-----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, In68H/jEbV5wS5EksNc3E46UeZu2NAAROGbgicdJjWVgTcneV4q16z8rAQPDu/GX N1wErg+MgVDD1tfwAimtrA== 0000950124-00-002397.txt : 20000424 0000950124-00-002397.hdr.sgml : 20000424 ACCESSION NUMBER: 0000950124-00-002397 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000421 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS SHOESOURCE INC /DE/ CENTRAL INDEX KEY: 0001060232 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 431813160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14770 FILM NUMBER: 606673 BUSINESS ADDRESS: STREET 1: 3231 SOUTH EAST SIXTH STREET CITY: TOPEKA STATE: KS ZIP: 66607-2207 BUSINESS PHONE: 9132335171 MAIL ADDRESS: STREET 1: 3231 S E 6TH ST CITY: TOPEKA STATE: KS ZIP: 66607-2207 FORMER COMPANY: FORMER CONFORMED NAME: PAYLESS SHOESOURCE HOLDINGS INC DATE OF NAME CHANGE: 19980421 10-K405 1 ANNUAL REPORT ENDED 1/29/00 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 29, 2000 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 1-14770 PAYLESS SHOESOURCE, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1813160 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3231 SOUTH EAST SIXTH AVENUE, 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Registrant's Common Stock held by non-affiliates based on the closing price of $1,322,131,836 on April 19, 2000, was $58.1875. The Registrant had 22,261,422 shares of $.01 par value Common Stock issued and outstanding as of April 19, 2000. 2 DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Annual Report to Shareowners for the fiscal year ended January 29, 2000, (the "1999 Annual Report") are incorporated into Part II, as described herein. 2. Portions of the Registrant's 2000 Proxy Statement for the Annual Meeting to be held on May 26, 2000, 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 the 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. The 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; successful implementation of new technologies; Year 2000 matters, 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 on acceptable terms; the ability to hire, train and retain associates; and general economic, business and social conditions. 2 3 Payless ShoeSource, Inc. Form 10-K Annual Report For the fiscal year ended January 29, 2000 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 7A. Quantitative and Qualitative Disclosures about Market Risk 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., a Delaware corporation, together with its subsidiaries, ("Payless," the "Company" or the "Registrant") is the largest family footwear retailer in the United States with more than $2.7 billion in sales in the fiscal year ended January 29, 2000 ("1999"). The Company sold approximately 215 million pairs of shoes in 1999 and served approximately 160 million customers. As of January 29, 2000, the Company operated 4,492 Payless ShoeSource(R) stores in 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, Saipan, and Canada. Payless ShoeSource(R) stores feature fashionable, quality footwear for men, women and children, including athletic, casual, dress, sandals, work boots and slippers. In addition, the Company operated 220 Parade stores in 16 states. Parade offers fashionable women's footwear and accessories at moderate prices. DEVELOPMENTS ALLIANCE WITH SHOPKO STORES, INC. In July, Payless entered into a strategic alliance with ShopKo Stores, Inc. The new "store within a store" concept was implemented in 13 ShopKo Stores in the fourth quarter. The Company expects to operate the shoe departments in all 160-plus ShopKo stores by mid-year 2000. These shoe departments offer the same footwear and accessories available in Payless ShoeSource(R) stores. The ShopKo(R) alliance is the first step in a strategy to exploit opportunities to extend the Payless presence in new retail formats. E-COMMERCE In the second quarter, the Company launched its exciting E-Commerce venture: Payless.comsm. This new platform allows the Company to extend its brand recognition through the Internet and provide customers with another convenient way to shop with Payless. Payless.com's unique arrangement gives customers the 24-hour shopping convenience plus speedy delivery to their homes or free delivery to their nearby Payless ShoeSource(R) store. In September, Payless.comsm became an anchor tenant in America Online's new SHOP@AOL Marketplace. This attracts more customers to the convenience of Payless.comsm and further extends the brand. SHARE REPURCHASES 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 repurchased approximately 2.8 million shares). In September 1997, the Board of Directors of the Company authorized a second repurchase of up to $150 million of outstanding Common Stock in open-market transactions, subject to market conditions and receipt of a favorable ruling from the Internal Revenue Service (the "IRS"). The Company received the favorable IRS ruling in March 1998. In July 1998, the Company completed this $150 million repurchase (having purchased approximately 2.2 million shares). In August 1998, the Board of Directors of the Company authorized a third repurchase of up to $150 million of outstanding Common Stock of Payless in open-market transactions. In October 1998, the third $150 million repurchase was increased by the Board of Directors, on the same terms, to $500 million. Between August 1, 1998 and January 30, 1999 the Company repurchased 2.7 million shares and during the last fiscal year, the Company repurchased 2.9 million shares at a cost of approximately $142 million. The aggregate cost of the 5.7 million repurchased shares in the Company's third stock repurchase program was approximately $265 million. In March 2000, the Board of Directors increased the $500 million share authorization to $700 million. On April 10, 2000, the Company completed a modified Dutch auction self-tender for its common stock repurchasing 7,547,169 shares for approximately $400 million. The Company is required to return the shares repurchased to authorized but unissued status. STORES During 1999 the Company had a net increase of 135 Payless ShoeSource stores (269 openings and 134 closings) and 7 Parade stores (21 openings and 14 closings). Year-end 1999 store count was 4,492 Payless ShoeSource stores and 220 Parade stores. 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 ("May"). 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 May. In June 1998, Payless was reorganized into a holding company structure with the retail operations 4 5 centralized in Payless ShoeSource, Inc., a Missouri corporation, the indirect, wholly-owned subsidiary of Payless ShoeSource, Inc., a Delaware corporation. The Company is listed for trading on the New York Stock Exchange under the symbol "PSS." PAYLESS SHOESOURCE(R) STORES The average size of the Company's Payless ShoeSource(R) stores is approximately 3,300 square feet. Each store carries on average 8,200 pairs of shoes selected from approximately 500 styles offered. Payless ShoeSource(R) stores operate in a variety of real estate formats, including shopping malls, central business districts, free-standing buildings, strip centers and the new "store within a store." Of the 4,492 Payless ShoeSource(R) locations open at the end of 1999, 714 incorporated a "Payless Kids(R)" area which consists of approximately an additional 1,000 square feet of selling space devoted to an expanded assortment of children's shoes and three were exclusively "Payless Kids(R)" stores. The stores that include a "Payless Kids(R)" area and those that are dedicated "Payless Kids(R)" stores are located throughout the country, have wider aisles, children-friendly seating and an entertainment center for children. Payless(R) intends to phase out the remaining exclusively "Payless Kids(R)" stores. The Company's Payless ShoeSource(R) stores operate in rural, suburban and urban environments. The 10 states with the largest concentration of the Company's Payless ShoeSource(R) stores are identified below (along with the total number of Payless ShoeSource(R) stores): STATE NO. OF PAYLESS SHOESOURCE(R) STORES ----- ----------------------------------- CALIFORNIA 647 TEXAS 380 FLORIDA 275 NEW YORK 274 ILLINOIS 203 PENNSYLVANIA 193 OHIO 178 MICHIGAN 155 NEW JERSEY 128 MASSACHUSETTS 103 OTHER (INCLUDING NON-U.S. STORES) 1,956 ----- TOTAL 4,492 The Company's Payless ShoeSource(R) stores are highly automated, each with an electronic point of sale register (excluding the ShopKo locations) and a back office computer which not only records transactions from the register (not in ShopKo stores), 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(R) operations are directed centrally by a senior officer and a small support staff. The average Payless ShoeSource(R) 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. PARADE 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. As of January 29, 2000, the Company operated 220 Parade stores as a separate division supported by Payless sourcing, distribution, information systems, real estate, human resources and financial operations. 5 6 Major markets include New York City, Chicago, Boston, Philadelphia, Washington, D.C., Miami and Puerto Rico. The average size of a Parade store is approximately 2,400 square feet. These stores operate in a variety of real estate formats including shopping malls, central business districts and strip centers. EMPLOYEES During 1999, the Company's average number of employees was approximately 26,000, including approximately 14,500 full-time associates and 11,500 part-time associates. Approximately 675 of the Company's distribution center general warehouse associates are covered by collective bargaining agreements. Approximately 150 of the Company's other associates are covered by collective bargaining agreements. Management believes it has a good relationship with its employees. The Company is led by a team of 21 senior management executives who have an average of 18.1 years of retail industry experience, including an average of 12.5 years with the Company and May. PRODUCTS The Company's Payless ShoeSource(R) 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 1999, shoes sold at Payless ShoeSource(R) stores sold at an average retail price of $11.63/pair. In addition to shoes, Payless ShoeSource(R) stores offer accessories, including handbags, shoe polish and hosiery. Parade stores feature fashionable women's dress, casual and athletic footwear priced in the $20 to $40/pair range. The Company's merchandising effort is led by the President and three general merchandise managers with an average of 19 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 accessories to Payless ShoeSource(R) 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 44. The Company believes that more than 45% of its target customers purchased at least one pair of shoes from the Company last year. In 1999, the Company sold more pairs of shoes than any other U.S. footwear retailer. SEASONALITY The retail footwear market is characterized by four high volume seasons: Easter, early Summer, back-to-school and Winter holiday. 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, both on its own account and through its indirect, wholly-owned subsidiary, Payless ShoeSource Merchandising, Inc., utilizes a network of agents and factories in the United States and 10 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 84% of the Company's merchandise. 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 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 Kansas, Taiwan, China, Brazil and Vietnam. 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. Worldwide, approximately 58 percent of the Company's merchandise calculated on an at cost basis is acquired through a network of third-party agents. Payless ShoeSource International, Inc., the Company's indirect subsidiary in Taipei, Taiwan, arranges directly with factories for 6 7 the design, selection, production management, inspection and distribution of approximately 42 percent 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. Imports from China currently enjoy "normal trade relations" ("NTR") treatment under United States tariff laws. NTR treatment provides the most favorable level of United States import duty rates. China's NTR treatment is annually reviewed by the United States Government. Extension of this treatment is subject to uncertainty every year. The loss of NTR treatment for imports from 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 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. The Company, through its indirect, wholly-owned subsidiary, Payless ShoeSource Distribution, Inc., operates a single 795,000 square foot distribution center, including office space, in Topeka, Kansas (the "DC"). The DC is capable of replenishing in-store product levels by style, color and size. The DC currently handles approximately 70 percent of the Company's distribution needs and operates seven days-a-week. Management believes this facility is one of the most highly-automated and cost-efficient distribution facilities in the retail footwear industry. The remaining 30 percent of the Company's distribution needs are handled by a third party facility in Los Angeles, California. 7 8 The Company believes its distribution center system has sufficient capacity to support more than 5,000 stores. The Company regularly monitors the capacity of the DC. Stores generally receive new merchandise at least twice 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 segments. The high priced segment is comprised principally of department stores. The moderate priced segment, which includes specialty shoe chains, mass merchandisers, and junior department stores, has no single dominant competitor. The Company and national discount mass-merchandisers are predominant in the value-priced segment. Based on industry data, the United States footwear market is estimated to be $38 billion/year comprising more than 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 in recent years. The Company considers itself part of the value-priced segment of the footwear industry. In 1999, the Company's sales accounted for approximately 7.1 percent of the total dollar sales of the estimated $38 billion United States footwear market. COMPETITION The Company operates in a highly competitive retail market competing primarily with national and regional discount mass-merchandisers, as well as with other 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 believes that it has a leadership position in the footwear market. INTELLECTUAL PROPERTY The Company, through its wholly-owned subsidiaries, owns certain copyrights, trademarks, patents and domain names which it uses in its business and which it regards as valuable assets. The trademarks include Payless(R), Payless ShoeSource(R), Payless Kids(R), Parade(sm), and Parade of Shoes(R) and domain names including: Payless.com(sm). The Company owns all rights to the yellow and orange logo used in its Payless ShoeSource(R) signs and advertising. In the United States, the Company has registered over 200 key marks and owns over 50 common law marks under which it markets private label merchandise in its Payless ShoeSource(R) stores. In addition, the Company owns over 50 registered and common law marks under which it markets private label merchandise in its Parade stores. The Company also owns registrations for Payless ShoeSource(R) in over 50 foreign countries. 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, newspaper and mail 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 communicates through the promotional funds, media funds, merchants' associations and similar efforts that are part of the leasing agreements from its various landlords. Finally, the Company uses publicity efforts to gain low cost awareness of Payless and its core business. In addition to its marketing staff, the Company uses professional firms to assist in advertising, creative services, media purchase, publicity, business and market planning 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. 8 9 FOREIGN OPERATIONS In late 1997, the Company, through its indirect wholly-owned Canadian subsidiary, Payless ShoeSource Canada Inc., opened its first store in Canada. By the end of fiscal year 1999, the Company had opened 180 Canadian stores. In February of 1999, the Company opened its first store in French-speaking Quebec Province. DIRECTORS OF THE COMPANY Listed below are the names and present principal occupations or, if retired, most recent occupations of the Company's Directors: NAME PRINCIPAL OCCUPATION ---- -------------------- STEVEN J. DOUGLASS CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF THE COMPANY DANIEL BOGGAN JR. SENIOR VICE PRESIDENT OF THE NATIONAL COLLEGIATE ATHLETIC ASSOCIATION HOWARD R. FRICKE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF THE SECURITY BENEFIT GROUP OF COMPANIES THOMAS A. HAYS RETIRED, FORMERLY DEPUTY CHAIRMAN OF THE MAY DEPARTMENT STORES COMPANY KEN C. HICKS PRESIDENT OF THE COMPANY MYLLE B. MANGUM CHIEF EXECUTIVE OFFICER OF MMS INCENTIVES, LLC MICHAEL E. MURPHY RETIRED, FORMERLY VICE CHAIRMAN AND CHIEF ADMINISTRATIVE OFFICER OF SARA LEE CORPORATION 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 as of April 19, 2000 and offices held by them with the Company. NAME AGE POSITION AND TITLE ---- --- ------------------ STEVEN J. DOUGLASS 50 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER KEN C. HICKS 47 PRESIDENT DUANE L. CANTRELL 44 EXECUTIVE VICE PRESIDENT -- OPERATIONS JOHN N. HAUGH 37 SENIOR VICE PRESIDENT -- MARKETING JED L. NORDEN 49 SENIOR VICE PRESIDENT -- HUMAN RESOURCES ULLRICH E. PORZIG 54 SENIOR VICE PRESIDENT -- CHIEF FINANCIAL OFFICER AND TREASURER WILLIAM J. RAINEY 53 SENIOR VICE PRESIDENT -- GENERAL COUNSEL AND SECRETARY GARY M. STONE 51 SENIOR VICE PRESIDENT -- CORPORATE DEVELOPMENT STEVEN J. DOUGLASS has served as Chairman of the Board and Chief Executive Officer of Payless since May 4, 1996, the date on which Payless Common Stock was distributed in a spin-off by May to its shareowners (the "Spin-off"). Mr. Douglass was also Chairman and Chief Executive Officer of Payless from April 1995 to the Spin-off. He joined Payless 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 Payless, Mr. Douglass held several positions at divisions of May, 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 a director of The Security Benefit Group of Companies. Mr. Douglass has served as a Director of Payless since April 30, 1996. 9 10 KEN C. HICKS has served as President of the Company since January 28, 1999. Before joining Payless, he was Executive Vice President and General Merchandise Manager for Home Shopping Network, Inc. Prior to his association with Home Shopping Network, Inc., Mr. Hicks held several positions with May serving as: Senior Vice President and General Merchandise Manager of Foley's Department Stores (1995-1998), Senior Vice President and General Merchandise Manager for May Merchandising Company (1990-1995) and as Senior Vice President of Strategic Planning for May (1987-1990). Mr. Hicks has served as a Director of Payless since January 28, 1999. DUANE L. CANTRELL has served as Executive Vice President -- Operations since April 1997 and as Senior Vice President -- Retail Operations from May 1995 to April 1997. He was 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. JOHN N. HAUGH has served as Senior Vice President -- Marketing since January 2000. He served as Executive Vice President of Marketing and Sales for Universal Studios (1998-1999) and prior to that he worked for Carlson Companies (1993-1998). JED L. NORDEN has served as Senior Vice President -- Human Resources since July 1985. He served as Vice President-Executive Development of May (1984-1985). Prior to joining May, Mr. Norden held various management positions with Ingersoll-Rand, most recently serving as General Manager-Personnel and Facilities (1982-1984). ULLRICH E. PORZIG has served as Senior Vice President -- Chief Financial Officer and Treasurer since April 1998. He served as Senior Vice President and Chief Financial Officer from February 1996 to April 1998 and from 1986 to 1988. 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 May in various capacities including 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). GARY M. STONE has served as Senior Vice President -- Corporate Development since October 1999 and served as Senior Vice President -- Store Development from February 1997 to October 1999. Prior to joining the Company, Mr. Stone was employed by PepsiCo, Inc. as Senior Vice President and General Manager -- Restaurant Services (1995-1997) and Vice President, Asset Development -- Pizza Hut (1990-1995). ITEM 2. PROPERTIES The Company leases substantially all of its stores. The leases typically have a primary term of 5 or 10 years, with none to two five-year renewal options. During 2000, approximately 815 of the Company's leases, including 177 leases which, as of January 29, 2000, were 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 store's sales volume. Payless ShoeSource stores average approximately 3,300 square feet and Parade stores average approximately 2,400 square feet. The Company owns and operates, directly or through its wholly-owned subsidiaries, a 305,000 square foot central office building and a 795,000 square foot distribution facility, including office space, both of which are located in Topeka, Kansas. ITEM 3. LEGAL PROCEEDINGS On September 16, 1999, a lawsuit entitled Martins, Johns and Mason vs. Payless ShoeSource, Inc. was filed in the Superior Court of the State of California for the County of Orange. The plaintiffs, all former managers of Payless ShoeSource stores in California, allege that the Company violated California wage and labor laws by not paying them overtime wages for time worked over 40 hours in a week. The plaintiffs further allege that the case should be certified as a class action and seek overtime wages for all current or former store managers for Payless ShoeSource stores in California during the four years prior to September 1999 through the date a judgment may be rendered. Although the lawsuit's outcome and the amount of any liability that could arise with respect to this lawsuit cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material adverse financial effect on the Company. The Company and its subsidiaries are also parties to ordinary private litigation incidental to their business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 11 There were no matters submitted to a vote of security holders during the 13 weeks ended January 29, 2000. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS There were approximately 18,514 registered holders of the Company's Common Stock as of January 29, 2000 compared to approximately 19,931 registered holders as of January 30, 1999. The information set forth under the headings "Management's Discussion and Analysis -- Common Stock and Market Prices" and "Shareowner Information -- Common Stock" in the Company's 1999 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the heading "Summary of Selected Historical Financial Information" of the Company's 1999 Annual Report is incorporated herein by reference. 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 1999 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Statement of Earnings for the fiscal years 1997, 1998 and 1999, the Consolidated Balance Sheet as of January 29, 2000 and January 30, 1999, the Consolidated Statement of Shareowners' Equity, the Consolidated Statement of Cash Flows for fiscal years 1997, 1998, 1999, the Notes to Consolidated Financial Statements and the Report of Independent Public Accountants contained in the Company's 1999 Annual Report to Shareowners are incorporated herein by reference. 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 26, 2000, under the captions "Election of Directors -- Directors and Nominees for Directors" and "Additional Information -- Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. 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 26, 2000, under the captions "Election of Directors -- The Board and Committees of the Board -- Compensation of Directors," "Compensation and Nominating Committee Report -- EICP" and "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 11 12 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 26, 2000, under the caption "Beneficial Stock Ownership of Directors, Nominees, Executive Officers and Persons Owning More Than Five Percent of Common Stock " is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 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 1999 Annual Report to Shareowners: PAGE IN ANNUAL REPORT Financial Statements: Consolidated Statement of Earnings for the three fiscal years ended January 29, 2000 18 Consolidated Balance Sheet -- January 29, 2000 and January 30, 1999 19 Consolidated Statement of Shareowners' Equity for the three fiscal years ended January 29, 2000 20 Consolidated Statement of Cash Flows for the three fiscal years ended January 29, 2000 21 Notes to Consolidated Financial Statements 22-26 Report of Independent Public 27 Accountants 12 13 2) EXHIBITS. NUMBER DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1) 3.2 Amended and Restated Bylaws of the Registrant.(2) 4 Stockholder Protection Rights Agreement, dated as of April 20, 1998, between the Registrant and UMB Bank, N.A.(1) 10.1 Tax Sharing Agreement, dated April 2, 1996, between The May Department Stores Company and the Registrant.(3) 10.2 Sublease, dated as of April 2, 1996, between The May Department Stores Company and the Registrant.(4) 10.3 Credit and Guaranty Agreement dated as of April 17, 2000 among Payless ShoeSource Finance, Inc., as Borrower, Payless ShoeSource, Inc. and Certain of its Subsidiaries, as Guarantors, various Lenders, Goldman Sachs Credit Partners L.P., as Sole Lead Arranger and Sole Syndication Agent, Bank One, NA, as Administrative Agent, and First Union National Bank, as Documentation Agent.* 10.4 Administrative Services Agreement, dated as of April 2, 1996, between The May Department Stores Company and the Registrant.(4) 10.5 Payless ShoeSource, Inc. 1996 Stock Incentive Plan, as amended March 16, 2000.* 10.6 Spin-Off Stock Plan, Payless ShoeSource, Inc.(4) 10.7 Spin-Off Cash Plan, Payless ShoeSource, Inc.(4) 10.8 Restricted Stock Plan for Non-Management Directors, as amended April 20, 1998, effective immediately prior to the effective time of the Merger (as defined therein).(1) 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, 2003, which contain agreements not to compete of 1-2 years beyond the expiration date of the respective Employment Agreements, and provide for annual base salaries at rates not less than the amounts presently paid to them.* 10.10 Payless ShoeSource, Inc. Supplementary Retirement Plan, as amended March 16, 2000.* 10.11 Payless ShoeSource, Inc, 401(k) Profit Sharing Plan, as amended and restated effective April 6, 2000.* 10.12 Payless ShoeSource, Inc. Deferred Compensation Plan, as amended March 16, 2000.* 10.13 Executive Incentive Compensation Plan of Registrant, as amended April 20, 1998.(1) 10.14 Form of Control Agreement. The Registrant has entered into Change of Control Agreements with the named executive officers in the form contained in this exhibit.* 10.15 Form of Directors' and Officers' Indemnity Agreement of Registrant.* 10.16 Payless ShoeSource, Inc. Deferred Compensation Plan for Non-Management Directors, as amended March 16, 2000.* 10.17 Executive Incentive Compensation Plan for Business Unit Management of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. (1) 13 14 10.18 The Stock Appreciation and Phantom Stock Unit Plan of Payless ShoeSource, Inc. and its Subsidiaries for Payless ShoeSource International Employees, as amended March 16, 2000.* 10.19 Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates, as amended March 16, 2000.* 10.20 Stock Ownership Plan of Registrant, as amended effective June 1, 1998.(1) 10.21 Assumption Agreement, dated as of May 22, 1998, between Registrant and Payless.(1) 10.22 Consulting Agreement between the Registrant and Richard A. Jolosky.(6) 10.23 Executive Incentive Compensation Plan for Annual Awards for Merchandising and Retail Operators Functions, effective May 28, 1999.(7) 11.1 Computation of Net Earnings Per Share.* 12.1 Computation of Ratio of Earnings to Fixed Charges.* 13.1 1999 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.* 27.1 Financial Data Schedule* * Filed herewith (1) Incorporated by reference from the Registrant's Form 8-K (File Number 1-14770) dated June 1, 1998. (2) Incorporated by reference from the Registrant's Form 10-K (File Number 1-14770) for the fiscal year ended January 30, 1999. (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 the correspondingly numbered Exhibit to Registrant's Registration Statement on Form 10 (File Number 1-11633) dated February 23, 1996 as amended through April 15, 1996. (5) Incorporated by reference from the Registrant's Form 10-K for fiscal year 1997 (File Number 1-11633). (6) Incorporated by reference from the Registrant's Form 10-Q (File Number 1-14770) for the quarter ended October 30, 1999. (7) Incorporated by reference from the Registrant's Form 10-Q (File Number 1-14770) for the quarter ended July 31, 1999. THE COMPANY WILL FURNISH TO SHAREOWNERS UPON REQUEST, AND WITHOUT CHARGE, A COPY OF THE 1999 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. (b) Reports on Form 8-K: 14 15 None. 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: April 21, 2000 By: /s/ Ullrich E. Porzig ------------------------- Ullrich E. Porzig Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Steven J. Douglass Date: April 21, 2000 - -------------------------- Steven J. Douglass Chairman, Chief Executive Officer and Director (Principal Executive Officer) By: /s/ Ullrich E. Porzig Date: April 21, 2000 - ------------------------- Ullrich E. Porzig Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By: /s/ Ken C. Hicks Date: April 21, 2000 - -------------------- Ken C. Hicks President and Director By: /s/ Daniel Boggan Jr. Date: April 21, 2000 - ------------------------- Daniel Boggan Jr. Director By: /s/ Howard R. Fricke Date: April 21, 2000 - ------------------------ Howard R. Fricke Director By: /s/ Thomas A. Hays Date: April 21, 2000 - ---------------------- Thomas A. Hays Director By: /s/ Mylle B. Mangum Date: April 21, 2000 - ----------------------- Mylle B. Mangum Director By: /s/ Michael E. Murphy Date: April 21, 2000 - ------------------------- Michael E. Murphy Director 15 16 Director By: /s/ Robert L. Stark Date: April 21, 2000 - ----------------------- Robert L. Stark Director 16 17 EXHIBIT INDEX EXHIBIT DESCRIPTION NUMBER 3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1) 3.2 Amended and Restated Bylaws of the Registrant.(2) 4 Stockholder Protection Rights Agreement, dated as of April 20, 1998, between the Registrant and UMB Bank, N.A.(1) 10.1 Tax Sharing Agreement, dated April 2, 1996, between The May Department Stores Company and the Registrant.(3) 10.2 Sublease, dated as of April 2, 1996, between The May Department Stores Company and the Registrant.(4) 10.3 Credit and Guaranty Agreement dated as of April 17, 2000 among Payless ShoeSource Finance, Inc., as Borrower, Payless ShoeSource, Inc. and Certain of its Subsidiaries, as Guarantors, various Lenders, Goldman Sachs Credit Partners L.P., as Sole Lead Arranger and Sole Syndication Agent, Bank One, NA, as Administrative Agent, and First Union National Bank, as Documentation Agent.* 10.4 Administrative Services Agreement, dated as of April 2, 1996, between The May Department Stores Company and the Registrant. (4) 10.5 Payless ShoeSource, Inc. 1996 Stock Incentive Plan, as amended March 16, 2000.* 10.6 Spin-Off Stock Plan, Payless ShoeSource, Inc.(4) 10.7 Spin-Off Cash Plan, Payless ShoeSource, Inc.(4) 10.8 Restricted Stock Plan for Non-Management Directors, as amended April 20, 1998, effectively immediately prior to the effective time of the Merger (as defined therein).(1) 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, 2003, which contain agreements not to compete of 1-2 years beyond the expiration date of the respective Employment Agreements, and which provide for annual base salaries at rates not less than the amounts presently paid to them.* 10.10 Payless ShoeSource, Inc. Supplementary Retirement Plan, as amended March 16, 2000.* 10.11 Payless ShoeSource, Inc. 401(k) Profit Sharing Plan, as amended March 16, 2000.* 10.12 Payless ShoeSource, Inc. Deferred Compensation Plan, as amended March 16, 2000.* 10.13 Executive Incentive Compensation Plan of Registrant, as amended April 20, 1998.(1) 10.14 Form of Control Agreement. The Registrant has entered into Change of Control Agreements with the named executive officers in the form contained in this exhibit.* 10.15 Form of Directors' and Officers' Indemnity Agreement of Registrant.* 10.16 Payless ShoeSource, Inc. Deferred Compensation Plan for Non-Management Directors, as amended March 16, 2000.* 10.17 Executive Incentive Compensation Plan for Business Unit Management of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. (1) 17 18 10.18 The Stock Appreciation and Phantom Stock Unit Plan of Payless ShoeSource, Inc. and its Subsidiaries for Payless ShoeSource International Employees, as amended March 16, 2000.* 10.19 Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates, as amended effective March 16, 2000.* 10.20 Stock Ownership Plan of Registrant, as amended effective June 1, 1998.(1) 10.21 Assumption Agreement, dated as of May 22, 1998, between Registrant and Payless.(1) 10.22 Consulting Agreement between the Registrant and Richard A. Jolosky.(6) 10.23 Executive Incentive Compensation Plan for Annual Awards for Merchandising and Retail Operators Functions, effective May 28, 1999.(7) 11.1 Computation of Net Earnings Per Share.* 12.1 Computation of Ratio of Earnings to Fixed Charges.* 13.1 1999 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.* 27.1 Financial Data Schedule* * Filed herewith (1) Incorporated by reference from the Registrant's Form 8-K (File Number 1-14770) dated June 1, 1998. (2) Incorporated by reference from the Registrant's Form 10-K (File Number 1-14770) for the fiscal year ended January 30, 1999. (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 the correspondingly numbered Exhibit to Registrant's Registration Statement on Form 10 (File Number 1-11633) dated February 23, 1996 as amended through April 15, 1996. (5) Incorporated by reference from the Registrant's Form 10-K for fiscal year 1997 (File Number 1-11633). (6) Incorporated by reference from the Registrant's Form 10-Q (File Number 1-14770) for the quarter ended October 30, 1999. (7) Incorporated by reference from the Registrant's Form 10-Q (File Number 1-14770) for the quarter ended July 31, 1999. 18 EX-10.3 2 CREDIT AND GUARANTY AGREEMENT DATED 4-17-00 1 Exhibit 10.3 CREDIT AND GUARANTY AGREEMENT DATED AS OF APRIL 17, 2000 AMONG PAYLESS SHOESOURCE FINANCE, INC., AS BORROWER, PAYLESS SHOESOURCE, INC. AND CERTAIN OF ITS SUBSIDIARIES, AS GUARANTORS, VARIOUS LENDERS, GOLDMAN SACHS CREDIT PARTNERS L.P., AS SOLE LEAD ARRANGER AND SOLE SYNDICATION AGENT, BANK ONE, NA, AS ADMINISTRATIVE AGENT, AND FIRST UNION NATIONAL BANK, AS DOCUMENTATION AGENT -------------------------------------------------------- $600,000,000 SENIOR SECURED CREDIT FACILITIES -------------------------------------------------------- 2 TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS AND INTERPRETATION........................................................................2 1.1. Definitions........................................................................................2 1.2. Accounting Terms..................................................................................31 1.3. Interpretation, etc...............................................................................31 SECTION 2. LOANS AND LETTERS OF CREDIT..........................................................................32 2.1. Term Loans........................................................................................32 2.2. Revolving Loans...................................................................................32 2.3. Swing Line Loans..................................................................................33 2.4. Issuance of Letters of Credit and Purchase of Participations Therein..............................36 2.5. Pro Rata Shares; Availability of Funds............................................................41 2.6. Use of Proceeds...................................................................................41 2.7. Evidence of Debt; Register; Lenders' Books and Records; Notes.....................................42 2.8. Interest on Loans.................................................................................43 2.9. Conversion/Continuation...........................................................................45 2.10. Default Interest..................................................................................45 2.11. Fees..............................................................................................46 2.12 Scheduled Payments/Commitment Reductions..........................................................47 2.13. Voluntary Prepayments/Commitment Reductions.......................................................48 2.14. Mandatory Prepayments/Commitment Reductions.......................................................50 2.15. Application of Prepayments/Reductions.............................................................51 2.16. General Provisions Regarding Payments.............................................................52 2.17. Ratable Sharing...................................................................................53 2.18. Making or Maintaining Eurodollar Rate Loans.......................................................54 2.19. Increased Costs; Capital Adequacy.................................................................55 2.20. Taxes; Withholding, etc...........................................................................57 2.21. Obligation to Mitigate............................................................................59 2.22. Defaulting Lenders................................................................................60 2.23. Removal or Replacement of a Lender................................................................60 SECTION 3. CONDITIONS PRECEDENT.................................................................................61 3.1. Closing Date......................................................................................61 3.2. Conditions to Each Credit Extension...............................................................66 3.3. Release of Share Collateral.......................................................................67 SECTION 4. REPRESENTATIONS AND WARRANTIES.......................................................................67 4.1. Organization; Powers; Qualification...............................................................67 4.2. Authorization of Credit Documents and Transaction Documents; No Conflict..........................68 4.3. Governmental Consents.............................................................................68 4.4. Binding Obligation................................................................................69
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Page 4.5. Historical Financial Statements; Projections.....................................................69 4.6. No Material Adverse Change; No Restricted Payments...............................................70 4.7. Litigation; Adverse Proceedings..................................................................70 4.8. Violation of Law.................................................................................70 4.9. Payment of Taxes.................................................................................70 4.10. Title to Properties..............................................................................70 4.11. Share Collateral.................................................................................71 4.12. Environmental Matters............................................................................71 4.13. No Defaults......................................................................................72 4.14. Governmental Regulation..........................................................................72 4.15. Margin Stock.....................................................................................72 4.16. Employee Matters.................................................................................72 4.17. Employee Benefit Plans...........................................................................73 4.18. Solvency.........................................................................................73 4.19. Transaction Documents............................................................................73 4.20. Year 2000........................................................................................74 4.21. Compliance with Statutes, etc. ..................................................................74 4.22. Disclosure.......................................................................................74 SECTION 5. AFFIRMATIVE COVENANTS................................................................................75 5.1. Financial Statements and Other Reports...........................................................75 5.2. Existence........................................................................................78 5.3. Payment of Taxes and Claims......................................................................78 5.4. Maintenance of Properties........................................................................78 5.5. Insurance........................................................................................78 5.6. Inspections; Lenders Meetings....................................................................79 5.7. Compliance with Laws.............................................................................79 5.8. Environmental....................................................................................79 5.9. Subsidiaries.....................................................................................79 5.10. Further Assurances. ............................................................................80 SECTION 6. NEGATIVE COVENANTS...................................................................................81 6.1. Indebtedness.....................................................................................81 6.2. Liens............................................................................................83 6.3. Equitable Lien; No Further Negative Pledges......................................................84 6.4. Restricted Payments; Restrictions on Subsidiary Distributions....................................85 6.5. Investments......................................................................................86 6.6. Financial Covenants..............................................................................87 6.7. Fundamental Changes; Disposition of Assets; Acquisitions.........................................88 6.8. Disposal of Subsidiary Interests.................................................................89 6.9. Sales and Lease-Backs............................................................................90 6.10. Transactions with Shareholders and Affiliates....................................................90 6.11. Conduct of Business..............................................................................90 6.12. Amendments or Waivers of Certain Transaction Documents...........................................90
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Page 6.13. Fiscal Year......................................................................................91 SECTION 7. GUARANTY.............................................................................................91 7.1. Guaranty of the Obligations......................................................................91 7.2. Contribution by Guarantors.......................................................................91 7.3. Payment by Guarantors............................................................................92 7.4. Liability of Guarantors Absolute.................................................................92 7.5. Waivers by Guarantors............................................................................94 7.6. Guarantors' Rights of Subrogation, Contribution, etc.............................................95 7.7. Subordination of Other Obligations...............................................................96 7.8. Continuing Guaranty..............................................................................96 7.9. Authority of Guarantors or Company...............................................................96 7.10. Financial Condition of Company...................................................................96 7.11. Bankruptcy, etc..................................................................................97 7.12. Notice of Events.................................................................................97 7.13. Discharge of Guaranty Upon Sale of Guarantor.....................................................97 SECTION 8. EVENTS OF DEFAULT....................................................................................98 8.1. Events of Default................................................................................98 SECTION 9. AGENTS..............................................................................................101 9.1. Appointment of Agents...........................................................................101 9.2. Powers and Duties...............................................................................101 9.3. General Immunity................................................................................101 9.4. Agents Entitled to Act as Lender................................................................102 9.5. Lenders' Representations, Warranties and Acknowledgment.........................................103 9.6. Right to Indemnity..............................................................................103 9.7. Successor Administrative Agent and Swing Line Lender............................................103 9.8. Notice of Default...............................................................................105 9.9. Collateral Documents and Guaranty...............................................................105 SECTION 10. MISCELLANEOUS......................................................................................106 10.1. Notices.........................................................................................106 10.2. Expenses........................................................................................106 10.3. Indemnity.......................................................................................107 10.4. Set-Off.........................................................................................107 10.5. Amendments and Waivers..........................................................................107 10.6. Successors and Assigns; Participations..........................................................109 10.7. Independence of Covenants.......................................................................112 10.8. Survival of Representations, Warranties and Agreements..........................................112 10.9. No Waiver; Remedies Cumulative..................................................................112 10.10. Marshalling; Payments Set Aside.................................................................113 10.11. Severability....................................................................................113 10.12. Obligations Several; Independent Nature of Lenders' Rights......................................113
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Page 10.13. Headings.......................................................................................113 10.14. APPLICABLE LAW.................................................................................113 10.15. CONSENT TO JURISDICTION........................................................................114 10.16. WAIVER OF JURY TRIAL...........................................................................114 10.17. Confidentiality................................................................................115 10.18. Usury Savings Clause...........................................................................115 10.19. Counterparts; Effectiveness....................................................................116
