity Current liabilities: Current maturities of capital lease obligations $ 1.4 $ 1.3 Accounts payable 63.8 82.9 Accrued expenses 112.9 98.4 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 178.1 182.6 Capital lease obligations 6.5 8.2 Other liabilities 52.0 48.0 Shareowners' Equity: Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued Common stock, $.01 par value; 120,000,000 shares authorized; 41,000,000 issued; 37,332,068 and 39,919,635 shares outstanding in 1997 and 1996, respectively 0.4 0.4 Additional paid-in capital 21.0 12.0 Unearned restricted stock (7.6) (3.1) Retained earnings 822.6 843.7 - --------------------------------------------------------------------------------------------------------------------------- Total shareowners' equity 836.4 853.0 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareowners' equity $ 1,073.0 $ 1,091.8 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 10 Payless ShoeSource Consolidated Statement of Cash Flows (dollars in millions)
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Operating activities: Net earnings $ 128.9 $ 107.7 $ 54.0 Adjustments for noncash items included in net earnings: Depreciation and amortization 90.6 90.3 95.3 Amortization of unearned restricted stock 4.5 8.9 -- Deferred income taxes (8.9) 2.9 (0.3) Special and nonrecurring items -- -- 71.8 Tax benefit on special and nonrecurring items -- -- (28.2) Merchandise inventories 30.2 43.2 (4.1) Other current assets (1.6) (1.1) 4.9 Accounts payable (19.1) 17.9 (36.5) Accrued expenses 14.5 (34.2) 1.2 Other assets and liabilities, net 3.7 4.9 1.2 - --------------------------------------------------------------------------------------------------------------------------- Total operating activities 242.8 240.5 159.3 - --------------------------------------------------------------------------------------------------------------------------- Investing activities: Capital expenditures (85.4) (73.4) (95.4) Disposition of property and equipment 10.6 40.5 30.7 - --------------------------------------------------------------------------------------------------------------------------- Total investing activities (74.8) (32.9) (64.7) - --------------------------------------------------------------------------------------------------------------------------- Financing activities: Repayment of capital lease obligations (1.6) (2.1) (1.6) Purchases of common stock (150.0) (16.5) -- Net transactions with May Company -- -- (95.0) - --------------------------------------------------------------------------------------------------------------------------- Total financing activities (151.6) (18.6) (96.6) - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in cash and cash equivalents 16.4 189.0 (2.0) Cash and cash equivalents, beginning of year 193.6 4.6 6.6 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 210.0 $ 193.6 $ 4.6 - --------------------------------------------------------------------------------------------------------------------------- Cash paid during the year: Interest $ 2.0 $ 1.4 $ 1.0 Income taxes 85.8 67.5 -- - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 18 11 1997 ANNUAL REPORT Notes to Consolidated Financial Statements Summary of Significant Accounting Policies Description of Business and Basis of Presentation Payless ShoeSource, Inc. (Payless, or the Company), a Missouri corporation, is the largest family footwear retailer in the United States. As of January 31, 1998, Payless operated 4,256 self-service Payless ShoeSource family shoe stores. Payless ShoeSource stores are located in all 50 states, the District of Columbia, Puerto Rico, Guam, Saipan, the U.S. Virgin Islands and Canada. Payless also operates Parade of Shoes, a 175-store division offering fashionable women's footwear at moderate prices. Payless utilizes a network of agents with factories in 14 foreign countries and the United States to source its products, which are manufactured to meet the Company's specifications and standards. Factories in the People's Republic of China are a source of approximately 80 percent of Payless merchandise. Payless was a subsidiary of The May Department Stores Company (May Company) until its spin-off in May 1996. The consolidated financial statements for all years presented include entire fiscal year results and the accounts of Payless and all wholly owned subsidiaries. Fiscal Year The Payless fiscal year ends on the Saturday closest to January 31. Fiscal year 1997 ended on January 31, 1998, and included 52 weeks. Fiscal year 1996 ended on February 1, 1997, and included 52 weeks. Fiscal year 1995, which included 53 weeks, ended on February 3, 1996. References to years in these financial statements and notes relate to fiscal years rather than calendar years. Net Retail Sales Net retail sales (sales) represent the sales of all stores operated during the period, are net of returns and exclude sales tax. Cost of Sales Cost of sales includes the cost of merchandise sold, buying and occupancy costs. Earnings Per Share During 1997 Payless adopted Statement of Financial Accounting Standards No. 128, Earnings per Share. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the effect of conversions of stock options. For 1995 earnings per share was calculated using the number of common shares as of May 4, 1996, the date of the spin-off from May Company. The following is a reconciliation of the net earnings and shares of the basic and diluted earnings per share:
For the year ended 1997 - ------------------------------------------------------------------------------------------ (dollars in millions, except per Net Per-Share share data, shares in thousands) Earnings Shares Amount - ------------------------------------------------------------------------------------------ Basic earnings per share $128.9 38,443 $3.35 - ------------------------------------------------------------------------------------------ Effect of dilutive stock options -- 487 -- - ------------------------------------------------------------------------------------------ Diluted earnings per share $128.9 38,930 $3.31 - ------------------------------------------------------------------------------------------ For the year ended 1996 - ------------------------------------------------------------------------------------------ Net Per-Share Earnings Shares Amount - ------------------------------------------------------------------------------------------ Basic earnings per share $107.7 40,220 $2.68 - ------------------------------------------------------------------------------------------ Effect of dilutive stock options -- 87 -- - ------------------------------------------------------------------------------------------ Diluted earnings per share $107.7 40,307 $2.67 - ------------------------------------------------------------------------------------------ For the year ended 1995 --------------------------------------- Net Per-Share Earnings Shares Amount - ------------------------------------------------------------------------------------------ Basic earnings per share $54.0 40,365 $1.34 - ------------------------------------------------------------------------------------------ Effect of dilutive stock options -- -- -- - ------------------------------------------------------------------------------------------ Diluted earnings per share $54.0 40,365 $1.34 - ------------------------------------------------------------------------------------------
12 (Joseph Sanchez Selling Star Store Manager Southwest Division) "Running a productive store is a team effort. I concentrate on building a more effective team by focusing on associate [PHOTO] satisfaction. Like our mission statement says, success starts with satisfied associates. If my associates get the job done, customers are happy; after that, everything else falls into place. 19 13 Payless ShoeSource Cash and Cash Equivalents Payless considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. Merchandise Inventories Merchandise inventories are valued by the retail method and are stated at the lower of cost, determined using the first-in, first-out (FIFO) basis, or market. Property and Equipment Property and equipment are recorded at cost. Property and equipment are depreciated on a straight-line basis over their estimated useful lives. Investments in properties under capital leases and leasehold improvements are amortized over the shorter of their useful lives or their related lease terms. Property and equipment to be held and used or disposed of are reviewed to determine whether the carrying amount of the assets is recoverable. Insurance Programs Under the Company's insurance programs, Payless retains its normal expected losses related primarily to workers' compensation, physical loss to property and business interruption resulting from such loss and comprehensive general, product, and vehicle liability, and purchases third party coverage for losses in excess of the normal expected level. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims incurred utilizing independent actuarial assumptions. Foreign Currency Translation Local currencies are the functional currencies for all subsidiaries. Accordingly, assets and liabilities of foreign subsidiaries are translated at the rate of exchange at the balance sheet date. Income and expense items of these subsidiaries are translated at average rates of exchange. The foreign currency translation was immaterial. Pre-opening Expenses Costs associated with the opening of new stores are expensed during the year incurred. Income Taxes Payless was included in the consolidated tax return filed by May Company for federal, state and local income tax purposes for the years prior to 1996 and for the period from February 4, 1996, through May 4, 1996. The provision for income taxes for those periods is calculated on a separate return basis. Income taxes are accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying the statutory tax rates in effect at the date of the balance sheet to differences between the book basis and the tax basis of assets and liabilities. Adjustments to deferred income taxes resulting from statutory rate changes are included within the tax provision in the year of the change. Advertising Costs Advertising costs and sales promotion costs are expensed at the time the advertising takes place. Included in selling, general and administrative expenses are advertising and sales promotion costs of $76.0 million, $66.4 million and $60.6 million in 1997, 1996 and 1995, respectively. Derivatives Policy The Company's derivatives policy permits the use of financial derivatives only to reduce foreign exchange risk. Gains and losses related to forward foreign exchange contracts used to hedge firm commitments are deferred and recognized in operating results or included in balance sheet amounts when the transactions are settled. The amounts of derivative financial instruments in place during 1997, 1996 and 1995 were immaterial. As of January 31, 1998 and February 1, 1997, there were no derivative financial instruments in place. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. While the financial statements reflect all available information and management's judgment and estimates of current conditions and circumstances and are prepared with the assistance of specialists within and outside Payless, actual results could differ from those estimates. Reclassification Certain reclassifications have been made to prior-year balances to conform with the current-year presentation. Relationship with May Company Prior to 1996, May Company provided various services to Payless, including legal, benefit administration, risk management and insurance, income and payroll tax management, and treasury services. In anticipation of the spin-off, Payless became solely responsible for substantially all of these services at the beginning of 1996. However, May Company continued to provide income and payroll tax management and treasury services until the spin-off was completed. These financial statements include specific charges from May Company based upon utilization and are representative of May Company's actual cost. These charges were $1.1 million and $4.2 million in fiscal years 14 (Mel Sadowsky Selling Star Store Manager Parade of Shoes Division) "Participating in the Payless Stock Purchase Plan makes me feel more like an owner of the company. I treat the business [PHOTO] as if it were my own. My team and I directly impact the company's success by working every day to satisfy our customers' footwear needs." 1996 and 1995, respectively. These costs could have been different had Payless operated as an independent public company during these periods. Quarterly Results (Unaudited) Quarterly results of operations are determined in accordance with annual accounting policies. They include certain items based upon estimates for the entire year. Summarized quarterly results for the last two years are as follows:
(dollars in millions, except per share data) 1997 - ------------------------------------------------------------------------------------------------- Quarter First Second Third Fourth Year - ------------------------------------------------------------------------------------------------- Net retail sales $645.1 $716.7 $635.7 $569.5 $2,566.9 Cost of sales 447.9 497.3 443.4 408.2 1,796.8 Net earnings $ 32.4 $ 45.6 $ 33.5 $ 17.4 $ 128.9 - ------------------------------------------------------------------------------------------------- Basic earnings per share(1) $ .81 $ 1.17 $ .89 $ .47 $ 3.35 - ------------------------------------------------------------------------------------------------- Diluted earnings per share(1) $ .81 $ 1.15 $ .88 $ .46 $ 3.31 - ------------------------------------------------------------------------------------------------- (dollars in millions, except per share data) 1996 - ------------------------------------------------------------------------------------------------- Quarter First Second Third Fourth Year - ------------------------------------------------------------------------------------------------- Net retail sales $601.4 $632.5 $576.8 $523.0 $2,333.7 Cost of sales 427.2 443.0 408.0 382.7 1,660.9 Net earnings $ 24.2 $ 38.9 $ 29.4 $ 15.1 $ 107.7 - ------------------------------------------------------------------------------------------------- Basic earnings per share $ .60 $ .96 $ .74 $ .38 $ 2.68 - ------------------------------------------------------------------------------------------------- Diluted earnings per share $ .60 $ .96 $ .73 $ .38 $ 2.67 - -------------------------------------------------------------------------------------------------
(1) Earnings per share were computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding. 15 Acquisition In March 1997 Payless purchased inventory, property and trademarks, and assumed leases on 186 stores of the Parade of Shoes division from J. Baker, Inc. The purchase price was approximately $28 million in cash, funded from operating cash flow. Payless operates Parade of Shoes as a separate division supported by existing Payless sourcing, distribution, information systems, real estate and financial organizations. As of January 31, 1998, Payless operated 175 Parade of Shoes stores in 14 states. The Parade of Shoes acquisition has been accounted for as a purchase, and accordingly, the operating results of the acquired stores have been included in the Company's consolidated results since the acquisition date. The Parade of Shoes acquisition did not have a material effect on the results of operations or financial position of Payless in 1997. Special and Nonrecurring Items During the 1995 fourth quarter, in connection with the spin-off from May Company, Payless committed to close or relocate underperforming stores and implemented a plan to reduce central office overhead by means of a personnel reduction program. A pretax special and nonrecurring charge of $71.8 million was recorded in 1995 for these initiatives. The original $71.8 million charge was sufficient for management to execute and complete the plans to close or relocate underperforming stores and restructure the central office during 1995, 1996 and 1997. No additional charges for these initiatives were recorded in 1996 or 1997. As of January 31, 1998, the entire special and nonrecurring charge of $71.8 million had been utilized. The special and nonrecurring reserve is included in Accrued Expenses and consists of the following:
Original Feb. 3, Feb.1, Jan 31, (dollars in millions) Reserve 1996 1997 1998 - -------------------------------------------------------------------------------------- Write-off of property and equipment $29.9 $27.9 $ 6.6 $ 0 Store closing costs 38.2 38.2 16.4 0 Employee severance costs 3.7 2.3 0 0 - -------------------------------------------------------------------------------------- Total $71.8 $68.4 $23.0 $ 0 - --------------------------------------------------------------------------------------
Also in connection with the spin-off from May Company, Payless initiated the Payless ShoeSource, Inc. Spin-off Stock Plan and the Payless ShoeSource, Inc. Spin-off Cash Plan as retention programs. Under these retention programs, Payless committed to pay out 408,558 shares of restricted stock and cash payments ranging from 10.0 percent to 37.5 percent of certain associates' base salaries. These retention incentives are contingent upon continued employment for up to two years after May 4, 1996. The costs related to these incentives are expensed as earned during the retention period. The amount of 16 expense for retention incentives recorded as special and nonrecurring items was $4.7 million and $12.5 million in 1997 and 1996, respectively. The estimate of retention incentive expense for 1998 is $0.8 million. Profit Sharing Plan As of April 1, 1996, Payless associates began to participate in the Payless ShoeSource, Inc. Profit Sharing Plan (Payless Profit Sharing Plan). Substantially all of the associates' balances in The May Department Stores Company Profit Sharing Plan (May Profit Sharing Plan), including amounts invested in May Company common stock, were transferred to the Payless Profit Sharing Plan. Contributions to the Payless Profit Sharing Plan are related to the Company's performance each year. At the Board of Directors discretion each year, Payless expects to contribute 2.5 percent of its pretax earnings to the Payless Profit Sharing Plan. Associates may voluntarily contribute to the Payless Profit Sharing Plan on both a before-tax and after-tax basis. Total profit sharing expenses were $5.5 million and $4.6 million in 1997 and 1996, respectively. Payless profit sharing expenses under the May Profit Sharing Plan were $1.8 million in 1995. Retirement Plan Payless does not have a tax-qualified retirement plan. Before the spin-off, The May Department Stores Company Retirement Plan (May Retirement Plan) expenses were charged to Payless by May Company based upon the actuarially determined portion of Payless service costs. May Company charged Payless $3.6 million in 1995. Payless associates who were covered by the May Retirement Plan prior to the spin-off date will continue to vest in the benefits earned under that plan. Benefits accrued through the spin-off date have been "frozen" and will be paid out in the future. Payless has a supplementary retirement plan generally covering associates who, at one time, had compensation in a calendar year equal to at least twice the amount of "wages" then subject to the payment of old age, survivor and disability insurance taxes. The supplementary retirement plan is unfunded. The accumulated benefit obligation, included in other liabilities, was $3.5 million and $2.5 million at January 31, 1998, and February 1, 1997, respectively. Income Taxes The provision for income taxes for the last three years consisted of the following:
(dollars in millions) 1997 1996 1995 - ----------------------------------------------------------- Current provision: Federal $73.3 $49.2 $ 50.7 State and local 21.0 11.4 11.0 - ----------------------------------------------------------- Taxes currently payable 94.3 60.6 61.7 - ----------------------------------------------------------- Deferred provision (benefit): Federal (7.3) 8.7 (22.0) State and local (1.6) 2.1 (4.8) - ----------------------------------------------------------- Deferred taxes (8.9) 10.8 (26.8) - ----------------------------------------------------------- Total provision $85.4 $71.4 $ 34.9 - -----------------------------------------------------------
The reconciliation between the statutory federal income tax rate and the effective income tax rate for the last three years was as follows:
1997 1996 1995 - -------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 7.5 7.5 7.0 Federal tax benefit of state and local income taxes (2.6) (2.6) (2.5) Other, net (0.0) (0.0) (0.2) - -------------------------------------------------------------- Effective income tax rate 39.9% 39.9% 39.3% - --------------------------------------------------------------
17 Major components of deferred income tax assets and (liabilities) were as follows:
Jan. 31, Feb. 1, (dollars in millions) 1998 1997 - ------------------------------------------------------------------ Accrued expenses and reserves $38.8 $38.2 Depreciation/amortization and basis differences (2.2) (8.8) Other deferred income taxes, net 0.2 (1.5) - ------------------------------------------------------------------ Net deferred income taxes 36.8 27.9 Net current deferred income taxes 16.9 16.6 - ------------------------------------------------------------------ Noncurrent deferred income taxes $19.9 $11.3 - ------------------------------------------------------------------
[PHOTO] (Magdalena Lagman Selling Star Store Manager Northwest Division) "Customers appreciate our wide selection, great service and low prices. Many shop the malls for the latest styles, then come to Payless for a similar shoe at a much lower price. They even come to me for fashion tips and help with selecting the right shoes to go with a new outfit." 18 Accrued Expenses Components of accrued expenses included:
Jan. 31, Feb. 1, (dollars in millions) 1998 1997 - ------------------------------------------------------------ Profit sharing, bonus and retention $ 24.1 $ 19.9 Store closings and real estate related 19.8 0.9 Construction costs 16.9 14.1 Taxes other than income 14.7 14.2 Insurance costs 10.9 10.1 Rent expense 6.8 5.8 Salaries, wages and employee benefits 4.3 2.8 Special and nonrecurring items -- 23.0 Other 15.4 7.6 - ----------------------------------------------------------- Total $ 112.9 $ 98.4 - -----------------------------------------------------------
Other Liabilities Major components of other liabilities included:
Jan. 31, Feb. 1, (dollars in millions) 1998 1997 - --------------------------------------------------------- Escalating rents $24.2 $24.2 Insurance costs 20.2 20.5 Other 7.6 3.3 - -------------------------------------------------------- Total $52.0 $48.0 - --------------------------------------------------------
Lines of Credit Payless has in place a $200 million unsecured revolving credit facility with a bank syndication group. At January 31, 1998, there were no amounts outstanding. 19 Lease Obligations Payless leases substantially all of its stores. Rental expense for the Payless operating leases consisted of:
(dollars in millions) 1997 1996 1995 - --------------------------------------------------------------- Minimum rentals $227.1 $217.8 $221.3 Contingent rentals based on sales 3.3 2.7 3.0 - ------------------------------------------------------------- Real property rentals 230.4 220.5 224.3 Equipment rentals 0.8 0.8 0.7 - ------------------------------------------------------------- Total $231.2 $221.3 $225.0 - -------------------------------------------------------------
Certain Payless lease agreements include escalating rents over the lease terms. Cumulative expense recognized on the straight-line basis in excess of cumulative payments was $27.8 million, and is included in accrued expenses and other liabilities. Future minimum lease payments at January 31, 1998, are as follows:
Capital Operating (dollars in millions) Leases Leases Total - -------------------------------------------------------------------- 1998 $ 2.2 $ 213.8 $ 216.0 1999 2.2 194.1 196.3 2000 1.3 169.9 171.2 2001 1.3 142.6 143.9 2002 1.3 112.1 113.4 After 2002 3.2 217.7 220.9 - -------------------------------------------------------------------- Minimum lease payments $11.5 $1,050.2 $1,061.7 - -------------------------------------------------------------------- Less imputed interest component 3.6 - ----------------------------------------------- Present value of net minimum lease payments of which $1.4 million is included in current liabilities $ 7.9 - -----------------------------------------------
At January 31, 1998, the present value of operating leases was $832.5 million. Common Stock Repurchase Program In January 1997 the Payless Board of Directors authorized the repurchase of up to $150 million of outstanding Payless common stock in open-market transactions. In September 1997 Payless completed the $150 million repurchase (having purchased approximately 2.8 million shares). Stock Compensation Plans Under the Payless 1996 Stock Incentive Plan (Stock Incentive Plan), officers and key employees may be granted stock options and other stock-based awards. A total of 5,200,000 shares of Payless common stock has been authorized to be issued under the Stock Incentive Plan. As of January 31, 1998, options for 2,163,963 shares were outstanding under the Stock Incentive Plan, including options for 169,889 shares, which represent options that had previously been issued to Payless employees under The May Department Stores Stock Incentive Plan and were converted to options under the Stock Incentive Plan at the rate of 1.25 Payless options for every one May Company option. The Payless options converted from May Company options and some of the options granted to senior officers of Payless have an exercise price equal to the average of the high and low trading prices of Payless stock for each of the first 30 days on which the stock was traded. All other options have an exercise price equal to the average of the high and low trading prices of the stock on the date the option is granted. Options converted from May Company become exercisable in installments 20 of 50 percent per year on each of the first two anniversaries of the grant date. The 1996 stock option grant becomes exercisable in installments of 25 percent per year on each of the first through the fourth anniversaries of the grant date. The 1997 stock option grant will vest 100 percent on May 14, 2003, although vesting will be accelerated if specific price targets for Payless common stock are met. In January 1998 the first of those specific targets was achieved, resulting in 50 percent of the stock options granted in fiscal 1997 becoming vested. All options have a term of 10 years. A summary of the status of the various stock option plans at the end of 1997 and 1996, and the changes within years are presented below:
1997 ------------------------- Weighted Range of Average Exercise Exercise (shares in thousands) Shares Prices Price - ------------------------------------------------------- Outstanding beginning of year 499 $27-38 $28 Granted 1,751 45-59 46 Exercised 38 27-46 30 Forfeited or expired 48 27-46 42 - ------------------------------------------------------- Outstanding at end of year 2,164 $27-59 $39 - ------------------------------------------------------- Exercisable at end of year 986 $27-59 $44 Shares available for additional grants 3,036 Fair value of options granted $ 24 - -------------------------------------------------------
1996 ------------------------------ Weighted Range of Average Exercise Exercise (shares in thousands) Shares Prices Price - ------------------------------------------------------------ Outstanding beginning of year -- $ -- $ -- Granted 513 27-38 28 Exercised -- -- -- Forfeited or expired 14 27-29 28 - ------------------------------------------------------------ Outstanding at end of year 499 $ 27-38 $ 28 - ------------------------------------------------------------ Exercisable at end of year 0 -- -- Shares available for additional grants 2,301 Fair value of options granted $ 16 - ------------------------------------------------------------
The following table summarizes information about stock options outstanding at January 31, 1998:
(shares in thousands) - -------------------------------------------------------------------------------- Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- Average Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Life - -------------------------------------------------------------------------------- $27-29 457 8 years $28 135 8 years 45-59 1,707 9 years 46 851 9 years - --------------------------------------------------------------------------------
Payless is authorized to grant a maximum of 1,125,000 shares of restricted stock to management associates. Restrictions, including performance restrictions, lapse over periods of up to four years, as determined on the date of grant. In 1997 and 1996, Payless granted 211,235 and 408,558 shares of restricted stock. Compensation expense is recognized over the restricted period, and was $4.7 million and $8.9 million for 1997 and 1996, respectively. Payless plans are accounted for by applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for stock-based compensation plans other than for restricted stock and performance-based awards. Had compensation cost for the Payless stock options been determined under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, net earnings and earnings per share for Payless would have been as follows:
(dollars in millions, except per share data) 1997 1996 - -------------------------------------------------------------------- Net earnings: As reported $128.9 $107.7 Pro forma $110.8 $105.6 Basic earnings per share: As reported $ 3.35 $ 2.68 Pro forma $ 2.88 $ 2.63 Diluted earnings per share: As reported $ 3.31 $ 2.67 Pro forma $ 2.84 $ 2.62 - --------------------------------------------------------------------
The option expense is estimated on the date of grant using the Black-Scholes option-pricing model. The respective 1997 and 1996 Black-Scholes assumptions include an expected dividend yield of zero, volatility of 30 percent, risk-free interest rate of 6.66 percent and 6.47 percent and an expected life of 10 years. Shareowner Rights Plan Payless has a shareowner rights plan under which one right is attached to each share of Payless common stock. The rights become exercisable only under certain circumstances involving actual or potential acquisitions of Payless common stock by a person or persons affiliated with such persons. Depending on the circumstances, if the rights become exercisable, the holder may be entitled to purchase units of Payless preference stock, shares of Payless common stock or shares of the common stock of the acquiring person. The rights will remain in existence until April 30, 2006, unless they are terminated, extended, exercised or redeemed. 21 1997 Annual Report Report of Independent Public Accountants To the Board of Directors and Shareowners of Payless ShoeSource, Inc.: We have audited the accompanying consolidated balance sheet of Payless ShoeSource, Inc. (a Missouri corporation) and subsidiaries as of January 31, 1998, and February 1, 1997, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Payless ShoeSource, Inc. and subsidiaries as of January 31, 1998, and February 1, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ------------------------- Arthur Andersen LLP St. Louis, Missouri February 20, 1998 [PHOTO] (Anne Marie Bradt Selling Star Store Manager Northeast Division) "Reducing unnecessary work from the stores gives us more time to serve customers better. New communication tools have helped me train my staff more effectively and recognize jobs well done. The recognition enhances associate morale so they are more responsive to customer needs and expectations." 22 Summary of Selected Historical Financial Information (dollars in millions, except per share data) The following table presents selected historical financial information on Payless. The information presented below reflects periods during which Payless did not operate as an independent public company, and, accordingly, certain assumptions were made in preparing this financial information. Therefore, this information may not necessarily reflect the consolidated results of operations or financial position that would have existed if Payless had been an independent public company during the periods shown or the future performance of Payless as an independent public company. The financial information below should be read in conjunction with the consolidated financial statements and the notes in this annual report.