(iv) 6 APPENDICES: A Term Loan Commitments B Revolving Credit Commitments C Notice Addresses SCHEDULES: 1.1(a) Refinanced Indebtedness 1.1(b) Immaterial Foreign Subsidiaries 4.1 Organization, Etc. 4.10 Ownership of Subsidiaries 6.1 Certain Indebtedness 6.2 Certain Liens 6.5 Certain Investments 6.10 Certain Transactions EXHIBITS: A-1 Funding Notice A-2 Conversion/Continuation Notice A-3 Issuance Notice B-1 Term Loan Note B-2 Revolving Loan Note B-3 Swing Line Note C Compliance Certificate D Opinions of Counsel E Assignment Agreement F Certificate Re Non-bank Status G-1 Closing Date Certificate G-2 Solvency Certificate H Counterpart Agreement I Pledge Agreement (v) 7 CREDIT AND GUARANTY AGREEMENT This CREDIT AND GUARANTY AGREEMENT, dated as of April 17, 2000, is entered into by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), PAYLESS SHOESOURCE, INC., a Delaware corporation ("PARENT"), and CERTAIN SUBSIDIARIES OF PARENT, as Guarantors, the Lenders party hereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P. ("GSCP"), as sole Lead Arranger (in such capacity, "LEAD ARRANGER"), and as sole Syndication Agent (in such capacity,"SYNDICATION AGENT"), BANK ONE, NA, with its main office in Chicago, Illinois ("BANK ONE"), as Administrative Agent (together with its permitted successors in such capacity,"ADMINISTRATIVE AGENT"), and FIRST UNION NATIONAL BANK ("FIRST UNION"), as Documentation Agent (in such capacity,"DOCUMENTATION AGENT"). RECITALS: WHEREAS, capitalized terms used in these Recitals shall have the respective meanings set forth for such terms in Section 1.1 hereof; WHEREAS, pursuant to the Offer to Purchase for Cash, dated as of March 13, 2000 (as amended from time to time prior to the Closing Date with the consent of Administrative Agent and Syndication Agent (not to be unreasonably withheld or delayed), the "OFFER TO PURCHASE"), Parent has made a Cash tender offer for up to 7,547,130 shares of its outstanding Parent Common Stock, including the associated preferred stock purchase rights issued under the Rights Agreement, for the Tender Offer Price (the "TENDER OFFER"), the terms and conditions of which are more fully described in the Tender Offer Documents; WHEREAS, in connection with the Tender Offer, certain existing indebtedness of Parent and its Subsidiaries is being refinanced; WHEREAS, approximately $541,000,000 of Cash will be required to consummate the Transaction consisting of (i) up to $400,000,000 to purchase and retire the Parent Common Stock pursuant to the Tender Offer (the "TENDER OFFER CONSIDERATION"), (ii) $122,000,000 to refinance the Refinanced Indebtedness pursuant to the Refinancing, and (iii) $19,000,000 to pay Transaction Costs; WHEREAS, the Lenders have agreed to extend certain credit facilities to Company, in an aggregate amount not to exceed $600,000,000, consisting of up to $400,000,000 aggregate principal amount of Term Loans and up to $200,000,000 aggregate principal amount of Revolving Loans, the proceeds of which will be used (i) together with certain Cash on hand of the Parent and its Subsidiaries as of the Closing Date, to pay the Transaction Financing Requirements, and (ii) for working capital and general corporate and other purposes of Company and its Subsidiaries; 1 8 WHEREAS, Company has agreed to secure all of its obligations hereunder by granting to Administrative Agent, for the benefit of Lenders, a First Priority Lien on all of the Capital Stock of each of its Domestic Subsidiaries and 65% of all the Capital Stock of each of its direct Material Foreign Subsidiaries; and WHEREAS, Guarantors have agreed to guarantee the obligations of Company hereunder and to secure Company's and all of the Guarantors' respective Obligations hereunder by granting to Administrative Agent, for the benefit of Lenders, a First Priority Lien on substantially all of the Capital Stock of each of their respective Domestic Subsidiaries and 65% of all the Capital Stock of each of their respective direct Material Foreign Subsidiaries. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Guarantors, Lenders, Issuing Bank and Agents agree as follows: SECTION 1. DEFINITIONS AND INTERPRETATION 1.1. DEFINITIONS. The following terms used herein, including in the preamble, recitals, and schedules hereto, shall have the following meanings: "ADJUSTED EURODOLLAR RATE" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per annum obtained by dividing (and rounding upward to the next whole multiple of 1/16 of 1%) (i) (a) the rate per annum (rounded to the nearest 1/100 of 1%) equal to the rate determined by Administrative Agent to be the offered rate which appears on Reuters Screen FRBD which displays an average British Bankers Association Interest Settlement Rate for deposits (for delivery two Business Days thence) with a term equivalent to such period in Dollars, determined as of approximately 11:00 a.m. (London, England time) on such Interest Rate Determination Date, or (b) in the event the rate referenced in the preceding clause (a) does not appear on such page or service or if such page or service shall cease to be available, the rate per annum (rounded to the nearest 1/100 of 1%) equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service which displays an average British Bankers Association Interest Settlement Rate for deposits (for delivery two Business Days thence) with a term equivalent to such period in Dollars, determined as of approximately 11:00 a.m. (London, England time) on such Interest Rate Determination Date, or (c) in the event the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum (rounded to the nearest 1/100 of 1%) equal to the offered quotation rate to first class banks in the London interbank market by Bank One or one of its Affiliates for deposits (for delivery two Business Days thence) in Dollars of amounts comparable to the principal amount of the applicable Loan of Administrative Agent, in its capacity as a Lender, for which the Adjusted Eurodollar Rate is then being determined with maturities comparable to such period as of approximately 11:00 a.m. (London, England time) on such Interest Rate Determination Date, by (ii) an amount equal to (a) one minus (b) the Applicable Reserve Requirement. "ADMINISTRATIVE AGENT" as defined in the preamble hereto. 2 9 "ADVERSE PROCEEDING" means any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration (whether or not purportedly on behalf of Parent or any of its Subsidiaries) at law or in equity, or before or by any Governmental Authority, domestic or foreign (including any Environmental Claims), whether pending or, to the knowledge of Parent or any of its Subsidiaries, threatened against or affecting Parent or any of its Subsidiaries or any property of Parent or any of its Subsidiaries. "AFFECTED LENDER" as defined in Section 2.18(b). "AFFECTED LOANS" as defined in Section 2.18(b). "AFFILIATE" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power (i) to vote 5% or more of the Securities having ordinary voting power for the election of directors of such Person or (ii) to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. "AGENT" means each of Lead Arranger, Syndication Agent, Administrative Agent, Documentation Agent and Collateral Agent. "AGGREGATE AMOUNTS DUE" as defined in Section 2.17. "AGGREGATE NET ASSET SALES PROCEEDS" means, as of any date, the aggregate amount of Net Asset Sale Proceeds received by Parent and its Subsidiaries in any Fiscal Year. "AGGREGATE NET DEBT ISSUANCE PROCEEDS" means, as of any date, the aggregate amount of Net Debt Issuance Proceeds received by Parent and its Subsidiaries in any Fiscal Year. "AGGREGATE NET INSURANCE/CONDEMNATION PROCEEDS" means, as of any date, the aggregate amount of Net Insurance/Condemnation Proceeds received by Parent and its Subsidiaries in any Fiscal Year. "AGGREGATE PAYMENTS" as defined in Section 7.2. "AGREEMENT" means this Credit and Guaranty Agreement, dated as of April 17, 2000, as it may be amended, supplemented or otherwise modified from time to time. "APPLICABLE MARGIN" and "APPLICABLE COMMITMENT FEE PERCENTAGE" means (i) with respect to Term Loans and Revolving Loans that are Eurodollar Rate Loans and the Applicable Commitment Fee Percentage, (a) from the Closing Date until the six-month anniversary of the Closing Date, a percentage, per annum, determined by reference to the following table as if 3 10 the Leverage Ratio then in effect were in excess of 1.75:1.00; and (b) thereafter, a percentage, per annum, determined by reference to the Leverage Ratio then in effect from time to time as set forth below:
APPLICABLE MARGIN APPLICABLE LEVERAGE FOR TERM LOANS AND COMMITMENT FEE RATIO REVOLVING LOANS PERCENTAGE - ---------------------- ------------------------------ ------------------------ > 1.75:1.00 2.00% 0.50% - < 1.75:1.00 1.75% 0.35% > 1.25:1.00 - < 1.25:1.00 1.50% 0.30% > 0.75:1.00 - < 0.75:1.00 1.25% 0.25%
and (ii) with respect to Swing Line Loans, and Term Loans and Revolving Loans that are Base Rate Loans, a percentage per annum equal to (a) the Applicable Margin for Eurodollar Rate Loans as set forth in clause (i)(a) or (i)(b) above, as applicable, minus (b) 1.00% per annum. No change in the Applicable Margin or the Applicable Commitment Fee Percentage shall be effective until three (3) Business Days after the date on which Administrative Agent shall have received the applicable financial statements and a Compliance Certificate pursuant to Section 5.1(c) calculating the Leverage Ratio. At any time Company has not submitted to Administrative Agent the applicable information as and when required under Section 5.1(c), the Applicable Margin and the Applicable Commitment Fee Percentage shall be determined as if the Leverage Ratio were in excess of 1.75:1.00. Within one (1) Business Day of receipt of the applicable information as and when required under Section 5.1(c), Administrative Agent shall give each Lender telefacsimile or telephonic notice (confirmed in writing) of the Applicable Margin and the Applicable Commitment Fee Percentage in effect from such date. "APPLICABLE RESERVE REQUIREMENT" means, at any time, for any Eurodollar Rate Loan, the maximum rate, expressed as a decimal, at which reserves (including, without limitation, any basic, marginal, special, supplemental, emergency or other reserves) are required to be maintained with respect thereto against "EUROCURRENCY LIABILITIES" (as such term is defined in Regulation D) under regulations issued from time to time by the Board of Governors of the Federal Reserve System or other applicable banking regulator. Without limiting the effect of the foregoing, the Applicable Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the applicable Adjusted Eurodollar Rate or any other interest rate of a Loan is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Rate Loans. A Eurodollar Rate Loan shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed subject to reserve requirements without benefits of credit for proration, exceptions or offsets that may be available from time to time to the applicable Lender. The rate of 4 11 interest on Eurodollar Rate Loans shall be adjusted automatically on and as of the effective date of any change in the Applicable Reserve Requirement. "ASSET SALE" means a sale, lease or sub-lease (as lessor or sublessor), sale and leaseback, assignment, conveyance, transfer or other disposition to any Person (other than Parent, Company or Guarantor Subsidiary) or any exchange of property with any Person (other than any exchange between Parent, Company or any Guarantor Subsidiary and Parent, Company or any other Guarantor Subsidiary), in one transaction or a series of transactions, of all or any part of Parent's or any of its Subsidiaries' businesses, assets or properties of any kind, whether real, personal, or mixed and whether tangible or intangible, whether now owned or hereafter acquired, including, without limitation, the Capital Stock of any of Parent's Subsidiaries, other than (i) inventory (or other assets) sold or leased in the ordinary course of business, (ii) Cash Equivalents sold in the ordinary course of business, (iii) any disposition which is deemed to have occurred in connection with a casualty or taking (pursuant to the power of eminent domain, condemnation or otherwise) event which results in Parent or any Subsidiary receiving Net Insurance/Condemnation Proceeds, or (iv) other than non- perpetual licenses of Parent's and its Subsidiaries' intellectual property (which licenses may grant varying degrees of exclusivity provided that Parent or its Subsidiaries retain an unlimited right to use the intellectual property which is the subject of such licenses) which are entered into in the ordinary course of business of Parent and its Subsidiaries, as such business is now or hereafter conducted in compliance with this Agreement. "ASSIGNMENT AGREEMENT" means an Assignment Agreement substantially in the form of Exhibit E, with such amendments or modifications as may be approved by Administrative Agent. "AUTHORIZED OFFICER" means, as applied to any Person, any individual holding the position of chairman of the board (if an officer), chief executive officer, president or one of its vice presidents (or the equivalent thereof), and such Person's chief financial officer or treasurer. "BANK ONE" as defined in the preamble hereto. "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "BANKRUPTCY," as now and hereafter in effect, or any successor statute. "BASE RATE" means, for any day, a rate per annum (rounded to the nearest 1/100 of 1%) equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "BASE RATE LOAN" means a Loan bearing interest at a rate determined by reference to the Base Rate. "BENEFICIARY" means each Agent, Issuing Bank, Lender and Lender Counterparty. 5 12 "BUSINESS DAY" means (i) any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or the State of Illinois or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close and (ii) with respect to all notices, determinations, fundings and payments in connection with the Adjusted Eurodollar Rate or any Eurodollar Rate Loans, the term "BUSINESS DAY" shall mean any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the London interbank market. "CAPITAL LEASE" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "CAPITAL STOCK" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), including, without limitation, partnership interests and membership interests, and any and all warrants, rights or options to purchase or other arrangements or rights to acquire any of the foregoing. "CASH" means money, currency or a credit balance in any demand or Deposit Account. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (v) shares of any money market mutual fund that (a) has substantially all of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's. "CERTIFICATE RE NON-BANK STATUS" means a certificate substantially in the form of Exhibit F. 6 13 "CHANGE OF CONTROL" means, at any time, (i) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) (a) shall have beneficial ownership of 30% or more on a fully diluted basis of the voting and/or economic interest in the Capital Stock of Parent or (b) shall have obtained the power (whether or not exercised) to elect a majority of the members of the board of directors (or similar governing body) of Parent; (ii) Parent shall cease to beneficially own and control 100% on a fully diluted basis of the economic and voting interest in the Capital Stock of Company; or (iii) the majority of the seats (other than vacant seats) on the board of directors (or similar governing body) of Parent shall cease to be occupied by Persons who either (a) were members of the board of directors of Parent on the Closing Date or (b) were nominated for election by the board of directors of Parent, a majority of whom were directors on the Closing Date or whose election or nomination for election was previously approved by a majority of such directors; or (iv) any "change of control" or similar event under any Subordinated Indebtedness shall occur. "CLASS" means with respect to Loans, each of the following classes of Loans: (a) Term Loans and (b) Revolving Loans (including Swing Line Loans). "CLOSING DATE" means the date on or before June 3, 2000 on which the conditions set forth in Section 3.1 have been satisfied and a Credit Extension shall have occurred. "CLOSING DATE CERTIFICATE" means a Closing Date Certificate substantially in the form of Exhibit G-1. "COLLATERAL ACCOUNT" as defined in Section 2.4(h). "COLLATERAL AGENT" as defined in the Pledge Agreement. "COLLATERAL DOCUMENTS" means the Pledge Agreement and all other instruments, documents and agreements delivered by any Credit Party pursuant to this Agreement or any of the other Credit Documents in order to grant to Administrative Agent, for the benefit of Lenders, a Lien on any real, personal or mixed property of that Credit Party as security for the Obligations. "COMMITMENTS" means a Term Loan Commitment and/or a Revolving Credit Commitment. "COMPANY" as defined in the preamble hereto. "COMPLIANCE CERTIFICATE" means a Compliance Certificate substantially in the form of Exhibit C. "CONSOLIDATED ADJUSTED EBITDA" means, for any period, an amount determined for Parent and its Subsidiaries on a consolidated basis equal to the sum, without duplication, of the amounts for such period of (i) Consolidated Net Income, plus (to the extent the amounts described in clauses (ii) through (vii) were deducted in calculating Consolidated Net Income) (ii) Consolidated 7 14 Interest Expense plus any amounts referred to in Section 2.11(c) payable on or before the Closing Date, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) any actual Transaction Costs and plus (vii) other non-Cash items reducing Consolidated Net Income (excluding any such non-Cash item to the extent that it represents an accrual or reserve for potential Cash items in any future period or amortization of a prepaid Cash item that was paid in a prior period), minus other non-Cash items increasing Consolidated Net Income for such period (excluding any such non-Cash item to the extent it represents the reversal of an accrual or reserve for potential Cash item in any prior period), all of the foregoing as determined in conformity with GAAP. "CONSOLIDATED ADJUSTED EBITDAR" means, for any period, the sum of the amounts for such period of (i) Consolidated Adjusted EBITDA plus (ii) Consolidated Rental Expense, each of the foregoing as determined on a consolidated basis for Parent and its Subsidiaries in conformity with GAAP. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the aggregate of all expenditures of Parent and its Subsidiaries during such period determined on a consolidated basis that, in accordance with GAAP, are or should be included in "purchase of property and equipment" or similar items reflected in the consolidated statement of cash flows of Parent and its Subsidiaries. "CONSOLIDATED CASH INTEREST EXPENSE" means, for any period, Consolidated Interest Expense for such period, excluding any amount not payable in Cash in such period. "CONSOLIDATED DEBT/CAPITALIZATION RATIO" means the ratio as of the last day of any Fiscal Quarter of (i) Consolidated Total Debt plus the Present Value of Operating Leases to (ii) Consolidated Total Capitalization. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum, without duplication, of the amounts determined for Parent and its Subsidiaries on a consolidated basis equal to the sum of (i) Consolidated Cash Interest Expense and (ii) Consolidated Rental Expense. "CONSOLIDATED INTEREST EXPENSE" means, for any period, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Parent and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Parent and its Subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, but excluding, however, any amounts referred to in Section 2.11(c) payable on or before the Closing Date. "CONSOLIDATED NET INCOME" means, for any period, (i) the net income (or loss) of Parent and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP, minus (ii) (a) the income of any Person (other than a Subsidiary of Parent) in which any other Person (other than Parent or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid 8 15 to Parent or any of its Subsidiaries by such Person during such period, (b) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Parent or is merged into or consolidated with Parent or any of its Subsidiaries or that Person's assets are acquired by Parent or any of its Subsidiaries, (c) the income of any Subsidiary of Parent to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (d) any after-tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan, and (e) (to the extent not included in clauses (a) through (d) above) any net extraordinary gains or net non-cash extraordinary losses. "CONSOLIDATED NET TANGIBLE ASSETS" means, at any date of determination, (i) the consolidated net book value of all assets of Parent and its Subsidiaries, minus (ii) the consolidated total net book value of all assets of Parent and its Subsidiaries which would be treated as intangibles under GAAP, including, without limitation, goodwill and trademarks, all as determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED RENTAL EXPENSE" means for any period, the sum of the aggregate payments of Parent and its Subsidiaries under agreements to rent or lease any real or personal property (exclusive of Capital Leases), all as determined on a consolidated basis for Parent and its Subsidiaries in accordance with GAAP. "CONSOLIDATED TOTAL CAPITALIZATION" means for any period, the sum of (i) Consolidated Total Debt, (ii) the Present Value of Operating Leases and (iii) total stockholder's equity of Parent. "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Parent and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONTRACTUAL OBLIGATION" means, as applied to any Person, any provision of any Security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CONVERSION/CONTINUATION DATE" means the effective date of a continuation or conversion, as the case may be, as set forth in the applicable Conversion/Continuation Notice. "CONVERSION/CONTINUATION NOTICE" means a Conversion/Continuation Notice substantially in the form of Exhibit A-2. "COUNTERPART AGREEMENT" means a Counterpart Agreement substantially in the form of Exhibit H. 9 16 "CONTRIBUTING GUARANTORS" as defined in Section 7.2. "CREDIT DATE" means the date of a Credit Extension. "CREDIT DOCUMENT" means any of this Agreement, the Notes, if any, the Collateral Documents, any documents or certificates executed by Company in favor of Issuing Bank relating to Letters of Credit, and all other documents, instruments or agreements executed and delivered by a Credit Party for the benefit of Agents, Issuing Bank or any Lender in connection herewith. "CREDIT EXTENSION" means the making of a Loan or the issuing of a Letter of Credit, or the amendment or other modification of a Letter of Credit to increase its stated amount, extend its period of effectiveness, or amend the conditions under which it may be drawn. "CREDIT PARTY" means each Person (other than any Agent, Issuing Bank or any Lender or any other representative thereof) from time to time party to a Credit Document. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement, each of which is for the purpose of hedging the foreign currency risk associated with Parent's and its Subsidiaries' operations. "DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "DEFAULT EXCESS" means, with respect to any Defaulting Lender, the excess, if any, of such Defaulting Lender's Pro Rata Share of the aggregate outstanding principal amount of Loans of all Lenders (calculated as if all Defaulting Lenders (other than such Defaulting Lender) had funded all of their respective Defaulted Loans) over the aggregate outstanding principal amount of all Loans of such Defaulting Lender. "DEFAULT PERIOD" means, with respect to any Defaulting Lender, the period commencing on the date of the applicable Funding Default and ending on the earliest of the following dates: (i) the date on which all Commitments are cancelled or terminated and/or the Obligations are declared or become immediately due and payable, (ii) the date on which (a) the Default Excess with respect to such Defaulting Lender shall have been reduced to zero (whether by the funding by such Defaulting Lender of any Defaulted Loans of such Defaulting Lender or by the non-pro rata application of any voluntary or mandatory prepayments of the Loans in accordance with the terms of Section 2.13 or Section 2.14 or by a combination thereof) and (b) such Defaulting Lender shall have delivered to Company and Administrative Agent a written reaffirmation of its intention to honor its obligations hereunder with respect to its Commitment, and (iii) the date on which Company, Administrative Agent and Requisite Lenders waive all Funding Defaults of such Defaulting Lender in writing. "DEFAULTED LOAN" as defined in Section 2.22. 10 17 "DEFAULTING LENDER" as defined in Section 2.22. "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "DOCUMENTATION AGENT" as defined in the preamble hereto. "DOLLARS" and the sign "$" mean the lawful money of the United States of America. "DOMESTIC SUBSIDIARY" means, with respect to any Person, any Subsidiary of such Person organized under the laws of the United States of America, any State thereof or the District of Columbia. "ELIGIBLE ASSIGNEE" means (i) any Lender, any Affiliate of any Lender and (ii) any commercial bank, insurance company, investment or mutual fund or other entity that is an "accredited investor" (as defined in Regulation D under the Securities Act) and which regularly extends credit or buys loans as one of its businesses; provided, no Affiliate of Parent shall be an Eligible Assignee. "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was sponsored, maintained or contributed to by, or required to be contributed by, Parent, any of its Subsidiaries or any of their respective ERISA Affiliates. "ENVIRONMENTAL CLAIM" means any investigation, notice, notice of violation, claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any Governmental Authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law; (ii) in connection with any Hazardous Material or any actual or alleged Hazardous Materials Activity; or (iii) in connection with any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. "ENVIRONMENTAL LAWS" means any and all current or future foreign or domestic, federal or state (or any subdivision of either of them), statutes, ordinances, orders, rules, regulations, guidance documents, judgments, Governmental Authorizations, or any other requirements of Governmental Authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity; (ii) the generation, use, storage, transportation or disposal of Hazardous Materials; or (iii) occupational safety and health or industrial hygiene, in any manner applicable to Parent or any of its Subsidiaries or any Facility. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. 11 18 "ERISA AFFILIATE" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Parent or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Parent or any such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Parent or such Subsidiary and with respect to liabilities arising after such period for which Parent or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA EVENT" means (i) a "REPORTABLE EVENT" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Parent, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which could reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Parent, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Parent, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Parent, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on Parent, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Parent, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other 12 19 Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or of the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EURODOLLAR RATE LOAN" means a Loan bearing interest at a rate determined by reference to the Adjusted Eurodollar Rate. "EVENT OF DEFAULT" means each of the conditions or events set forth in Section 8.1. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "FACILITY" means any real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Parent or any of its Subsidiaries or any of their respective predecessors or Affiliates. "FAIR SHARE CONTRIBUTION AMOUNT" as defined in Section 7.2. "FAIR SHARE" as defined in Section 7.2. "FAIR SHARE SHORTFALL" as defined in Section 7.2. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, an interest rate per annum (expressed, as a decimal, rounded upwards, if necessary, to the next higher 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent in its sole discretion. "FINANCIAL OFFICER CERTIFICATION" means, with respect to the financial statements for which such certification is required, the certification of the chief financial officer of Parent that such financial statements fairly present, in all material respects, the financial condition of Parent and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject (in the case of unaudited financial statements) to changes resulting from audit and normal year-end adjustments and the absence of footnotes. "FIRST PRIORITY" means, with respect to any Lien purported to be created in any Share Collateral pursuant to any Collateral Document, that such Lien is the only Lien to which such Share Collateral is subject, other than Permitted Liens. 13 20 "FIRST UNION" as defined in the preamble hereto. "FISCAL QUARTER" means a fiscal quarter of any Fiscal Year. "FISCAL YEAR" means the fiscal year of Parent and its Subsidiaries ending on the Saturday which is the closest to January 31 of each following calendar year. "FIXED CHARGE COVERAGE RATIO" means the ratio as of the last day of any Fiscal Quarter of (i) Consolidated Adjusted EBITDAR for the four-Fiscal Quarter Period then ending, to (ii) Consolidated Fixed Charges for such four-Fiscal Quarter Period; provided that for purposes of calculating Consolidated Fixed Charges for any period prior to the first anniversary of the Closing Date, the Consolidated Interest Expense for such period included in the determination of Consolidated Fixed Charges shall be equal to the actual amount of Consolidated Interest Expense for the period commencing on the Closing Date and ending on the date of determination multiplied by the quotient of (x) three hundred and sixty-five (365) divided by (y) the number of days that have passed since the Closing Date. "FOREIGN SUBSIDIARY" means, with respect to any Person, any Subsidiary of such Person that is not a Domestic Subsidiary. "FUNDING DEFAULT" as defined in Section 2.22. "FUNDING GUARANTORS" as defined in Section 7.2. "FUNDING NOTICE" means a notice substantially in the form of Exhibit A-1. "GAAP" means, subject to the limitations on the application thereof set forth in Section 1.2, United States generally accepted accounting principles in effect as of the date of determination thereof. "GOVERNMENTAL ACTS" means any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any Governmental Authority. "GOVERNMENTAL AUTHORITY" means any federal, state, municipal, national or other government, governmental department, commission, board, bureau, court, agency or instrumentality or political subdivision thereof or any entity or officer exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any court, in each case whether associated with a state of the United States, the United States, or a foreign entity or government. "GUARANTEED OBLIGATIONS" as defined in Section 7.1. 14 21 "GUARANTOR" means each of Parent and each wholly-owned Domestic Subsidiary of Parent (other than Company). "GUARANTOR SUBSIDIARY" means each Subsidiary of Parent (other than Company) that is a Guarantor. "GUARANTY" means the guaranty of each Guarantor set forth in Section 7. "HAZARDOUS MATERIALS" means any chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority or which may or could pose a hazard to the health and safety of any Persons in the vicinity of any Facility or to the indoor or outdoor environment. "HAZARDOUS MATERIALS ACTIVITY" means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "HEDGE AGREEMENT" means an Interest Rate Agreement or a Currency Agreement entered into with a Lender Counterparty in the ordinary course of Parent's or any of its Subsidiaries' businesses and not for speculative purposes. "HIGHEST LAWFUL RATE" means the maximum lawful interest rate, if any, that at any time or from time to time may be contracted for, charged, or received under the laws applicable to any Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "HISTORICAL FINANCIAL STATEMENTS" means as of the Closing Date, (i) the audited consolidated financial statements of the Parent and its Subsidiaries for the Fiscal Years 1997, 1998 and 1999 consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years; and (ii) the same store comparable sales flash report for the most recently ended monthly period for the Parent and its Subsidiaries; and, in the case of clause (i) accompanied by a Financial Officer Certification. "IMMATERIAL FOREIGN SUBSIDIARIES" means those Foreign Subsidiaries of Parent which in the aggregate have (i) gross revenues of less than $1,000,000 and (ii) gross assets of less than $1,000,000, and which as of the Closing Date are listed on Schedule 1.1 (b). Notwithstanding the foregoing, if at any time after the Closing Date either the aggregate gross revenues or the aggregate gross assets of all Immaterial Foreign Subsidiaries under the preceding sentence exceeds $1,000,000, then one or more of such Immaterial Foreign Subsidiaries designated by the Parent (or, if the Parent shall make no designation, then one or more of such Foreign Subsidiaries in descending 15 22 order based on their respective gross revenues or gross assets, as determined by the Administrative Agent) shall be deemed for purposes of this Agreement to be Material Foreign Subsidiaries to the extent necessary to eliminate such excess. "INCREASED-COST LENDERS" as defined in Section 2.23. "INDEBTEDNESS", as applied to any Person, means, without duplication, (i) all indebtedness for borrowed money; (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP; (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA, ordinary course trade payables and expenses accrued in the ordinary course), which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument; (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person; provided, that the amount of such indebtedness which has not been assumed by that person or is nonrecourse to the credit of that Person shall be limited to an amount equal to the lesser of the amount of such secured indebtedness or the value of the property and assets securing such indebtedness; (vi) the face amount of any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings; (vii) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another; (viii) any obligation of such Person the primary purpose or intent of which is to provide assurance to an obligee that the obligation of the obligor thereof will be paid or discharged, or any agreement relating thereto will be complied with, or the holders thereof will be protected (in whole or in part) against loss in respect thereof; and (ix) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (a) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (b) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (a) or (b) of this clause (ix), the primary purpose or intent thereof is as described in clause (viii) above; and (x) obligations of such Person in respect of any exchange traded or over the counter derivative transaction, including, without limitation, any Interest Rate Agreement or Currency Agreement, whether entered into for hedging or speculative purposes; provided, in no event shall obligations under any Interest Rate Agreements or Currency Agreements be deemed "Indebtedness" for any purpose under Section 6.6. "INDEMNIFIED LIABILITIES" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any 16 23 kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any reasonable fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement, the other Credit Documents or the Transaction Documents or the transactions contemplated hereby or thereby (including, without limitation, the Transaction and the Lenders' agreement to make Credit Extensions or the use or intended use of the proceeds thereof, or any enforcement of any of the Credit Documents (including any sale of, collection from, or other realization upon any of the Share Collateral or the enforcement of the Guaranty)); (ii) the statements contained in the commitment letter delivered by any Lender to Parent with respect to the transactions contemplated by this Agreement; or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Parent or any of its Subsidiaries. "INDEMNITEE" as defined in Section 10.3. "INSTALLMENT" as defined in Section 2.12(a). "INSTALLMENT DATE" as defined in Section 2.12(a). "INTEREST PAYMENT DATE" means with respect to (i) any Base Rate Loan, each April 30, July 31, October 31 and January 31 of each year, commencing on July 31, 2000, and the final maturity date of such Loan; and (ii) any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan; provided, in the case of each Interest Period of longer than three months "Interest Payment Date" shall also include each date that is three months, or an integral multiple thereof, after the commencement of such Interest Period. "INTEREST PERIOD" means, in connection with a Eurodollar Rate Loan, an interest period of one-, two-, three- or six-months, as selected by Company in the applicable Funding Notice or Conversion/Continuation Notice, (i) initially, commencing on the Credit Date or Conver sion/Continuation Date thereof, as the case may be; and (ii) thereafter, commencing on the day on which the immediately preceding Interest Period expires; provided, (a) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless no further Business Day occurs in such month, in which case such Interest Period shall expire on the immediately preceding Business Day; (b) any Interest Period 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, subject to clauses (c) through (e), of this definition, end on the last Business Day of a calendar month; (c) no Interest Period with respect to any portion of any Term Loans shall extend beyond such Term Loan Maturity Date; (d) no Interest Period with respect to any portion of the Revolving Loans shall extend beyond 17 24 the Revolving Credit Commitment Termination Date; and (e) no Interest Period with respect to any portion of any Term Loans shall extend beyond a date on a which Company is required to make a scheduled payment of principal of such Term Loans, unless the sum of (1) the aggregate principal amount of such Term Loans that are Base Rate Loans, and (2) the aggregate principal amount of such Term Loans that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on such Term Loans on such date. "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or arrangement, each of which is for the purpose of hedging the interest rate exposure associated with Parent's and its Subsidiaries' operations. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the date that is two Business Days prior to the first day of such Interest Period. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Parent or any of its Subsidiaries of, or of a beneficial interest in, any of the Securities of any other Person (other than a wholly-owned Guarantor Subsidiary); (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Parent from any Person (other than Company or any wholly-owned Guarantor Subsidiary), of any Capital Stock of such Subsidiary; and (iii) any direct or indirect loan, advance (other than advances or loans to employees for moving, relocation, entertainment and travel expenses, drawing accounts, purchase of Parent Common Stock and similar expenditures in the ordinary course of business) or capital contribution by Parent or any of its Subsidiaries to any other Person (other than Company or any wholly-owned Guarantor Subsidiary), including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise in the ordinary course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "INVESTMENT GRADE STATUS" means, at any date of determination, that each of the following conditions is true: (i) Moody's has assigned to Parent a senior implied (or any rating category that Moody's replaces for such category) rating of at least Baa3 and (ii) S&P has assigned to Parent a corporate credit (or any rating category that S&P's replaces for such category) rating of at least BBB-. "ISSUANCE NOTICE" means an Issuance Notice substantially in the form of Exhibit A-3. "ISSUING BANK" means Bank One as Issuing Bank hereunder, together with its permitted successors and assigns in such capacity. 18 25 "JOINT VENTURE" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership, limited liability company, or other legal form; provided, in no event shall any corporate Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party. "LEAD ARRANGER" as defined in the preamble hereto. "LENDER" means each financial institution listed on the signature pages hereto as a Lender, together with each such institution's successors and permitted assigns. "LENDER COUNTERPARTY" means each Lender or any Affiliate thereof counterparty to a Hedge Agreement. "LETTER OF CREDIT" means a commercial or standby letter of credit issued or to be issued by Issuing Bank pursuant to this Agreement. "LETTER OF CREDIT SUBLIMIT" means the lesser of (i) $200,000,000 and (ii) the aggregate unused amount of the Revolving Credit Commitments then in effect. "LETTER OF CREDIT USAGE" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is, or at any time thereafter may become, available for drawing under all Letters of Credit then outstanding, and (ii) the aggregate amount of all drawings under Letters of Credit honored by Issuing Bank and not theretofore reimbursed by or on behalf of Company. "LEVERAGE RATIO" means the ratio as of the last day of any Fiscal Quarter of (i) Consolidated Total Debt as of such day to (ii) Consolidated Adjusted EBITDA for the four-Fiscal Quarter period ending on such date. "LIEN" means (i) any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof and any option, trust or other preferential arrangement having the practical effect of any of the foregoing and (ii) in the case of Securities, any purchase option, call or similar right of a third party with respect to such Securities. "LOAN" means a Term Loan, a Revolving Loan or a Swing Line Loan. "MARGIN STOCK" as defined in Regulation T, U or X of the Board of Governors of the Federal Reserve System as in effect from time to time. "MATERIAL ADVERSE CHANGE" means a material adverse change in or affecting the general affairs, management, financial position, shareholders' equity, results of operations or prospects of Parent and its Subsidiaries taken as a whole. 19 26 "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the general affairs, management, financial position, shareholders' equity, results of operations or prospects of Parent and its Subsidiaries taken as a whole; (ii) the ability of the Credit Parties to fully and timely perform the Obligations in any material respects; (iii) the legality, validity, binding effect or enforceability in any material respects against the Credit Parties of the Credit Documents; (iv) the rights, remedies and benefits taken as a whole, available to, or conferred upon, any Agent, Issuing Bank and any Lender under any Credit Document; or (v) the Share Collateral or the Administrative Agent's Liens, on behalf of Agents and Lenders on the Share Collateral taken as a whole, or the priority of such Liens. "MATERIAL FOREIGN SUBSIDIARY" means all Foreign Subsidiaries other than Immaterial Foreign Subsidiaries. "MATERIAL SUBSIDIARY" means each Subsidiary of Parent now existing or hereafter acquired or formed by Parent or its Subsidiaries which, on a consolidated basis for such Subsidiary and its Subsidiaries, (i) for the most recent Fiscal Year accounted for more than 5% of the consolidated gross revenues of Parent and its Subsidiaries or (ii) as at the end of such Fiscal Year, was the owner of more than 5% of the consolidated total assets of Parent and its Subsidiaries. "MAXIMUM AVAILABLE AMOUNT" as defined in Section 2.4(i). "MOODY'S" means Moody's Investors Service, Inc. "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a "MULTIEMPLOYER PLAN" as defined in Section 3(37) of ERISA. "NAIC" means The National Association of Insurance Commissioners, and any successor thereto. "NARRATIVE REPORT" means, with respect to the financial statements for which such narrative report is required, a narrative report describing the operations of Parent and its Subsidiaries in the form prepared for presentation to senior management thereof for the applicable Fiscal Quarter or Fiscal Year and for the period from the beginning of the then current Fiscal Year to the end of such period to which such financial statements relate; provided, at any time Parent is a reporting company for purposes of the Exchange Act, the term "NARRATIVE REPORT" shall mean the report filed by Parent with the SEC for the financial statements to which such report relates. "NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, an amount equal to: (i) Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received by Parent or any of its Subsidiaries from such Asset Sale, minus (ii) any bona fide direct costs incurred in connection with such Asset Sale, including (a) income or gains taxes actually payable by the seller as a result of any gain recognized in connection with such Asset Sale, (b) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid 20 27 under the terms thereof as a result of such Asset Sale, (c) payments associated with the liquidation of inventory, employee severance and termination of operating leases as a result of such Asset Sale and (d) direct expenses arising from such Asset Sale (including reasonable brokerage fees, transfer taxes and professional fees and expenses). "NET DEBT ISSUANCE PROCEEDS" means, an amount equal to (i) any Cash proceeds received by Parent or any of its Subsidiaries from the incurrence of any Indebtedness by Parent or any of its Subsidiaries or the issuance of preferred stock Securities by Parent minus (ii) all underwriting discounts and commissions and other reasonable and customary costs and expenses associated with the issuance or incurrence of such Indebtedness or issuance of preferred stock Securities, including reasonable legal fees and expenses. For purposes of this definition Indebtedness shall not include any Indebtedness permitted to be incurred pursuant to Section 6.1. "NET INSURANCE/CONDEMNATION PROCEEDS" means an amount equal to: (i) any Cash payments or proceeds received by Parent or any of its Subsidiaries (a) under any casualty insurance policy in respect of a covered loss thereunder or (b) as a result of the taking of any assets of Parent or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, minus (ii) (a) any actual and reasonable documented costs incurred by Parent or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Parent or such Subsidiary in respect thereof, and (b) any bona fide direct costs incurred in connection with any sale of such assets as referred to in clause (i)(b) of this definition, including income taxes actually payable as a result of any gain recognized in connection therewith. "NON-CONSENTING LENDER" as defined in Section 2.23. "NON-US LENDER" as defined in Section 2.20(c). "NOTE" means a Term Note, Revolving Loan Note or a Swing Line Note. "NOTICE" means a Funding Notice, an Issuance Notice, or a Conversion/ Continuation Notice. "OBLIGATIONS" means all obligations of every nature of each Credit Party from time to time owed to the Agents, the Lenders or any of them or their respective Affiliates (including, without limitation, all former Agents, Lenders or Lender Counterparties) under any Credit Document or Hedge Agreement (including, without limitation, with respect to a Hedge Agreement, obligations owed thereunder to any person who was a Lender or an Affiliate of a Lender at the time such Hedge Agreement was entered into), whether for principal, interest (including interest which, but for the filing of a petition in bankruptcy with respect to such Credit Party, would have accrued on any Obligation, whether or not a claim is allowed against such Credit Party for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Hedge Agreements, fees, expenses, indemnification or otherwise. 21 28 "OBLIGEE GUARANTOR" as defined in Section 7.7. "OFFER TO PURCHASE" as defined in the recitals hereto. "ORGANIZATIONAL DOCUMENTS" means (i) with respect to any corporation, its certificate or articles of incorporation, as amended, and its by-laws, as amended, (ii) with respect to any limited partnership, its certificate of limited partnership, as amended, and its partnership agreement, as amended, (iii) with respect to any general partnership, its partnership agreement, as amended, and (iv) with respect to any limited liability company, its articles of organization, as amended, and its operating agreement, as amended. In the event any term or condition of this Agreement or any other Credit Document requires any Organizational Document to be certified by a secretary of state or similar governmental official, the reference to any such "ORGANIZATIONAL DOCUMENT" shall only be to a document of a type customarily certified by such governmental official. "PARENT" as defined in the preamble hereto. "PARENT COMMON STOCK" means the outstanding common stock of Parent. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "PERMITTED ACQUISITION" means any acquisition, whether by purchase, merger or otherwise, of all or substantially all of the assets of, all of the Capital Stock of, or a business line or unit or a division of, any Person; provided, (i) immediately prior to, and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing or would result therefrom; (ii) all transactions in connection therewith shall be consummated in accordance with all applicable laws and in conformity with all applicable Governmental Authorizations; (iii) any business or property acquired shall be owned 100% by Company, Parent or a wholly-owned Guarantor Subsidiary thereof; (iv) in the case of the acquisition of Capital Stock, all of the Capital Stock (except for any such Securities in the nature of directors' qualifying shares required pursuant to applicable law) outstanding or otherwise issued by such Person or any newly formed Subsidiary of Parent in connection with such acquisition shall be owned 100% by Parent or a Guarantor Subsidiary thereof, and Parent shall have taken, or caused to be taken, as of the 22 29 date such Person becomes a Subsidiary of Parent, each of the actions set forth in Sections 5.9, as applicable; (v) Parent and its Subsidiaries shall be in compliance with, immediately before and after giving pro forma effect to such acquisition, Section 6.6 (as determined in accordance with Section 6.6(e)); (vi) Parent shall have delivered to Administrative Agent at least ten (10) Business Days prior to the closing of such proposed acquisition, (A) a certificate in the form of a Compliance Certificate evidencing compliance with Section 6.6 as required under clause (v) above, together with all relevant financial information with respect to such acquired assets, including, without limitation, the aggregate consideration for such acquisition and any other information required to demonstrate compliance with Section 6.6 and (B) copies of the definitive documentation relating to such proposed acquisition; and (vii) any such proposed acquisition shall be approved by the Board of Directors or comparable governing body of the relevant Person being acquired. "PERMITTED LIENS" means each of the Liens permitted pursuant to Section 6.2. "PERMITTED SALE-LEASEBACKS" has the meaning assigned to that term in Section 6.9. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and Governmental Authorities. "PLEDGE AGREEMENT" means the Pledge Agreement, dated as of April 17, 2000, substantially in the form of Exhibit I, as it may be amended, supplemented or otherwise modified from time to time. "PLEDGOR" as defined in the Pledge Agreement. "PRESENT VALUE" means, with respect to each lease of Parent 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 Parent 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 Parent prior to April 22, 1996 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 Parent 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 23 30 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 Company and the Administrative 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 Parent and its Subsidiaries. "PRIME RATE" means the rate of interest per annum that Bank One or its parent announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Bank One or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "PRINCIPAL OFFICE" means, for each of Administrative Agent, Swing Line Lender and Issuing Bank, such Person's "Principal Office" as set forth on Appendix C, or such other office as such Person may from time to time designate in writing to Company, Administrative Agent and each Lender. "PROJECTIONS" as defined in Section 4.5. "PRO RATA SHARE" means (i) with respect to all payments, computations and other matters relating to the Term Loan of any Lender, the percentage obtained by dividing (a) the Term Loan Exposure of that Lender by (b) the aggregate Term Loan Exposure of all Lenders; and (ii) with respect to all payments, computations and other matters relating to the Revolving Credit Commitment or Revolving Loans of any Lender or any Letters of Credit issued or participations purchased therein by any Lender or any participations in any Swing Line Loans purchased by any Lender, the percentage obtained by dividing (a) the Revolving Credit Exposure of that Lender by (b) the aggregate Revolving Credit Exposure of all Lenders. For all other purposes with respect to each Lender, "PRO RATA SHARE" means the percentage obtained by dividing (A) an amount equal to the sum of the Term Loan Exposure and the Revolving Credit Exposure of that Lender, by (B) an amount equal to the sum of the aggregate Term Loan Exposure and the aggregate Revolving Credit Exposure of all Lenders. 24 31 "REFINANCED INDEBTEDNESS" means the Indebtedness and other obligations outstanding under (i) the Amended and Restated Multicurrency Credit Agreement, dated as of May 22, 1998, among Parent, Company, certain Subsidiaries of Parent, various lending institutions and Bank of America National Trust and Savings Association, as agent, as amended prior to the Closing Date, (ii) the Note Purchase Agreement, dated as of November 1, 1998 pursuant to which Parent and Payless ShoeSource, Inc., a Missouri corporation, issued 6.55% Senior Notes, Series A, due November 23, 2003, 6.88% Senior Notes, Series B, due November 23, 2005, and 7.35% Senior Notes, Series C, due November 23, 2008, (iii) the Note Purchase Agreement, dated as of June 1, 1999, pursuant to which Parent and Payless ShoeSource, Inc., a Missouri corporation issued 7.34% Senior Notes, Series D, due June 3, 2004, 7.67% Senior Notes, Series E, due June 3, 2009 and 7.78% Senior Notes, Series F, due June 3, 2009 and (iv) the other agreements identified on Schedule 1.1(a) annexed hereto. "REFINANCING" means and includes the refinancing and repayment in full of all amounts outstanding under, and the termination in full of all commitments and letters of credit in respect of the Refinanced Indebtedness. "REFUNDED SWING LINE LOANS" as defined in Section 2.3(b)(iv). "REGISTER" as defined in Section 2.7(b). "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT DATE" as defined in Section 2.4(d). "RELEASE" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of any Hazardous Material into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Material), including the movement of any Hazardous Material through the air, soil, surface water or groundwater. "REPLACEMENT LENDER" as defined in Section 2.23. "REQUISITE LENDERS" means one or more Lenders having or holding Term Loan Exposure and/or Revolving Credit Exposure representing more than 50% of the sum of (i) the aggregate Term Loan Exposure of all Lenders, and (ii) the aggregate Revolving Credit Exposure of all Lenders. "RESTRICTED PAYMENT" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any Capital Stock of Parent or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of Capital Stock to the holders of that class; (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Parent 25 32 or any of its Subsidiaries now or hereafter outstanding; (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any Capital Stock of Parent or any of its Subsidiaries now or hereafter outstanding; and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness. "REVOLVING CREDIT COMMITMENT" means the commitment of a Lender to make or otherwise fund any Credit Extension (other than any Term Loan). The amount of each Lender's Revolving Credit Commitment, if any, is set forth on Appendix B or in the applicable Assignment Agreement, subject to any adjustment or reduction pursuant to the terms and conditions hereof; REVOLVING CREDIT COMMITMENTS" means the Revolving Credit Commitments of all Lenders in the aggregate, and the aggregate amount of the Revolving Loan Commitments as of the Closing Date is $200,000,000. "REVOLVING CREDIT COMMITMENT PERIOD" means the period from the Closing Date to but excluding the Revolving Credit Commitment Termination Date. "REVOLVING CREDIT COMMITMENT TERMINATION DATE" means the earliest to occur of (i) June 3, 2000, if the Term Loans are not made on or before that date; (ii) the fifth year anniversary of the Closing Date, (iii) the date the Revolving Credit Commitments are permanently reduced to zero pursuant to Section 2.13(b) or 2.14, and (iv) the date of the termination of the Revolving Credit Commitments pursuant to Section 8.1. "REVOLVING CREDIT EXPOSURE" means, with respect to any Lender as of any date of determination, (i) prior to the termination of the Revolving Credit Commitments, that Lender's Revolving Credit Commitment; and (ii) after the termination of the Revolving Credit Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Lender, (b) in the case of Issuing Bank, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Lender (net of any participations by Lenders in such Letters of Credit), and (c) the aggregate amount of all participations by that Lender in any outstanding Letters of Credit or any unreimbursed drawing under any Letter of Credit, (d) in the case of Swing Line Lender, the aggregate outstanding principal amount of all Swing Line Loans (net of any participations therein by other Lenders), and (e) the aggregate amount of all participations therein by that Lender in any outstanding Swing Line Loans. "REVOLVING LOAN" means a Loan made by a Lender to Company pursuant to Section 2.2(a) or Section 2.3(b)(iv). "REVOLVING LOAN NOTE" means a promissory note substantially in the form of Exhibit B-2, as it may be amended, supplemented or otherwise modified from time to time. "RIGHTS AGREEMENT" means the Stockholder Protection Rights Agreement, dated as of April 20, 1998, between Parent and UMB Bank, NA, as rights agent. 26 33 "SALE-LEASEBACKS" has the meaning assigned to that term in Section 6.9. "S&P" means Standard & Poor's Ratings Group, a division of The McGraw Hill Corporation. "SEC" means the Securities and Exchange Commission or any successor entity. "SECURED PARTY" has the meaning assigned to that term in the Pledge Agreement. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SHARE COLLATERAL" means the "Collateral" (as that term is defined in Section 1.1 of the Pledge Agreement). "SOLVENCY CERTIFICATE" means a Solvency Certificate of the chief financial officer of Parent substantially in the form of Exhibit G-2. "SOLVENT" means, with respect to any Person, that as of the date of determination both (i) (a) the sum of such Person's debt (including contingent liabilities) does not exceed all of its property, at a fair valuation; (b) the present fair saleable value of the property of such Person is not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured; (c) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (d) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (ii) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability (irrespective of whether such contingent liabilities meet the criteria for accrual under Statement of Financial Accounting Standard No.5). "SUBJECT TRANSACTION" as defined in Section 6.6(e). 27 34 "SUBORDINATED INDEBTEDNESS" means Indebtedness of Parent and its Subsidiaries subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance reasonably satisfactory to Administrative Agent and the Requisite Lenders. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof; provided, in determining the percentage of ownership interests of any Person controlled by another Person, no ownership interest in the nature of a "qualifying share" of the former Person shall be deemed to be outstanding. "SWING LINE LENDER" means Bank One in its capacity as Swing Line Lender hereunder, together with its permitted successors and assigns in such capacity. "SWING LINE LOAN" means a Revolving Loan made by Swing Line Lender to Company pursuant to Section 2.3. "SWING LINE NOTE" means a promissory note in the form of Exhibit B-3, as it may be amended, supplemented or otherwise modified from time to time. "SWING LINE SUBLIMIT" means the lesser of (i) $3,000,000, and (ii) the aggregate unused amount of Revolving Credit Commitments then in effect. "SYNDICATION AGENT" as defined in the preamble hereto. "TAX" means any present or future tax, levy, impost, duty, assessment, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided, "TAX ON THE OVERALL NET INCOME" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's applicable principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its applicable lending office). "TENDER OFFER" as defined in the recitals hereto. 28 35 "TENDER OFFER CONSIDERATION" as defined in the recitals hereto. "TENDER OFFER DOCUMENTS" means (i) the Offer to Purchase, as such Offer to Purchase may thereafter have been or may be amended, restated, supplemented or otherwise modified from time to time on or prior to the Closing Date pursuant to documentation in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent (such consent not to be unreasonably withheld or delayed) and (ii) all related documents, shareholder notices and SEC and other governmental filings. "TENDER OFFER PRICE" means the price of $53.00 per share of Parent Common Stock paid by Parent pursuant to the Tender Offer. "TERM LOAN" means a Term Loan made by a Lender to Company pursuant to Section 2.1(a). "TERM LOAN COMMITMENT" means the Commitment of a Lender to make or otherwise fund a Term Loan to Company. The amount of each Lender's Term Loan Commitment, if any, is set forth on Appendix A or in the applicable Assignment Agreement, subject to any adjustment or reduction pursuant to the terms and conditions hereof; "TERM LOAN COMMITMENTS" means such Commitments of all Lenders in the aggregate, and the aggregate amount of the Term Loan Commitments as of the Closing Date is $400,000,000. "TERM LOAN COMMITMENT TERMINATION DATE" means the earliest to occur of (a) June 3, 2000, but only if the Closing Date has not occurred prior to such date, (b) the Closing Date after giving effect to the funding of the Term Loans on such date or (c) the date of the termination of the Term Loan Commitment pursuant to Section 8.1. "TERM LOAN EXPOSURE" means, with respect to any Lender, as of any date of determination, (i) at any time prior to the making of the Term Loans, the Term Loan Exposure of any Lender shall be equal to such Lender's Term Loan Commitment and (ii) after the initial funding of the Term Loans, the outstanding principal amount of the Term Loans of that Lender. "TERM LOAN MATURITY DATE" means the earlier of (i) the fifth year anniversary of the Closing Date, and (ii) the date that all Term Loans shall otherwise become due and payable in full hereunder, whether by acceleration or otherwise. "TERM LOAN NOTE" means a promissory note substantially in the form of Exhibit B- 1, as it may be amended, supplemented or otherwise modified from time to time. "TERMINATED LENDER" as defined in Section 2.23. "TOTAL UTILIZATION OF REVOLVING CREDIT COMMITMENTS" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans (other than Revolving Loans made for the purpose of repaying any Refunded Swing Line Loans or 29 36 reimbursing Issuing Bank for any amount drawn under any Letter of Credit, but not yet so applied), (ii) the aggregate principal amount of all outstanding Swing Line Loans, and (iii) the Letter of Credit Usage. "TRANSACTION" means, collectively (i) the consummation of the Tender Offer, (ii) the consummation of the Refinancing and (iii) the payment of fees and expenses in connection with the foregoing. "TRANSACTION COSTS" means collectively, the estimated fees, costs and expenses payable by Parent and its Subsidiaries in connection with the transactions contemplated by the Transaction Documents and the Credit Documents. "TRANSACTION DOCUMENTS" means collectively, (i) the Tender Offer Documents and (ii) the documents governing the Refinancing and all other documents, instruments or agreements executed and delivered by Parent or any of its Subsidiaries in connection therewith. "TRANSACTION FINANCING REQUIREMENTS" means the aggregate of all amounts necessary (i) to pay the Tender Offer Consideration, (ii) to refinance the Refinanced Indebtedness pursuant to the Refinancing; and (iii) to pay the Transaction Costs. "TYPE OF LOAN" means (i) with respect to either Term Loans or Revolving Loans, a Base Rate Loan or a Eurodollar Rate Loan, and (ii) with respect to Swing Line Loans, a Base Rate Loan. "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "UNADJUSTED EURODOLLAR RATE COMPONENT" means that component of the interest cost to Company in respect of a Eurodollar Rate Loan that is based upon the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate. 1.2. ACCOUNTING TERMS. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Parent or Company to Lenders pursuant to Section 5.1(a) and 5.1(b) shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in Section 5.1(d), if applicable). Subject to the foregoing, calculations in connection with the definitions, covenants and other provisions hereof shall utilize accounting principles and policies in conformity with those used to prepare the Historical Financial Statements. 1.3. INTERPRETATION, ETC. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. References herein to any Section, Appendix, Schedule or Exhibit shall be to a Section, an Appendix, a Schedule or an Exhibit, as the case may be, hereof unless otherwise specifically provided. The use herein of the word "include" or "including", when following any general statement, term or matter, shall not be 30 37 construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. SECTION 2. LOANS AND LETTERS OF CREDIT 2.1. TERM LOANS. (a) Loan Commitments. (i) Subject to the terms and conditions hereof (including, without limitation, Section 2.6), each Lender holding a Term Loan Commitment severally agrees to make, on the Closing Date, a Term Loan to Company in the aggregate amount up to but not exceeding such Lender's Term Loan Commitment. (ii) Company may make only one borrowing under the Term Loan Commitment which shall be on the Closing Date. Any amount borrowed under this Section 2.1(a) and subsequently repaid or prepaid may not be reborrowed. Subject to Sections 2.13(a) and 2.14, all amounts owed hereunder with respect to the Term Loans shall be paid in full no later than the Term Loan Maturity Date. Each Lender's Term Loan Commitment shall terminate immediately and without further action on Term Loan Commitment Termination Date. (b) Borrowing Mechanics for Term Loans. (i) Company shall deliver to Administrative Agent a fully executed Closing Date Certificate (which shall be deemed to be a Funding Notice with respect to the Term Loans) on the Closing Date. Promptly upon receipt by Administrative Agent of such Certificate, Administrative Agent shall notify each Lender of the proposed borrowing. (ii) Each Lender shall make its Term Loan available to Administrative Agent not later than 12:00 p.m. (Chicago time) on the Closing Date, by wire transfer of same day funds in Dollars, at Administrative Agent's Principal Office. Upon satisfaction or waiver of the conditions precedent specified herein, Administrative Agent shall make the proceeds of the Term Loans available to Company on the Closing Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders to be credited to the account of Company at Administrative Agent's Principal Office or to such other account as may be designated in writing to Administrative Agent by Company. 2.2. REVOLVING LOANS. (a) Revolving Credit Commitments. (i) During the Revolving Credit Commitment Period, subject to the terms and conditions hereof, each Lender holding a Revolving Credit Commitment severally agrees to make Revolving Loans to Company in the aggregate amount up to but not exceeding such Lender's Revolving Credit Commitment; provided, after giving effect 31 38 to the making of any Revolving Loans in no event shall the Total Utilization of Revolving Credit Commitments exceed the Revolving Credit Commitments then in effect. (ii) Amounts borrowed pursuant to this Section 2.2(a) may be repaid and reborrowed during the Revolving Credit Commitment Period. Each Lender's Revolving Credit Commitment shall expire on the Revolving Credit Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Credit Commitments shall be paid in full no later than such date. (b) Borrowing Mechanics for Revolving Loans. (i) Except with regard to Refunded Swing Line Loans, Revolving Loans that are Base Rate Loans shall be made in an aggregate minimum amount of $3,000,000 and integral multiples of $1,000,000 in excess of that amount, and Revolving Loans that are Eurodollar Rate Loans shall be in an aggregate minimum amount of $3,000,000 and integral multiples of $1,000,000 in excess of that amount. (ii) Whenever Company desires that Lenders make Revolving Loans, Company shall deliver to Administrative Agent a fully executed Funding Notice no later than 10:00 a.m. (Chicago time) at least three (3) Business Days in advance of the proposed Credit Date in the case of a Eurodollar Rate Loan, and at least one (1) Business Day in advance of the proposed Credit Date in the case of a Revolving Loan that is a Base Rate Loan. Except as otherwise provided herein, a Funding Notice for a Revolving Loan that is a Eurodollar Rate Loan shall be irrevocable on and after the date given, and Company shall be bound to make a borrowing in accordance therewith. (iii) Notice of receipt of each Funding Notice in respect of Revolving Loans, together with the amount of each Lender's Pro Rata Share thereof, if any, together with the applicable interest rate, shall be provided by Administrative Agent to each applicable Lender by telefacsimile with reasonable promptness, but (provided Administrative Agent shall have received such notice by 10:00 a.m. (Chicago time)) not later than 2:00 p.m. (Chicago time) on the same day as Administrative Agent's receipt of such Notice from Company. (iv) Each Lender shall make the amount of its Revolving Loan available to Administrative Agent not later than 12:00 p.m. (Chicago time) on the applicable Credit Date by wire transfer of same day funds in Dollars, at the Administrative Agent's Principal Office. Except as provided herein, upon satisfaction or waiver of the conditions precedent specified herein, Administrative Agent shall make the proceeds of such Revolving Loans available to Company on the applicable Credit Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Revolving Loans received by Administrative Agent from Lenders to be credited to the account of Company at the Administrative Agent's Principal Office or such other account as may be designated in writing to Administrative Agent by Company. 32 39 2.3. SWING LINE LOANS. (a) Swing Line Loans Commitments. During the Revolving Credit Commitment Period, subject to the terms and conditions hereof, Swing Line Lender hereby agrees to make Swing Line Loans to Company in the aggregate amount up to but not exceeding the Swing Line Sublimit; provided, after giving effect to the making of any Swing Line Loan, in no event shall the Total Utilization of Revolving Credit Commitments exceed the Revolving Credit Commitments then in effect. Amounts borrowed pursuant to this Section 2.3 may be repaid and reborrowed during the Revolving Credit Commitment Period. Swing Line Lender's Revolving Credit Commitment shall expire on the Revolving Credit Commitment Termination Date and all Swing Line Loans and all other amounts owed hereunder with respect to the Swing Line Loans and the Revolving Credit Commitments shall be paid in full no later than such date. (b) Borrowing Mechanics for Swing Line Loans. (i) Swing Line Loans shall be made in an aggregate minimum amount of $5,000. (ii) Whenever Company desires that Swing Line Lender make a Swing Line Loan, Company shall deliver to Administrative Agent a Funding Notice no later than 12:00 p.m. (Chicago time) on the proposed Credit Date. (iii) Swing Line Lender shall make the amount of its Swing Line Loan available to Administrative Agent not later than 2:00 p.m.(Chicago time) on the applicable Credit Date by wire transfer of same day funds in Dollars, at the Administrative Agent's Principal Office. Except as provided herein, upon satisfaction or waiver of the conditions precedent specified herein, Administrative Agent shall make the proceeds of such Swing Line Loans available to Company on the applicable Credit Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Swing Line Loans received by Administrative Agent from Swing Line Lender to be credited to the account of Company at the Administrative Agent's Principal Office, or to such other account as may be designated in writing to Administrative Agent by Company. (iv) With respect to any Swing Line Loans which have not been voluntarily prepaid by Company pursuant to Section 2.13, Swing Line Lender may at any time in its sole and absolute discretion, deliver to Administrative Agent (with a copy to Company), no later than 11:00 a.m. (Chicago time) at least one (1) Business Day in advance of the proposed Credit Date, a notice (which shall be deemed to be a Funding Notice given by Company) requesting that each Lender holding a Revolving Credit Commitment make Revolving Loans that are Base Rate Loans to Company on such Credit Date in an amount equal to the amount of such Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is given which the Swing Line Lender requests Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (1) the proceeds of such Revolving Loans made by the Lenders other than Swing Line Lender shall be immediately delivered by Administrative Agent to Swing Line Lender (and not to Company) and applied to repay a corresponding portion of the Refunded Swing Line Loans and 33 40 (2) on the day such Revolving Loans are made, Swing Line Lender's Pro Rata Share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a Revolving Loan made by Swing Line Lender to Company, and such portion of the Swing Line Loans deemed to be so paid shall no longer be outstanding as Swing Line Loans and shall no longer be due under the Swing Line Note of Swing Line Lender but shall instead constitute part of Swing Line Lender's outstanding Revolving Loans to Company and shall be due under the Revolving Loan Note issued by Company to Swing Line Lender. Company hereby authorizes Administrative Agent and Swing Line Lender to charge Company's accounts with Administrative Agent and Swing Line Lender (up to the amount available in each such account) in order to immediately pay Swing Line Lender the amount of the Refunded Swing Line Loans to the extent the proceeds of such Revolving Loans made by Lenders, including the Revolving Loan deemed to be made by the Swing Line Lender, are not sufficient to repay in full the Refunded Swing Line Loans. If any portion of any such amount paid (or deemed to be paid) to Swing Line Lender should be recovered by or on behalf of Company from Swing Line Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Lenders in the manner contemplated by Section 2.17. (v) If for any reason Revolving Loans are not made pursuant to Section 2.3(b)(iv) in an amount sufficient to repay any amounts owed to Swing Line Lender in respect of any outstanding Swing Line Loans on or before the third Business Day after demand for payment thereof by Swing Line Lender, each Lender holding a Revolving Credit Commitment shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swing Line Loans, and in an amount equal to its Pro Rata Share of the applicable unpaid amount together with accrued interest thereon. Upon one (1) Business Day's notice from Swing Line Lender, each Lender holding a Revolving Credit Commitment shall deliver to Swing Line Lender an amount equal to its respective participation in the applicable unpaid amount in same day funds at the Principal Office of Swing Line Lender. In order to evidence such participation each Lender holding a Revolving Credit Commitment agrees to enter into a participation agreement at the request of Swing Line Lender in form and substance reasonably satisfactory to Swing Line Lender. In the event any Lender holding a Revolving Credit Commitment fails to make available to Swing Line Lender the amount of such Lender's participation as provided in this paragraph, Swing Line Lender shall be entitled to recover such amount on demand from such Lender together with interest thereon for three Business Days at the rate customarily used by Swing Line Lender for the correction of errors among banks and thereafter at the Base Rate, as applicable. (vi) Notwithstanding anything contained herein to the contrary, (1) each Lender's obligation to make Revolving Loans for the purpose of repaying any Refunded Swing Line Loans pursuant to the second preceding paragraph and each Lender's obligation to purchase a participation in any unpaid Swing Line Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation (A) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against Swing Line Lender, any Credit Party or any other Person for any reason whatsoever; (B) the occurrence or continuation of a Default or Event of Default; (C) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of any Credit Party; (D) any breach of this Agreement or any other Credit Document by any party thereto; or (E) 34 41 any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided that such obligations of each Lender are subject to the condition that Swing Line Lender believed in good faith that all conditions under Section 3.2 to the making of the applicable Refunded Swing Line Loans or other unpaid Swing Line Loans, were satisfied at the time such Refunded Swing Line Loans or unpaid Swing Line Loans were made, or the satisfaction of any such condition not satisfied had been waived by Requisite Lenders prior to or at the time such Refunded Swing Line Loans or other unpaid Swing Line Loans were made; and (2) Swing Line Lender shall not be obligated to make any Swing Line Loans (A) if it has elected not to do so after the occurrence and during the continuation of a Default or Event of Default or (B) at a time when a Funding Default exists unless Swing Line Lender has entered into arrangements satisfactory to it and Company to eliminate Swing Line Lender's risk with respect to the Defaulting Lender's participation in such Swing Ling Loan, including by cash collateralizing such Defaulting Lender's Pro Rata Share of the outstanding Swing Line Loans. 2.4. ISSUANCE OF LETTERS OF CREDIT AND PURCHASE OF PARTICIPATIONS THEREIN. (a) Letters of Credit. During the Revolving Credit Commitment Period, subject to the terms and conditions hereof, Issuing Bank agrees to issue Letters of Credit for the account of Company in the aggregate amount up to but not exceeding the Letter of Credit Sublimit; provided, (i) each Letter of Credit shall be denominated in Dollars; (ii) the stated amount of each Letter of Credit shall not be less than $5,000 or such lesser amount as is acceptable to Issuing Bank; (iii) after giving effect to such issuance, in no event shall the Total Utilization of Revolving Credit Commitments exceed the Revolving Credit Commitments then in effect; (iv) after giving effect to such issuance, in no event shall the Letter of Credit Usage exceed the Letter of Credit Sublimit then in effect; (v) in no event shall any standby Letter of Credit have an expiration date later than the earlier of (1) the Revolving Credit Commitment Termination Date and (2) the date which is one year from the date of issuance of such standby Letter of Credit; and (vi) in no event shall any commercial Letter of Credit (x) have an expiration date later than the earlier of (1) the Revolving Credit Commitment Termination Date and (2) the date which is 180 days from the date of issuance of such commercial Letter of Credit or (y) be issued if such commercial Letter of Credit is otherwise unacceptable to the Issuing Bank in accordance with the Issuing Bank's standard practices. Subject to the foregoing, Issuing Bank may agree that a standby Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each, unless Issuing Bank elects not to extend for any such additional period; provided, Issuing Bank shall not extend any such Letter of Credit if it has received written notice that an Event of Default has occurred and is continuing at the time Issuing Bank must elect to allow such extension; provided, further, in the event a Funding Default exists, Issuing Bank shall not be required to issue any Letter of Credit unless Issuing Bank has entered into arrangements satisfactory to it and Company to eliminate Issuing Bank's risk with respect to the participation in Letters of Credit of the Defaulting Lender, including by cash collateralizing such Defaulting Lender's Pro Rata Share of the Letter of Credit Usage. (b) Notice of Issuance. Whenever Company desires the issuance of a Letter of Credit, it shall deliver to Administrative Agent an Issuance Notice no later than 12:00 p.m. (Chicago time) at least three Business Days or such shorter period as may be agreed to by Issuing Bank in any 35 42 particular instance, in advance of the proposed date of issuance. Upon the request of a Lender, Issuing Bank shall deliver to such Lender a copy of each Letter of Credit and any amendment or modification to a Letter of Credit and shall notify such Lender of the amount of such Lender's respective participation in such Letter of Credit pursuant to Section 2.4(e). Upon the request of a Lender, within fifteen (15) days after the end of each month ending after the Closing Date, so long as any Letter of Credit shall have been outstanding during such month, Issuing Bank shall deliver to such Lender a report setting forth for such month the daily aggregate amount available to be drawn under the Letters of Credit that were outstanding during such month. (c) Responsibility of Issuing Bank With Respect to Requests for Drawings and Payments. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, Issuing Bank shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in accordance with the terms and conditions of such Letter of Credit. As between Company and Issuing Bank, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by Issuing Bank, by the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, Issuing Bank shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any 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; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of Issuing Bank, including any Governmental Acts; none of the above shall affect or impair, or prevent the vesting of, any of Issuing Bank's rights or powers hereunder. Without limiting the foregoing and in furtherance thereof, any action taken or omitted by Issuing Bank under or in connection with the Letters of Credit or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put Issuing Bank under any resulting liability to Company. Notwithstanding anything to the contrary contained in this Section 2.4(c), Company shall retain any and all rights it may have against Issuing Bank for any liability arising out of the gross negligence or willful misconduct of Issuing Bank. (d) Reimbursement by Company of Amounts Drawn or Paid Under Letters of Credit. In the event Issuing Bank has determined to honor a drawing under a Letter of Credit, it shall immediately notify Company and Administrative Agent by telephone and facsimile, and Company shall reimburse Issuing Bank on or before the Business Day immediately following the date on which such drawing is honored (the "REIMBURSEMENT DATE") in an amount in Dollars and in same 36 43 day funds equal to the amount of such honored drawing; provided, anything contained herein to the contrary notwithstanding, (i) unless Company shall have notified Administrative Agent and Issuing Bank prior to 12:00 p.m. (Chicago time) on the date such drawing is honored that Company intends to reimburse Issuing Bank for the amount of such honored drawing with funds other than the proceeds of a Swing Line Loan, Company shall be deemed to have given a timely Funding Notice to Administrative Agent requesting Swing Line Lender to make a Swing Line Loan on the Reimbursement Date in an amount in Dollars equal to the amount of such honored drawing (up to the amount available under the Swing Line Sublimit), and (ii) subject to satisfaction or waiver of the conditions specified in Section 3, Swing Line Lender shall, on the Reimbursement Date, make a Swing Line Loan in the amount of such honored drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse Issuing Bank for the amount of such honored drawing; and provided further, if for any reason proceeds of the Swing Line Loan is not received by Issuing Bank on the Reimbursement Date in an amount equal to the amount of such honored drawing, Company shall reimburse Issuing Bank, on demand, in an amount in same day funds equal to the excess of the amount of such honored drawing over the aggregate amount of such Swing Line Loan, if any, which is so received. Nothing in this Section 2.4(d) shall be deemed to relieve Swing Line Lender from its obligation to make Swing Line Loan on the terms and conditions set forth herein, and Company shall retain any and all rights it may have against Swing Line Lender resulting from the failure of Swing Line Lender to make such Swing Line Loan under this Section 2.4(d). (e) Lenders' Purchase of Participations in Letters of Credit. Immediately upon the issuance of each Letter of Credit, each Lender having a Revolving Credit Commitment shall be deemed to have purchased, and hereby agrees to irrevocably purchase, from Issuing Bank a participation in such Letter of Credit and any drawings honored thereunder in an amount equal to such Lender's Pro Rata Share (with respect to the Revolving Credit Commitments) of the maximum amount which is or at any time may become available to be drawn thereunder. In the event that Company shall fail for any reason to reimburse Issuing Bank as provided in Section 2.4(d), Issuing Bank shall promptly notify each Lender of the unreimbursed amount of such honored drawing and of such Lender's respective participation therein based on such Lender's Pro Rata Share of the Revolving Credit Commitments. Each Lender shall make available to Issuing Bank an amount equal to its respective participation, in Dollars and in same day funds, at the office of Issuing Bank specified in such notice, not later than 12:00 p.m. (Chicago time) on the first business day (under the laws of the jurisdiction in which such office of Issuing Bank is located) after the date notified by Issuing Bank. In the event that any Lender fails to make available to Issuing Bank on such business day the amount of such Lender's participation in such Letter of Credit as provided in this Section 2.4(e), Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest thereon for three Business Days at the rate customarily used by Issuing Bank for the correction of errors among banks and thereafter at the Base Rate. Nothing in this Section 2.4(e) shall be deemed to prejudice the right of any Lender to recover from Issuing Bank any amounts made available by such Lender to Issuing Bank pursuant to this Section in the event that it is determined that the payment with respect to a Letter of Credit in respect of which payment was made by such Lender constituted gross negligence or willful misconduct on the part of Issuing Bank. In the event Issuing Bank shall have been reimbursed by other Lenders pursuant to this Section 2.4(e) for all or any portion of any drawing honored by Issuing Bank under a Letter of Credit, such 37 44 Issuing Bank shall distribute to each Lender which has paid all amounts payable by it under this Section 2.4(e) with respect to such honored drawing such Lender's Pro Rata Share of all payments subsequently received by Issuing Bank from Company in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Lender at its primary address set forth below its name on Appendix C or at such other address as such Lender may request. (f) Obligations Absolute. The obligation of Company to reimburse Issuing Bank for drawings honored under the Letters of Credit issued by it and to repay any Swing Line Loans made by the Swing Line Lender under Section 2.4(d) and to repay any Revolving Loans made by the Lenders in respect of any Refunded Swing Line Loans arising out of the Swing Line Loans thereunder and the obligations of Lenders under Section 2.4(e) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms hereof under all circumstances including any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, set-off, defense or other right which Company or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), Issuing Bank, any Lender or any other Person or, in the case of a Lender, against Company, whether in connection herewith, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured); (iii) any draft 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; (iv) payment by Issuing Bank under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit; (v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Parent or any of its Subsidiaries; (vi) any breach hereof or any other Credit Document by any party thereto; (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or (viii) the fact that an Event of Default or a Default shall have occurred and be continuing; provided, in each case, that payment by Issuing Bank under the applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of Issuing Bank under the circumstances in question. (g) Indemnification. Without duplication of any obligation of Company under Section 10.2 or 10.3, in addition to amounts payable as provided herein, Company hereby agrees to protect, indemnify, pay and save harmless Issuing Bank from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which Issuing Bank may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by Issuing Bank, other than as a result of (1) the gross negligence or willful misconduct of Issuing Bank or (2) the wrongful dishonor by Issuing Bank of a proper demand for payment made under any Letter of Credit issued by it, or (ii) the failure of Issuing Bank to honor a drawing under any such Letter of Credit as a result of any Governmental Act. (h) Collateral Account. Bank One is hereby authorized to establish and maintain at Bank One's Principal Office, as a blocked account in the name of Bank One and under the sole 38 45 dominion and control thereof, a restricted deposit account designated as "Payless ShoeSource Collateral Account" (the "COLLATERAL ACCOUNT"). All amounts at any time held in the Collateral Account shall be beneficially owned by Company but shall be held in the name of Collateral Agent, for the benefit of the Secured Parties, as collateral security for the Obligations upon the terms and conditions set forth herein and pursuant to documentation reasonably acceptable to Collateral Agent. Company shall have no right to withdraw, transfer or, except as expressly set forth herein, otherwise receive any funds deposited into the Collateral Account. Anything contained herein to the contrary notwithstanding, the Collateral Account shall be subject to such applicable laws, and such applicable regulations of the Board of Governors of the Federal Reserve System and of any other appropriate banking or governmental authority, as may now or hereafter be in effect. All deposits of funds in the Collateral Account shall be made by wire transfer (or, if applicable, by intra-bank transfer from another account of Company) of immediately available funds, in each case addressed to Collateral Agent's Principal Office. Company shall, promptly after initiating a transfer of funds to the Collateral Account, give notice to Collateral Agent by telefacsimile of the date, amount and method of delivery of such deposit. To the extent permitted under Regulation Q of the Board of Governors of the Federal Reserve System, any cash held in the Collateral Account shall bear interest at the standard rate paid by Bank One to its customers for deposits of like amounts and terms. Subject to Collateral Agent's rights hereunder, any interest earned on deposits of cash in the Collateral Account shall be deposited directly in, and held in the Collateral Account. (i) Application of Collateral Account Proceeds. Upon the occurrence and during the continuance of an Event of Default at the request of Issuing Bank or Lenders holding more than 50% of the aggregate Revolving Credit Exposure, Company shall deliver funds for deposit in the Collateral Account in an amount equal to the Letter of Credit Usage at such time. If for any reason the aggregate amount delivered by Company for deposit in the Collateral Account as aforesaid is less than the Letter of Credit Usage at such time, the aggregate amount so delivered by Company shall be apportioned among all outstanding Letters of Credit for purposes of this Section 2.4(i) in accordance with the ratio of the maximum amount available for drawing under each such Letter of Credit (as to such Letter of Credit, the "MAXIMUM AVAILABLE AMOUNT") to the Letter of Credit Usage at such time. Upon any drawing under any outstanding Letter of Credit in respect of which Company has deposited in the Collateral Account any amounts described above, Collateral Agent shall apply such amounts to reimburse Issuing Bank for the amount of such drawing. In the event of cancellation or expiration of any Letter of Credit in respect of which Company has deposited in the Collateral Account any amount described above, or in the event of any reduction in the Maximum Available Amount under such Letter of Credit, Collateral Agent shall apply the amount then on deposit in the Collateral Account in respect of such Letter of Credit (less, in the case of such a reduction, the Maximum Available Amount under such Letter of Credit immediately after such reduction): first, to the payment of any amounts payable to Administrative Agent pursuant to Section 9; second, to the extent of any excess, to the cash collateralization pursuant to the terms of this Agreement of any outstanding Letters of Credit in respect of which 39 46 Company has failed to pay all or a portion of the amounts described above (such cash collateralization to be apportioned among all such Letters of Credit in the manner described above); and third, to the extent of any further excess, to the payment of any other outstanding Obligations in such order as directed by the Lenders holding more than 50% of the aggregate Revolving Credit Exposure. 2.5. PRO RATA SHARES; AVAILABILITY OF FUNDS. (a) Pro Rata Shares. All Loans (other than Swing Line Loans) shall be made, and all participations purchased, by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in such other Lender's obligation to make a Loan requested hereunder or purchase a participation required hereby nor shall any Commitment of any Lender be increased or decreased as a result of a default by any other Lender in such other Lender's obligation to make a Loan requested hereunder or purchase a participation required hereby. (b) Availability of Funds. Unless Administrative Agent shall have been notified by any Lender prior to the applicable Credit Date that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Credit Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Credit Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Credit Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Credit Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Credit Date until the date such amount is paid to Administrative Agent, at the rate payable hereunder for Base Rate Loans for such Class of Loans. Nothing in this Section 2.5(b) shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. 2.6. USE OF PROCEEDS. (a) Term Loans. The proceeds of the Term Loans shall be applied by Company on the Closing Date solely to fund the payment of Transaction Financing Requirements. (b) Revolving Loans, Swing Line Loans and Letters of Credit. The proceeds of the Revolving Loans, Swing Line Loans and Letters of Credit in an aggregate amount not to exceed 40 47 $50,000,000 may be applied by Company on the Closing Date to fund the payment of the Transaction Financing Requirements. All of the proceeds of Revolving Loans, Swing Line Loans and Letters of Credit may be applied by Company for working capital and general corporate and other purposes of Parent and its Subsidiaries, including Permitted Acquisitions. (c) Margin Regulations. No portion of the proceeds of any Credit Extension shall be used by Parent or any of its Subsidiaries in any manner that might cause such Credit Extension or the application of such proceeds to violate Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation thereof or to violate the Exchange Act, in each case as in effect on the date or dates of such Credit Extension and such use of proceeds. 2.7. EVIDENCE OF DEBT; REGISTER; LENDERS' BOOKS AND RECORDS; NOTES. (a) Lenders' Evidence of Debt. Each Lender shall maintain on its internal records an account or accounts evidencing the Indebtedness of Company to such Lender, including the amounts of the Loans made by it and each repayment and prepayment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; provided, failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of any applicable Loans; and provided further, in the event of any inconsistency between the Register and any Lender's records, the recordations in the Register shall govern absent manifest error. (b) Register. Administrative Agent shall maintain at its Principal Office a register for the recordation of the names and addresses of Lenders and the Commitments and Loans of each Lender from time to time (the "REGISTER"). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. Administrative Agent shall record in the Register the Commitments and the Loans, and each repayment or prepayment in respect of the principal amount of the Loans, and any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; provided, failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of any Loan. Company hereby designates Bank One to serve as Company's agent solely for purposes of maintaining the Register as provided in this Section 2.6, and Company hereby agrees that, to the extent Bank One serves in such capacity, Bank One and its officers, directors, employees, agents and affiliates shall constitute "INDEMNITEES." (c) Notes. If so requested by any Lender by written notice to Company (with a copy to Administrative Agent) at least two Business Days prior to the Closing Date, or at any time thereafter, Company shall execute and deliver to such Lender (and/or, if applicable and if so specified in such notice, to any Person who is an assignee of such Lender pursuant to Section 10.6) on the Closing Date (or, if such notice is delivered after the Closing Date, promptly after Company's receipt of such notice) a Note or Notes to evidence such Lender's Term Loan, Revolving Loan or Swing Line Loan, as the case may be. 41 48 2.8. INTEREST ON LOANS. (a) Except as otherwise set forth herein, each Class of Loan shall bear interest on the unpaid principal amount thereof from the date made through repayment (whether by acceleration or otherwise) thereof as follows: (i) in the case of Term Loans and Revolving Loans: (1) if a Base Rate Loan, at the Base Rate plus the Applicable Margin; or (2) if a Eurodollar Rate Loan, at the Adjusted Eurodollar Rate plus the Applicable Margin; and (ii) in the case of Swing Line Loans, at the Base Rate plus the Applicable Margin. (b) The basis for determining the rate of interest with respect to any Loan (except a Swing Line Loan which can be made and maintained as Base Rate Loans only), and the Interest Period with respect to any Eurodollar Rate Loan, shall be selected by Company and notified to Administrative Agent and Lenders pursuant to the applicable Funding Notice or Conversion/Continuation Notice, as the case may be; provided, the Loans initially shall be made and maintained as either Base Rate Loans or Eurodollar Rate Loans having an Interest Period of no longer than one month until the date which is the earlier of (i) the date which is ninety (90) days following the Closing Date and (ii) the date that Syndication Agent notifies Company and Administrative Agent that the primary syndication of the Loans and Commitments has been completed, as determined by Syndication Agent. If on any day a Loan is outstanding with respect to which a Funding Notice or Conversion/Continuation Notice has not been delivered to Administrative Agent in accordance with the terms hereof specifying the applicable basis for determining the rate of interest, then for that day such Loan shall be a Base Rate Loan. (c) In connection with Eurodollar Rate Loans there shall be no more than nine (9) Interest Periods outstanding at any time. In the event Company fails to specify between a Base Rate Loan or a Eurodollar Rate Loan in the applicable Funding Notice or Conversion/Continuation Notice, such Loan (if outstanding as a Eurodollar Rate Loan) will be automatically converted into a Base Rate Loan on the last day of the then-current Interest Period for such Loan (or if outstanding as a Base Rate Loan will remain as, or (if not then outstanding) will be made as, a Base Rate Loan). In the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Funding Notice or Conversion/Continuation Notice, Company shall be deemed to have selected an Interest Period of one month. A soon as practicable after 10:00 a.m. (Chicago time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the 42 49 applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. (d) Interest payable pursuant to Section 2.8(a) shall be computed (i) in the case of Base Rate Loans on the basis of a 365-day or 366-day year, as the case may be, and (ii) in the case of Eurodollar Rate Loans, on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; provided, if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. (e) Except as otherwise set forth herein, interest on each Loan shall be payable in arrears on and to (i) each Interest Payment Date applicable to that Loan; (ii) any prepayment of that Loan, whether voluntary or mandatory, to the extent accrued on the amount being prepaid; and (iii) at maturity, including final maturity; provided, however, with respect to any prepayment of a Base Rate Loan, accrued interest shall instead be payable on the applicable Interest Payment Date. (f) Company agrees to pay to Issuing Bank, with respect to drawings honored under any Letter of Credit, interest on the amount paid by Issuing Bank in respect of each such honored drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by or on behalf of Company at a rate equal to (i) for the period from the date such drawing is honored to but excluding the applicable Reimbursement Date, the rate of interest otherwise payable hereunder with respect to Revolving Loans that are Base Rate Loans, and (ii) thereafter, a rate which is 2% per annum in excess of the rate of interest otherwise payable hereunder with respect to Revolving Loans that are Base Rate Loans. (g) Interest payable pursuant to Section 2.8(f) shall be computed on the basis of a 365-day or 366-day year, as the case may be, for the actual number of days elapsed in the period during which it accrues, and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. Promptly upon receipt by Issuing Bank of any payment of interest pursuant to Section 2.8(f), Issuing Bank shall distribute to each Lender, out of the interest received by Issuing Bank in respect of the period from the date such drawing is honored to but excluding the date on which Issuing Bank is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of any Revolving Loans), the amount that such Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period if no drawing had been honored under such Letter of Credit. In the event Issuing Bank shall have been reimbursed by Lenders for all or any portion of such honored drawing, Issuing Bank shall distribute to each Lender which has paid all amounts payable by it under Section 2.4(e) with respect to such honored drawing such Lender's Pro Rata Share of any interest received by Issuing Bank in respect of that portion of 43 50 such honored drawing so reimbursed by Lenders for the period from the date on which Issuing Bank was so reimbursed by Lenders to but excluding the date on which such portion of such honored drawing is reimbursed by Company. 2.9. CONVERSION/CONTINUATION. (a) Subject to Section 2.18 and so long as no Default or Event of Default shall have occurred and then be continuing, Company shall have the option: (i) to convert at any time all or any part of any Term Loan or Revolving Loan equal to $3,000,000 and integral multiples of $1,000,000 in excess of that amount from one Type of Loan to another Type of Loan; provided, a Eurodollar Rate Loan may only be converted on the expiration of the Interest Period applicable to such Eurodollar Rate Loan unless Company shall pay all amounts due under Section 2.18 in connection with any such conversion; or (ii) upon the expiration of any Interest Period applicable to any Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $3,000,000 and integral multiples of $1,000,000 in excess of that amount as a Eurodollar Rate Loan. (b) The Company shall deliver a Conversion/Continuation Notice to Administrative Agent no later than 10:00 a.m. (Chicago time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). Except as otherwise provided herein, a Conversion/Continuation Notice for conversion to, or continuation of, any Eurodollar Rate Loans (or telephonic notice in lieu thereof) shall be irrevocable on and after the date given and Company shall be bound to effect a conversion or continuation in accordance therewith. 2.10. DEFAULT INTEREST. Upon the occurrence and during the continuance of an Event of Default, the principal amount of all Loans and, to the extent permitted by applicable law, any interest payments on the Loans or any fees or other amounts owed hereunder not paid when due, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable on demand at a rate that is 2% per annum in excess of the interest rate otherwise payable hereunder with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable hereunder for Base Rate Loans); provided, in the case of Eurodollar Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable hereunder for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this Section 2.10 is not a permitted alternative to timely payment and shall not 44 51 constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender. 2.11. FEES. (a) Commitment Fees. (i) During the Revolving Credit Commitment Period, Company agrees to pay to Administrative Agent, for distribution to each Lender having Revolving Credit Exposure in proportion to such Lender's Pro Rata Share, commitment fees equal to (1) the average of the daily difference between (a) the Revolving Credit Commitments, and (b) the sum of (x) the aggregate principal amount of outstanding Revolving Loans (but not any outstanding Swing Line Loans) plus (y) the Letter of Credit Usage, times (2) the Applicable Commitment Fee Percentage. (ii) All such commitment fees shall be calculated on the basis of a 360-day year and the actual number of days elapsed, and shall be payable in arrears on April 30, July 31, October 31, and January 31 of each year, commencing on July 31, 2000, and on the Term Loan Commitment Termination Date and the Revolving Credit Commitment Termination Date. Promptly upon receipt by the Administrative Agent of any amount described in clause (i) the Administrative Agent shall distribute to each Lender its Pro Rata Share of such amount. (b) Letter of Credit Fees. Company agrees to pay: (i) a fronting fee, payable directly to Issuing Bank for its own account, equal to 0.10% per annum, times the aggregate daily amount available to be drawn under all outstanding Letters of Credit issued by such Issuing Bank (determined as of close of business on any date of determination), (ii) a letter of credit fee, payable to Administrative Agent for distribution to each Lender having Revolving Credit Exposure in proportion to such Lender's Pro Rata Share, equal to the product of (1) the Applicable Margin for Revolving Loans that are Eurodollar Rate Loans times (2) the average daily maximum amount available to be drawn under all such Letters of Credit (regardless of whether any conditions for drawing could then be met and determined as of the close of business on any date of determination), and (iii) such documentary and processing charges for any issuance, amendment, transfer or payment of a Letter of Credit as are in accordance with Issuing Bank's standard schedule for such charges and as in effect at the time of such issuance, amendment, transfer or payment, as the case may be. All such letter of credit fees (other than under clause (iii) above which will be paid on the day of such issuance, amendment, transfer or payment) shall be calculated on the basis 45 52 of a 360-day year and the actual number of days elapsed, and shall be payable quarterly in arrears on April 30, July 31, October 31 and January 31 of each year during the Revolving Credit Commitment Period, commencing on the first such date to occur after the Closing Date, and on the Revolving Credit Commitment Termination Date. Promptly upon receipt by Administrative Agent of any amount described in clause (ii) above, Administrative Agent shall distribute to each Lender its Pro Rata Share of such amount. (c) Agency and Lead Arranger. In addition to any of the foregoing fees, Company agrees to pay to Agents, for their respective accounts such other fees in the amounts and at the times separately agreed upon. 2.12. SCHEDULED PAYMENTS/COMMITMENT REDUCTIONS. (a) Scheduled Payments. The principal amounts of the Term Loans shall be repaid in installments (each, an "INSTALLMENT") on the dates set forth below (each, an "INSTALLMENT DATE"), each such Installment to be in the corresponding amount set forth below:
TERM LOAN DATE INSTALLMENTS ---- ------------ July 31, 2000 $5,000,000 October 31, 2000 $5,000,000 January 31, 2001 $5,000,000 April 30, 2001 $5,000,000 July 31, 2001 $12,500,000 October 31, 2001 $12,500,000 January 31, 2002 $12,500,000 April 30, 2002 $12,500,000 July 31, 2002 $20,000,000 October 31, 2002 $20,000,000 January 31, 2003 $20,000,000 April 30, 2003 $20,000,000 July 31, 2003 $27,500,000 October 31, 2003 $27,500,000
46 53
TERM LOAN DATE INSTALLMENTS ---- ------------ January 31, 2004 $27,500,000 April 30, 2004 $27,500,000 July 31, 2004 $35,000,000 October 31, 2004 $35,000,000 January 31, 2005 $35,000,000 Fifth Year Anniversary $35,000,000 of the Closing Date
Notwithstanding the foregoing, (i) such Installments shall be reduced in connection with any voluntary or mandatory prepayments of the Term Loans in accordance with Sections 2.13(a) and 2.14; and (ii) the Term Loans, together with all other amounts owed hereunder with respect thereto, shall be paid in full no later than the Term Loan Maturity Date. (b) Commitment Reductions. The Revolving Credit Commitments shall be permanently reduced to zero on the fifth year anniversary of the Closing Date. 2.13. VOLUNTARY PREPAYMENTS/COMMITMENT REDUCTIONS. (a) Voluntary Prepayments. (i) Any time and from time to time: (1) with respect to Term Loans, Company may prepay, without premium or penalty, any such Loans on any Business Day in whole or in part, in an aggregate minimum amount of $3,000,000 and integral multiples of $1,000,000 in excess of that amount; (2) with respect to Revolving Loans, Company may prepay, without premium or penalty, any such Loans on any Business Day in whole or in part in an aggregate minimum amount of $3,000,000 and integral multiples of $1,000,000 in excess of that amount; and (3) with respect to Swing Line Loans, Company may prepay, without premium or penalty, any such Loans on any Business Day in whole or in part in an aggregate minimum amount of $5,000. (ii) All such prepayments shall be made: (1) upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans; 47 54 (2) upon not less than three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans; and (3) upon written or telephonic notice on the date of prepayment, in the case of Swing Line Loans; in each case given to Administrative Agent or Swing Line Lender, as the case may be, by 12:00 p.m. (Chicago time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (and Administrative Agent will promptly transmit such telephonic or original notice for Term Loans or Revolving Loans, as the case may be, by telefacsimile or telephone to each Lender) or Swing Line Lender, as the case may be. Upon the giving of any such notice, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. (b) Voluntary Commitment Reductions. (i) Company may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each applicable Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, Revolving Credit Commitments in an amount up to the amount by which the Revolving Credit Commitments exceed the Total Utilization of Revolving Credit Commitments at the time of such proposed termination or reduction; provided, any such partial reduction of the Revolving Credit Commitments shall be in an aggregate minimum amount of $3,000,000 and integral multiples of $1,000,000 in excess of that amount. (ii) Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Credit Commitments shall be effective on the date specified in Company's notice and shall reduce the Revolving Credit Commitments of each Lender proportionately to its Pro Rata Share thereof. 2.14. MANDATORY PREPAYMENTS/COMMITMENT REDUCTIONS. (a) Asset Sales. If as of any date, Parent and any of its Subsidiaries shall have received Aggregate Net Asset Sale Proceeds (including Net Asset Sale Proceeds received in connection with a Permitted Sale-Leaseback, but only to the extent such Net Asset Sale Proceeds exceed $50,000,000 since the Closing Date) in excess of $10,000,000 in any Fiscal Year, Company shall, no later than the third Business Day following the date the Aggregate Net Asset Sale Proceeds received exceeds such amount, prepay the Term Loans as set forth in Section 2.15(b) in an aggregate amount equal to 100% of such excess; provided, so long as no Default or Event of Default shall have occurred and be continuing, Company shall have the option, directly or through one or more of its Subsidiaries, to invest Net Asset Sale Proceeds within three hundred sixty (360) days of receipt thereof in long term productive assets of the general type used in the business of Parent and its Subsidiaries or a Permitted Acquisition made in compliance with Section 6.7(f); provided further, 48 55 pending any such investment all such Net Asset Sale Proceeds shall be applied to prepay outstanding Revolving Loans (without a reduction in Revolving Credit Commitments). Notwithstanding anything to the contrary, this Section 2.14(a) shall not be applicable after the date on which Parent has received an Investment Grade Status rating. (b) Insurance/Condemnation Proceeds. If as of any date, Parent and its Subsidiaries shall have received Aggregate Net Insurance/Condemnation Proceeds in excess of $10,000,000 in any Fiscal Year, Company shall, no later than the third Business Day following the date the Aggregate Net Insurance/Condemnation Proceeds received exceeds such amount, prepay the Term Loans as set forth in Section 2.15(b) in an aggregate amount equal to 100% of such excess; provided, so long as no Default or Event of Default shall have occurred and be continuing, Company shall have the option, directly or through one or more of its Subsidiaries to invest such Net Insurance/Condemnation Proceeds within three hundred and sixty (360) days of receipt thereof in long term productive assets of the general type used in the business of Parent and its Subsidiaries, which investment may include the repair, restoration or replacement of the applicable assets thereof or a Permitted Acquisition made in compliance with Section 6.7(f); provided further, pending any such investment all such Net Insurance/Condemnation Proceeds, as the case may be, shall be applied to prepay outstanding Revolving Loans (without a reduction in Revolving Credit Commitments). Notwithstanding anything to the contrary, this Section 2.14(b) shall not be applicable after the date on which Parent has received an Investment Grade Status rating. (c) Issuance of Debt. If as of any date, Parent or any of its Subsidiaries shall have received Aggregate Net Debt Issuance Proceeds in excess of $25,000,000 in any Fiscal Year, Company shall, no later than the third Business Day following the date of receipt of such proceeds exceeding such amount, prepay the Term Loans as set forth in Section 2.15(b) in an aggregate amount equal to 100% of such excess. Notwithstanding anything to the contrary, this Section 2.14(c) shall not be applicable after the date on which Parent has received an Investment Grade Status rating. (d) Revolving Loans and Swing Line Loans. Company shall from time to time prepay first, the Swing Line Loans, and second, the Revolving Loans to the extent necessary so that the Total Utilization of Revolving Commitments shall not at any time exceed the Revolving Credit Commitments then in effect. (e) Prepayment Certificate. Concurrently with any prepayment of the Loans pursuant to Sections 2.14(a) through 2.14(c), Company shall deliver to Administrative Agent a certificate of an Authorized Officer demonstrating the calculation of the amount of the applicable net proceeds. In the event that Company shall subsequently determine that the actual amount received exceeded the amount set forth in such certificate, Company shall promptly make an additional prepayment of the Loans) in an amount equal to such excess, and Company shall concurrently therewith deliver to Administrative Agent a certificate of an Authorized Officer demonstrating the derivation of such excess. 49 56 2.15. APPLICATION OF PREPAYMENTS/REDUCTIONS. (a) Application of Voluntary Prepayments by Type of Loans. Any prepayment of any Loan pursuant to Section 2.13(a) shall be applied as specified by Company in the applicable notice of prepayment; provided, however, the voluntary prepayment of the Term Loans shall be applied as follows (i) 50% of each such prepayment shall be applied to prepay the next scheduled Installments of principal of the Term Loans in the order of maturity and (ii) the remaining 50% of each such prepayment shall be applied to prepay each remaining scheduled Installments of principal of the Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof); provided further, in the event Company fails to specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied as follows: first, to repay outstanding Swing Line Loans to the full extent thereof; second, to repay outstanding Revolving Loans to the full extent thereof; and third, to prepay the Term Loans with such amount applied as follows: (i) 50% of each such prepayment shall be applied to prepay the next scheduled Installments of principal of the Term Loans in the order of maturity and (ii) the remaining 50% of each such prepayment shall be applied to prepay each remaining scheduled Installments of principal of the Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof). (b) Application of Mandatory Prepayments by Type of Loans. Any amount required to be paid pursuant to Sections 2.14(a) through 2.14(c) shall be applied to prepay the Term Loans as follows: (i) 50% of such prepayment shall be applied to prepay each remaining scheduled Installments of principal of Term Loans in the inverse order of maturity and (ii) the remaining 50% of each such prepayment shall be applied to prepay each remaining scheduled Installments of principal of Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof). (c) Application of Prepayments of Loans to Base Rate Loans and Eurodollar Rate Loans. Considering each Class of Loans being prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to Section 2.18(c). 2.16. GENERAL PROVISIONS REGARDING PAYMENTS. (a) All payments by Company of principal, interest, fees and other Obligations shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 12:00 p.m. (Chicago time) on the date due at the Administrative Agent's Principal Office for the account of Lenders; 50 57 funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. (b) Except as set forth in Section 2.8(e), all payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal. (c) Administrative Agent shall promptly distribute to each Lender at such address as such Lender shall indicate in writing, such Lender's applicable Pro Rata Share of all payments and prepayments of principal and interest due hereunder, together with all other amounts due thereto, including, without limitation, all fees payable with respect thereto, to the extent received by Administrative Agent. (d) Notwithstanding the foregoing provisions hereof, if any Conver sion/Continuation Notice is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. (e) Subject to the provisos set forth in the definition of "Interest Period", whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the Revolving Credit Commitment fees hereunder, as the case may be. (f) Company hereby authorizes Administrative Agent to charge Company's accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (g) Administrative Agent shall deem any payment by or on behalf of Company hereunder that is not made in same day funds prior to 12:00 p.m. (Chicago time) to be a non- conforming payment. Any such payment shall not be deemed to have been received by Administrative Agent until the later of (i) the time such funds become available funds, and (ii) the applicable next Business Day. Administrative Agent shall give prompt telephonic notice to Company and each applicable Lender (confirmed in writing) if any payment is non-conforming. Any non-conforming payment may constitute or become a Default or Event of Default in accordance with the terms of Section 8.1(a). Interest shall continue to accrue on any principal as to which a non- conforming payment is made until such funds become available funds (but in no event less than the period from the date of such payment to the next succeeding applicable Business Day) at the rate determined pursuant to Section 2.10 from the date such amount was due and payable until the date such amount is paid in full. 51 58 2.17. RATABLE SHARING. Lenders hereby agree among themselves that, except as otherwise provided in the Collateral Documents with respect to amounts realized from the exercise of rights with respect to Liens on the Share Collateral, if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms hereof), through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Credit Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to such Lender hereunder or under the other Credit Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (a) notify Administrative Agent and each other Lender of the receipt of such payment and (b) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided, if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 2.18. MAKING OR MAINTAINING EURODOLLAR RATE LOANS. (a) Inability to Determine Applicable Interest Rate. In the event that Administrative Agent shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist, and (ii) any Funding Notice or Conversion/Continuation Notice given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Company. (b) Illegality or Impracticability of Eurodollar Rate Loans. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and 52 59 Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), or (ii) has become impracticable, as a result of contingencies occurring after the date hereof which materially and adversely affect the London interbank market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (1) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (2) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Funding Notice or a Conversion/Continuation Notice, the Affected Lender shall make such Loan as (or continue such Loan as or convert such Loan to, as the case may be) a Base Rate Loan, (3) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (4) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Funding Notice or a Conversion/Continuation Notice, Company shall have the option, subject to the provisions of Section 2.18(c), to rescind such Funding Notice or Conversion/Continuation Notice as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this Section 2.18(b) shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms hereof. (c) Compensation for Breakage of Non-Commencement of Interest Periods. Company shall compensate each Lender, upon written request by such Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by such Lender in connection with the liquidation or re-employment of such funds but excluding loss of anticipated profits) which such Lender may sustain: (i) if for any reason (other than a default by such Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Funding Notice or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Conversion/Continuation Notice or a telephonic request for conversion or continuation; (ii) if any prepayment or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan; (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date 53 60 specified in a notice of prepayment given by Company; or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate Loans when required by the terms hereof. (d) Booking of Eurodollar Rate Loans. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of such Lender. (e) Assumptions Concerning Funding of Eurodollar Rate Loans. Calculation of all amounts payable to a Lender under this Section 2.18 and under Section 2.19 shall be made as though such Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of such Lender to a domestic office of such Lender in the United States of America; provided, however, each Lender may fund each of its Eurodollar Rate Loans in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this Section 2.18 and under Section 2.19. 2.19. INCREASED COSTS; CAPITAL ADEQUACY. (a) Compensation For Increased Costs and Taxes. Subject to the provisions of Section 2.20 (which shall be controlling with respect to the matters covered thereby), in the event that any Lender (which term shall include Issuing Bank for purposes of this Section 2.19(a)) shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the London interbank market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company 54 61 shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this Section 2.19(a), which statement shall be conclusive and binding upon all parties hereto absent manifest error. (b) Capital Adequacy Adjustment. In the event that any Lender (which term shall include Issuing Bank for purposes of this Section 2.19(b)) shall have determined that the adoption, effectiveness, phase-in or applicability after the Closing Date of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit, or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to Lender under this Section 2.19(b), which statement shall be conclusive and binding upon all parties hereto absent manifest error. 2.20. TAXES; WITHHOLDING, ETC. (a) Payments to Be Free and Clear. All sums payable by any Credit Party hereunder and under the other Credit Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of any Credit Party or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. In addition, Company hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or 55 62 similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Withholding of Taxes. If any Credit Party or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by any Credit Party to Administrative Agent or any Lender (which term shall include Issuing Bank for purposes of this Section 2.20(b)) under any of the Credit Documents: (i) Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; (ii) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on any Credit Party) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; (iii) the sum payable by such Credit Party in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (iv) within thirty (30) days after paying any sum from which it is required by law to make any deduction or withholding, and within thirty (30) days after the due date of payment of any Tax which it is required by clause (ii) above to pay, Company shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided, no such additional amount shall be required to be paid to any Lender under clause (iii) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof on the Closing Date) or after the effective date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date hereof or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. (c) Evidence of Exemption From U.S. Withholding Tax. Each Lender that is not a United States Person (as such term is defined in Section 7701(a)(30) of the Internal Revenue Code) for U.S. federal income tax purposes (a "NON-US LENDER") shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof on the Closing Date) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (i) two original copies of Internal Revenue Service Form W-8BEN or W-8ECI (or any successor forms), properly completed and duly executed by such Lender, and such other documentation required under the Internal Revenue Code and reasonably requested by Company to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Credit Documents, or (ii) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot 56 63 deliver either Internal Revenue Service Form W-8BEN or W-8ECI pursuant to clause (i) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, and such other documentation required under the Internal Revenue Code and reasonably requested by Company to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Credit Documents. Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to this Section 2.20(c) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form W-8BEN or W-8ECI , or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, and such other documentation required under the Internal Revenue Code and reasonably requested by Company to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Credit Documents, or notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. Company shall not be required to pay any additional amount to any Non-US Lender under Section 2.20(b)(iii) if such Lender shall have failed (1) to deliver the forms, certificates or other evidence referred to in the second sentence of this Section 2.20(c), or (2) to notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence, as the case may be; provided, if such Lender shall have satisfied the requirements of the first sentence of this Section 2.20(c) on the Closing Date or on the date of the Assignment Agreement pursuant to which it became a Lender, as applicable, nothing in this last sentence of Section 2.20(c) shall relieve Company of its obligation to pay any additional amounts pursuant to Section 2.19(a) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described herein. (d) If the Internal Revenue Service or any other Governmental Authority asserts a claim that Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed by such Lender, because such Lender failed to notify Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason within such Lender's control), such Lender shall indemnify Administrative Agent fully for all amounts paid, directly or indirectly, by Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to Administrative Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for Administrative Agent, which attorneys may be employees of Administrative Agent) except insofar as any such amounts result from the Administrative Agent's gross negligence or willful misconduct. The obligations of the Lenders 57 64 under this Section 2.20(d) shall survive the payment of the Obligations and termination of this Agreement. 2.21. OBLIGATION TO MITIGATE. Each Lender (which term shall include Issuing Bank for purposes of this Section 2.21) agrees that, as promptly as practicable after the officer of such Lender responsible for administering its Loans or Letters of Credit, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender to receive payments under Section 2.18, 2.19 or 2.20, it will, to the extent not inconsistent with the internal policies of such Lender and any applicable legal or regulatory restrictions, use reasonable efforts (a) to make, issue, fund or maintain its Credit Extensions, including any Affected Loans, through another office of such Lender, or (b) take such other measures as such Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender pursuant to Section 2.18, 2.19 or 2.20 would be materially reduced and if, as determined by such Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments, Loans or Letters of Credit through such other office or in accordance with such other measures, as the case may be, would not otherwise adversely affect such Commitments, Loans or Letters of Credit or any interests of such Lender; provided, such Lender will not be obligated to utilize such other office pursuant to this Section 2.21 unless Company agrees to pay all incremental expenses incurred by such Lender as a result of utilizing such other office as described in clause (a) above. A certificate as to the amount of any such expenses payable by Company pursuant to this Section 2.21 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. 2.22. DEFAULTING LENDERS. Anything contained herein to the contrary notwithstanding, in the event that any Lender, at the direction or request of any regulatory agency or authority, defaults (a "DEFAULTING LENDER") in its obligation to fund (a "FUNDING DEFAULT") any Loan or its portion of any unreimbursed payment under Section 2.4(e) (in each case, a "DEFAULTED LOAN"), then (a) during any Default Period with respect to such Defaulting Lender, such Defaulting Lender shall be deemed not to be a "Lender" for purposes of voting on any matters (including the granting of any consents or waivers) with respect to any of the Credit Documents (other than under Sections 10.5(b) or 10.5(c)(i)); (b) to the extent permitted by applicable law, until such time as the Default Excess with respect to such Defaulting Lender shall have been reduced to zero, (i) any voluntary prepayment of the Loans shall, if Company so directs at the time of making such voluntary prepayment, be applied to the Loans of other Lenders as if such Defaulting Lender had no Loans outstanding and the Term Loan Exposure and Revolving Credit Exposure of such Defaulting Lender were zero, and (ii) any mandatory prepayment of the Loans shall, if Company so directs at the time of making such mandatory prepayment, be applied to the Loans of other Lenders (but not to the Loans of such Defaulting Lender) as if such Defaulting Lender had funded all Defaulted Loans of such Defaulting Lender, it being understood and agreed that Company shall be entitled to retain any portion of any mandatory prepayment of the Loans that is not paid to such Defaulting Lender solely as a result of the operation of the provisions of this clause (b); (c) such Defaulting Lender's Commitments and outstanding Loans and such Defaulting Lender's Pro Rata Share of the Letter of Credit Usage shall 58 65 be excluded for purposes of calculating the Commitment fees payable to Lenders in respect of any day during any Default Period with respect to such Defaulting Lender, and such Defaulting Lender shall not be entitled to receive any Commitment fees pursuant to Section 2.11 with respect to such Defaulting Lender's Commitments in respect of any Default Period with respect to such Defaulting Lender; and (d) the Total Utilization of Revolving Credit Commitments and the aggregate principal amount of all outstanding Term Loans as at any date of determination shall be calculated as if such Defaulting Lender had funded all Defaulted Loans of such Defaulting Lender. No Commitment of any Lender shall be increased or otherwise affected, and, except as otherwise expressly provided in this Section 2.22, performance by Company of its obligations hereunder and the other Credit Documents shall not be excused or otherwise modified as a result of any Funding Default or the operation of this Section 2.22. The rights and remedies against a Defaulting Lender under this Section 2.22 are in addition to other rights and remedies which Company may have against such Defaulting Lender with respect to any Funding Default and which Administrative Agent or any Lender may have against such Defaulting Lender with respect to any Funding Default. 2.23. REMOVAL OR REPLACEMENT OF A LENDER. Anything contained herein to the contrary notwithstanding, in the event that: (a) any Lender (an "INCREASED-COST LENDER") shall give notice to Company that such Lender is an Affected Lender or that such Lender is entitled to receive payments under Section 2.18, 2.19 or 2.20, the circumstances which have caused such Lender to be an Affected Lender or which entitle such Lender to receive such payments shall remain in effect, and such Lender shall fail to withdraw such notice within five Business Days after Company's request for such withdrawal; or (b) any Lender shall become a Defaulting Lender, the Default Period for such Defaulting Lender shall remain in effect, and such Defaulting Lender shall fail to cure the default as a result of which it has become a Defaulting Lender within five Business Days after Company's request that it cure such default; or (c) in connection with any proposed amendment, modification, termination, waiver or consent with respect to any of the provisions hereof as contemplated by Section 10.5(b), the consent of Requisite Lenders shall have been obtained but the consent of one or more of such other Lenders (each a "NON-CONSENTING LENDER") whose consent is required shall not have been obtained; then, with respect to each such Increased-Cost Lender, Defaulting Lender or Non-Consenting Lender (the "TERMINATED LENDER"), Company may, by giving written notice to Administrative Agent and any Terminated Lender of its election to do so, elect to cause such Terminated Lender (and such Terminated Lender hereby irrevocably agrees) to assign its outstanding Loans and its Commitments, if any, in full to one or more Eligible Assignees (each a "REPLACEMENT LENDER") in accordance with the provisions of Section 10.6 and Terminated Lender shall pay any fees payable thereunder in connection with such assignment; provided, (1) on the date of such assignment, the Replacement Lender shall pay to Terminated Lender an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Terminated Lender, (B) an amount equal to all unreimbursed drawing that have been funded by such Terminated Lender, together with all then unpaid interest with respect thereto at such time and (C) an amount equal to all accrued, but theretofore unpaid fees owing to such Terminated Lender pursuant to Section 2.11; (2) on the date of such assignment, Company shall pay any amounts payable to such Terminated Lender pursuant to Section 2.18(c), 2.19 or 2.20 or otherwise as if it were a prepayment; and (3) in the event such Terminated Lender is a Non-Consenting Lender, each Replacement Lender shall consent, at the time of such assignment, to each 59 66 matter in respect of which such Terminated Lender was a Non-Consenting Lender; provided, Company may not make such election with respect to any Terminated Lender that is also an Issuing Bank unless, prior to the effectiveness of such election, Company shall have caused each outstanding Letter of Credit issued thereby to be cancelled. Upon the prepayment of all amounts owing to any Terminated Lender and the termination of such Terminated Lender's Commitments, if any, such Terminated Lender shall no longer constitute a "Lender" for purposes hereof; provided, any rights of such Terminated Lender to indemnification hereunder shall survive as to such Terminated Lender. SECTION 3. CONDITIONS PRECEDENT 3.1. CLOSING DATE. The obligation of any Lender to make a Credit Extension on the Closing Date is subject to the satisfaction, or waiver in accordance with Section 10.5, of the following conditions on or before the Closing Date: (a) Credit Documents. Administrative Agent shall have received sufficient copies of each Credit Document originally executed and delivered by each applicable Credit Party for each Lender. (b) Organizational Documents; Incumbency. Administrative Agent shall have received (i) a copy of each Organizational Document of each Credit Party, as applicable, and, to the extent applicable, certified as of a recent date by the appropriate governmental official; (ii) signature and incumbency certificates of the officers of such Person executing the Credit Documents to which it is a party; (iii) resolutions of the Board of Directors or similar governing body of each Credit Party approving and authorizing the execution, delivery and performance of this Agreement, the other Credit Documents and the Transaction Documents to which it is a party or by which it or its assets may be bound as of the Closing Date, certified as of the Closing Date by its secretary or an assistant secretary as being in full force and effect without modification or amendment; (iv) a good standing certificate from the applicable Governmental Authority of each Credit Party's jurisdiction of incorporation, organization or formation and, with respect to Company and Parent, in each jurisdiction in which it is qualified as a foreign corporation or other entity to do business, and, with respect to each Credit Party other than Company, in each jurisdiction in which it is qualified as a foreign corporation or other entity to do business and where the failure to be so qualified or in good standing would cause a Material Adverse Effect, each dated a recent date prior to the Closing Date; and (v) such other customary documents as Administrative Agent may reasonably request. (c) Organizational and Capital Structure. The organizational structure and the capital structure of Parent and its Subsidiaries, both before and after giving effect to the Transaction, shall be as set forth on Schedule 4.1. (d) Capitalization of Holdings and Company. On or before the Closing Date, Administrative Agent and Syndication Agent shall be reasonably satisfied in all respects with Parent's and Company's capital structure. 60 67 (e) Transaction Documents; Opinions. (i) (1) All conditions to the Tender Offer set forth in the Tender Offer Documents shall have been satisfied or the fulfillment of any such conditions shall have been waived with the consent of Syndication Agent and Administrative Agent (such consent not to be unreasonably withheld or delayed), (2) all shares of Parent Common Stock to be purchased on such date shall have been tendered to Parent, and such shares shall not have been validly withdrawn and shall be available for purchase in accordance with the terms and conditions of the Tender Offer Documents, (3) the Tender Offer shall have become effective in accordance with the terms of the Tender Offer Documents, and (4) the aggregate cash consideration paid to purchase the Parent Common Stock in connection with the Tender Offer shall not exceed the Tender Offer Consideration. (ii) Syndication Agent and Administrative Agent shall each have received a fully executed or conformed copy of each Transaction Document and any documents executed in connection therewith, together with copies of each of the opinions of counsel delivered to the parties under the Transaction Documents, accompanied by a letter from each such counsel (to the extent not inconsistent with such counsel's established internal policies) authorizing Lenders to rely upon such opinion to the same extent as though it were addressed to Lenders. Each Transaction Document shall be in full force and effect and no provision thereof shall have been modified or waived in any respect determined by Syndication Agent or Administrative Agent to be material, in each case without the consent of Syndication Agent and Administrative Agent (such consent not to be unreasonably withheld or delayed). (iii) Syndication Agent and Administrative Agent shall each have received a certificate from an Authorized Officer of each of Parent and Company, in form and substance satisfactory to Syndication Agent and Administrative Agent, to the effect set forth in clauses (i) and (ii) above. (f) Existing Indebtedness. On the Closing Date, Parent and its Subsidiaries shall have (1) repaid in full all Refinanced Indebtedness, (2) terminated any commitments to lend or make other extensions of credit thereunder, (3) delivered to Syndication Agent and Administrative Agent all documents or instruments necessary to release all Liens securing such Refinanced Indebtedness or other obligations of Parent and its Subsidiaries thereunder being repaid on the Closing Date, and (iv) made arrangements satisfactory to Syndication Agent and Administrative Agent with respect to the cancellation of any letters of credit outstanding thereunder or the issuance of Letters of Credit to support the obligations of Parent and its Subsidiaries with respect thereto. (g) Transaction Costs. On or prior to the Closing Date, Parent shall have delivered to Administrative Agent, Parent's reasonable best estimate of the Transaction Costs (other than fees payable to any Agent) and such estimate (together with all fees payable to Agents) shall not exceed approximately $19,000,000. (h) Governmental Authorizations and Consents. Each Credit Party shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are 61 68 necessary or appropriate in connection with the Transaction and the transactions contemplated by the Credit Documents and each of the foregoing shall be in full force and effect and in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the transactions contemplated by the Credit Documents or the Transaction Documents or the financing thereof and no action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. (i) Share Collateral. In order to create in favor of Administrative Agent, for the benefit of Lenders, a valid and, subject to any filing and/or recording referred to herein, perfected First Priority security interest in the Share Collateral, the Administrative Agent shall have received: (i) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise reasonably satisfactory in form and substance to Collateral Agent) representing all certificated shares of Capital Stock pledged pursuant to the Pledge Agreement; (ii) UCC financing statements, duly executed by each applicable Credit Party with respect to all Share Collateral of such Credit Party, for filing in all jurisdictions as may be necessary or, in the opinion of Collateral Agent and Syndication Agent, desirable to perfect the security interests created in such Share Collateral pursuant to the Collateral Documents; (iii) an opinion of counsel (which counsel shall be reasonably satisfactory to Syndication Agent and Collateral Agent) with respect to the creation and perfection of the security interests in favor of Collateral Agent in such Share Collateral as Syndication Agent and Collateral Agent may reasonably request, in each case in form and substance reasonably satisfactory to Syndication Agent and Collateral Agent; and (iv) evidence that each Credit Party shall have taken or caused to be taken any other action, executed and delivered or caused to be executed and delivered any other agreement, document and instrument, and made or caused to be made any other filing and recording (other than as set forth herein) reasonably required by Syndication Agent and Collateral Agent. (j) Environmental Reports. Syndication Agent and Administrative Agent shall have received certificates from an Authorized Officer of Company and other information which Syndication Agent and Administrative Agent may reasonably request, in form, scope and substance reasonably satisfactory to Syndication Agent and Administrative Agent, regarding environmental matters relating to the Facilities. 62 69 (k) Financial Statements; Projections. Lenders shall have received from Company (i) the Historical Financial Statements, (ii) pro forma consolidated balance sheets of Parent and its Subsidiaries as at January 29, 2000, prepared in accordance with GAAP and reflecting the consummation of the Transaction, the related financings and the other transactions contemplated by the Credit Documents and the Transaction Documents to occur on or prior to the Closing Date, which pro forma financial statements shall be in form and substance reasonably satisfactory to Administrative Agent and Syndication Agent, and (iii) the Projections. (l) Evidence of Insurance. Syndication Agent and Administrative Agent shall have received a certificate from Company's insurance broker or other evidence reasonably satisfactory to it that all insurance required to be maintained pursuant to Section 5.5 is in full force and effect and that Administrative Agent, for the benefit of Lenders has been named as loss payee thereunder to the extent required under Section 5.5. (m) Opinions of Counsel to Credit Parties. Lenders and their respective counsel shall have received originally executed copies of the favorable written opinions of (i) Wachtell Lipton Rosen & Katz, special counsel for Company, Parent and each Subsidiary Guarantor, (ii) Michael Massey, Esq., in-house counsel for Company, Parent and each Subsidiary Guarantor and (iii) Kummer, Kempf, Bonner & Renshaw, special Nevada counsel for Company, in the forms of Exhibits D-1 and D-2, respectively, and as to such other matters as Administrative Agent or Syndication Agent may reasonably request, dated the Closing Date and otherwise in form and substance reasonably satisfactory to Administrative Agent and Syndication Agent. (n) Opinions of Counsel to Syndication Agent. Lenders shall have received originally executed copies of one or more favorable written opinions of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Syndication Agent, dated the Closing Date, in form and substance reasonably satisfactory to Syndication Agent and Administrative Agent. (o) Fees. Company shall have paid to Syndication Agent, Administrative Agent and Documentation Agent, the fees payable on the Closing Date referred to in Section 2.11. (p) Solvency Certificate. On the Closing Date, Syndication Agent, Administrative Agent and Lenders shall have received a Solvency Certificate from Parent dated the Closing Date and addressed to Syndication Agent, Administrative Agent and Lenders, and in form, scope and substance reasonably satisfactory to Syndication Agent and Administrative Agent, with appropriate attachments and demonstrating that after giving effect to the consummation of the Transaction and the incurrence of Indebtedness in connection therewith and taking into account the making of the Loans under this Agreement, Parent and its Subsidiaries are and will be Solvent. (q) Absence of Material Adverse Change. Since January 30, 1999, there shall have been no Material Adverse Change which either Administrative Agent or Syndication Agent, in its judgment, deems material, and Administrative Agent shall have received a certification from an Authorized Officer of Company to that effect. 63 70 (r) Completion of Proceedings. All partnership, corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent or Syndication Agent and its counsel shall be reasonably satisfactory in form and substance to Administrative Agent and Syndication Agent and such counsel, and Administrative Agent, Syndication Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent or Syndication Agent may reasonably request. (s) No Litigation, etc. There shall exist no action, suit, investigation, litigation or proceeding affecting Parent or any of its Subsidiaries pending or threatened before any Governmental Authority that (i) could be reasonably likely to have a Material Adverse Effect or (ii) purports to affect the transactions contemplated by the Credit Documents or the Transaction Documents. (t) Closing Date Certificate. Company shall have delivered to Syndication Agent and Administrative Agent an originally executed Closing Date Certificate, together with all attachments thereto. (u) Closing Date. Lenders shall have made the Term Loans to Company on or before June 3, 2000. Each Lender, by delivering its signature page to this Agreement and funding its Term Loan Commitment and/or a Revolving Loan on the Closing Date, shall be deemed to have acknowledged receipt of, and consented to and approved, each Credit Document and each other document required to be approved by Requisite Lenders or Lenders, as applicable, but only to the extent such Credit Documents and other documents have been made available to such Lender. 3.2. CONDITIONS TO EACH CREDIT EXTENSION. (a) The obligation of each Lender to make any Loan, or Issuing Bank to issue any Letter of Credit, on any Credit Date (including the Closing Date), are subject to the satisfaction, or waiver in accordance with Section 10.5, of the following conditions precedent: (i) Administrative Agent shall have received a fully executed and delivered Funding Notice or Issuance Notice, as the case may be; (ii) with respect to any Revolving Loans or Letters of Credit, after making any such Credit Extensions requested on such Credit Date, the Total Utilization of Revolving Credit Commitments shall not exceed the Revolving Credit Commitments then in effect; (iii) as of such Credit Date, the representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects on and as of that Credit Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in 64 71 which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date; (iv) as of such Credit Date, no event shall have occurred and be continuing or would result from the consummation of the applicable Credit Extension that would constitute an Event of Default or a Default; and (v) on or before the date of issuance of any Letter of Credit, Administrative Agent shall have received all other information required by the applicable Issuance Notice, and such other documents or information as Issuing Bank may reasonably require in connection with the issuance of such Letter of Credit. (b) Any Notice shall be executed by an Authorized Officer in a writing delivered to Administrative Agent. In lieu of delivering a Notice, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing, conversion/continuation or issuance of a Letter of Credit, as the case may be; provided each such notice shall be promptly confirmed in writing by delivery of the applicable Notice to Administrative Agent on or before the applicable date of borrowing, continuation/conversion or issuance. Neither Issuing Bank, Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized on behalf of Company or for otherwise acting in good faith. 3.3. RELEASE OF SHARE COLLATERAL. (a) If at any time, Parent has received an Investment Grade Status rating then, at the written request of Company and so long as no Default or Event of Default shall have occurred and be continuing, (x) the Pledge Agreement shall be immediately and automatically terminated and (y) Collateral Agent shall take or cause to be taken any action, execute and deliver or cause to be executed and delivered any agreement, document and instrument, and make or cause to be made any filing and recording, in each case as reasonably requested by Company in order to evidence the release of the First Priority Lien of Collateral Agent in all of the Share Collateral including, without limitation, return of the pledged Share Collateral and stock powers related thereto; provided, in the event of any such release, any Liens or security interest on such Share Collateral securing Indebtedness which is equal and ratable with the Obligations under the Credit Documents shall be concurrently released. (b) Company shall pay or otherwise reimburse Administrative Agent for all reasonable costs and expenses incurred or made by or on behalf of Administrative Agent, including, without limitation, all attorneys' fees and expenses, in complying with this Section 3.3. 65 72 SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce Lenders and Issuing Bank to enter into this Agreement and to make each Credit Extension to be made thereby, each Credit Party represents and warrants to each Lender and Issuing Bank, on the Closing Date and on each Credit Date, that the following statements are true and correct (it being understood and agreed that the representations and warranties made on the Closing Date are deemed to be made concurrently with the consummation of the Transaction contemplated hereby): 4.1. ORGANIZATION; POWERS; QUALIFICATION. (a) Each of Parent and its Subsidiaries (i) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization as identified in Schedule 4.1, (ii) has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Credit Documents and Transaction Documents to which it is a party and to carry out the transactions contemplated thereby, and (iii) is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had, and could not be reasonably expected to have, a Material Adverse Effect. Schedule 4.1 correctly sets forth the ownership interest of Parent and each of its Subsidiaries in their respective Subsidiaries as of the Closing Date both before and after giving effect to the Transaction. (b) The Capital Stock of each of Parent and its Subsidiaries has been duly authorized and validly issued and is fully paid and non-assessable. Except as expressly provided on Schedule 4.1, as of the date hereof, there is no existing option, warrant, call, right, commitment or other agreement to which Parent or any of its Subsidiaries is a party requiring, and there is no membership interest or other Capital Stock of Parent or any of its Subsidiaries outstanding which upon conversion or exchange would require, the issuance by Parent or any of its Subsidiaries of any additional membership interests or other Capital Stock of Parent or any of its Subsidiaries or other Securities convertible into, exchangeable for or evidencing the right to subscribe for or purchase, a membership interest or other Capital Stock of Parent or any of its Subsidiaries. 