FISCAL YEAR * 1997 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- Statement of Earnings Data: Net retail sales $2,566.9 $2,333.7 $2,330.3 $2,116.4 $1,966.5 $1,787.8 Cost of sales(1) 1,796.8 1,660.9 1,693.4 1,492.3 1,367.6 1,225.9 Selling, general and administrative expenses(1) 560.0 487.3 475.2 405.9 377.2 349.6 Interest (income) expense, net (8.9) (6.2) 1.0 1.1 0.9 0.8 Special and nonrecurring items 4.7(2) 12.6(2) 71.8(3) -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Total cost of sales and expenses 2,352.6 2,154.6 2,241.4 1,899.3 1,745.7 1,576.3 - --------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 214.3 179.1 88.9 217.1 220.8 211.5 Provision for income taxes 85.4 71.4 34.9 85.6 88.0 80.4 - --------------------------------------------------------------------------------------------------------------------------- Net earnings $ 128.9 $ 107.7 $ 54.0(3) $ 131.5 $ 132.8 $ 131.1 - --------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Working capital $ 384.8 $ 392.2 $ 232.0 $ 242.8 $ 253.5 $ 206.1 Property and equipment, net 486.7 502.5 560.0 590.6 433.9 383.9 Total assets 1,073.0 1,091.8 1,014.3 1,019.8 840.8 732.7 Total capital lease obligations 7.9 9.5 11.5 13.1 14.5 16.1 Total equity(4) 836.4 853.0 752.9 793.9 661.0 571.1 - --------------------------------------------------------------------------------------------------------------------------- Other Financial Data: Capital expenditures $ 85.4 $ 73.4 $ 95.4 $ 255.2 $ 139.8 $ 119.3 Present value of operating leases 832.5 817.9 885.5 952.1 779.9 688.1 Earnings before interest, income taxes, depreciation and amortization(5) 300.5 272.1 185.2 295.2 288.7 245.2 Net retail sales growth 10.0% 1.4%(6) 10.1% 7.6% 10.0% 15.5% Same-store sales growth 5.6% 3.6% (3.7)% (0.2)% 1.7% 2.8% Number of stores (at year-end) 4,431(7) 4,236 4,549 4,435 3,779 3,570 - ---------------------------------------------------------------------------------------------------------------------------
*The Payless fiscal year ends on the Saturday closest to January 31. Fiscal year 1995 included 53 weeks. (1) Certain expenses related to asset disposals have been reclassified from selling, general and administrative expense to cost of sales. (2) Payless incurred executive retention costs associated with the spin-off that established Payless as an independent public company. (3) During the 1995 fourth quarter, in connection with the spin-off, Payless committed to close or relocate underperforming stores. In addition, Payless committed to restructure its central office and other personnel. The 1995 net earnings, excluding special and nonrecurring items, is $97.5 million. (4) Prior to 1996, total equity was the total May Company equity investment. (5) EBITDA should not be considered in isolation or as a substitute for measures of performance or cash generation prepared in accordance with generally accepted accounting principles. See the consolidated financial statements and the accompanying notes. (6) Growth percentage based on a 52-week comparison. (7) Includes both Payless ShoeSource and Parade of Shoes stores. 23 1997 Annual Report Management's Responsibility Report of Management Management is responsible for the preparation, integrity and objectivity of the financial information included in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. Although the financial statements reflect all available information and management's judgment and estimates of current conditions and circumstances, and are prepared with the assistance of specialists within and outside Payless, actual results could differ from those estimates. Management has established and maintains a system of accounting and controls to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, that the accounting records provide a reliable basis for the preparation of financial statements, and that such financial statements are not misstated due to material fraud or error. The system of controls includes the careful selection of associates, the proper segregation of duties and the communication and application of formal policies and procedures that are consistent with high standards of accounting and administrative practices. An important element of this system is a comprehensive internal audit program. Management continually reviews, modifies and improves its systems of accounting and controls in response to changes in business conditions and operations and in response to recommendations in the reports prepared by the independent public accountants and internal auditors. Management believes that it is essential for Payless to conduct its business affairs in accordance with the highest ethical standards and in conformity with the law. This standard is described in the company's policies on business conduct, which are publicized throughout Payless. Audit and Finance Committee of the Board of Directors The Board of Directors, through the activities of its Audit and Finance Committee, participates in the reporting of financial information by Payless. The committee meets regularly with management, the internal auditors and the independent public accountants. The committee reviewed the scope, timing and fees for the annual audit and the results of the audit examinations completed by the internal