4.2. AUTHORIZATION OF CREDIT DOCUMENTS AND TRANSACTION DOCUMENTS; NO CONFLICT. The execution, delivery and performance of the Credit Documents and the Transaction Documents have been duly authorized by all necessary action on the part of each Credit Party that is a party thereto. The execution, delivery and performance by Credit Parties of the Credit Documents and the Transaction Documents to which they are parties and the consummation of the transactions contemplated by the Credit Documents do not and will not (a) violate any provision of any law or any governmental rule or regulation (including the Margin Regulations) applicable to Parent or any of its Subsidiaries, any of the Organizational Documents of Parent or any of its Subsidiaries, or any order, judgment or decree of any court or other agency of government binding on Parent or any of its Subsidiaries except to the extent such violation could not be reasonably expected to have a Material Adverse Effect; (b) conflict with, result in a breach of or constitute (with due notice or lapse 66 73 of time or both) a default under any Contractual Obligation of Parent or any of its Subsidiaries except to the extent such conflict, breach or default could not reasonably be expected to have a Material Adverse Effect; (c) result in or require the creation or imposition of any Lien upon any of the properties or assets of Parent or any of its Subsidiaries (other than any Liens created under any of the Credit Documents in favor of Collateral Agent, on behalf of the Secured Parties); or (d) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Parent or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to Lenders and except for any such approvals or consents the failure of which to obtain will not have a Material Adverse Effect. 4.3. GOVERNMENTAL CONSENTS. The execution, delivery and performance by Credit Parties of the Credit Documents and the Transaction Documents to which they are parties and the consummation of the transactions contemplated by the Credit Documents and the Transaction Documents do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Governmental Authority except for the Share Collateral to be delivered to Administrative Agent, as of the Closing Date. 4.4. BINDING OBLIGATION. Each Credit Document and each Transaction Document has been duly executed and delivered by each Credit Party that is a party thereto and is the legally valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 4.5. HISTORICAL FINANCIAL STATEMENTS; PROJECTIONS. (a) The Historical Financial Statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position, on a consolidated basis, of the Persons described in such financial statements as at the respective dates thereof and the results of operations and cash flows, on a consolidated basis, of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments. As of the Closing Date, neither Parent nor any of its Subsidiaries has any contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the Historical Financial Statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Parent and any of its Subsidiaries taken as a whole. (b) On and as of the Closing Date, the Projections of Parent and its Subsidiaries for the period Fiscal Year 2000 through and including Fiscal Year 2004 (the "PROJECTIONS") (i) are based on reasonable assumptions as to all legal and factual matters material to the estimates set forth therein, (ii) have been and will be prepared in good faith and with due care; (iii) fairly represent Parent's expectation on the date of their preparation as to the matters covered thereby as of the date thereof, and (iv) are based upon good faith estimates and assumptions believed by Parent to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such 67 74 projections may differ from the projected results and no assurance can be given that the Projections will be realized. (c) The financial statements of Parent and its Subsidiaries most recently delivered to Administrative Agent pursuant to Section 5.1 were prepared in conformity with GAAP and fairly present, in all material respects, the financial position, on a consolidated basis, of the Persons and businesses described in such financial statements as at the respective dates thereof and the results of operations and cash flows, on a consolidated basis, of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments and the absence of footnotes. Neither Parent nor any of its Subsidiaries has any contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment which in accordance with GAAP should be reflected on such financial statements or the notes thereto that is not reflected in such financial statements or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, financial condition or operations of Parent and its Subsidiaries taken as a whole. 4.6. NO MATERIAL ADVERSE CHANGE; NO RESTRICTED PAYMENTS. Since January 30, 1999, there has been no Material Adverse Change and no event or circumstance has occurred that has had or could reasonably be expected to have, either in any case or in the aggregate, a Material Adverse Effect, and neither Parent nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Payment or agreed to do so except as permitted pursuant to Section 6.4 or in connection with the Transactions. 4.7. LITIGATION; ADVERSE PROCEEDINGS. (a) No injunction, stay or restraint regarding the Tender Offer, the Refinancing or the financing contemplated by this Agreement has been issued and is in effect, and no pending or threatened litigation, arbitration, or other proceeding exists which could reasonably be expected to result in any injunction, stay, or restraint of the Tender Offer, the Refinancing or the financing contemplated by this Agreement. (b) There are no Adverse Proceedings, individually or in the aggregate, that could reasonably be expected to have a Material Adverse Effect. 4.8. VIOLATION OF LAW. Neither Parent nor any of its Subsidiaries (a) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or (b) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 4.9. PAYMENT OF TAXES. Except as otherwise permitted under Section 5.3, all tax returns and reports of Parent and its Subsidiaries required to be filed by any of them have been timely filed, and all taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Parent and its Subsidiaries and upon their respective properties, assets, 68 75 income, businesses and franchises which are due and payable have been paid when due and payable. Parent knows of no material tax assessment proposed in writing against Parent or any of its Subsidiaries which is not being timely paid or actively contested by Parent or such Subsidiary in good faith and by appropriate proceedings; provided, such reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. 4.10. TITLE TO PROPERTIES; OWNERSHIP OF SUBSIDIARIES. (a) Each of Parent and its Subsidiaries has (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), and (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in their respective Historical Financial Statements referred to in Section 4.5 and in the most recent financial statements delivered pursuant to Section 5.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under Section 6.7. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. (b) Parent owns, directly or indirectly, free and clear of any Lien, the equity Securities of each Subsidiary listed in Schedule 4.10 (as such schedule may be supplemented in writing by Company from time to time to reflect transactions or circumstances permitted by this Agreement or, with the written consent of Administrative Agent, to reflect other transactions or circumstances), other than a Lien in favor of Administrative Agent pursuant to the Pledge Agreement. 4.11. SHARE COLLATERAL. (a) The execution and delivery of the Collateral Documents by Credit Parties, together with (i) the actions taken on or prior to the date hereof pursuant to Section 3.1(i) and (ii) the delivery to Collateral Agent of any Share Collateral not delivered to Collateral Agent at the time of execution and delivery of the applicable Collateral Document, are effective to create in favor of Collateral Agent, on behalf of the Secured Parties, as security for the Obligations of each Credit Party, a valid and perfected First Priority Lien on all of the Share Collateral, and all filings and other actions necessary or desirable to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect. (b) No authorization, approval or other action by, and no notice to or filing with, any Governmental Authority is required for either (i) the pledge or grant by any Credit Party of the Liens purported to be created in favor of Collateral Agent pursuant to any of the Collateral Documents or (ii) the exercise by Collateral Agent of any rights or remedies in respect of any Share Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law). (c) Except as may have been filed in favor of Collateral Agent as contemplated by Section 3.1(i), no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Share Collateral is on file in any filing or recording office. 69 76 (d) All written information supplied to Collateral Agent by or on behalf of any Credit Party with respect to any of the Share Collateral (in each case taken as a whole with respect to any particular Share Collateral) is accurate and complete in all material respects. 4.12. ENVIRONMENTAL MATTERS. (i) Neither Parent nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to any Environmental Law, any Environmental Claim, or any Hazardous Materials Activity that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; (ii) neither Parent nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmen tal Response, Compensation, and Liability Act (42 U.S.C. ss. 9604) or any comparable state law; (iii) there are and, to each of Parent's and its Subsidiaries' knowledge, have been, no conditions, occurrences, or Hazardous Materials Activities which could reasonably be expected to form the basis of an Environmental Claim against Parent or any of its Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; (iv) neither Parent nor any of its Subsidiaries nor, to any Credit Party's knowledge, any predecessor of Parent or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Parent's or any of its Subsidiaries' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent; (v) compliance with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws could not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect; and (vi) no event or condition has occurred or is occurring with respect to Parent or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity which individually or in the aggregate has had, or could reasonably be expected to have, a Material Adverse Effect. 4.13. NO DEFAULTS. Neither Parent nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists which, with the giving of notice or the lapse of time or both, could constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, could not reasonably be expected to have a Material Adverse Effect. 4.14. GOVERNMENTAL REGULATION. Neither Parent nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. Neither Parent nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" or a "principal underwriter" of an "investment company" as such terms are defined in the Investment Company Act of 1940. 4.15. MARGIN STOCK. Neither Parent nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing 70 77 or carrying any Margin Stock. No part of the proceeds of the Loans made to such Credit Party will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. 4.16. EMPLOYEE MATTERS. Neither Parent nor any of its Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a Material Adverse Effect. There is (a) no unfair labor practice complaint pending against Parent or any of its Subsidiaries, or to the best knowledge of Parent, threatened against any of them before the National Labor Relations Board and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement that is so pending against Parent or any of its Subsidiaries or to the best knowledge of Parent and Company, threatened against any of them, (b) no strike or work stoppage in existence or threatened involving Parent or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect and (c) to the best knowledge of Parent, no union representation question existing with respect to the employees of Parent or any of its Subsidiaries and, to the best knowledge of Parent, no union organization activity that is taking place, except (with respect to any matter specified in clause (a), (b) or (c) above, either individually or in the aggregate) such as is not reasonably likely to have a Material Adverse Effect. 4.17. EMPLOYEE BENEFIT PLANS. Parent, each of its Subsidiaries and each of their respective ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA and the Internal Revenue Code and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan, other than any such failure to comply or perform that individually or in the aggregate could reasonably be expected to result in a liability to Parent or any of its Subsidiaries in excess of $10,000,000. Each Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified, except for failures to so qualify that can be cured without a Material Adverse Effect. No material unsatisfied liability to the PBGC (other than required premium payments) has been or is expected to be incurred by Parent, any of its Subsidiaries or any of their ERISA Affiliates. No ERISA Event has occurred or is reasonably expected to occur that could reasonably be expected to result in a liability to Parent or any of its Subsidiaries in excess of $10,000,000. As of the most recent valuation date for any Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), does not exceed $10,000,000. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Parent, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $10,000,000. Parent, each of its Subsidiaries and each of their ERISA Affiliates have complied with the requirements of Section 515 of ERISA with respect to each Multiemployer Plan and are not in material "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan. 71 78 4.18. SOLVENCY. Each Credit Party is and, upon the incurrence of any Obligation by such Credit Party on any date on which this representation and warranty is made, will be, Solvent. 4.19. TRANSACTION DOCUMENTS. (a) Company has delivered to Syndication Agent and Administrative Agent complete and correct copies of (i) each Transaction Document and of all exhibits and schedules thereto as of the date hereof and (ii) copies of any material amendment, restatement, supplement or other modification to or waiver of each Transaction Document entered into after the date hereof. (b) Except to the extent otherwise expressly set forth herein or in the schedules hereto, and subject to the qualifications set forth therein, each of the representations and warranties given by any Credit Party in any Transaction Document is true and correct in all material respects as of the Closing Date (or as of any earlier date to which such representation and warranty specifically relates). Notwithstanding anything in the Transaction Document to the contrary, the representations and warranties of each Credit Party set forth in this Section 4.19 shall, solely for purposes hereof, survive the Closing Date for the benefit of Lenders. (c) All Governmental Authorizations and all other authorizations, approvals and consents of any other Person required by the Transaction Documents or to consummate the Transaction have been obtained and are in full force and effect. On the Closing Date, (i) all of the conditions to effecting or consummating the Transaction set forth in the Transaction Documents have been duly satisfied or, with the consent of Administrative Agent and Syndication Agent (such consent not to be unreasonably withheld or delayed), waived, and (ii) the Tender Offer has been consummated in accordance with the Transaction Documents and all applicable laws and all of the shares of Parent Common Stock acquired in connection with the Tender Offer have been retired. 4.20. YEAR 2000. Parent reasonably believes that all computer applications that are material to its or any of its Subsidiaries' business and operations are able to perform properly date-sensitive functions for all dates before and after January 1, 2000, except to the extent that a failure to do so would not reasonably have a Material Adverse Effect. 4.21. COMPLIANCE WITH STATUTES, ETC. Each of Parent and its Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all Governmental Authorities, in respect of the conduct of its business and the ownership of its property, except such non-compliance that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 4.22. DISCLOSURE. (a) No representation or warranty of any Credit Party contained in any Credit Document, Transaction Document or in any other documents, certificates or written statements furnished to Lenders by or on behalf of Parent or any of its Subsidiaries for use in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact (known to Parent, in the case of any document not furnished by either of them) necessary in order to make the statements contained herein or therein not misleading 72 79 in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Parent to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results and no assurance can be given that the Projections will be realized. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Parent (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. (b) The Transaction Documents do not contain any untrue statement of any material fact or omit to state a material fact (known to Parent or any of its Subsidiaries, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. SECTION 5. AFFIRMATIVE COVENANTS Each Credit Party covenants and agrees that so long as any Commitment is in effect and until payment in full of all Obligations and cancellation or expiration of all Letters of Credit, each Credit Party shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 5. 5.1. FINANCIAL STATEMENTS AND OTHER REPORTS. Parent will deliver to Administrative Agent and Lenders: (a) Quarterly Financial Statements. As soon as available, and in any event within forty five (45) days after the end of each of the first three Fiscal Quarters of each Fiscal Year, the consolidated balance sheets of Parent and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of income, stockholders' equity and cash flows of Parent and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year, together with a Financial Officer Certification and a Narrative Report with respect thereto; (b) Annual Financial Statements. As soon as available, and in any event within ninety (90) days after the end of each Fiscal Year (commencing with the Fiscal Year ending January 2001) (i) the consolidated balance sheets of Parent and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of Parent and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year, together with a Financial Officer Certification and a Narrative Report with respect thereto; and (ii) with respect such consolidated financial statements of Parent and its Subsidiaries, a report thereon of Arthur Andersen LLP or other independent certified public accountants of recognized national standing selected by Parent, and 73 80 reasonably satisfactory to Administrative Agent (which report shall be unqualified as to going concern and scope of audit, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Parent and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards) together with a written statement by such independent certified public accountants stating (1) that their audit examination has included a review of the terms of the Credit Documents, (2) whether, in connection therewith, any condition or event that constitutes a Default or an Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof, and (3) that nothing has come to their attention that causes them to believe that the information contained in any Compliance Certificate is not correct or that the matters set forth in such Compliance Certificate are not stated in accordance with the terms hereof; (c) Compliance Certificate. Together with each delivery of financial statements of Parent and its Subsidiaries pursuant to Sections 5.1(a) and 5.1(b), a duly executed and completed Compliance Certificate; (d) Statements of Reconciliation after Change in Accounting Principles. If, as a result of any change in accounting principles and policies from those used in the preparation of the Historical Financial Statements, the consolidated financial statements of Parent and its Subsidiaries delivered pursuant to Section 5.1(a) or 5.1(b) will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then, together with the first delivery of such financial statements after such change, one or more a statements of reconciliation for all such prior financial statements in form and substance reasonably satisfactory to Administrative Agent; (e) SEC Filings and Press Releases. Promptly upon their becoming available, copies of (i) all financial statements, reports, notices and proxy statements sent or made available generally by Parent to its security holders acting in such capacity or by any Subsidiary of Parent to its security holders other than Parent or another Subsidiary of Parent, (ii) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Parent or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (iii) all press releases and other statements made available generally by Parent or any of its Subsidiaries to the public concerning material developments in the business of Parent or any of its Subsidiaries. (f) Notice of Default. Promptly upon any officer of Parent or Company obtaining knowledge (i) of any condition or event that constitutes a Default or an Event of Default or that notice has been given to Parent or Company with respect thereto; (ii) that any Person has given any notice to Parent or Company or any of its Subsidiaries or taken any other action with respect to any event or condition set forth in Section 8.1(b); (iii) of any condition or event of a type required to be 74 81 disclosed in a current report on Form 8-K of the Securities and Exchange Commission; or (iv) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, a certificate of its Authorized Officers specifying the nature and period of existence of such condition, event or change, or specifying the notice given and action taken by any such Person and the nature of such claimed Event of Default, Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (g) Notice of Litigation. Promptly upon any officer of Parent or Company obtaining knowledge of (i) the institution of, or non-frivolous threat of, any Adverse Proceeding not previously disclosed in writing by Company to Lenders, or (ii) any material development in any Adverse Proceeding that, in the case of either (i) or (ii) if adversely determined, could be reasonably expected to have a Material Adverse Effect, or seeks to enjoin or otherwise prevent the consumma tion of, or to recover any damages or obtain relief as a result of, the Tender Offer, the Refinancing or any other transactions contemplated hereby, written notice thereof together with such other information as may be reasonably available to Parent or Company to enable Lenders and their counsel to evaluate such matters; (h) ERISA. (i) Promptly upon becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event that could reasonably be expected to result in a liability to Parent or any of its Subsidiaries in excess of $10,000,000, a written notice specifying the nature thereof, what action Parent, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; and (ii) with reasonable promptness, copies of (1) each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Parent, any of its Subsidiaries or any of their respective ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (2) all notices received by Parent, any of its Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (3) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; (i) Rating Change. Promptly upon the occurrence of either Moody's or S&P changing the rating it has assigned to Parent, a written notice describing such change; (j) Insurance Report. As soon as practicable and in any event by the last day of each Fiscal Year, a report in form and substance reasonably satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by Parent and its Subsidiaries and all material insurance coverage planned to be maintained by Parent and its Subsidiaries in the immediately succeeding Fiscal Year; (k) Environmental Reports and Audits. As soon as practicable following receipt thereof, copies of all environmental audits and reports with respect to environmental matters at any Facility or which relate to any environmental liabilities of Parent or its Subsidiaries which, in any 75 82 such case, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect; and (l) Other Information. With reasonable promptness, such other information and data with respect to Parent or any of its Subsidiaries as from time to time may be reasonably requested by Administrative Agent or any Lender. 5.2. EXISTENCE. Except as otherwise permitted under Section 6.7, each Credit Party will, and will cause each of its Subsidiaries to, at all times preserve and maintain in full force and effect its existence and all rights and franchises, licenses and permits material to its business; provided, no Credit Party nor any of its Subsidiaries shall be required to preserve any such existence, right or franchise, licenses and permits if such Person's board of directors (or similar governing body) shall determine that the preservation thereof is no longer desirable in the conduct of the business of such Person, and that the loss thereof is not disadvantageous in any material respect to such Person or to Lenders. 5.3. PAYMENT OF TAXES AND CLAIMS. Each Credit Party will, and will cause each of its Subsidiaries to, pay and discharge as the same shall become due and payable all Taxes imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty or fine accrues thereon, and all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided, no such Tax or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as (a) adequate reserve or other appropriate provision, as shall be required in conformity with GAAP shall have been made therefor, and (b) in the case of a charge or claim which has or may become a Lien against any of the Share Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Share Collateral to satisfy such Tax or claim. No Credit Party will, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income Tax return with any Person (other than Parent or any of its Subsidiaries). 5.4. MAINTENANCE OF PROPERTIES. Each Credit Party will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Parent and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof except where the failure to so maintain or preserve could not reasonably be expected to have a Material Adverse Effect. 5.5. INSURANCE. Each Credit Party will maintain or cause to be maintained, with financially sound and reputable independent insurers, such insurance in respect of the assets, properties and businesses of Parent and its Subsidiaries as may customarily be carried or maintained under similar circumstances by Persons of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for such Persons. 76 83 5.6. INSPECTIONS; LENDERS MEETINGS. Each Credit Party will, and will cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of any Credit Party and any of its respective Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested and such visit and inspection shall be coordinated with the Administrative Agent. Parent and Company will, upon the request of Administrative Agent or Requisite Lenders, participate in a meeting of Administrative Agent and Lenders once during each Fiscal Year to be held at Company's corporate offices (or at such other location as may be agreed to by Company and Administrative Agent) at such time as may be agreed to by Company and Administrative Agent. 5.7. COMPLIANCE WITH LAWS. Each Credit Party will comply, and shall cause each of its Subsidiaries and all other Persons, if any, on or occupying any Facilities to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 5.8. ENVIRONMENTAL. Each Credit Party shall promptly take, and shall cause each of its Subsidiaries promptly to take, any and all actions necessary to (i) cure any violation of applicable Environmental Laws by such Credit Party or its Subsidiaries that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and (ii) make an appropriate response to any Environmental Claim against such Credit Party or any of its Subsidiaries and discharge any obligations it may have to any Person thereunder where failure to do so could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 5.9. SUBSIDIARIES. (a) With respect to each Person that becomes a Subsidiary of Parent after the Closing Date, Parent shall promptly send to Administrative Agent written notice setting forth with respect to such Person (i) the date on which such Person became a Subsidiary of Parent, and (ii) all of the data required to be set forth in Schedule 4.1 with respect to all Subsidiaries of Parent; provided, such written notice shall be deemed to supplement Schedule 4.1 for all purposes hereof. (b) With respect to each Person that becomes a wholly-owned Domestic Subsidiary of Parent after the Closing Date, Parent shall cause such Domestic Subsidiary to become a Guarantor hereunder and, until the date on which Parent has received an Investment Grade Status rating, a Pledgor under the Pledge Agreement by executing and delivering to Administrative Agent a Counterpart Agreement, and to take all such actions and execute and deliver, or cause to be executed and delivered, all such documents, instruments, agreements, and certificates similar to those described in Sections 3.1(b), 3.1(i) and 3.1(m). (c) Until the date on which Parent has received an Investment Grade Status rating, with respect to each Person that becomes a Domestic Subsidiary of Parent after the Closing Date, 77 84 Parent shall promptly take all applicable actions and execute and deliver all applicable documents, instruments, agreements, and certificates similar to those described in Sections 3.1(b), 3.1(i) and 3.1(m) with respect to such Subsidiary, and Parent shall cause the owner of the Capital Stock of such Subsidiary to become a Pledgor under the Pledge Agreement by executing and delivering to Administrative Agent a Counterpart Agreement. (d) Until the date on which Parent has received an Investment Grade Status rating, with respect to each Person that after the Closing Date becomes a Foreign Subsidiary of Parent, and the ownership interests of such Foreign Subsidiary are owned by Parent or by any Domestic Subsidiary thereof, Parent shall, or shall cause such Domestic Subsidiary to, deliver, all such documents, instruments, agreements, and certificates as are similar to those described in Sections 3.1(b), and, except with respect to Immaterial Foreign Subsidiaries, Parent shall take, or shall cause such Domestic Subsidiary to take, all of the actions referred to in Section 3.1(i) reasonably requested to evidence and to grant and to perfect a First Priority Lien in favor of Administrative Agent, for the benefit of Lenders, under the Pledge and Security Agreement in sixty-five percent (65%) of such ownership interests. (e) Until the date on which Parent has received an Investment Grade Status rating, with respect to each Person that after the Closing Date is designated as a Material Foreign Subsidiary of Parent in accordance with the terms hereof, and the ownership interests of such Material Foreign Subsidiary are owned by Parent or by any Domestic Subsidiary thereof, Parent shall, or shall cause such Domestic Subsidiary to, deliver, all such documents, instruments, agreements, and certificates as are similar to those described in Sections 3.1(b), and Parent shall take, or shall cause such Domestic Subsidiary to take, all of the actions referred to in Section 3.1(i) reasonably requested to evidence and to grant and to perfect a First Priority Lien in favor of Administrative Agent, for the benefit of Lenders, under the Pledge and Security Agreement in sixty-five percent (65%) of such ownership interests. 5.10. FURTHER ASSURANCES. At any time or from time to time upon the request of Administrative Agent, each Credit Party will, at its expense, promptly execute, acknowledge and deliver such further documents and do such other acts and things as Administrative Agent may reasonably request in order to effect fully the purposes of the Credit Documents and to provide for payment of the Obligations in accordance with the terms of this Agreement, any Note and the other Credit Documents. In furtherance and not in limitation of the foregoing, each Credit Party shall take such actions as Administrative Agent may reasonably request from time to time (including, without limitation, the execution and delivery of guaranties, pledge agreements, acknowledgments of pledge, stock powers, financing statements and other documents, the filing or recording of any of the foregoing and the delivery of stock certificates and other collateral with respect to which perfection is obtained by possession) to ensure that the Obligations are guarantied by the Guarantors and, prior to the date on which Parent has received an Investment Grade Status rating, are secured by the Share Collateral (subject to limitations contained in the Credit Documents with respect to Foreign Subsidiaries). 78 85 SECTION 6. NEGATIVE COVENANTS Each Credit Party covenants and agrees that, so long as any Commitment is in effect and until payment in full of all Obligations and cancellation or expiration of all Letters of Credit, such Credit Party shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1. INDEBTEDNESS. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness, except: (a) the Obligations; (b) Indebtedness of any wholly-owned Subsidiary of Parent to Parent, Company or to any other wholly-owned Subsidiary of Parent, or of Parent or Company to any wholly-owned Subsidiary of Parent; provided, (i) all such Indebtedness with respect to wholly-owned Foreign Subsidiaries shall be unsecured and subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement that in any such case, is reasonably satisfactory to Administrative Agent, and (ii) any payment by any such Subsidiary under any guaranty of the Obligations shall result in a pro tanto reduction of the amount of any Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made; (c) Subordinated Indebtedness of Company or Parent; provided, (i) immediately prior to, and after giving effect to the incurrence of such Subordinated Indebtedness and the application of the Net Issuance Proceeds thereof, no Default or Event of Default shall have occurred and be continuing or would result from such incurrence, and (ii) Parent and its Subsidiaries shall be in compliance with, immediately prior to and after giving pro forma effect to the incurrence of such Indebtedness as if such Indebtedness and the application of the Net Issuance Proceeds thereof had been incurred at the beginning of the measurement period for the most recently completed Fiscal Quarter, Section 6.6; (d) Indebtedness incurred by Parent or any of its Subsidiaries arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from guaranties or letters of credit, surety bonds or performance bonds securing the performance of the Parent or any such Subsidiary pursuant to such agreements, in connection with Permitted Acquisitions or permitted dispositions of any business, assets or Subsidiary of Parent or any of its Subsidiaries; (e) Indebtedness which may be deemed to exist pursuant to any guaranties, performance, surety, statutory, appeal or similar bonds or obligations incurred in the ordinary course of business; 79 86 (f) Indebtedness in respect of netting services, overdraft protections and otherwise in connection with deposit accounts maintained in the ordinary course of business; (g) Indebtedness under Capital Leases arising out of Permitted Sale-Leasebacks made in compliance with Section 6.9, in an aggregate amount not to exceed $75,000,000. (h) guaranties in the ordinary course of business of the obligations of suppliers, customers, franchisees and licensees of Parent and its Subsidiaries; (i) Indebtedness described in Schedule 6.1, but not any extensions, renewals or replacements of such Indebtedness except (i) renewals and extensions expressly provided for in the agreements evidencing any such Indebtedness as the same are in effect on the date of this Agreement and (ii) refinancings and extensions of any such Indebtedness if the terms and conditions thereof are not less favorable to the obligor thereon or to the Lenders than the Indebtedness being refinanced or extended, the average life to maturity thereof is greater than or equal to the remaining average life to maturity of the Indebtedness being refinanced or extended; provided, such Indebtedness permitted under the immediately preceding clause (i) or (ii) above shall not (A) include Indebtedness of an obligor that was not an obligor with respect to the Indebtedness being extended, renewed or refinanced, (B) exceed in a principal amount the Indebtedness being renewed, extended or refinanced or (C) incurred, created or assumed if any Default or Event of Default has occurred and is continuing or would result therefrom; (j) Indebtedness in respect of Interest Rate Agreements entered into to limit the Unadjusted Eurodollar Rate Component of the interest costs to Company with respect to the Term Loans hereunder; (k) Indebtedness in an aggregate amount not to exceed at any time $10,000,000 in respect of Currency Agreements entered into to limit Parent's and its Subsidiaries' exposure to currency exchange fluctuations in the ordinary course of business and not for speculative purposes; (l) other Indebtedness of Company's Subsidiaries in an aggregate amount not to exceed at any time $35,000,000 in the aggregate less the aggregate outstanding amount of Indebtedness of Parent or Company that was incurred pursuant to Section 6.1(m) and is guaranteed by any Subsidiary of Company; and (m) other Indebtedness of Parent and Company, in an aggregate amount not to exceed at any time $15,000,000; provided, however, that if such Indebtedness is guaranteed by any Subsidiary of Company pursuant to, and in compliance with, Section 6.1(l), such Indebtedness shall not be applied to reduce the amount of Indebtedness permitted under this Section 6.1(m). 6.2. LIENS. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Parent or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or 80 87 profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the UCC of any State or under any similar recording or notice statute, except: (a) Liens in favor of Administrative Agent for the benefit of Lenders and Lender Counterparties granted pursuant to any Credit Document; (b) Liens for Taxes, or claims the payment of which is not, at the time, required thereby; (c) statutory Liens of landlords, banks (and rights of set-off), of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law (other than any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA), in each case incurred in the ordinary course of business (i) for amounts not yet overdue or (ii) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of five days) are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts; (d) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money or other Indebtedness), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of any property on account thereof; (e) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of Parent or any of its Subsidiaries taken as a whole; (f) any interest or title of a lessor or sublessor under any lease permitted hereunder; (g) Liens solely on any cash earnest money deposits made by Parent or any of its Subsidiaries in connection with any letter of intent or purchase agreement entered into by it; (h) Liens incurred in connection with the purchase or shipping of goods or assets on the related assets and proceeds thereof in favor of the seller or shipper of such goods or assets; (i) Liens arising from filing precautionary UCC financing statements relating solely to operating leases entered into the ordinary course of business; 81 88 (j) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (k) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (l) licenses of patents, trademarks and other intellectual property rights granted by Parent or any of its Subsidiaries in the ordinary course of business and not interfering in any respect with the ordinary conduct of the business of Parent or such Subsidiary taken as a whole; (m) Liens described in Schedule 6.2; (n) Liens consisting of judgment or judicial attachment liens with respect to judgements that do not constitute and Event of Default and in the aggregate do not exceed $10,000,000; and (o) other Liens on assets other than the Share Collateral securing Indebtedness in an aggregate amount not to exceed $50,000,000 at any time outstanding. 6.3. EQUITABLE LIEN; NO FURTHER NEGATIVE PLEDGES. If any Credit Party or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Permitted Liens, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided, notwithstanding the foregoing, this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not otherwise permitted hereby. Except with respect to (a) specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to a permitted Asset Sale and (b) restrictions by reason of customary provisions restricting assignments, subletting or other transfers contained in leases, licenses and similar agreements entered into in the ordinary course of business (provided that such restrictions are limited to the property or assets secured by such Liens or the property or assets subject to such leases, licenses or similar agreements, as the case may be) no Credit Party nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. 6.4. RESTRICTED PAYMENTS; RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS. (a) No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Payment except the following shall be permitted: (i) Parent and Company may make regularly scheduled payments of interest in respect of any of its respective Subordinated Indebtedness in accordance with the 82 89 terms of, and only to the extent required by, and subject to the subordination provisions contained in, the indenture or other agreement pursuant to which such Subordinated Indebtedness was issued; (ii) any Subsidiary of Parent may pay ratable dividends and make ratable distributions to its equity holders; (iii) Parent shall be permitted to repurchase its shares of Parent Common Stock in accordance with the terms of the Offer to Purchase; provided that such shares of Parent Common Stock are immediately retired in connection with such repurchase; (iv) Parent shall be permitted to repurchase its shares of Parent Common Stock within six months following the Closing Date; provided that (x) such repurchases shall not in the aggregate exceed the excess of $400,000,000 over the actual Tender Offer Consideration paid pursuant to the Tender Offer and (y) any shares of Additional Purchased Common Stock are immediately retired in connection with such repurchases; (v) Parent shall be permitted to repurchase the rights issued pursuant to the Rights Agreement at a purchase price of no more than $.01 for each issued and outstanding right; and (vi) Parent may declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire shares of its Capital Stock; provided that, (i) 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 exists and (ii) in the case of any purchase, redemption or other acquisition of its Capital Stock at any time prior to the date on which Parent has received an Investment Grade Status rating, the aggregate amount of such purchase, redemption or other acquisition of its Capital Stock shall not exceed for any Fiscal Year set forth below the amount set forth below opposite such Fiscal Year:
Fiscal Year Amount ----------- ------- February 3, 2001 $25,000,000 and each following Fiscal Year $50,000,000 ===========
(b) Except as provided herein, no Credit Party shall, nor shall it permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary of Parent to (i) pay dividends or make any other distributions on any of such Subsidiary's Capital Stock owned by Parent or any other Subsidiary of Parent, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Parent or any other Subsidiary of Parent, (iii) make loans or advances to Parent or any other Subsidiary of 83 90 Parent, or (iv) transfer any of its property or assets to Parent or any other Subsidiary of Parent other than restrictions (1) in agreements evidencing Indebtedness permitted by Section 6.1 that impose restrictions on the property acquired with the proceeds of such Indebtedness or the property subject to a Lien securing such Indebtedness, (2) by reason of customary provisions restricting assignments, subletting or other transfers contained in leases, licenses, joint venture agreements and similar agreements entered into in the ordinary course of business, and (3) that are or were created by virtue of any transfer of, agreement to transfer or option or right with respect to any property, assets or Capital Stock not otherwise prohibited under this Agreement. 6.5. INVESTMENTS. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including without limitation any Joint Venture, except: (a) Cash Equivalents; (b) Interest Rate Agreements entered into to limit the Unadjusted Eurodollar Rate Component of the interest costs to Company with respect to the Term Loans hereunder; (c) Currency Agreements entered into to limit Parent's and its Subsidiaries' exposure to currency exchange fluctuations in the ordinary course of business and not for speculative purposes; (d) (i) equity Investments owned as of the Closing Date in any Subsidiary, and (ii) Investments made after the Closing Date in any wholly-owned Foreign Subsidiary of Parent; (e) Consolidated Capital Expenditures permitted by Section 6.6(d); (f) Investments (i) in accounts receivable arising and trade credit granted in the ordinary course of business and in any Securities or other assets received in satisfaction or partial satisfaction thereof from financially troubled account debtors or in settlement of disputes with account debtors and (ii) deposits, prepayments and other credits to suppliers made in the ordinary course of business consistent with the past practices of Parent and its Subsidiaries; (ii) deposits, prepayments and other credits to suppliers made in the ordinary course of business consistent with the past practices of Parent and its Subsidiaries; (g) Investments in bonds issued by a Governmental Authority in connection with the lease of property or equipment by the Parent or its Subsidiaries from such Governmental Authority, provided that such bonds are secured by the lease payments required to be made by the Parent or its Subsidiaries with respect to such leased property and are issued in transactions which are in form and substance substantially similar to those in which the investments described on part II of Schedule 6.5 were made; (h) Investments made in connection with Permitted Acquisitions permitted pursuant to Section 6.7; 84 91 (i) Investments described in Schedule 6.5; and (j) other Investments in an aggregate amount not to exceed at any time $75,000,000. 6.6. FINANCIAL COVENANTS. (a) Minimum Fixed Charge Coverage Ratio. Parent shall not permit the Fixed Charge Coverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending April 29, 2000, to be less than the ratio of 1.75:1.00. (b) Maximum Leverage Ratio. Parent shall not permit the Leverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending April 29, 2000, to exceed the ratio of 2.00:1.00. (c) Maximum Consolidated Debt/Capitalization Ratio. Parent shall not permit the Consolidated Debt/Capitalization Ratio as of the last day of any Fiscal Quarter (which last day occurs in any period set forth below), beginning with the Fiscal Quarter ending February 3, 2001, to exceed the correlative ratio indicated:
CONSOLIDATED PERIOD DEBT/CAPITALIZATION RATIO ------ ------------------------- February 3, 2001 - February 1, 2003 0.80:1.00 February 2, 2003 and thereafter 0.70:1.00
(d) Maximum Consolidated Capital Expenditures. Until the date on which Parent has received an Investment Grade Status rating, Parent shall not, and shall not permit its Subsidiaries to, make or incur Consolidated Capital Expenditures, in any Fiscal Year indicated below, in an aggregate amount for Parent and its Subsidiaries in excess of the corresponding amount set forth below opposite such Fiscal Year; provided, such amount for any Fiscal Year shall be increased by an amount equal to the excess, if any, of such amount for the previous Fiscal Year (as adjusted in accordance with this proviso) over the actual amount of Consolidated Capital Expenditures for such previous Fiscal Year: 85 92
CONSOLIDATED FISCAL YEAR CAPITAL EXPENDITURES ----------- -------------------- Fiscal Year ending February 3, 2001 $165,000,000 Thereafter $150,000,000
(e) Certain Calculations. With respect to any period during which a Permitted Acquisition or an Asset Sale has occurred (each, a "SUBJECT TRANSACTION"), for purposes of determining compliance with the financial covenants set forth in this Section 6.6 (but not for purposes of determining the Applicable Margin or Applicable Commitment Fee Percentage), Consolidated Adjusted EBITDA and the components of Consolidated Fixed Charges shall be calculated with respect to such period on a pro forma basis (including pro forma adjustments arising out of events which are directly attributable to a specific transaction, are factually supportable and are expected to have a continuing impact, in each case determined on a basis consistent with Article 11 of Regulation S-X promulgated under the Securities Act and as interpreted by the staff of the Securities and Exchange Commission, which would include cost savings resulting from head count reduction, closure of facilities and similar restructuring charges, which pro forma adjustments shall be certified by the chief financial officer of Parent) using the historical audited financial statements of any business so acquired or to be acquired or sold or to be sold and the consolidated financial statements of Parent and its Subsidiaries which shall be reformulated as if such Subject Transaction, and any Indebtedness incurred or repaid in connection therewith, had been consummated or incurred or repaid at the beginning of such period (and assuming that such Indebtedness bears interest during any portion of the applicable measurement period prior to the relevant acquisition at the weighted average of the interest rates applicable to outstanding Loans incurred during such period). 6.7. FUNDAMENTAL CHANGES; DISPOSITION OF ASSETS; ACQUISITIONS. No Credit Party shall, nor shall it permit, any of its Subsidiaries to, enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, assets or property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, whether now owned or hereafter acquired, or acquire by purchase or otherwise (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business or other business unit of any Person, except: (a) any Subsidiary of Parent (other than Company) may be merged with or into Parent, Company or any wholly-owned Guarantor Subsidiary, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Parent, Company or any wholly-owned Guarantor Subsidiary; provided, (i) at the time of any such merger, no Event of Default shall exist or shall result from such merger, and (ii) in the case of such a merger, 86 93 Parent, Company or such wholly-owned Guarantor Subsidiary, as applicable, shall be the continuing or surviving Person; (b) sales or other dispositions of assets that do not constitute Asset Sales; (c) Asset Sales not otherwise permitted hereunder; provided that (i) the consideration received for such assets shall be in an amount at least equal to the fair market value thereof (determined in good faith by the Board of Directors of Parent (or similar governing body)); (ii) at the time of any such Asset Sale, no Event of Default shall exist or shall result from such Asset Sale; (iii) no less than 80% of the consideration therefor shall be paid in Cash; (iv) the Net Asset Sale Proceeds thereof shall be applied as required by Section 2.14(a); and (v) at the time of such Asset Sale and after giving effect thereto, the aggregate sales price of all assets or property so sold by Parent and its Subsidiaries, together, since the Closing Date shall not exceed 5% of the Consolidated Net Tangible Assets of Parent and its Subsidiaries determined in accordance with GAAP. (d) disposals of obsolete, worn out or surplus property in the ordinary course of business; provided the Net Asset Sale Proceeds thereof, if any, shall be applied as required by Section 2.14(a); (e) disposals of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment; (f) Permitted Acquisitions by Parent and its wholly-owned Subsidiaries, the consideration of which constitutes less than $200,000,000 in the aggregate from the Closing Date. Notwithstanding anything to the contrary, the $200,000,000 limitation in this Section 6.7(f) shall not be applicable after the date on which Parent has received an Investment Grade Status rating. (g) Investments made in accordance with Section 6.5; and (h) Asset Sales of stores developed by Parent or any of its Subsidiaries in connection with Permitted Sale-Leasebacks, provided that (x) the proceeds of any such Permitted Sale Leaseback shall be entirely in cash and shall not be less than 100% of the fair market value of the equipment being sold (determined in good faith by the board of directors of Parent) and (y) the Net Asset Sale Proceeds thereof shall be applied as required by Section 2.14(a). 6.8. DISPOSAL OF SUBSIDIARY INTERESTS. Except for any sale of 100% of the Capital Stock of any of its Subsidiaries in compliance with the provisions of Section 6.7, no Credit Party shall, nor shall it permit any of its Subsidiaries to, (a) directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any Capital Stock of any of its Subsidiaries, except to qualify directors if required by applicable law; or (b) permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any Capital Stock of any of its Subsidiaries, except to another Credit Party (subject to the restrictions on such disposition otherwise imposed herein under), or to qualify directors if required by applicable law. 87 94 6.9. SALES AND LEASE-BACKS. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease of any property (whether real, personal or mixed), whether now owned or hereafter acquired (a "SALE-LEASEBACK"), which such Credit Party (a) has sold or transferred or is to sell or to transfer to any other Person (other than Parent or any of its Subsidiaries), or (b) intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by such Credit Party to any Person (other than Parent or any of its Subsidiaries) in connection with such lease; provided, however, that a Credit Party may enter into Sale-Leasebacks at market rates and subject to compliance with Section 6.7(i) provided that the aggregate amount of such Sale-Leasebacks since the Closing Date shall not exceed $75,000,000 ("PERMITTED SALE-LEASEBACKS"). For avoidance of doubt, Sale-Leasebacks that result in Capital Leases shall be treated as Indebtedness for all purposes of this Agreement. 6.10. TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. No Credit Party shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of Capital Stock of Parent or any of its Subsidiaries or with any Affiliate of Parent or of any such holder, on terms that are less favorable to Parent or that Subsidiary, as the case may be, than those that might be obtained at the time in a comparable transaction from a Person who is not such a holder or Affiliate; provided, the foregoing restriction shall not apply to (a) any transaction between Parent and any wholly-owned Subsidiary of Parent; (b) reasonable and customary fees paid to members of the board of directors (or similar governing body) of Parent and its Subsidiaries; (c) compensation arrangements for officers and other employees of Parent and its Subsidiaries entered into in the ordinary course of business; and (d) transactions described in Schedule 6.10. 6.11. CONDUCT OF BUSINESS. From and after the Closing Date, no Credit Party shall, nor shall it permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by such Credit Party on the Closing Date and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders. 6.12. AMENDMENTS OR WAIVERS OF CERTAIN TRANSACTION DOCUMENTS. (a) No Credit Party shall nor shall it permit any of its Subsidiaries to, agree to any material amendment, restatement, supplement or other modification to, or waiver of, any of its material rights under any Transaction Document after the Closing Date without in each case obtaining the prior written consent of Requisite Lenders to such amendment, restatement, supplement or other modification or waiver. (b) No Credit Party shall, nor shall it permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or change any 88 95 condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions of such Subordinated Indebtedness (or of any guaranty thereof), or if the effect of any such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or to confer any additional rights on the holders of such Subordinated Indebtedness (or a trustee or other representative on their behalf) which would be adverse to any Credit Party or Lenders. 6.13. FISCAL YEAR. No Credit Party shall, nor shall it permit any of its Subsidiaries to change its Fiscal Year-end from the Saturday which is the closest to January 31. SECTION 7. GUARANTY 7.1. GUARANTY OF THE OBLIGATIONS. Subject to the provisions of Section 7.2, Guarantors jointly and severally hereby irrevocably and unconditionally guaranty to Administrative Agent for the ratable benefit of the Beneficiaries the due and punctual payment in full of all Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)) (collectively, the "GUARANTEED OBLIGATIONS"). 7.2. CONTRIBUTION BY GUARANTORS. All Guarantors desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty. Accordingly, in the event any payment or distribution is made on any date by a Guarantor (a "FUNDING GUARANTOR") under this Guaranty that exceeds its Fair Share as of such date, such Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (a) the ratio of (i) the Fair Share Contribution Amount with respect to such Contributing Guarantor to (ii) the aggregate of the Fair Share Contribution Amounts with respect to all Contributing Guarantors multiplied by (b) the aggregate amount paid or distributed on or before such date by all Funding Guarantors under this Guaranty in respect of the obligations Guaranteed. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "FAIR SHARE CONTRIBUTION AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty that would not render its obligations hereunder or thereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any comparable applicable provisions of state law; provided, solely for purposes of calculating the "FAIR SHARE CONTRIBUTION AMOUNT" with respect to any Contributing Guarantor for purposes of this Section 7.2, any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations 89 96 of contribution hereunder shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (1) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty (including, without limitation, in respect of this Section 7.2), minus (2) the aggregate amount of all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this Section 7.2. The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this Section 7.2 shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder. Each Guarantor is a third party beneficiary to the contribution agreement set forth in this Section 7.2. 7.3. PAYMENT BY GUARANTORS. Subject to Section 7.2, Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guaranteed Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)), Guarantors will upon demand pay, or cause to be paid, in Cash, to Administrative Agent for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guaranteed Obligations then due as aforesaid, accrued and unpaid interest on such Guaranteed Obligations (including interest which, but for Company's becoming the subject of a case under the Bankruptcy Code, would have accrued on such Guaranteed Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy case) and all other Guaranteed Obligations then owed to Beneficiaries as aforesaid. 7.4. LIABILITY OF GUARANTORS ABSOLUTE. Each Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: (a) this Guaranty is a guaranty of payment when due and not of collectability. This Guaranty is a primary obligation of each Guarantor and not merely a contract of surety; (b) Administrative Agent may enforce this Guaranty upon the occurrence of an Event of Default notwithstanding the existence of any dispute between Company and any Beneficiary with respect to the existence of such Event of Default; (c) the obligations of each Guarantor hereunder are independent of the obligations of Company and the obligations of any other guarantor (including any other Guarantor) of the obligations of Company, and a separate action or actions may be brought and prosecuted against 90 97 such Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions; (d) payment by any Guarantor of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge any Guarantor's liability for any portion of the Guaranteed Obligations which has not been paid. Without limiting the generality of the foregoing, if Administrative Agent is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guaranteed Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guaranteed Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guaranteed Obligations; (e) any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability hereof or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guaranteed Obligations; (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guaranteed Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guaranteed Obligations and take and hold security for the payment hereof or the Guaranteed Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guaranteed Obligations, any other guaranties of the Guaranteed Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guaranteed Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect hereof or the Guaranteed Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent herewith or the applicable Hedge Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Company or any security for the Guaranteed Obligations; and (vi) exercise any other rights available to it under the Credit Documents or the Hedge Agreements; and (f) this Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guaranteed Obligations), including the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising 91 98 under the Credit Documents or the Hedge Agreements, at law, in equity or otherwise) with respect to the Guaranteed Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guaranteed Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) hereof, any of the other Credit Documents, any of the Hedge Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guaranteed Obligations, in each case whether or not in accordance with the terms hereof or such Credit Document, such Hedge Agreement or any agreement relating to such other guaranty or security; (iii) the Guaranteed Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Credit Documents or any of the Hedge Agreements or from the proceeds of any security for the Guaranteed Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guaranteed Obligations) to the payment of indebtedness other than the Guaranteed Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guaranteed Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Parent or any of its Subsidiaries and to any corresponding restructuring of the Guaranteed Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guaranteed Obligations; (vii) any defenses, set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guaranteed Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guaranteed Obligations. 7.5. WAIVERS BY GUARANTORS. Each Guarantor hereby waives, for the benefit of Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Company, any other guarantor (including any other Guarantor) of the Guaranteed Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any Deposit Account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company or any other Guarantor including any defense based on or arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company or any other Guarantor from any cause other than payment in full of the Guaranteed Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guaranteed Obligations, except behavior which amounts to bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms hereof and any legal or equitable discharge of such Guarantor's obligations hereunder, (ii) the benefit of any statute of limitations 92 99 affecting such Guarantor's liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance hereof, notices of default hereunder, the Hedge Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guaranteed Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in Section 7.4 and any right to consent to any thereof; and (g) any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms hereof. 7.6. GUARANTORS' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Until the Guaranteed Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against Company or any other Guarantor or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Company with respect to the Guaranteed Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guaranteed Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guaranteed Obligations, including, without limitation, any such right of contribution as contemplated by Section 7.2. Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Company or against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guaranteed Obligations shall not have been finally and indefeasibly paid in full, such amount shall be held in trust for Administrative Agent on behalf of Beneficiaries and shall forthwith be paid over to Administrative Agent for the benefit of Beneficiaries to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms hereof. 93 100 7.7. SUBORDINATION OF OTHER OBLIGATIONS. Any Indebtedness of Company or any Guarantor now or hereafter held by any Guarantor (the "OBLIGEE GUARANTOR") is hereby subordinated in right of payment to the Guaranteed Obligations, and any such indebtedness collected or received by the Obligee Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Administrative Agent on behalf of Beneficiaries and shall forthwith be paid over to Administrative Agent for the benefit of Beneficiaries to be credited and applied against the Guaranteed Obligations but without affecting, impairing or limiting in any manner the liability of the Obligee Guarantor under any other provision hereof. 7.8. CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall remain in effect until all of the Guaranteed Obligations shall have been finally and indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Each Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guaranteed Obligations. 7.9. AUTHORITY OF GUARANTORS OR COMPANY. It is not necessary for any Beneficiary to inquire into the capacity or powers of any Guarantor or Company or the officers, directors or any agents acting or purporting to act on behalf of any of them. 7.10. FINANCIAL CONDITION OF COMPANY. Any Credit Extension may be made to Company or continued from time to time, and any Hedge Agreements may be entered into from time to time, in each case without notice to or authorization from any Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Hedge Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Company. Each Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Credit Documents and the Hedge Agreements, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 7.11. BANKRUPTCY, ETC. (a) So long as any Guaranteed Obligations remain outstanding, no Guarantor shall, without the prior written consent of Administrative Agent acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency case or proceeding of or against Company or any other Guarantor. The obligations of Guarantors hereunder shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any case or proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or any other Guarantor or by any defense which Company or any other Guarantor may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. 94 101 (b) Each Guarantor acknowledges and agrees that any interest on any portion of the Guaranteed Obligations which accrues after the commencement of any case or proceeding referred to in clause (a) above (or, if interest on any portion of the Guaranteed Obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, such interest as would have accrued on such portion of the Guaranteed Obligations if such case or proceeding had not been commenced) shall be included in the Guaranteed Obligations because it is the intention of Guarantors and Beneficiaries that the Guaranteed Obligations which are Guaranteed by Guarantors pursuant hereto should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guaranteed Obligations. Guarantors will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Administrative Agent, or allow the claim of Administrative Agent in respect of, any such interest accruing after the date on which such case or proceeding is commenced. (c) In the event that all or any portion of the Guaranteed Obligations are paid by Company, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guaranteed Obligations for all purposes hereunder. 7.12. NOTICE OF EVENTS. As soon as any Guarantor obtains knowledge thereof, such Guarantor shall give Administrative Agent written notice of any condition or event which has resulted in (i) a material adverse change in the financial condition of any Guarantor or Company or (ii) a breach of or noncompliance with any term, condition or covenant contained herein, any other Credit Document, any Hedge Agreement or any other document delivered pursuant hereto or thereto. 7.13. DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the Capital Stock of any Guarantor or any of its successors in interest hereunder shall be sold or otherwise disposed of (including by merger or consolidation) in accordance with the terms and conditions hereof, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall immediately and automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided, as a condition precedent to such discharge and release, Administrative Agent shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Administrative Agent of the applicable Net Asset Sale Proceeds of such disposition pursuant to Section 2.14(a). SECTION 8. EVENTS OF DEFAULT 8.1. EVENTS OF DEFAULT. If any one or more of the following conditions or events shall occur: (a) Failure to Make Payments When Due. Failure by Company to pay (i) when due any installment of principal of any Loan, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; (ii) when due any amount payable 95 102 to Issuing Bank in reimbursement of any drawing under a Letter of Credit; or (iii) any interest on any Loan or any fee or any other amount due hereunder within five (5) days after the date due; or (b) Default in Other Agreements. (i) Failure of any Credit Party or any of their respective Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in Section 8.1(a)) in an individual or with an aggregate principal amount of $10,000,000 or more, in each case beyond the grace period, if any, provided therefor; or (iii) breach or default by any Credit Party with respect to any other material term of (1) one or more items of Indebtedness in the individual or aggregate principal amounts referred to in clause (i) above or (2) any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness, in each case beyond the grace period, if any, provided therefor, if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness (or a trustee on behalf of such holder or holders), to cause, that Indebtedness to become or be declared due and payable (or redeemable) prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be; or (c) Breach of Certain Covenants. Failure of any Credit Party to perform or comply with any term or condition contained in Section 2.6, Section 5.2 or Section 6; or (d) Breach of Representations, etc. Any representation, warranty, certification or other statement made or deemed made by any Credit Party in any Credit Document or in any statement or certificate at any time given by any Credit Party or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect as of the date made or deemed made; or (e) Other Defaults Under Credit Documents. Any Credit Party shall default in the performance of or compliance with any term contained herein or any of the other Credit Documents, other than any such term referred to in any other Section of this Section 8.1, and such default shall not have been remedied or waived within thirty (30) days after the earlier of (i) an officer of such Credit Party becoming aware of such default or (ii) receipt by Company of notice from Administrative Agent or any Lender of such default; or (f) Involuntary Bankruptcy; Appointment of Receiver, etc.. (i) A court of competent jurisdiction shall enter a decree or order for relief in respect of any Credit Party or any Material Subsidiary in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against any Credit Party or any Material Subsidiary under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Credit Party or any Material Subsidiary, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of any Credit Party or any Material Subsidiary for all or 96 103 a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of any Credit Party or any Material Subsidiary , and any such event described in this clause (ii) shall continue for sixty (60) days without having been dismissed, bonded or discharged; or (g) Voluntary Bankruptcy; Appointment of Receiver, etc.. (i) any Credit Party or any Material Subsidiary shall have an order for relief entered with respect to it or shall commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or any Credit Party or any Material Subsidiary shall make any assignment for the benefit of creditors; or (ii) any Credit Party or any Material Subsidiary shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the board of directors (or similar governing body) of any Credit Party or any Material Subsidiary (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to herein or in Section 8.1(f); or (h) Judgments and Attachments. Any money judgments, writs or warrants of attachment or similar processes involving in the aggregate at any time an amount in excess of $10,000,000 (in any case to the extent not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against Parent or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of sixty (60) days (or in any event later than five days prior to the date of any proposed sale thereunder); or (i) Dissolution. Any order, judgment or decree shall be entered against any Credit Party decreeing the dissolution or split up of Parent or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days; or (j) Employee Benefit Plans. There shall occur one or more ERISA Events which individually or in the aggregate results in or might reasonably be expected to result in liability of Parent, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $10,000,000 during the term hereof; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), which exceeds $10,000,000; or (k) Change of Control. A Change of Control shall occur; or (l) Guaranties, Collateral Documents and other Credit Documents. At any time after the execution and delivery thereof, (i) the Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms) or shall be declared to be null and void or any Guarantor shall repudiate its obligations 97 104 thereunder, (ii) this Agreement or any Collateral Document ceases to be in full force and effect (other than by reason of a release of Share Collateral in accordance with the terms hereof or thereof or the satisfaction in full of the Obligations in accordance with the terms hereof) or shall be declared null and void, or Administrative Agent shall not have or shall cease to have a valid and perfected Lien in any Share Collateral (other than by reason of a release of Share Collateral in accordance with the terms hereof or thereof) purported to be covered by the Collateral Documents with the priority required by the relevant Collateral Document, in each case for any reason other than the failure of Administrative Agent or any Lender to take any action within its control, or (iii) any Credit Party shall contest the validity or enforceability of any Credit Document in writing or deny in writing that it has any further liability, including with respect to future advances by Lenders, under any Credit Document to which it is a party. THEN, (1) upon the occurrence of any Event of Default described in Section 8.1(f) or 8.1(g), automatically, and (2) upon the occurrence of any other Event of Default, at the request of (or with the consent of) Requisite Lenders, upon notice to Company by Administrative Agent, (A) the Commitments, if any, of each Lender having such Commitments and the obligation of Issuing Bank to issue any Letter of Credit shall immediately terminate; (B) each of the following shall immediately become due and payable, in each case without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by each Credit Party: (I) the unpaid principal amount of and accrued interest on the Loans, (II) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (regardless of whether any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letters of Credit), and (III) all other Obligations; provided, the foregoing shall not affect in any way the obligations of Lenders under Section 2.4(e); (C) the Administrative Agent may enforce any and all Liens and security interests created pursuant to Collateral Documents; and (D) Administrative Agent shall direct Company to pay (and Company hereby agrees upon receipt of such notice, or upon the occurrence of any Event of Default specified in Section 8.1(f) and (g) to pay) to Administrative Agent such additional amounts of cash, to be held as security for Company's reimbursement Obligations in respect of Letters of Credit then outstanding, equal to the Letter of Credit Usage at such time. SECTION 9. AGENTS 9.1. APPOINTMENT OF AGENTS. GSCP is hereby appointed Lead Arranger and Syndication Agent hereunder, and each Lender hereby authorizes Lead Arranger and Syndication Agent to act as its agents in accordance with the terms hereof and the other Credit Documents. Bank One is hereby appointed Administrative Agent (for purposes of this Section 9, the terms "Administrative Agent" and "Agent" also shall include Bank One in its capacity as Collateral Agent pursuant to the Collateral Documents) hereunder and under the other Credit Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms hereof and the other Credit Documents. First Union is hereby appointed Documentation Agent hereunder, and each Lender hereby authorizes Documentation Agent to act as its agent in accordance with the terms hereof and the other Credit Documents. Each Agent hereby agrees to act upon the express 98 105 conditions contained herein and the other Credit Documents, as applicable. The provisions of this Section 9 are solely for the benefit of Agents and Lenders and no Credit Party shall have any rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties hereunder, each Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Parent or any of its Subsidiaries. Each of Syndication Agent and Documentation Agent, without consent of or notice to any party hereto, may assign any and all of its rights or obligations hereunder to any of its Affiliates. As of the Closing Date, all the respective obligations of GSCP, in its capacity as Lead Arranger, Syndication Agent, and First Union, in its capacity as Documentation Agent, shall terminate. 9.2. POWERS AND DUTIES. Each Lender irrevocably authorizes each Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Credit Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Each Agent shall have only those duties and responsibilities that are expressly specified herein and the other Credit Documents. Each Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. No Agent shall have, by reason hereof or any of the other Credit Documents, a fiduciary relationship in respect of any Lender; and nothing herein or any of the other Credit Documents, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect hereof or any of the other Credit Documents except as expressly set forth herein or therein. 9.3. GENERAL IMMUNITY. (a) No Responsibility for Certain Matters. No Agent shall be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectability or sufficiency hereof or any other Credit Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by any of Agent to Lenders or by or on behalf of any Credit Party to any Agent or any Lender in connection with the Credit Documents and the transactions contemplated thereby or for the financial condition or business affairs of any Credit Party or any other Person liable for the payment of any Obligations, nor shall any Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Credit Documents or as to the use of the proceeds of the Loans or as to the existence or possible existence of any Event of Default or Default. Anything contained herein to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof. (b) Exculpatory Provisions. No Agent nor any of its officers, partners, directors, employees or agents shall be liable to Lenders for any action taken or omitted by any Agent under or in connection with any of the Credit Documents except to the extent caused by such Agent's gross negligence or willful misconduct. Each Agent shall be entitled to refrain from any act or the taking 99 106 of any action (including the failure to take an action) in connection herewith or any of the other Credit Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until such Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under Section 10.5) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), such Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) each Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper Person or Persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Parent and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting hereunder or any of the other Credit Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under Section 10.5). 9.4. AGENTS ENTITLED TO ACT AS LENDER. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, any Agent in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Letters of Credit, each Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as if it were not performing the duties and functions delegated to it hereunder, and the term "Lender" shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Any Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Parent or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Parent or Company for services in connection herewith and otherwise without having to account for the same to Lenders. 9.5. LENDERS' REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENT. (a) Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Parent and its Subsidiaries in connection with Credit Extensions hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Parent and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. (b) Each Lender, by delivering its signature page to this Agreement and funding its Term Loan Amount and/or a Revolving Loan on the Closing Date, shall be deemed to have acknowledged receipt of, and consented to and approved, each Credit Document and each other 100 107 document required to be approved by any Agent, Requisite Lenders or Lenders, as applicable on the Closing Date. 9.6. RIGHT TO INDEMNITY. Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent, to the extent that such Agent shall not have been reimbursed by any Credit Party, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Credit Documents or otherwise in its capacity as such Agent in any way relating to or arising out hereof or the other Credit Documents; provided, no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. If any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished; provided, in no event shall this sentence require any Lender to indemnify any Agent against any liability, obligation, loss, damage, penalty, action, judgment, suit, cost, expense or disbursement in excess of such Lender's Pro Rata Share thereof; and provided further, this sentence shall not be deemed to require any Lender to indemnify any Agent against any liability, obligation, loss, damage, penalty, action, judgment, suit, cost, expense or disbursement described in the proviso in the immediately preceding sentence. 9.7. SUCCESSOR ADMINISTRATIVE AGENT AND SWING LINE LENDER. Administrative Agent may resign at any time by giving written notice thereof to the Lenders and Company, such resignation to be effective upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five days after the retiring Administrative Agent gives notice of its intention to resign. Administrative Agent may be removed at any time with or without cause by written notice received by Administrative Agent from the Requisite Lenders, such removal to be effective on the date specified by the Requisite Lenders. Upon any such resignation or removal, the Requisite Lenders shall have the right to appoint, on behalf of Company and the Lenders, a successor Administrative Agent; provided, that unless a Default or an Event of Default has occurred and is continuing, such successor Administrative Agent shall be reasonably acceptable to Company. If no successor Administrative Agent shall have been so appointed by the Requisite Lenders within thirty days after the resigning Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of Company and the Lenders, a successor Administrative Agent; provided, that unless a Default or an Event of Default has occurred and is continuing, such successor Administrative Agent shall be reasonably acceptable to Company. Notwithstanding the previous sentence, Administrative Agent may at any time without the consent of Company or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Administrative Agent hereunder. If Administrative Agent has resigned or been removed and no successor Administrative Agent has been appointed, the Lenders may perform all the duties of Administrative Agent hereunder and Company shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor 101 108 Administrative Agent has accepted the appointment. Any successor Administrative Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Credit Documents. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article 9 shall continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent hereunder and under the other Credit Documents. Any resignation or removal of Administrative Agent pursuant to this Section 9.7 shall also constitute the resignation or removal of Bank One or its successor as Swing Line Lender, and any successor Administrative Agent appointed pursuant to this Section 9.7 shall, upon its acceptance of such appointment, become the successor Swing Line Lender for all purposes hereunder. In such event (a) Company shall prepay any outstanding Swing Line Loans made by the retiring or removed Administrative Agent in its capacity as Swing Line Lender, (b) upon such prepayment, the retiring or removed Administrative Agent and Swing Line Lender shall surrender any Swing Line Note held by it to Company for cancellation, and (c) Company shall issue, if so requested by Successor Administrative Agent and Swing Line Lender, a new Swing Line Note to the successor Administrative Agent and Swing Line Lender, in the principal amount of the Swing Line Sublimit then in effect and with other appropriate insertions. In the event that there is a successor to Administrative Agent by merger or upon the resignation or removal of Administrative Agent pursuant to this Section 9.7, or Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 9.7, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent. 9.8. NOTICE OF DEFAULT. Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless Administrative Agent has received written notice from a Lender or Company referring to this Agreement describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that Administrative Agent receives such a notice, Administrative Agent shall give prompt notice thereof to the Lenders. 9.9. COLLATERAL DOCUMENTS AND GUARANTY. (a) Administrative Agent as Agent under Collateral Documents and Guaranty. Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to be the agent for and representative of Lenders with respect to the Guaranty, the Share Collateral and the Collateral Documents. Subject to Section 10.5, without further written consent or authorization from Lenders, Administrative Agent may execute any documents or instruments necessary to (i) release any Lien encumbering any item of Share Collateral that is the subject of a sale or other disposition of assets permitted hereby or to which Requisite Lenders (or such other Lenders as may be required to give such consent under Section 10.5) have otherwise consented or 102 109 (ii) release any Guarantor from the Guaranty pursuant to Section 7.13 or with respect to which Requisite Lenders (or such other Lenders as may be required to give such consent under Section 10.5) have otherwise consented. (b) Administrative Agent's Right to Realize on Share Collateral and Enforce Guaranty. Anything contained in any of the Credit Documents to the contrary notwithstanding, Company, Administrative Agent and each Lender hereby agree that (i) no Lender shall have any right individually to realize upon any of the Share Collateral or to enforce the Guaranty, it being understood and agreed that all powers, rights and remedies hereunder may be exercised solely by Administrative Agent, on behalf of Lenders in accordance with the terms hereof, and (ii) in the event of a foreclosure by Administrative Agent on any of the Share Collateral pursuant to a public or private sale, Administrative Agent or any Lender may be the purchaser of any or all of such Share Collateral at any such sale and Administrative Agent, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Share Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Administrative Agent at such sale. SECTION 10. MISCELLANEOUS 10.1. NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given to a Credit Party, Lead Arranger, Syndication Agent, Administrative Agent, Swing Line Lender, Issuing Bank or Documentation Agent, shall be sent to such Person's address as set forth on Appendix C or in the other relevant Credit Document, and in the case of any Lender, the address as indicated on Appendix C or otherwise indicated to Administrative Agent in writing. Each notice hereunder shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service and signed for against receipt thereof, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided, no notice to any Agent shall be effective until received by such Agent. 10.2. EXPENSES. Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (a) all the actual and reasonable costs and expenses of preparation of the Credit Documents and any consents, amendments, waivers or other modifications thereto; (b) all the costs of furnishing all opinions by counsel for Company and the other Credit Parties; (c) the reasonable fees, expenses and disbursements of counsel to Agents (in each case including allocated costs of internal counsel) in connection with the negotiation, preparation, execution and administration of the Credit Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (d) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Administrative Agent, for the benefit of Lenders pursuant hereto, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums and reasonable fees, 103 110 expenses and disbursements of counsel to each Agent and of counsel providing any opinions that any Agent or Requisite Lenders may request in respect of the Share Collateral or the Liens created pursuant the Collateral Documents; (e) all the actual costs and reasonable fees, expenses and disbursements of any auditors, accountants, consultants or appraisers; (f) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any appraisers, consultants, advisors and agents employed or retained by Administrative Agent and its counsel) in connection with the custody or preservation of any of the Share Collateral; (g) all other actual and reasonable costs and expenses incurred by each Agent in connection with the syndication of the Loans and Commitments and the negotiation, preparation and execution of the Credit Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (h) after the occurrence of an Event of Default and during the continuance thereof, all costs and expenses, including reasonable attorneys' fees (including allocated costs of internal counsel) and costs of settlement, incurred by any Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Credit Party hereunder or under the other Credit Documents by reason of such Default or Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Share Collateral or the enforcement of the Guaranty) or in connection with any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a "work-out" or pursuant to any insolvency or bankruptcy cases or proceedings. 10.3. INDEMNITY. In addition to the payment of expenses pursuant to Section 10.2, whether or not the transactions contemplated hereby shall be consummated, each Credit Party agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless, each Agent and Lender and the officers, partners, directors, trustees, employees, agents and Affiliates of each Agent and each Lender (each, an "INDEMNITEE"), from and against any and all Indemnified Liabilities; provided, no Credit Party shall have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this Section 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, the applicable Credit Party shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 10.4. SET-OFF. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default each Lender is hereby authorized by each Credit Party at any time or from time to time subject to the consent of Administrative Agent (such consent not to be unreasonably withheld or delayed), without notice to any Credit Party or to any other Person (other than Administrative Agent), any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by such Lender to or for the credit or the account of any Credit Party against and on account of the obligations and liabilities of any Credit Party to such Lender hereunder, the Letters of Credit and participations therein and under the other Credit Documents, including all claims of any nature or 104 111 description arising out of or connected hereto, the Letters of Credit and participations therein or with any other Credit Document, irrespective of whether or not (a) such Lender shall have made any demand hereunder or (b) the principal of or the interest on the Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 2 and although such obligations and liabilities, or any of them, may be contingent or unmatured. Each Credit Party hereby further grants to Administrative Agent and each Lender a security interest in all Deposit Accounts maintained with Administrative Agent or such Lender as security for the Obligations. 10.5. AMENDMENTS AND WAIVERS. Requisite Lenders' Consent. (a) Subject to Section 10.5(b) and 10.5(c), no amendment, modification, termination or waiver of any provision of the Credit Documents, or consent to any departure by any Credit Party therefrom, shall in any event be effective without the written concurrence of the Requisite Lenders. (b) Consent of Lenders Affected. Without the written consent of each Lender that would be affected thereby, no amendment, modification, termination, or consent shall be effective if the effect thereof would: (i) extend the scheduled final maturity of any Loan or Note; (ii) waive, reduce or postpone any scheduled repayment (but not prepayment); (iii) extend the expiration date of any Term Loan Commitment or Revolving Credit Commitment; (iv) extend the stated expiration date of any Letter of Credit beyond the Revolving Credit Commitment Termination Date; (v) reduce the rate of interest on any Loan (other than any waiver of any increase in the interest rate applicable to any Loan pursuant to Section 2.10) or any fee payable hereunder; (vi) extend the time for payment of any such interest or fees; (vii) reduce the principal amount of any Loan or any reimbursement obligation in respect of any Letter of Credit; (viii) amend, modify, terminate or waive any provision of this Section 10.5(b), Section 10.5(c), Section 2.5(a) or Section 2.17; (ix) amend the definition of "REQUISITE LENDERS" or "PRO RATA SHARE"; provided, with the consent of Requisite Lenders, additional extensions of credit pursuant hereto may be included in the determination of "REQUISITE LENDERS" or "PRO RATA SHARE" 105 112 on substantially the same basis as the Term LoanCommitments, the Term Loans, the Revolving Credit Commitments and the Revolving Loans are included on the Closing Date; (x) release or otherwise subordinate all or substantially all of the Share Collateral and the Collateral Account or all or substantially all of the Guarantors from the Guaranty except as expressly provided in the Credit Documents; or (xi) consent to the assignment or transfer by any Credit Party of any of its rights and obligations under any Credit Document. (c) Other Consents. No amendment, modification, termination or waiver of any provision of the Credit Documents, or consent to any departure by any Credit Party therefrom, shall: (i) increase any Commitment of any Lender over the amount thereof then in effect without the consent of such Lender; provided, no amendment, modification or waiver of any condition precedent, covenant, Default or Event of Default shall constitute an increase in any Commitment of any Lender; (ii) amend, modify, terminate or waive any obligation of Lenders relating to the purchase of participations in Letters of Credit as provided in Section 2.4(e) without the written consent of Administrative Agent and of Issuing Bank; (iii) amend, modify, terminate or waive any provision of Section 9 as the same applies to any Agent, or any other provision hereof as the same applies to the rights or obligations of any Agent, in each case without the consent of such Agent; or (iv) amend, modify, terminate or waive any provision hereof relating specifically to the Swing Line Sublimit or the Swing Line Loans without the consent of Swing Line Lender. (d) Execution of Amendments, etc. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of such Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 10.5 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by a Credit Party, on such Credit Party. 10.6. SUCCESSORS AND ASSIGNS; PARTICIPATIONS. (a) This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and 106 113 assigns of Lenders. No Credit Party's rights or obligations hereunder nor any interest therein may be assigned or delegated by any Credit Party without the prior written consent of all Lenders. (b) Company, Administrative Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding Commitments and Loans listed therein for all purposes hereof, and no assignment or transfer of any such Commitment or Loan shall be effective, in each case, unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been delivered to and accepted by Administrative Agent and recorded in the Register as provided in Section 10.6(e). Prior to such recordation, all amounts owed with respect to the applicable Commitment or Loan shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Commitments or Loans. (c) Each Lender shall have the right at any time to sell, assign or transfer all or a portion of its rights and obligations under this Agreement, including, without limitation, all or a portion of its Commitment or Loans owing to it, Note or Notes held by it, or other Obligation (provided, however, that each such assignment shall be of a uniform, and not varying, percentage of all rights and obligations under and in respect of any Loan and its related Commitments; provided, further, that each such assignment shall be of an equal percentage of both the Term Loans and the Revolving Loans (and the related Commitments) held by such Lender): (i) to any Person meeting the criteria of clause (i) of the definition of the term of "Eligible Assignee" upon the giving of notice to Company and Administrative Agent; and (ii) to any Person meeting the criteria of clause (ii) of the definition of the term of "Eligible Assignee" and in the case of such assignment to such Person (except in the case of assignments made by or to GSCP), consented to by each of Company, Issuing Bank and Administrative Agent (such consent not to be (x) unreasonably withheld or delayed or (y) in the case of Company, required at any time an Event of Default shall have occurred and then be continuing); provided, further each such assignment pursuant to this Section 10.6(c)(ii) shall be in an aggregate amount of not less than $5,000,000 (or such lesser amount as may be agreed to by Company and Administrative Agent or as shall constitute the aggregate amount of the Commitments and Loans of the assigning Lender) with respect to the assignment of the Commitments and Loans. (d) The assigning Lender and the assignee thereof shall execute and deliver to Administrative Agent an Assignment Agreement, together with (i) a processing and recordation fee of $3,000 and (ii) such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to Section 2.20(c). 