auditors and independent public accountants, including the recommendations to improve certain internal controls and the follow-up reports prepared by management. The independent public accountants and internal auditors have free access to the committee and the Board of Directors and attend each committee meeting. The members of the Audit and Finance Committee are Howard R. Fricke, Thomas A. Hays, Mylle B. Mangum, Michael E. Murphy and Robert L. Stark. The Audit and Finance Committee reports the results of its activities to the full Board of Directors. Forward-looking Statements This report contains, and from time to time Payless may publish, forward-looking statements about Payless that are subject to risks and uncertainties. Forward-looking statements include information concerning matters as anticipated financial performance, business prospects, technological developments, new products, future store openings, possible strategic alternatives and similar matters. Also, statements including the words "expects," "anticipates," "intends," "plans," "believes," "seeks," or variations of such words and similar expressions are forward-looking statements. Payless notes that a variety of known and unknown risks, uncertainties and other factors could cause its actual results and experience to differ materially from the anticipated results or other expectations set forth in or contemplated by such forward-looking statements. The risks, uncertainties and other factors that may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: changes in consumer spending patterns; changes in consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; the financial condition of suppliers and manufacturers from whom Payless sources its merchandise; changes in existing or potential duties, tariffs or quotas; changes in relationships between the United States and foreign countries, economic and political instability in foreign countries or restrictive actions by the governments of foreign countries in which suppliers and manufacturers from whom Payless sources are located; changes in trade and foreign tax laws; fluctuations in currency exchange rates; availability of suitable store locations and appropriate terms; the ability to hire and train associates; and general economic, business and social conditions. EX-21.1 9 EX-21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT The corporations listed below are subsidiaries of Registrant, and all are included in the consolidated financial statements of Registrant as subsidiaries (unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary): Jurisdiction in which Name organized ---- ------------ Payless ShoeSource Distribution, Inc. Kansas Payless ShoeSource Merchandising, Inc. Kansas Payless ShoeSource Worldwide, Inc. Kansas EX-23.1 10 EX-23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (No. 333-02559, 333-25877,333-28483 and 333-30371). ARTHUR ANDERSEN LLP St. Louis, Missouri, April 20, 1998 EX-24.1 11 EX-24.1 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Steven J. Douglass ------------------------------------ Steven J. Douglass 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Mylle B. Mangum ------------------------------------ Mylle B. Mangum 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Robert L. Stark ------------------------------------ Robert L. Stark 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Michael E. Murphy ------------------------------------ Michael E. Murphy 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Richard A. Jolosky ------------------------------------ Richard A. Jolosky 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Howard R. Fricke ------------------------------------ Howard R. Fricke 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Daniel Boggan Jr. ------------------------------------ Daniel Boggan Jr. 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 24 day of March, 1998. /s/ Thomas A. Hays ------------------------------------ Mr. Thomas A. Hays 9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven J. Douglass, Ullrich E. Porzig, and William J. Rainey, and each or any one of them acting alone, as his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises to perfect and complete such filing(s), as fully to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Dated this 19th day of March, 1998. /s/ Daniel Boggan Jr. ------------------------------------ Mr. Daniel Boggan Jr. EX-27.1 12 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PAYLESS SHOESOURCE, INC. CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 52 WEEKS ENDED JANUARY 31, 1998, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001008802 PAYLESS SHOESOURCE, INC. 1,000 YEAR JAN-31-1998 FEB-01-1997 JAN-31-1998 210,000 0 4,900 0 324,600 562,900 850,800 364,100 1,073,000 178,100 6,500 0 0 400 836,000 1,073,000 2,566,900 2,566,900 1,796,800 1,796,800 0 0 (8,900) 214,300 85,400 128,900 0 0 0 128,900 3.35 3.31 Includes cash equivalent securities. Any "securities" are shown under "Cash". Receivables are net after deduction of allowances. Consists of Capital Lease Obligations. Reflects Retained Earnings and Additional Paid in Capital. Reflects net sales. Expressed in dollars.
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