107 114 (e) Upon its receipt of a duly executed and completed Assignment Agreement, together with the processing and recordation fee referred to in Section 10.6(d) (and any forms, certificates or other evidence required by this Agreement in connection therewith), Administrative Agent shall record the information contained in such Assignment Agreement in the Register, shall give prompt notice thereof to Company and shall maintain a copy of such Assignment Agreement. (f) Each Lender, upon execution and delivery hereof or upon executing and delivering an Assignment Agreement, as the case may be, represents and warrants as of the Closing Date or as of the applicable Effective Date (as defined in the applicable Assignment Agreement) that (i) it is an Eligible Assignee; (ii) it has experience and expertise in the making of or investing in commitments or loans such as the applicable Commitments or Loans, as the case may be; and (iii) it will make or invest in, as the case may be, its Commitments or Loans for its own account in the ordinary course of its business and without a view to distribution of such Commitments or Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this Section 10.6, the disposition of such Commitments or Loans or any interests therein shall at all times remain within its exclusive control). (g) Subject to the terms and conditions of this Section 10.6, as of the "Effective Date" specified in the applicable Assignment Agreement: (i) the assignee thereunder shall have the rights and obligations of a "Lender" hereunder to the extent such rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement and shall thereafter be a party hereto and a "Lender" for all purposes hereof; (ii) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned thereby pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination hereof under Section 10.8) and be released from its obligations hereunder (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations hereunder, such Lender shall cease to be a party hereto; provided, anything contained in any of the Credit Documents to the contrary notwithstanding, (y) Issuing Bank shall continue to have all rights and obligations thereof with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereunder) and (z) such assigning Lender shall continue to be entitled to the benefit of all indemnities hereunder as specified herein with respect to matters arising out of the prior involvement of such assigning Lender as a Lender hereunder; (iii) the Commitments shall be modified to reflect the Commitment of such assignee and any remaining Commitment of such assigning Lender, if any; and (iv) if any such assignment occurs after the issuance of any Note hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Administrative Agent for cancellation, and thereupon Company shall issue and deliver new Notes, if so requested by the assignee and/or assigning Lender, to such assignee and/or to such assigning Lender, with appropriate insertions, to reflect the new Commitments and/or outstanding Loans of the assignee and/or the assigning Lender. (h) Each Lender shall have the right at any time to sell one or more participations to any Person (other than Parent, any of its Subsidiaries or any of its Affiliates) in all or any part of its Commitments, Loans or in any other Obligation. The holder of any such participation, other than 108 115 an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except with respect to any amendment modification or waiver that would (i) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Revolving Credit Commitment Termination Date) in which such participant is participating, or reduce the rate or extend the time of payment of Interest or fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Commitment shall not constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof), (ii) consent to the assignment or transfer by any Credit Party of any of its rights and obligations under this Agreement or (iii) release all or substantially all of the Share Collateral under the Collateral Documents and the Collateral Account (except as expressly provided in the Credit Documents) supporting the Loans hereunder in which such participant is participating. All amounts payable by any Credit Party hereunder, including amounts payable to such Lender pursuant to Section 2.18(c), 2.19 or 2.20, shall be determined as if such Lender had not sold such participation. Each Credit Party and each Lender hereby acknowledge and agree that, solely for purposes of Sections 2.17 and 10.4, (1) any participation will give rise to a direct obligation of each Credit Party to the participant and (2) the participant shall be considered to be a "Lender." (i) In addition to any other assignment permitted pursuant to this Section 10.6, any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes, if any, to secure obligations of such Lender, including any pledge or assignment to secure obligations to any Federal Reserve Bank, and this Section 10.6 shall not apply to any such pledge or assignment of a security interest; provided, (x) no Lender, as between Company and such Lender, shall be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (y) in no event shall the applicable pledgee or assignee be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder, and (z) any transfer of the rights and obligations of a "Lender" hereunder to any Person (other than any Federal Reserve Bank) upon the foreclosure of any pledge or security interest referred to in this clause (i) may only be made pursuant to the provisions of Sections 10.6(c) through (e) governing assignments of interests in the Loans. 10.7. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. 10.8. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations, warranties and agreements made herein shall survive the execution and delivery hereof and the making of any Credit Extension. Notwithstanding anything herein or implied by law to the contrary, the agreements of each Credit Party set forth in Sections 2.18(c), 2.19, 2.20, 10.2, 10.3 and 10.4 and 109 116 the agreements of Lenders set forth in Sections 2.17 and 9.6 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination hereof. 10.9. NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Credit Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. The rights, powers and remedies given to each Agent and each Lender hereby are cumulative and shall be in addition to and independent of all rights, powers and remedies existing by virtue of any statute or rule of law or in any of the other Credit Documents or any of the Hedge Agreements. Any forbearance or failure to exercise, and any delay in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 10.10. MARSHALLING; PAYMENTS SET ASIDE. Neither Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of any Credit Party or any other Person or against or in payment of any or all of the Obligations. To the extent that any Credit Party makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent, on behalf of Lenders), or Administrative Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.11. SEVERABILITY. In case any provision in or obligation hereunder or any Note shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.12. OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitment of any other Lender hereunder. Nothing contained herein or in any other Credit Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out hereof and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 110 117 10.13. HEADINGS. Section headings herein are included herein for convenience of reference only and shall not constitute a part hereof for any other purpose or be given any substantive effect. 10.14. APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 10.15. CONSENT TO JURISDICTION. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY CREDIT PARTY ARISING OUT OF OR RELATING HERETO OR ANY OTHER CREDIT DOCUMENT, OR ANY OF THE OBLIGATIONS, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF ILLINOIS OR IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH CREDIT PARTY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (A) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (B) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (C) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE APPLICABLE CREDIT PARTY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 10.1; (D) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (C) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE APPLICABLE CREDIT PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; AND (E) AGREES SUCH LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST ANY CREDIT PARTY IN THE COURTS OF ANY OTHER JURISDICTION. 10.16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING HEREUNDER OR UNDER ANY OF THE OTHER CREDIT DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WAR- 111 118 RANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 10.16 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO OR ANY OF THE OTHER CREDIT DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 10.17. CONFIDENTIALITY. Each Lender shall hold all non-public information obtained pursuant to the requirements hereof which has been identified as confidential by Company in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with prudent lending or investing practices, it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates of such Lender (and to other persons authorized by a Lender or Agent to organize, present or disseminate such information in connection with disclosures otherwise made in accordance with this Section 10.17) or disclosures reasonably required by any bona fide or potential assignee, transferee or participant in connection with the contemplated assignment, transfer or participation by such Lender of any Loans or any participations therein or by any direct or indirect contractual counterparties (or the professional advisors thereto) in Hedge Agreements (provided, such counterparties and advisors are advised of and agree to be bound by the provisions of this Section 10.17) or disclosures required or requested by any governmental agency or representative thereof or by the NAIC or pursuant to legal process; provided, unless specifically prohibited by applicable law or court order, each Lender shall make reasonable efforts to notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition or other routine examination of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information. 10.18. USURY SAVINGS CLAUSE. Notwithstanding any other provision herein, the aggregate interest rate charged with respect to any of the Obligations, including all charges or fees in connection therewith deemed in the nature of interest under applicable law shall not exceed the Highest Lawful Rate. If the rate of interest (determined without regard to the preceding sentence) under this Agreement at any time exceeds the Highest Lawful Rate, the outstanding amount of the Loans made hereunder shall bear interest at the Highest Lawful Rate until the total amount of interest due hereunder equals the amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect. In addition, if when the Loans made hereunder are repaid in full the total interest due hereunder (taking into account the increase provided for above) is less than the total amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect, then to the extent permitted by law, Company shall pay to Administrative Agent an amount equal to the 112 119 difference between the amount of interest paid and the amount of interest which would have been paid if the Highest Lawful Rate had at all times been in effect. Notwithstanding the foregoing, it is the intention of Lenders and Company to conform strictly to any applicable usury laws. Accordingly, if any Lender contracts for, charges, or receives any consideration which constitutes interest in excess of the Highest Lawful Rate, then any such excess shall be cancelled automatically and, if previously paid, shall at such Lender=s option be applied to the outstanding amount of the Loans made hereunder or be refunded to Company. 10.19. COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 120 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. PAYLESS SHOESOURCE FINANCE, INC., as Borrower By: ------------------------------------------------ Name: Title: PAYLESS SHOESOURCE, INC., as a Guarantor By: ------------------------------------------------ Name: Title: PSS DELAWARE COMPANY 1, INC. as a Guarantor By: ------------------------------------------------ Name: Title: PSS DELAWARE COMPANY 2, INC. as a Guarantor By: ------------------------------------------------ Name: Title: PSS DELAWARE COMPANY 3, INC. S-1 121 as a Guarantor By: ____________________________________ Name: Title: PSS DELAWARE COMPANY 4, INC. as a Guarantor By: ____________________________________ Name: Title: PAYLESS SHOESOURCE, INC., as a Guarantor By: ____________________________________ Name: Title: EASTBOROUGH, INC., as a Guarantor By: ____________________________________ Name: Title: PAYLESS SHOESOURCE WORLDWIDE, INC., as a Guarantor By: ____________________________________ Name: Title: S-2 122 PSS LABOR LEASING, INC., as a Guarantor By: ____________________________________ Name: Title: PSS INVESTMENT I, INC., as a Guarantor By: ____________________________________ Name: Title: PSS INVESTMENT III, INC., as a Guarantor By: ____________________________________ Name: Title: PAYLESS SHOESOURCE DISTRIBUTION, INC, as a Guarantor By: ____________________________________ Name: Title: S-3 123 PAYLESS SHOESOURCE MERCHANDISING, INC., as a Guarantor By: ____________________________________ Name: Title: PSS CANADA, INC., as a Guarantor By: ____________________________________ Name: Title: S-4 124 AGENTS AND LENDERS: GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger, Syndication Agent and a Lender By: _____________________________________________ Authorized Signatory S-5 125 BANK ONE, NA, as Administrative Agent, Swing Line Lender, Issuing Bank and a Lender By: _______________________________________________ Name: Title: S-6 126 FIRST UNION NATIONAL BANK, as Documentation Agent and a Lender By: ____________________________________ Name: Title: S-7 127 ABN AMRO BANK N.V. By: ____________________________________ Name: Title: By: ____________________________________ Name: Title: 128 BANCO POPULAR DE PUERTO RICO By: ____________________________________ Name: Jorge Garcia Title: Assistant Vice President By:_____________________________________ Name: John Incandela Title: Senior Vice President 129 BANK OF HAWAII By: ____________________________________ Name: Title: 130 THE BANK OF NEW YORK BY: ____________________________________ NAME: TITLE: 131 COMMERCE BANK, N.A. BY: ____________________________________ NAME: TITLE: 132 FIRSTAR BANK, N.A. BY: ____________________________________ NAME: Barry P. Sullivan TITLE: Vice President 133 FLEET NATIONAL BANK BY: ____________________________________ NAME: TITLE: 134 THE FUJI BANK, LIMITED BY: ____________________________________ NAME: TITLE: 135 HIBERNIA NATIONAL BANK BY: ____________________________________ NAME: TITLE: 136 HSBC BANK USA BY: ____________________________________ NAME: TITLE: 137 IKB DEUTSCHE INDUSTRIEBANK AG, LUXEMBOURG BRANCH BY: ____________________________________ NAME: TITLE: 138 THE MITSUBISHI TRUST & BANKING CORPORATION BY: ____________________________________ NAME: TITLE: 139 ROYAL BANK OF CANADA BY: ____________________________________ NAME: TITLE: 140 RZB FINANCE LLC BY: ____________________________________ NAME: TITLE: BY: ____________________________________ NAME: TITLE: 141 SUMMIT BANK BY: ____________________________________ NAME: TITLE: 142 UNION BANK OF CALIFORNIA, N.A. BY: ____________________________________ NAME: TITLE: 143 UMB BANK, N.A. BY: ____________________________________ NAME: TITLE: 144 CITIZENS BANK OF MASSACHUSETTS BY: ____________________________________ NAME: TITLE: 145 WELLS FARGO BANK (TEXAS), N.A. BY: ____________________________________ NAME: Juan J. Sanchez TITLE: AVP 146 APPENDIX A TO CREDIT AND GUARANTY AGREEMENT TERM LOAN COMMITMENTS
PRO LENDER TERM LOAN COMMITMENT RATA SHARE Goldman Sachs Credit Partners L.P. $35,000,000.00 8.75% Bank One, NA $33,333,333.33 8.33% First Union National Bank $33,333,333.33 8.33% The Bank of New York $30,000,000.00 7.5% Summit Bank $30,000,000.00 7.5% Firstar Bank N.A. $26,666,666.67 6.67% HSBC Bank USA $26,666,666.67 6.67% Wells Fargo (Texas), N.A. $20,000,000.00 5.00% ABN AMRO Bank N.V. $16,666,666.67 4.17% Fleet National Bank $16,666,666.67 4.17% The Fuji Bank, Limited $16,666,666.67 4.17% Royal Bank of Canada $16,666,666.67 4.17% Union Bank of California, N.A. $16,666,666.67 4.17% Citizens Bank of Massachusetts $13,333,333.33 3.33% IKB Deutsche Industriebank AG, Luxembourg Branch $13,333,333.33 3.33% Bank of Hawaii $10,000,000.00 2.50% Banco Popular de Puerto Rico $10,000,000.00 2.50% The Mitsubishi Trust and Banking Corporation $10,000,000.00 2.50% UMB Bank, n.a. $10,000,000.00 2.50% RZB Finance LLC $6,666,666.67 1.67%
147 Commerce Bank, N.A. $5,000,000.00 1.25% Hibernia National Bank $3,333,333.33 .83% TOTAL $400,000,000 100%
148 APPENDIX B TO CREDIT AND GUARANTY AGREEMENT REVOLVING CREDIT COMMITMENTS
LENDER REVOLVING CREDIT COMMITMENT PRO RATA SHARE Goldman Sachs Credit Partners L.P. $17,500,000.00 8.75% Bank One, NA $16,666,666.67 8.33% First Union National Bank $16,666,666.67 8.33% The Bank of New York $15,000,000.00 7.50% Summit Bank $15,000,000.00 7.50% Firstar Bank N.A. $13,333,333.33 6.67% HSBC Bank USA $13,333,333.33 6.67% Wells Fargo (Texas), N.A. $10,000,000.00 5.00% ABN AMRO Bank N.V. $8,333,333.33 4.17% Fleet National Bank $8,333,333.33 4.17% The Fuji Bank, Limited $8,333,333.33 4.17% Royal Bank of Canada $8,333,333.33 4.17% Union Bank of California, N.A. $8,333,333.33 4.17% Citizens Bank of Massachusetts $6,666,666.67 3.33% IKB Deutsche Industriebank AG, Luxembourg $6,666,666.67 3.33% Branch Bank of Hawaii $5,000,000.00 2.50% Banco Popular de Puerto Rico $5,000,000.00 2.50% The Mitsubishi Trust and Banking Corporation $5,000,000.00 2.50% UMB Bank, n.a. $5,000,000.00 2.50% RZB Finance LLC $3,333,333.33 1.67% Commerce Bank, N.A. $2,500,000.00 1.25%
149 Hibernia National Bank $1,666,666.67 .83% TOTAL $200,000,000 100%
150 APPENDIX C TO CREDIT AND GUARANTY AGREEMENT NOTICE ADDRESSES PAYLESS SHOESOURCE FINANCE, INC. 3231 Southeast 6th Avenue Topeka, KS 66607 Attention: Telecopier: PAYLESS SHOESOURCE, INC. 3231 Southeast 6th Avenue Topeka, KS 66607 Attention: Telecopier: FOR EACH GUARANTOR SUBSIDIARY: 3231 Southeast 6th Avenue Topeka, KS 66607 Attention: Telecopier: in each case, with a copy to: - ------------------------------ - ------------------------------ - ------------------------------ Attention: Telecopier: 151 GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger, Syndication Agent and a Lender Goldman Sachs Credit Partners L.P. 85 Broad Street New York, New York 10004 Attention: Elizabeth Fischer Telecopier: (212) 357-0932 with a copy to: Goldman Sachs Credit Partners L.P. 85 Broad Street New York, New York 10004 Attention: Lisa Perrotto Telecopier: (212) 357-2608 152 BANK ONE, NA, as Administrative Agent, Swing Line Lender, Issuing Bank and a Lender Administrative Agent's Principal Office: Bank One 1 Bank One Plaza Suite Il1-0086 Chicago, IL 60670 Attention: Debora K.Oberling Telecopier: 312-732-1117 Swing Line Lender's Principal Office: Bank One 1 Bank One Plaza Chicago, IL 60670 Attention: Maribel Lorenzo Telecopier: 312-732-7271 Issuing Bank's Principal Office: Bank One 1 Bank One Plaza Suite Il1-0086 Chicago, IL 60670 Attention: Debora K.Oberling Telecopier: 312-732-1117 153 FIRST UNION NATIONAL BANK, as Documentation Agent and a Lender First Union National Bank One South Penn Square 12th Floor - Widener Bldg PA 4843 Philadelphia, PA 19107 Attention: Bill Fox Telecopier: 215-786-2877 154 ABN AMRO BANK N.V. ABN AMRO Bank N.V. 208 South LaSalle Suite 1500 Chicago, IL 60604-1003 Attention: Credit Administration Telecopier: 312-992-5111 with a copy to: ABN AMRO Bank N.V. 208 South LaSalle Suite 1500 Chicago, IL 60604-1003 Attention: Brian Sharpe Telecopier: 312-904-1110 155 BANCO POPULAR DE PUERTO RICO Banco Popular de Puerto Rico 209 Ponce De Leon Avenue Popular Center Building 6th Floor San Juan, Puerto Rico 00918 Attention: Jorge Garcia Telecopier: 787-756-3909 156 BANK OF HAWAII Bank of Hawaii 1850 North Central Avenue Suite 400 Phoenix, AZ 85004 Attention: Donna Parker Telecopier: 602-257-2444 157 THE BANK OF NEW YORK The Bank of New York One Wall Street 8th Floor - Retailing Industry Division New York, NY 10286 Attention: Charlotte Sohn Telecopier: 212-635-1483 158 COMMERCE BANK, N.A. Commerce Bank, N.A. 1000 Walnut Street 17th Floor Kansas City, MO 64106 Attention: David Emley Telecopier: 816-234-7290 159 FIRSTAR Firstar Bank, N.A., 1101 Walnut 7th Floor Kansas City, MO 64106 Attention: Barry P. Sullivan Telecopier: 816-871-2226 with a copy to: Firstar Bank N.A. 1850 Osborn Avenue Oshkosh, WI 54902 Attention: Connie Sweeney Telecopier: 920-426-7655 160 FLEET NATIONAL BANK Fleet National Bank 100 Federal Street 9th Floor Boston, MA 02110 Attention: Judith C.E. Kelly Telecopier: 617-434-6685 with a copy to: Fleet National Bank 100 Federal Street 9th Floor Boston, MA 02110 Attention: Dwayne Nelson Telecopier: 617-346-0595 161 THE FUJI BANK, LIMITED The Fuji Bank Limited 225 West Wacker Drive Suite 2000 Chicago, IL 60606 Attention: James Fayen Telecopier: 312-621-3387 162 HIBERNIA NATIONAL BANK Hibernia National Bank 313 Carondelet Street 12th Floor New Orleans, Louisiana 70130 Attention: Laura K. Watts Telecopier: 504-533-5344 with a copy to: Hibernia National Bank 313 Carondelet Street 12th Floor New Orleans, Louisiana 70130 Attention: Shelly Strada Telecopier: 504-533-5344 163 HSBC BANK USA HSBC Bank USA 200 South Wacker Drive Suite 770 Chicago, IL 60606-5829 Attention: Steve Trepiccione Telecopier: 312-575-1331 164 IKB DEUTSCHE INDUSTRIEBANK AG, LUXEMBOURG BRANCH IKB Deutsche Industriebank AG, Luxembourg Branch c/o Structured Finance Wilhelm-Boetzkes-Strasse 1, 40474 Dusseldorf P.O. Box 10 11 18 40002 DUSSELDORF Germany Attention: Andrea Schroeder Telecopier: 011-49-211-8221-2181 165 THE MITSUBISHI TRUST & BANKING CORPORATION The Mitsubishi Trust & Banking Corporation 520 Madison Avenue New York, NY 10022 Attention: Dan Chang Telecopier: 212-644-6825 166 ROYAL BANK OF CANADA Royal Bank of Canada One Liberty Plaza New York, NY 10006 - 1404 Attention: Gordon MacArthur Telecopier: 212-428-2319 with a copy to: Royal Bank of Canada One Liberty Plaza New York, NY 10006 - 1404 Attention: John Crawford Telecopier: 212-428-2319 167 RZB FINANCE LLC RZB Finance LLC 1133 Avenue of the Americas New York, NY 10036 Attention: John Valiska Telecopier: 212-845-4130 168 SUMMIT BANK Summit Bank 750 Walnut Avenue Cranford, NJ 07016 Attention: Miguel Medida Telecopier: 908-709-6433/4436 with a copy to: Summit Bank 750 Walnut Avenue Cranford, NJ 07016 Attention: Barbara Sesee Telecopier: 908-709-6433/4436 169 UNION BANK OF CALIFORNIA, N.A. Union Bank of California, N.A. 350 California Street 6th Floor San Francisco, CA 94104 Attention: J. William Bloore Telecopier: 415-705-7085 170 UMB BANK, N.A. UMB Bank, n.a. 1010 Grand Boulevard Kansas City, MO 64106 Attention: Douglas F. Page Telecopier: 816-860-7143 171 CITIZENS BANK OF MASSACHUSETTS Citizens Bank of Massachusetts 40 Court Street Boston, MA 02108 Attention: Tony Wilson Telecopier: 617-695-4185 172 WELLS FARGO BANK Wells Fargo Bank 4975 Preston Park Blvd. Suite 280 Plano, Texas 75093 Attention: Juan Sanchez Telecopier: 972-867-5674 173 CREDIT AGREEMENT SCHEDULES SCHEDULE 1.1(A) REFINANCED INDEBTEDNESS 1. Letter of Credit for insurance claims ($O drawn) $11,445,510 Issued under the existing amended and restated (L/C only) Multicurrency Credit Agreement dated as of May 22, 1998 2. Aggregate of Senior Notes due Series A, B & C 2003-2008 $67,000,000 3. Aggregate of Senior Notes due Series D, E & F 2004-2009 $55,000,000 174 SCHEDULE 1.1(B) IMMATERIAL FOREIGN SUBSIDIARIES 1. Payless ShoeSource International Servicos Tecnicos E Brazil Inspetoria De Calcados S/C Ltda. 2. Payless Servicios, S.A. de C.V. (Inactive) Mexico 3. Payless Controladora, S.A. de C.V. Mexico 4. Payless ShoeSource, S.A. de C.V. (Inactive) Mexico 5. Dynamic Assets Limited Hong Kong 175 SCHEDULE 4.1 ORGANIZATION AND CAPITAL STRUCTURE
Name of Company Jurisdiction of Percentage of shares Percentage of shares Organization of each class owned of each class owned by the Parent by other Subsidiary Payless ShoeSource, DE N/A N/A Inc. Payless ShoeSource NV 100% N/A Finance, Inc. Payless ShoeSource, MO 0% 100% Payless Inc. ShoeSource Finance, Inc. (NV) PSS of Puerto Rico, PR 0% 100% Payless Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4150, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4152, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4153, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4154, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4157, Inc. ShoeSource, Inc. (MO)
176 PSS of Puerto Rico PR 0% 100% Payless No. 4158, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4162, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4163, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4164, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4166, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4167, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4168, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4204, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4206, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4207, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4208, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4219, Inc. ShoeSource, Inc. (MO)
177 PSS of Puerto Rico PR 0% 100% Payless No. 4220, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4221, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4238, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4242, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4940, Inc. ShoeSource, Inc. (MO) Payless ShoeSource KS 0% 100% Payless Merchandising, Inc. ShoeSource, Inc. (MO) Payless ShoeSource KS 0% 100% Payless Worldwide, Inc. ShoeSource, Inc. (MO) PSS Labor Leasing, KS 0% 100% Payless Inc. ShoeSource Worldwide, Inc.(MO) Payless ShoeSource NMI 0% 100% Payless Saipan, Inc. ShoeSource Worldwide, Inc. (KS) PSS Canada, Inc. KS 0% 100% Payless ShoeSource Worldwide, Inc. (KS) Payless ShoeSource Canada 0% 100% PSS Canada, Canada, Inc. Inc. (KS) Payless ShoeSource KS 0% 100% Payless Distribution, Inc. ShoeSource, Inc. (MO)
178 Payless ShoeSource Brazil 0% 75% Payless International ShoeSource, Inc. Servicos Tecnicos E (MO), 25% PSS Inspetoria De Investment I, Inc. Calcados S/C Ltda. (NV) Payless ShoeSource Hong Kong 0% 99.95% Payless International Limited ShoeSource, Inc. (MO), 0.05% PSS Investment I, Inc. (NV) Payless ShoeSource Taiwan 0% 99.97% Payless International, Inc. ShoeSource International Limited (Hong Kong), 0.03% held in trust by six individuals for Payless ShoeSource International Limited. 100% Payless PSS Investment I, NV 0% ShoeSource, Inc. Inc. (MO) 100% Payless PSS Investment III, KS 0% ShoeSource, Inc. Inc. (MO) 99.998% Payless Payless Servicios, Mexico 0% Controladora, S.A. de S.A. de C.V. C.V. (Mexico), (Inactive) 0.002% PSS Investment I, Inc. (NV) 50% PSS Investment Payless Mexico 0% I, Inc. (NV), 50% Controladora, S.A. de PSS Investment III, C.V. Inc. (KS)
179 Eastborough, Inc. Kansas 0% 100% Payless ShoeSource Finance Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 1, Inc. ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 2, Inc. ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 3, Inc. ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 4, Inc. ShoeSource Finance, Inc. (NV) Dynamic Assets Hong Kong 0% 1% Payless Limited ShoeSource Finance, Inc. (NV) 99% Payless ShoeSource Worldwide, Inc.
180 SCHEDULE 4.10 ORGANIZATION AND CAPITAL STRUCTURE
Name of Company Jurisdiction of Percentage of shares Percentage of shares Organization of each class owned of each class owned by the Parent by other Subsidiary Payless ShoeSource, DE N/A N/A Inc. Payless ShoeSource NV 100% N/A Finance, Inc. Payless ShoeSource, MO 0% 100% Payless Inc. ShoeSource Finance, Inc. (NV) PSS of Puerto Rico, PR 0% 100% Payless Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4150, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4152, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4153, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4154, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4157, Inc. ShoeSource, Inc. (MO)
181 PSS of Puerto Rico PR 0% 100% Payless No. 4158, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4162, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4163, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4164, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4166, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4167, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4168, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4204, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4206, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4207, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4208, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4219, Inc. ShoeSource, Inc. (MO)
182 PSS of Puerto Rico PR 0% 100% Payless No. 4220, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4221, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4238, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4242, Inc. ShoeSource, Inc. (MO) PSS of Puerto Rico PR 0% 100% Payless No. 4940, Inc. ShoeSource, Inc. (MO) Payless ShoeSource KS 0% 100% Payless Merchandising, Inc. ShoeSource, Inc. (MO) Payless ShoeSource KS 0% 100% Payless Worldwide, Inc. ShoeSource, Inc. (MO) Payless ShoeSource NMI 0% 100% Payless Saipan, Inc. ShoeSource Worldwide, Inc. (KS) PSS Labor Leasing, KS 0% 100% Payless Inc. ShoeSource Worldwide, Inc.(MO) PSS Canada, Inc. KS 0% 100% Payless ShoeSource Worldwide, Inc. (KS) Payless ShoeSource Canada 0% 100% PSS Canada, Canada, Inc. Inc. (KS) Payless ShoeSource KS 0% 100% Payless Distribution, Inc. ShoeSource, Inc. (MO)
183 Payless ShoeSource Brazil 0% 75% Payless International ShoeSource, Inc. Servicos Tecnicos E (MO), 25% PSS Inspetoria De Investment I, Inc. Calcados S/C Ltda. (NV) Payless ShoeSource Hong Kong 0% 99.95% Payless International Limited ShoeSource, Inc. (MO), 0.05% PSS Investment I, Inc. (NV) Payless ShoeSource Taiwan 0% 99.97% Payless International, Inc. ShoeSource International Limited (Hong Kong), 0.03% held in trust by six individuals for Payless ShoeSource International Limited. PSS Investment I, NV 0% 100% Payless Inc. ShoeSource, Inc. (MO) PSS Investment III, KS 0% 100% Payless Inc. ShoeSource, Inc. (MO) Payless Servicios, Mexico 0% 99.998% Payless S.A. de C.V. Controladora, S.A. de (Inactive) C.V. (Mexico), 0.002% PSS Investment I, Inc. (NV) Payless Mexico 0% 50% PSS Investment Controladora, S.A. de I, Inc. (NV), 50% C.V. PSS Investment III, Inc. (KS)
184 Payless ShoeSource, Mexico 0% 99.998% Payless S.A. de C.V. Controladora, S.A. de (Inactive) C.V. (Mexico), 0.002% PSS Investment I, Inc. (KS) Eastborough, Inc. Kansas 0% 100% Payless ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 1, Inc. ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 2, Inc. ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 3, Inc. ShoeSource Finance, Inc. (NV) PSS Delaware Delaware 0% 100% Payless Company 4, Inc. ShoeSource Finance, Inc. (NV) Dynamic Assets Hong Kong 0% 1% Payless Limited ShoeSource Finance, Inc. (NV) 99% Payless ShoeSource Worldwide, Inc.
185 PARENT CORPORATION'S DIRECTORS AND OFFICERS Directors: Daniel Boggan Jr. Steven J. Douglass Howard R. Fricke Thomas A. Hays Ken C. Hicks Mylle B. Mangum Michael E. Murphy Robert L. Stark Officers: Steven J. Douglass Chairman of the Board and Chief Executive Officer Duane L. Cantrell Executive Vice President - Operations Bryan P. Collins Senior Vice President - Parade of Shoes Ken C. Hicks President John N. Haugh Senior Vice President - Marketing Gerald F. Kelly, Jr. Senior Vice President - Logistics/Information Systems and Technology Harris Mustafa Senior Vice President - Worldwide Sourcing Jed L. Norden Senior Vice President - Human Resources JoAnn Ogee Senior Vice President - General Merchandise Manager - Women's Darrel J. Pavelka Senior Vice President - Merchandise Distribution Ullrich E. Porzig Senior Vice President - Chief Financial Officer and Treasurer William J. Rainey Senior Vice President - General Counsel and Secretary 186 Gary M. Stone Senior Vice President - Store Development Larry M. Strecker Senior Vice President - Retail Operations Jeffrey W. Wagner Senior Vice President - General Merchandise Manager - Men's Karolyn W. Wangstad Senior Vice President - Trend Merchandising Michael S. Wilkes Senior Vice President - General Merchandise Manager - Children's 187 SCHEDULE 6.1(A) EXISTING INDEBTEDNESS AS OF APRIL 17, 2000 1. Aggregate of various Capitalized Lease Obligations (short-term1) $748,767 2. Aggregate of various Capitalized Lease Obligations (long-term2) $3,956,916 - -------------------- 1 Short-term obligations are those obligations which are expected to be paid within the next 12 months. 2 Long-term obligations are those obligations which are expected to be paid more than 12 months from now. 188 SCHEDULE 6.2 LIENS None 189 SCHEDULE 6.5 INVESTMENTS Securities in other publicly held U.S. corporations not exceeding $25,000 City of Topeka, KS Industrial Revenue Bonds Issued 1991 $5,640,000 City of Topeka, KS Industrial Revenue Bonds Issued 1997 $14,376,000 City of Topeka, KS Industrial Revenue Bonds Issued 1998 $11,880,000 City of Topeka, KS Industrial Revenue Bonds Issued 1999 $3,844,000 190 SCHEDULE 6.10 CERTAIN TRANSACTIONS NONE 191 EXHIBIT A-1 TO CREDIT AND GUARANTY AGREEMENT FUNDING NOTICE Reference is made to the Credit and Guaranty Agreement, dated as of April _____, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. Pursuant to Section 2.1, 2.2 and/or 2.3 of the Credit Agreement, Company desires that Lenders make the following Loans to Company in accordance with the applicable terms and conditions of the Credit Agreement on _____________, 200__ (the "CREDIT DATE"): 1. Revolving Loans [ ] Base Rate Loans: $[___,___,___] [ ] Eurodollar Rate Loans, with an Initial Interest Period of ________ Month(s): $[___,___,___] 2. Term Loans [ ] Base Rate Loans: $[___,___,___] [ ] Eurodollar Rate Loans, with an Initial Interest Period of ________ Month(s): $[___,___,___] 3. Swing Line Loans: $[___,___,___] EXHIBIT A-1-1 192 Company hereby certifies that: (i) with respect to any Revolving Loan or Swing Line Loan, after making any such Loan requested on such Credit Date, the Total Utilization of Revolving Credit Commitments shall not exceed the Revolving Credit Commitments then in effect; (ii) with respect to any Term Loan, after making any such Loan requested on such Credit Date, the sum of (i) the aggregate principal amount of Term Loans made to the Company, plus (ii) the aggregate amount of Cash (excluding the proceeds of any Term Loans and any Cash used to make purchases of Parent Common Stock under and in compliance with Section 6.4(vi) of the Credit Agreement) used by the Company from the Closing Date to the six-month anniversary of the Closing Date to consummate purchases of Additional Purchased Common Stock, shall not exceed $400,000,000; (iii) as of the Credit Date, the representations and warranties contained in each of the Credit Documents are true, correct and complete in all material respects on and as of such Credit Date to the same extent as though made on and as of such date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties are true, correct and complete in all material respects on and as of such earlier date; (iv) as of the Credit Date no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the borrowing contemplated hereby; and (v) as of such Credit Date, no event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Default. Date: _________ __, 20__ PAYLESS SHOESOURCE FINANCE, INC. By: ___________________________________ Title: EXHIBIT A-1-2 193 EXHIBIT A-2 TO CREDIT AND GUARANTY AGREEMENT CONVERSION/CONTINUATION NOTICE Reference is made to the Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. Pursuant to Section 2.9 of the Credit Agreement, Company desires to convert or to continue the following Loans, each such conversion and/or continuation to be effective as of ____________ __, 200__: 1. TERM LOANS: $[___,___,___] Eurodollar Rate Loans to Initial Interest Period of be continued _______ month(s) $[___,___,___] Base Rate Loans to be Initial Interest Period of converted to Eurodollar _______ month(s) Rate Loans $[___,___,___] Eurodollar Rate Loans to be converted to Base Rate Loans
2. REVOLVING LOANS: $[___,___,___] Eurodollar Rate Loans to Initial Interest Period of be continued _______ month(s) $[___,___,___] Base Rate Loans to be Initial Interest Period of converted to Eurodollar _______ month(s) Rate Loans $[___,___,___] Eurodollar Rate Loans to be converted to Base Rate Loans
EXHIBIT A-2-1 194 Company hereby certifies that as of the date hereof, no event has occurred and is continuing or would result from the consummation of the conversion and/or continuation contemplated hereby that would constitute an Event of Default or a Default. Date: __________ __, 200__ PAYLESS SHOESOURCE FINANCE, INC. By: __________________________ Title: EXHIBIT A-2-2 195 EXHIBIT A-3 TO CREDIT AND GUARANTY AGREEMENT ISSUANCE NOTICE Reference is made to the Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. Pursuant to Section 2.4 of the Credit Agreement, Company desires Letters of Credit to be issued in accordance with the terms and conditions of the Credit Agreement on [_________ __, 200__] (the "CREDIT DATE") in an aggregate face amount of $[___,___,___]. Attached hereto for each such Letter of Credit are the following: (a) the stated amount of such Letter of Credit; (b) the name and address of the beneficiary; (c) the expiration date; and (d) either (i) the verbatim text of such proposed Letter of Credit, or (ii) a description of the proposed terms and conditions of such Letter of Credit, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of such Letter of Credit, would require the Issuing Lender to make payment under such Letter of Credit. Company hereby certifies that: (i) after making any such Letter of Credit requested on such Credit Date, the Total Utilization of Revolving Credit Commitments shall not exceed the Revolving Credit Commitments then in effect; (ii) as of the Credit Date, the representations and warranties contained in each of the Credit Documents are true, correct and complete in all material respects on and as of such Credit Date to the same extent as though made on and as of such date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties are true, correct and complete in all EXHIBIT A-3-1 196 material respects on and as of such earlier date; (iii) as of the Credit Date no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the issuance contemplated hereby; and (iv) as of such Credit Date, no event has occurred and is continuing or would result from the consummation of the issuance contemplated hereby that would constitute an Event of Default or a Default. Date: [MM/DD/200_] PAYLESS SHOESOURCE FINANCE, INC. By: __________________________ Title: EXHIBIT A-3-2 197 EXHIBIT B-1 TO CREDIT AND GUARANTY AGREEMENT TERM LOAN NOTE $[1][___,___,___] [2][mm/dd/yy] FOR VALUE RECEIVED, PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), promises to pay to the order of [NAME OF LENDER] ("PAYEE") or its permitted assigns the principal amount of [1][DOLLARS] ($[___,___,___][1]) in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, FIRST UNION NATIONAL BANK, as Documentation Agent. Company shall make principal payments on this Note as set forth in Section 2.12 of the Credit Agreement. This Note is one of the "Term Notes" in the aggregate principal amount of $[___,___,___] and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Term Loan evidenced hereby was made and is to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Principal Office of Administrative Agent or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent and recorded in the Register, Company, each Agent and Lenders shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it - -------- [1] Lender's Term Loan Commitment [2] Date of Issuance EXHIBIT B-1-1 198 will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. This Note is subject to mandatory prepayment and to prepayment at the option of Company, each as provided in the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. EXHIBIT B-1-2 199 IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. PAYLESS SHOESOURCE FINANCE, INC. By: ______________________________ Title: EXHIBIT B-1-3 200 EXHIBIT B-2 TO CREDIT AND GUARANTY AGREEMENT REVOLVING LOAN NOTE $[1][___,___,___] [2][mm/dd/yy] FOR VALUE RECEIVED, PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), promises to pay to the order of [NAME OF LENDER] ("PAYEE") or its permitted assigns, on or before April __, 2005, the lesser of (a) [1][DOLLARS] ($[1][___,___,___]) and (b) the unpaid principal amount of all advances made by Payee to Company as Revolving Loans under the Credit Agreement referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. This Note is one of the "Revolving Loan Notes" in the aggregate principal amount of $[___,___,___] and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Principal Office of Administrative Agent or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent and recorded in the Register, Company, each Agent and Lenders shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loans evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, the failure to make a notation of any payment - -------- [1] Lender's Revolving Credit Commitment [2] Date of Issuance EXHIBIT B-2-1 201 made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. This Note is subject to mandatory prepayment and to prepayment at the option of Company, each as provided in the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. EXHIBIT B-2-2 202 IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. PAYLESS SHOESOURCE FINANCE, INC. By: _____________________________ Title: EXHIBIT B-2-3 203 TRANSACTIONS ON REVOLVING LOAN NOTE
Outstanding Type of Amount of Amount of Principal Loan Made Loan Made Principal Paid Balance Notation Date This Date This Date This Date This Date Made By
EXHIBIT B-2-4 204 EXHIBIT B-3 TO CREDIT AND GUARANTY AGREEMENT SWING LINE NOTE $3,000,000 APRIL __, 2000 FOR VALUE RECEIVED, PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), promises to pay to to the order of BANK ONE, N.A., as Swing Line Lender ("PAYEE"), on or before April __, 2005, the lesser of (a) THREE MILLION DOLLARS ($3,000,000) and (b) the unpaid principal amount of all advances made by Payee to Company as Swing Line Loans under the Credit Agreement referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. This Note is the "Swing Line Note" and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Swing Line Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Principal Office of Swing Line Lender or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. This Note is subject to mandatory prepayment and to prepayment at the option of Company, each as provided in the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be EXHIBIT B-3-1 205 declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. EXHIBIT B-3-2 206 IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. PAYLESS SHOESOURCE FINANCE, INC. By: ____________________________ Name: Title: EXHIBIT B-3-3 207 TRANSACTIONS ON SWING LINE NOTE
Outstanding Amount of Amount of Principal Loan Made Principal Paid Balance Notation Date This Date This Date This Date Made By
EXHIBIT B-3-4 208 EXHIBIT C TO CREDIT AND GUARANTY AGREEMENT COMPLIANCE CERTIFICATE THE UNDERSIGNED HEREBY CERTIFIES AS FOLLOWS: 1. I am the Chief Financial Officer of PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY") and PAYLESS SHOESOURCE, INC., a Delaware corporation ("PARENT"). 2. I have reviewed the terms of that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, Parent, certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent, and I have made, or have caused to be made under my supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by the attached financial statements. 3. The examination described in paragraph 2 above did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes an Event of Default or Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth in a separate attachment, if any, to this Certificate, describing in detail, the nature of the condition or event, the period during which it has existed and the action which Company has taken, is taking, or proposes to take with respect to each such condition or event. The foregoing certifications, together with the computations set forth in the Annex A hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered [MM/DD/YY] pursuant to Section 5.1(c) of the Credit Agreement. PAYLESS SHOESOURCE FINANCE, INC. By: ______________________________ Title: Chief Financial Officer EXHIBIT C-1 209 PAYLESS SHOESOURCE, INC. By: ______________________________ Title: Chief Financial Officer EXHIBIT C-2 210 ANNEX A TO COMPLIANCE CERTIFICATE FOR THE FISCAL [QUARTER] [YEAR] ENDING [MM/DD/YY]. 1. Consolidated Adjusted EBITDA: (I) - (II) = $[___,___,___] (i) (a) Consolidated Net Income: $[___,___,___] (b) Consolidated Interest Expense[*]: $[___,___,___] (c) provisions for taxes based on income[*]: $[___,___,___] (d) total depreciation expense [*]: $[___,___,___] (e) total amortization expense [*]: $[___,___,___] (f) actual Transaction Costs [*]: $[___,___,___] (g) other non-cash items reducing Consolidated Net Income[*][***]: $[___,___,___] (ii) other non-cash items increasing Consolidated Net Income[****]: $[___,___,___] 2. Consolidated Adjusted EBITDAR: (I) + (II) $[___,___,___] (i) Consolidated Adjusted EBITDA: $[___,___,___] (ii) Consolidated Rental Expense $[___,___,___] 3. Consolidated Capital Expenditures: $[___,___,___]
- -------- [*] Only to the extent such amount was deducted in calculating Consolidated Net Income. [**] Plus any amounts referred to in Section 2.11(c) of the Credit Agreement to the extent payable on or before the Closing Date [***] Excluding any such non-Cash item to the extent that it represents an accrual or reserve for potential Cash items in any future period or amortization of a prepaid Cash item that was paid in a prior period. [****] Excluding any such non-Cash item to the extent that it represents an accrual or reserve for potential Cash items in any future period or amortization of a prepaid Cash item that was paid in a prior period. EXHIBIT C-3 211 4. Consolidated Cash Interest Expense: $[___,___,___] 5. Consolidated Fixed Charges: (I) + (II) = $[___,___,___] (i) Consolidated Cash Interest Expense $[___,___,___] (ii) Consolidated Rental Expense $[___,___,___] 6. Consolidated Total Capitalization: (I) + (II) + (III) = $[___,___,___] (i) Consolidated Total Debt: $[___,___,___] (ii) Present Value of Operating Leases: $[___,___,___] (iii) total stockholder's equity of Parent: $[___,___,___] 7. Consolidated Interest Expense: $[___,___,___] 8. Consolidated Net Income: (I) - (II) = $[___,___,___] (i) the net income (or loss) of Parent and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP: $[___,___,___] (ii) (a) the income of any Person (other than a Subsidiary of Parent) in which any other Person (other than Parent or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Parent or any of its Subsidiaries by such Person during such period: $[___,___,___] (b) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Parent or is merged into or consolidated with Parent or any of its Subsidiaries or that Person's assets are acquired by Parent or any of its Subsidiaries: $[___,___,___]
EXHIBIT C-4 212 (c) the income of any Subsidiary of Parent to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary: $[___,___,___] (d) any after-tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan: $[___,___,___] (e) to the extent not included in clauses (ii)(a) through (d) above, any net extraordinary gains or net non-cash extraordinary losses: $[___,___,___] 9. Consolidated Net Tangible Assets: $[___,___,___] 10. Consolidated Rental Expense: $[___,___,___] 11. Consolidated Total Debt: $[___,___,___] 12. Present Value of Operating Leases: the sum of the Present Value [*****] $[___,___,___]
- -------- [*****] "PRESENT VALUE" means, with respect to each lease of Parent 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 Parent 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 Parent prior to April 22, 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 Parent 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 Company and the Administrative 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. EXHIBIT C-5 213 of each operating lease of Parent and its Subsidiaries. 13. Fixed Charge Coverage Ratio: (I)/(II) = (i) Consolidated Adjusted EBITDAR for the four-Fiscal Quarter Period then ended: $[___,___,___] (ii) Consolidated Fixed Charges for such four-Fiscal Quarter Period[******]: $[___,___,___] Actual: _.__:1.00 Required: 1.75:1.00 14. Leverage Ratio: (I)/(II) = (i) Consolidated Total Debt $[___,___,___] (ii) Consolidated Adjusted EBITDA for the four-Fiscal Quarter period then ended: $[___,___,___] Actual: _.__:1.00 Required: 2.00:1.00
- -------- [******] For purposes of calculating Consolidated Fixed Charges for any period prior to the first anniversary of the Closing Date, the Consolidated Interest Expense for such period included in the determination of Consolidated Fixed Charges shall be equal to the actual amount of Consolidated Interest Expense for the period commencing on the Closing Date and ending on the date of determination multiplied by the quotient of (x) three hundred and sixty-five (365) divided by (y) the number of days that have passed since the Closing Date. EXHIBIT C-6 214 15. Consolidated Debt/Capitalization Ratio: ((I) + (II))/(III) = $[___,___,___] (i) Consolidated Total Debt: $[___,___,___] (ii) Present Value of Operating Leases (ii) Consolidated Total Capitalization $[___,___,___] Actual: _.__:1.00 Required: _.__:1.00 16. Maximum Consolidated Capital Expenditures Actual: $[___,___,___] Permitted amount of Consolidated Capital Expenditures: $[___,___,___] plus, the excess, if any, the maximum amount of permitted Consolidated Capital Expenditures for the pervious Fiscal Year (as adjusted in accordance with this provision) over the actual amount of Consolidated Capital Expenditures for such previous Fiscal Year: $[___,___,___]
EXHIBIT C-7 215 EXHIBIT D TO CREDIT AND GUARANTY AGREEMENT OPINIONS OF COUNSEL [TO BE PROVIDED] EXHIBIT D-1 216 EXHIBIT E TO CREDIT AND GUARANTY AGREEMENT ASSIGNMENT AGREEMENT This ASSIGNMENT AGREEMENT (this "AGREEMENT"), dated as of the Effective Date as set forth on Schedule I annexed hereto (the "EFFECTIVE DATE"), by and between the parties signatory hereto and designated as Assignor ("ASSIGNOR") and Assignee ("ASSIGNEE"). RECITALS: WHEREAS, Assignor is party to that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among PAYLESS SHOESOURCE FINANCE, INC. ("COMPANY"), a Nevada corporation, PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent; and WHEREAS, Assignor desires to sell and assign to Assignee, and Assignee desires to purchase and assume from Assignor, certain rights and obligations of Assignor under the Credit Agreement. NOW, THEREFORE, in consideration of the agreements and covenants herein contained and for such other valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. ASSIGNMENT AND ASSUMPTION. (a) Subject to the terms and conditions hereof, as of the Effective Date, Assignor sells and assigns to Assignee, without recourse, representation or warranty (except as expressly set forth herein), and Assignee purchases and assumes from Assignor, the percentage interest specified on Schedule I in an equal percentage among the Term Loan Commitments, Revolving Credit Commitments and the outstanding Loans, which is determined as a percentage of the aggregate amount of all Term Loan Commitments, Revolving Credit Commitments and outstanding Loans, in all of the rights and obligations with respect to the Term Loan Commitments, Revolving Credit Commitments and outstanding Loans arising under the Credit Agreement and the other Credit Documents (the "ASSIGNED SHARE"). (b) Upon the occurrence of the Effective Date: (i) the Assignee shall have the rights and obligations of a "Lender" to the extent of the Assigned Share and shall thereafter be a party to the Credit Agreement and a "Lender" for all purposes of the Credit Documents; (ii) Assignor shall, to the extent of the Assigned Share, relinquish its rights (other than any rights EXHIBIT E-2 217 which survive the termination of the Credit Agreement under Section 10.8 thereof) and be released from its obligations under the Credit Agreement; and (iii) the Commitments shall be modified to reflect the Commitments of Assignee and the remaining Commitments of Assignor, if any. (c) From and after the Effective Date, Administrative Agent shall make all payments under the Credit Agreement in respect of the Assigned Share (i) in the case of any interest and fees that shall have accrued prior to the Settlement Date, to Assignor, and (ii) in all other cases, to Assignee; provided, Assignor and Assignee shall make payments directly to each other to the extent necessary to effect any appropriate adjustments in any amounts distributed to Assignor and/or Assignee by Administrative Agent under the Credit Documents in respect of the Assigned Share in the event that, for any reason whatsoever, the payment of the applicable consideration for this Assignment (the "PURCHASE PRICE") occurs on a date other than the Settlement Date as set forth on Schedule I annexed hereto (the "SETTLEMENT DATE"). Without limiting the generality of the foregoing, the parties hereto hereby expressly acknowledge and agree that in the event Assignor is an Issuing Bank, any assignment of all or any portion of Assignor's rights and obligations relating to Assignor's Revolving Credit Commitment shall include, with respect to any outstanding Letters of Credit, the sale to Assignee of a participation in such Letters of Credit and any drawings thereunder as contemplated by Section 2.4 of the Credit Agreement. SECTION 2. EFFECTIVE DATE. Notwithstanding anything herein to the contrary, the Effective Date shall not be deemed to have occurred until each of the following conditions are satisfied, as determined in the reasonable judgment of each of Assignor, Assignee and Administrative Agent: (a) the execution of a counterpart hereof by each of Assignor and Assignee; (b) the payment of the Purchase Price on the Settlement Date; (c) if applicable, the receipt by Administrative Agent of the processing and recordation fee referred to in Section 10.6 of the Credit Agreement; (d) in the event Assignee is a Non-US Lender, the delivery by Assignee to Administrative Agent of such forms, certificates or other evidence with respect to United States federal income tax withholding matters as Assignee may be required to deliver to Administrative Agent pursuant to Section 2.20(c) of the Credit Agreement; (e) the receipt by Administrative Agent of originals or telefacsimiles of executed counterparts hereof; and (f) the recordation by Administrative Agent in the Register of the pertinent information regarding this Assignment pursuant to Section 10.6 of the Credit Agreement. SECTION 3. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (a) Assignor represents and warrants to Assignee that Assignor is the legal and beneficial owner of the Assigned Share, free and clear of any adverse claim. (b) Assignee represents and warrants to Assignor that (i) Assignee is an Eligible Assignee and that it has experience and expertise in the making or purchasing of loans such as the Loans; (ii) it has acquired the Assigned Share for its own account in the ordinary course of its business and without a view to distribution of the Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, EXHIBIT E-3 218 subject to the provisions of Section 10.6 of the Credit Agreement, the disposition of the Assigned Share or any interests therein shall at all times remain within its exclusive control); (iii) it has received, reviewed and approved a copy of the Credit Agreement (including all Appendices, Schedules and Exhibits thereto); and (iv) it has received from Assignor such financial information regarding Company and its Subsidiaries as is available to Assignor and as Assignee has requested, that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the assignment evidenced by this Agreement, and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. Assignor shall have no duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Assignee or to provide Assignee with any other credit or other information with respect thereto, whether coming into its possession before the making of the initial Loans or at any time or times thereafter, and Assignor shall not have any responsibility with respect to the accuracy of or the completeness of any information provided to Assignee. (c) Each party to this Agreement represents and warrants to the other party hereto that it has full power and authority to enter into this Agreement and to perform its obligations hereunder in accordance with the provisions hereof, that this Agreement has been duly authorized, executed and delivered by such party and that this Agreement constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity. (d) Assignor shall not be responsible to Assignee for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of any of the Credit Documents or for any representations, warranties, recitals or statements made therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Assignor to Assignee or by or on behalf of Company or any of its Subsidiaries to Assignor or Assignee in connection with the Credit Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Assignor be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Credit Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or possible existence of any Event of Default or Default. SECTION 4. MISCELLANEOUS. Assignor and Assignee each agrees from time to time, upon request of such other party, to take such additional actions and to execute and deliver such additional documents and instruments as such other party may reasonably request to effect the transactions contemplated by, and to carry out the intent of, this Agreement. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party (including, if applicable, any party required to evidence its consent to or acceptance of this Agreement) against whom enforcement of such change, EXHIBIT E-4 219 waiver, discharge or termination is sought. Any notice or other communication herein required or permitted to be given shall be given pursuant to Section 10.1 of the Credit Agreement, and all for purposes thereof, the notice address of Assignor and Assignee shall be the addresses as set forth on Schedule I hereof. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. [Remainder of page intentionally left blank] EXHIBIT E-5 220 IN WITNESS WHEREOF, the parties hereto have caused their respective officers thereunto duly authorized to execute and deliver this Agreement as of the Effective Date. [NAME OF ASSIGNOR], [NAME OF ASSIGNEE], Assignor Assignee By: ____________________________ By: ____________________________ Name: Name: Title: Title: [*Consented to as of the [*Consented to as of the Effective Date: Effective Date: PAYLESS SHOESOURCE FINANCE, BANK ONE, N.A., as Administrative INC., Agent and Issuing Bank as Company By: ____________________________ By: ____________________________ Name: Name: Title: Title: *Only if required pursuant to Section *Only if required pursuant to Section 10.6(c)(ii) of the Credit Agreement.] 10.6(c)(ii) of the Credit Agreement.] EXHIBIT E-6 221 SCHEDULE I TO ASSIGNMENT AGREEMENT 1. EFFECTIVE DATE: [_________ __, 200__] 2. SETTLEMENT DATE: [_________ __, 200__] 3. ASSIGNED SHARE: PERCENTAGE PRINCIPAL AMOUNT Term Loan Commitments: __._____% $ Term Loans: __._____% $ Revolving Credit Commitments: __._____% $ EXHIBIT E-7 222 4. NOTICE AND WIRE INSTRUCTIONS: [NAME OF ASSIGNOR] [NAME OF ASSIGNOR] Notices: Notices: - -------- -------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- Attention: Attention: Telecopier: Telecopier: with a copy to: with a copy to: ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- Attention: Attention: Telecopier: Telecopier: Wire Instructions: Wire Instructions: - ----------------- ----------------- EXHIBIT E-8 223 EXHIBIT F TO CREDIT AND GUARANTY AGREEMENT CERTIFICATE RE NON-BANK STATUS Reference is made to the Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY"), PAYLESS SHOESOURCE, INC., a Delaware corporation, and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. Pursuant to Section 2.20(c) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code of 1986, as amended. [NAME OF LENDER] By: ____________________________ Title: EXHIBIT F-1 224 EXHIBIT G-1 TO CREDIT AND GUARANTY AGREEMENT CLOSING DATE CERTIFICATE THE UNDERSIGNED HEREBY CERTIFY AS FOLLOWS: 1. We are, respectively, the chief executive officer and the chief financial officer of PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY") and PAYLESS SHOESOURCE, INC., a Delaware corporation ("PARENT"). 2. Pursuant to Sections 2.1 and 2.2 of the Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, Parent, certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent, Company requests that Lenders make the following Loans to Company on the Closing Date in accordance with the provisions of the Credit Agreement: (a) Term Loans: [ ] Base Rate Loans: $[___,___,___] [ ] Eurodollar Rate Loans: $[___,___,___] (b) Revolving Loans: [ ] Base Rate Loans: $[___,___,___] [ ] Eurodollar Rate Loans: $[___,___,___] 3. We have reviewed the terms of Sections 3 and 4 of the Credit Agreement and the definitions and provisions contained in such Credit Agreement relating thereto, and in our opinion we have made, or have caused to be made under our supervision, such examination or investigation as is necessary to enable us to express an informed opinion as to the matters referred to herein. 4. Based upon our review and examination described in paragraph (3) above, we certify, on behalf of Company, that as of the date hereof: (a) with respect to any Revolving Loan, after making any such Loan requested on the Closing Date, the Total Utilization of Revolving Credit Commitments shall not EXHIBIT G-1-1 225 exceed the Revolving Credit Commitments then in effect; (b) as of the Closing Date, the representations and warranties contained in each of the Credit Documents are true, correct and complete in all respects on and as of the Closing Date to the same extent as though made on and as of such date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties are true, correct and complete in all respects on and as of such earlier date; (c) as of the Closing Date, no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the borrowing contemplated hereby; and (d) as of the Closing Date, no event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Default. 5. Attached as Annex A hereto are true and complete (and, where applicable, executed and conformed) copies of each of the Transaction Documents, together with copies of each of the opinions of counsel delivered to the parties under the Transaction Documents. 6. Each Credit Party has requested each of (i) Wachtell, Lipton, Rosen & Katz, (ii) Kummer, Kempf, Bonner & Renshaw and (iii) Michael Massey, Esquire to deliver to Agents and Lenders on the Closing Date favorable written opinions setting forth substantially the matters in the opinions designated in Exhibit D annexed to the Credit Agreement, and as to such other matters as Syndication Agent and Administrative Agent may reasonably request. 7. Attached hereto as Annex B are true, complete and correct copies of (a) the Historical Financial Statements, (b) pro forma consolidated balance sheets of Parent and its Subsidiaries as at January 31, and with respect to the Fiscal Quarter ended September, 1999, prepared in accordance with GAAP and reflecting the consummation of the Transactions, the related financings and the other transactions contemplated by the Credit Documents and the Transaction Documents, and (c) the Projections. [Remainder of page intentionally left blank] EXHIBIT G-1-2 226 The foregoing certifications are made and delivered as of April __, 2000. ------------------------------ Title: Chief Executive Officer ------------------------------ Title: Chief Financial Officer EXHIBIT G-1-3 227 EXHIBIT G-2 TO CREDIT AND GUARANTY AGREEMENT SOLVENCY CERTIFICATE THE UNDERSIGNED HEREBY CERTIFIES AS FOLLOWS: 1. I am the chief financial officer of PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY") and PAYLESS SHOESOURCE, INC., a Delaware corporation ("PARENT"). 2. Reference is made to that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, Parent, certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. 3. I have reviewed the terms of Sections 3 and 4 of the Credit Agreement and the definitions and provisions contained in the Credit Agreement relating thereto, together with each of the Transaction Documents, and, in my opinion, have made, or have caused to be made under my supervision, such examination or investigation as is necessary to enable me to express an informed opinion as to the matters referred to herein. 4. Based upon my review and examination described in paragraph (3) above, I certify that as of the date hereof, after giving effect to the consummation of the Transactions, the related financings and the other transactions contemplated by the Credit Documents and the Transaction Documents, each Credit Party is Solvent. The foregoing certifications are made and delivered as of [MM/DD/YY]. ------------------------------ Title: Chief Financial Officer EXHIBIT G-2-1 228 EXHIBIT H TO CREDIT AND GUARANTY AGREEMENT COUNTERPART AGREEMENT This COUNTERPART AGREEMENT, dated [MM/DD/YY] (this "COUNTERPART AGREEMENT") is delivered pursuant to that certain Credit and Guaranty Agreement, dated as of April __, 2000 (as it may be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("COMPANY") and PAYLESS SHOESOURCE, INC., a Delaware corporation ("PARENT"), and certain Subsidiaries of Company, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Syndication Agent, BANK ONE, N.A., as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent. SECTION 1. Pursuant to Section 5.9 of the Credit Agreement, the undersigned hereby: (a) agrees that this Counterpart Agreement may be attached to the Credit Agreement and that by the execution and delivery hereof, the undersigned becomes a Guarantor under the Credit Agreement and agrees to be bound by all of the terms thereof; (b) represents and warrants that each of the representations and warranties set forth in the Credit Agreement and each other Credit Document and applicable to the undersigned is true and correct both before and after giving effect to this Counterpart Agreement, except to the extent that any such representation and warranty relates solely to any earlier date, in which case such representation and warranty is true and correct as of such earlier date; (c) no event has occurred or is continuing as of the date hereof, or will result from the transactions contemplated hereby on the date hereof, that would constitute an Event of Default or a Default; (d) agrees, subject to the provisions of Section 7.2 of the Credit Agreement, to irrevocably and unconditionally guaranty the due and punctual payment in full of all Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)) and in accordance with Section 7 of the Credit Agreement; and [(e) (i) agrees that this counterpart may be attached to the Pledge Agreement, (ii) agrees that the undersigned will comply with all the terms and conditions of the Pledge Agreement as if it were an original signatory thereto, (iii) grants to the Collateral Agent (as such term is defined in the Pledge Agreement) a security interest in all of the undersigned's right, title and interest in and to all "Collateral" (as such term is defined in the Pledge Agreement) of the EXHIBIT H-1 229 undersigned [, including, without limitation, the Investment Related Property (as such term is defined in the Pledge Agreement) listed on supplemental Schedule 1.1(a) attached hereto, in each case whether now or hereafter existing or in which the undersigned now has or hereafter acquires an interest and wherever the same may be located and (iv) represents and warrants that is has duly completed and herewith delivers to Collateral Agent supplements to all schedules to the Pledge Agreement. All Collateral of the undersigned shall be deemed to be part of the "Collateral" and hereafter subject to each of the terms and conditions of the Pledge Agreement.] [THIS CLAUSE (e) WILL BE INCLUDED IN COUNTERPART AGREEMENTS UNTIL THE DATE ON WHICH PARENT HAS RECEIVED AN INVESTMENT GRADE STATUS RATING.] SECTION 2. The undersigned agrees from time to time, upon request of Administrative Agent, to take such additional actions and to execute and deliver such additional documents and instruments as Administrative Agent may request to effect the transactions contemplated by, and to carry out the intent of, this Agreement. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party (including, if applicable, any party required to evidence its consent to or acceptance of this Agreement) against whom enforcement of such change, waiver, discharge or termination is sought. Any notice or other communication herein required or permitted to be given shall be given in pursuant to Section 10.1 of the Credit Agreement, and all for purposes thereof, the notice address of the undersigned shall be the address as set forth on the signature page hereof. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EXHIBIT H-2 230 IN WITNESS WHEREOF, the undersigned has caused this Counterpart Agreement to be duly executed and delivered by its duly authorized officer as of the date above first written. [NAME OF SUBSIDIARY] By:______________________ Name: Title: Address for Notices: -------------- -------------- -------------- Attention: Telecopier with a copy to: -------------- -------------- -------------- Attention: Telecopier ACKNOWLEDGED AND ACCEPTED, as of the date above first written: BANK ONE, N.A. as Administrative Agent By:__________ Name: Title: EXHIBIT H-3 231 EXHIBIT I [FORM OF PLEDGE AGREEMENT] PLEDGE AGREEMENT DATED AS OF APRIL 17, 2000 BETWEEN EACH OF THE PLEDGORS PARTY HERETO AND BANK ONE, NA, AS THE COLLATERAL AGENT 232 TABLE OF CONTENTS
PAGE ---- SECTION 1. DEFINITIONS; GRANT OF SECURITY..........................................................................2 1.1. General Definitions.... ..............................................................................2 1.2. Definitions; Interpretation...........................................................................4 1.3. Grant of Security.....................................................................................5 1.4. Certain Limited Exclusions ...........................................................................5 SECTION 2. SECURITY FOR OBLIGATIONS; PLEDGORS REMAIN LIABLE........................................................5 2.1. Security for Obligations..............................................................................5 2.2. Pledgors Remain Liable................................................................................5 SECTION 3. REPRESENTATIONS AND WARRANTIES AND COVENANTS............................................................6 3.1. Generally.............................................................................................6 3.2. Investment Related Property...........................................................................8 SECTION 4. FURTHER ASSURANCES; ADDITIONAL PLEDGORS................................................................12 4.1. Further Assurances...................................................................................12 4.2. Additional Pledgors..................................................................................13 SECTION 5. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT............................................................14 5.1. Power of Attorney....................................................................................14 5.2. No Duty on the Part of Collateral Agent or Secured Parties...........................................15 SECTION 6. REMEDIES...............................................................................................15 6.1. Generally............................................................................................15 6.2. Investment Property..................................................................................17 6.3. Application of Proceeds..............................................................................17 SECTION 7. COLLATERAL AGENT.......................................................................................18 SECTION 8. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS........................................................19 SECTION 9. STANDARD OF CARE; COLLATERAL AGENT MAY PERFORM.........................................................19 SECTION 10. INDEMNITY AND EXPENSES.................................................................................20 SECTION 11. MISCELLANEOUS..........................................................................................20
i 233 This PLEDGE AGREEMENT, dated as of April 17, 2000 (this "Agreement"), between EACH OF THE UNDERSIGNED, whether as an original signatory hereto or as an Additional Pledgor (as herein defined) (each, a "Pledgor"), and BANK ONE, NA, as collateral agent for the Secured Parties (as herein defined) (in such capacity as collateral agent, the "Collateral Agent"). RECITALS: WHEREAS, reference is made to that certain Credit and Guaranty Agreement, dated as of the date hereof (as it may be amended, supplemented or otherwise modified, the "Credit Agreement"), by and among PAYLESS SHOESOURCE FINANCE, INC., a Nevada corporation ("Company"), PAYLESS SHOESOURCE, INC., a Delaware corporation and certain of its Subsidiaries, as Guarantors, the Lenders party thereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P., as Lead Arranger and Sole Syndication Agent, BANK ONE, NA, as Administrative Agent, and FIRST UNION NATIONAL BANK, as Documentation Agent; WHEREAS, subject to the terms and conditions of the Credit Agreement, certain Pledgors may enter into one or more Hedge Agreements with one or more Lender Counterparties; WHEREAS, in consideration of the extensions of credit and other accommodations of Lenders and Lender Counterparties as set forth in the Credit Agreement and the Hedge Agreements, respectively, each Pledgor has agreed, subject to the terms and conditions hereof, each other Credit Document and each of the Hedge Agreements, to secure such Pledgor's obligations under the Credit Documents and the Hedge Agreements as set forth herein; and NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, each Pledgor and the Collateral Agent agree as follows: SECTION 1. DEFINITIONS; GRANT OF SECURITY. 1.1. General Definitions. In this Agreement, the following terms shall have the following meanings: "AGREEMENT" shall have the meaning set forth in the preamble. "ADDITIONAL PLEDGORS" shall have the meaning assigned in Section 4.2. "COLLATERAL" shall have the meaning assigned in Section 1.3. "COLLATERAL ACCOUNT" shall mean an account maintained at Bank One, NA, established pursuant to Section 2.4(h) of the Credit Agreement as the Collateral Account and any successor account or accounts. 234 "COLLATERAL AGENT" shall have the meaning set forth in the preamble. "CONTROLLED FOREIGN CORPORATION" shall mean "controlled foreign corporation" as defined in the United States Internal Revenue Code of 1986, as amended. "CREDIT AGREEMENT" shall have the meaning set forth in the preamble. "INDEMNITEE" shall mean the Collateral Agent, and its officers, partners, directors, trustees, employees, agents and Affiliates. "INSTRUMENTS" shall mean all "instruments" as defined in Article 9 of the UCC. "INVESTMENT RELATED PROPERTY" shall mean: all of the following (regardless of whether classified as investment property under the UCC): all Pledged Equity Interests and the Collateral Account. "PERMITTED SALE" shall mean those sales, transfers or assignments permitted by the Credit Agreement. "PLEDGED EQUITY INTERESTS" shall mean all Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests. "PLEDGED LLC INTERESTS" shall mean all interests owned by any Pledgor in any limited liability company which is either a Domestic Subsidiary of such Pledgor or, subject to Section 1.4, a Material Foreign Subsidiary of such Pledgor, including without limitation, all limited liability company interests described on Schedule 3.2 under the heading "Pledged LLC Interests" (as such schedule may be amended or supplemented from time to time), and the certificates, if any, representing such limited liability company interests and any interest of such Pledgor on the books and records of such limited liability company or on the books and records of any securities intermediary pertaining to such interest. "PLEDGED PARTNERSHIP INTERESTS" shall mean all interests owned by any Pledgor in any general partnership, limited partnership, limited liability partnership or other partnership which is either a Domestic Subsidiary of such Pledgor or, subject to Section 1.4, a Material Foreign Subsidiary of such Pledgor, including without limitation, all partnership interests described on Schedule 3.2 under the heading "Pledged Partnership Interests" (as such schedule may be amended or supplemented from time to time), and the certificates, if any, representing such partnership interests and any interest of such Pledgor on the books and records of such partnership or on the books and records of any securities intermediary pertaining to such interest. "PLEDGED TRUST INTERESTS" shall mean all interests owned by any Pledgor in a Delaware business trust or other trust which is either a Domestic Subsidiary of such Pledgor or, subject to Section 1.4, a Material Foreign Subsidiary of such Pledgor, including without limitation, 2 235 all trust interests described on Schedule 3.2 under the heading "Pledged Trust Interests" (as such schedule may be amended or supplemented from time to time), and the certificates, if any, representing such trust interests and any interest of such Pledgor on the books and records of such trust or on the books and records of any securities intermediary pertaining to such interest. "PLEDGED STOCK" shall mean all shares of capital stock owned by any Pledgor in any Domestic Subsidiary of such Pledgor or, subject to Section 1.4, Material Foreign Subsidiary of such Pledgor, including without limitation, all shares of capital stock described on Schedule 3.2 under the heading "Pledged Stock" (as such schedule may be amended or supplemented from time to time), and the certificates, if any, representing such shares and any interest of such Pledgor in the entries on the books of the issuer of such shares or on the books of any securities intermediary pertaining to such shares. "PLEDGE SUPPLEMENT" shall mean any supplement to this agreement in substantially the form of Exhibit A. "PROCEEDS" shall mean: (i) all "proceeds" as defined in the UCC, (ii) payments or distributions made with respect to any Investment Related Property and (iii) whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. "RECORD" shall have the meaning specified in Revised Article 9. "REQUISITE OBLIGEES" shall have the meaning assigned in Section 7. "REVISED ARTICLE 9" shall mean the 1999 Official Text of Article 9 of the Uniform Commercial Code with conforming amendments to Articles 1, 2, 2a, 4, 5, 6, 7 and 8. "SECURED OBLIGATIONS" shall have the meaning assigned in Section 2.1. "SECURED PARTIES" means the Agents, the Lenders and the Lender Counterparties and shall include, without limitation, all former Agents, Lenders or Lender Counterparties to the extent that any Obligations owing to such Persons were incurred while such Persons were Agents, Lenders or Lender Counterparties and such Obligations have not been paid or satisfied in full. "UCC" shall mean Uniform Commercial Code as in effect from time to time in the State of New York or, when the context implies, the Uniform Commercial Code as in effect from time to time in any other applicable jurisdiction. 1.2. DEFINITIONS; INTERPRETATION. The following capitalized terms are used as defined in the Credit Agreement: Credit Documents, Counterpart Agreement, Event of Default, Net Asset Sale Proceeds, Obligations and Permitted Lien. All other capitalized terms used herein (including the preamble and recitals hereto) and not otherwise defined herein shall have the meanings 3 236 ascribed thereto in the Credit Agreement or, if not defined therein, in the UCC. References to "Sections", "Exhibits" and "Schedules" shall be to Sections, Exhibits and Schedules, as the case may be, of this Agreement unless otherwise specifically provided. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. The rules of construction set forth in Section 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. If any conflict or inconsistency exists between this Agreement and the Credit Agreement, the Credit Agreement shall govern. All references herein to provisions of the UCC shall include all successor provisions under any subsequent version or amendment to any Article of the UCC. 1.3. GRANT OF SECURITY. Each Pledgor hereby grants to the Collateral Agent a security interest and continuing lien on all of such Pledgor's right, title and interest in, to and under the following, in each case whether now owned or existing or hereafter acquired or arising and wherever located (all of which being hereinafter collectively referred to as the "COLLATERAL"): (a) Investment Related Property; and (b) all Proceeds, products, accessions, rents and profits of or in respect of any of the foregoing. 1.4. CERTAIN LIMITED EXCLUSIONS. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and no Pledgor shall be deemed to have granted a security interest in, any of such Pledgor's right, title or interest in any of the outstanding capital stock of a Controlled Foreign Corporation, in excess of 65% of the voting power of all classes of capital stock of such Controlled Foreign Corporation entitled to vote. SECTION 2. SECURITY FOR OBLIGATIONS; PLEDGORS REMAIN LIABLE. 2.1. SECURITY FOR OBLIGATIONS. This Agreement secures, and the Collateral is collateral security for, the prompt and complete payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)), of all Obligations with respect to any Pledgor (the "SECURED OBLIGATIONS"). 2.2. PLEDGORS REMAIN LIABLE. (a) Anything contained herein to the contrary notwithstanding: (i) each Pledgor shall remain liable under any partnership agreement or limited liability company agreement relating to any Pledged Partnership Interest or Pledged 4 237 LLC Interest, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed; (ii) the exercise by the Collateral Agent of any of its rights hereunder shall not release any Pledgor from any of its duties or obligations under the contracts and agreements included in the Collateral; and (iii) neither the Collateral Agent nor any Lender nor Lender Counterparty shall have any obligation or liability under any partnership agreement or limited liability company agreement relating to any Pledged Partnership Interests or Pledged LLC Interests, nor shall the Collateral Agent, any Lender or any Lender Counterparty be obligated to perform any of the obligations or duties of any Pledgor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. (b) Neither the Collateral Agent, any Lender, any Lender Counterparty nor any purchaser at a foreclosure sale under this Agreement shall be obligated to assume any of any obligation or liability under any partnership agreement or limited liability company agreement relating to any Pledged Partnership Interests or Pledged LLC Interests unless the Collateral Agent, any Lender, any Lender Counterparty or any such purchaser otherwise expressly agrees in writing to assume any or all of said obligations. SECTION 3. REPRESENTATIONS AND WARRANTIES AND COVENANTS. 3.1. GENERALLY. (a) Representations and Warranties. Each Pledgor hereby represents and warrants, on the Closing Date and on each Credit Date, that: (i) its chief executive office (or other office that serves as the chief place of business) is, and has been for the four month period preceding the date hereof, located at the place indicated on Schedule 3.1(A) (as amended or supplemented from time to time), and the jurisdiction of organization of such Pledgor is the jurisdiction indicated on Schedule 3.1(B) (as amended or supplemented from time to time). If the principal place of business of any Pledgor is located outside of the United States, then Schedule 3.1(A) (as amended or supplemented from time to time) shall also include the address of the major executive office in the United States, if any, of such Pledgor; (ii) the full legal name of such Pledgor is as set forth on Schedule 3.1(A) and it has not in the last five (5) years and does not do business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule 3.1(C) (as amended or supplemented from time to time); 5 238 (iii) all actions and consents on the part of such Pledgor, including all filings, notices, registrations and recordings necessary or desirable to create, perfect or insure the first priority (subject only to Permitted Liens) of the security interests granted to the Collateral Agent hereunder or for the exercise by the Collateral Agent of the voting or other rights provided for in this Agreement or the exercise of remedies in respect of the Collateral have been made or obtained except for the filing of UCC financing statements naming each Pledgor as "debtor" and the Collateral Agent as "secured party" and describing the Collateral in the filing offices set forth opposite such Pledgor's name on Schedule 3.1(D) hereof (as amended or supplemented from time to time); and (iv) other than the financing statements filed in favor of the Collateral Agent as set forth on Schedule 3.1(D) (as amended or supplemented from time to time), no effective UCC financing statement, fixture filing or other instrument similar in effect under any applicable law covering all or any part of the Collateral is on file in any filing or recording office except for (x) financing statements for which proper termination statements have been delivered to the Collateral Agent for filing and (y) financing statements filed in connection with Permitted Liens. (b) Covenants and Agreements. Each Pledgor hereby covenants and agrees that: (i) it shall not change such Pledgor's name, identity, corporate structure, chief place of business, chief executive office or jurisdiction of organization or establish any trade names unless it shall have (a) notified the Collateral Agent in writing, by executing and delivering to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, at least thirty (30) days prior to any such change or establishment, identifying such new proposed name, identity, corporate structure, chief place of business, chief executive office, jurisdiction of organization or trade name and providing such other information in connection therewith as the Collateral Agent may reasonably request and (b) taken all actions necessary or advisable to maintain the continuous validity, perfection and the same or better priority of the Collateral Agent's security interest in the Collateral intended to be granted and agreed to hereby; (ii) if the Collateral Agent or any Secured Party gives value to enable Pledgor to acquire rights in or the use of any Collateral, it shall use such value for such purposes and such Pledgor further agrees that repayment of any Obligation shall apply on a "first-in, first-out" basis so that the portion of the value used to acquire rights in any Collateral shall be paid in the chronological order such Pledgor acquired rights therein; (iii) it shall not sell, transfer or assign (by operation of law or otherwise) any Collateral except as permitted by the Credit Agreement. 6 239 3.2. INVESTMENT RELATED PROPERTY. (a) Representations and Warranties. Each Pledgor hereby represents and warrants, on the Closing Date and on each Credit Date, that: (i) Schedule 3.2 (as amended or supplemented from time to time) sets forth under the headings "Pledged Stock," "Pledged LLC Interests," "Pledged Partnership Interests" and "Pledged Trust Interests," respectively, all of the Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests owned by any Pledgor and such Pledged Equity Interests constitute the percentage of issued and outstanding shares of stock, percentage of membership interests, percentage of partnership interests or percentage of beneficial interest of the respective issuers thereof indicated on such Schedule; (ii) it is the record and beneficial owner of the Pledged Equity Interests free of all Liens, rights or claims of other Persons other than Permitted Liens and there are no outstanding warrants, options or other rights to purchase, or shareholder, voting trust or similar agreements outstanding with respect to, or property that is convertible into, or that requires the issuance or sale of, any Pledged Equity Interests; (iii) without limiting the generality of Section 3.1(a)(v), no consent of any Person including any other general or limited partner, any other member of a limited liability company, any other shareholder or any other trust beneficiary is necessary or desirable in connection with the creation, perfection or first priority status of the security interest of the Collateral Agent in any Pledged Equity Interests or the exercise by the Collateral Agent of the voting or other rights provided for in this Agreement or the exercise of remedies in respect thereof; (iv) none of the Pledged LLC Interests nor Pledged Partnership Interests are or represent interests in issuers that are: (a) registered as investment companies, (b) are dealt in or traded on securities exchanges or markets or (c) have opted to be treated as securities under the uniform commercial code of any jurisdiction; (v) The Borrower is or shall be the sole account holder of the Collateral Account and the Borrower has not consented, and shall not consent, to, and is not otherwise aware of, any Person (other than the Collateral Agent pursuant hereto) having either sole dominion and control or "control" (within the meaning of Section 9-104 of Revised Article 9) over, or any other interest in, the Collateral Account or any funds or other property deposited therein; and (vi) each Pledgor has taken all actions necessary or desirable, including those specified in Section 3.2(c), to: (a) establish the Collateral Agent's "control" (within the meaning of Section 9-115 of the UCC) over any portion of the Investment Related 7 240 Property constituting Certificated Securities, Uncertificated Securities, or Securities Entitlements; and (b) establish the Collateral Agent's "control" (within the meaning of Section 9-115 of the UCC) over the Collateral Account. (b) Covenants and Agreements. Each Pledgor hereby covenants and agrees that: (i) without the prior written consent of the Collateral Agent, it shall not vote to enable or take any other action to: (a) amend, terminate or waive any default under or breach of any terms of any partnership agreement, limited liability company agreement, certificate of incorporation, by-laws or other organizational documents in any way that materially adversely affects the validity, perfection or priority of the Collateral Agent's security interest, (b) unless permitted under the Credit Agreement, permit any issuer of any Pledged Equity Interest to issue to any Person other than a Pledgor any additional stock, partnership interests, limited liability company interests or other equity interests of any nature or to issue securities convertible into or granting the right of purchase or exchange for any stock or other equity interest of any nature of such issuer, (c) cause any issuer of any Pledged Partnership Interests or Pledged LLC Interests which are not securities (for purposes of the UCC) on the date hereof to elect or otherwise take any action to cause such Pledged Partnership Interests or Pledged LLC Interests to be treated as securities for purposes of the Uniform Commercial Code of any jurisdiction; provided, however, notwithstanding the foregoing, if any issuer of any Pledged Partnership Interests or Pledged LLC Interests takes any such action in violation of the foregoing in this clause (c), such Pledgor shall promptly notify the Collateral Agent in writing of any such election or action and, in such event, shall take all steps necessary or advisable to establish the Collateral Agent's "control" thereof; (ii) subject to Section 1.4, in the event it acquires rights in any Investment Related Property after the date hereof, it shall deliver to the Collateral Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, reflecting such new Investment Related Property and all other Investment Related Property. Notwithstanding the foregoing, it is understood and agreed that the security interest of the Collateral Agent shall attach to all Investment Related Property, subject to Section 1.4, immediately upon any Pledgor's acquisition of rights therein and shall not be affected by the failure of any Pledgor to deliver a supplement to Schedule 3.2 as required hereby; (iii) in the event such Pledgor receives any dividends, interest or distributions on any Investment Related Property, then, so long as no Event of Default shall have occurred and be continuing, the Collateral Agent authorizes each Pledgor to retain and/or expend or otherwise dispose of any such dividends, interest or distributions and the security interest of the Collateral Agent shall immediately and automatically be released so long as such Pledgor shall have complied with any applicable provision of the Credit 8 241 Agreement, including, without limitation, Section 2.14 of the Credit Agreement; provided, however, that in no event shall the security interest therein of the Collateral Agent be released to the extent that such dividends, interest or distributions constitute Pledged Equity Interests; (iv) without the prior written consent of the Collateral Agent, it shall not permit any issuer of any Pledged Equity Interest owned by such Pledgor to merge or consolidate unless all the outstanding capital stock or other equity interests of the surviving or resulting corporation, limited liability company, partnership or other entity is, upon such merger or consolidation, pledged hereunder to the extent required by the Credit Agreement; and (v) each Pledgor consents to the grant by each other Pledgor of a security interest in all Investment Related Property to the Collateral Agent and, without limiting the foregoing, consents to the transfer of any Pledged Partnership Interest and any Pledged LLC Interest to the Collateral Agent or its nominee following an Event of Default and to the substitution of the Collateral Agent or its nominee as a partner in any partnership or as a member in any limited liability company with all the rights and powers related thereto. (c) Delivery and Control. Each Pledgor agrees that with respect to any Investment Related Property in which it currently has rights it shall comply with the provisions of this Section 3.2(c) on or before the Closing Date and with respect to any Investment Related Property hereafter acquired by such Pledgor it shall comply with the provisions of this Section 3.2(c) immediately upon acquiring rights therein, in each case in form and substance satisfactory to the Collateral Agent. With respect to any Investment Related Property that is represented by a certificate or that is an "instrument" (other than any Investment Related Property credited to a Securities Account) it shall cause such certificate or instrument to be delivered to the Collateral Agent, indorsed in blank by an "effective indorsement" (as defined in Section 8-107 of the UCC), regardless of whether such certificate constitutes a "certificated security" for purposes of the UCC. With respect to any Investment Related Property that is an "uncertificated security" for purposes of the UCC (other than any "uncertificated securities" credited to a Securities Account), it shall cause the issuer of such uncertificated security to either (i) register the Collateral Agent as the registered owner thereof on the books and records of the issuer or (ii) execute an agreement substantially in the form of Exhibit B hereto, pursuant to which such issuer agrees to comply with the Collateral Agent's instructions with respect to such uncertificated security without further consent by such Pledgor. With respect to the Collateral Account, it shall cause the depositary institution maintaining such account to enter into an agreement substantially in the form of Exhibit C hereto or such other agreement reasonably satisfactory to the Collateral Agent, pursuant to which the Collateral Agent shall have both sole dominion and control over such Deposit Account (within the meaning of the common law) and "control" (as defined in Section 9-104 of Revised Article 9) over such Deposit Account. In addition to the foregoing, if any issuer of any Investment Related Property is located in a jurisdiction outside of the United States, each Pledgor shall take such additional actions, including, without limitation, causing the issuer to register the pledge on its books and records or making such filings or recordings, in each case as may be necessary or 9 242 reasonably advisable, under the laws of such issuer's jurisdiction to insure the validity, perfection and priority of the security interest of the Collateral Agent. Upon the occurrence of an Event of Default, the Collateral Agent shall have the right, without notice to any Pledgor, to transfer all or any portion of the Investment Related Property to its name or the name of its nominee or agent. In addition, the Collateral Agent shall have the right at any time, without notice to any Pledgor, to exchange any certificates or instruments representing any Investment Related Property for certificates or instruments of smaller or larger denominations. (d) Voting and Distributions. (i) So long as no Event of Default shall have occurred and be continuing: (A) except as otherwise provided in Section 3.2(b)(i) of this Agreement or elsewhere herein or in the Credit Agreement, each Pledgor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Investment Related Property or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement; provided, no Pledgor shall exercise or refrain from exercising any such right if such action would have a Material Adverse Effect on the value of the Investment Related Property or any part thereof unless such action is permitted under the Credit Agreement; it being under stood, however, that neither the voting by such Pledgor of any Pledged Stock for, or such Pledgor's consent to, the election of directors at a regularly scheduled annual or other meeting of stockholders or with respect to incidental matters at any such meeting, nor such Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement, shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 3.2(d)(i)(A), and no notice of any such voting or consent need be given to the Collateral Agent; and (B) the Collateral Agent shall promptly execute and deliver (or cause to be executed and delivered) to each Pledgor all proxies, and other instruments as such Pledgor may from time to time reasonably request for the purpose of enabling such Pledgor to exercise the voting and other consensual rights when and to the extent which it is entitled to exercise pursuant to clause (A) above; (ii) Upon the occurrence and during the continuation of an Event of Default: 10 243 (A) all rights of each Pledgor to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant hereto shall cease and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; and (B) in order to permit the Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions which it may be entitled to receive hereunder: (1) each Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to the Collateral Agent all proxies, dividend payment orders and other instruments as the Collateral Agent may from time to time reasonably request and (2) each Pledgor acknowledges that the Collateral Agent may utilize the power of attorney set forth in Section 5. SECTION 4. FURTHER ASSURANCES; ADDITIONAL PLEDGORS. 4.1. FURTHER ASSURANCES. (a) Each Pledgor agrees that from time to time, at the expense of such Pledgor, that it shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Collateral Agent may reasonably request, in order to create and/or maintain the validity, perfection or priority of and protect any security interest granted or purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Pledgor shall: (i) execute and file such financing or continuation statements, or amendments thereto, and execute and deliver such other agreements, instruments, endorsements, powers of attorney or notices, as may be necessary or desirable, or as the Collateral Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (ii) (A) on July 1, 2001, with respect to the laws of the State of New York, and (B) upon written request by the Collateral Agent, on the date of effectiveness of Revised Article 9 in any other material jurisdiction, furnish to the Collateral Agent an opinion of counsel either (x) stating that, in the opinion of such counsel, such action has been taken to maintain the validity, perfection and priority of the lien and security interest granted hereby, including, without limitation, with respect to the execution and filing of any financing statements and continuation statements as is necessary and reciting the details of such action or (y) stating that in the opinion of such counsel no such action is 11 244 necessary to maintain the validity, perfection and priority of such lien and security interest under Revised 9; (iii) at any reasonable time, upon request by the Collateral Agent, exhibit the Collateral to and allow inspection of the Collateral by the Collateral Agent, or persons designated by the Collateral Agent; and (iv) at the Collateral Agent's request, appear in and defend any action or proceeding that may affect such Pledgor's title to or the Collateral Agent's security interest in all or any part of the Collateral. (b) In addition, to the extent permitted by applicable law, each Pledgor hereby authorizes the Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Pledgor. Each Pledgor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Pledgor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. Each Pledgor shall furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail. (c) Each Pledgor hereby authorizes the Collateral Agent to file a record or records (as defined in Revised Article 9), including, without limitation, financing statements, in all jurisdictions and with all filing offices as the Collateral Agent may determine, in its sole discretion, are necessary or advisable to perfect the security interest granted to the Collateral Agent herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Collateral Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to the Collateral Agent herein, including, without limitation, describing such property as "all assets" or "all personal property." 4.2. ADDITIONAL PLEDGORS. From time to time subsequent to the date hereof, additional Persons may become parties hereto as additional Pledgors (each, an "Additional Pledgor"), by executing a Counterpart Agreement. Upon delivery of any such Counterpart Agreement to the Collateral Agent, notice of which is hereby waived by Pledgors, each Additional Pledgor shall be a Pledgor and shall be as fully a party hereto as if Additional Pledgor were an original signatory hereto. Each Pledgor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Pledgor hereunder, nor by any election of Collateral Agent not to cause any Subsidiary of Company to become an Additional Pledgor hereunder. This Agreement shall be fully effective as to any Pledgor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Pledgor hereunder. 12 245 SECTION 5. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. 5.1. POWER OF ATTORNEY. Each Pledgor hereby irrevocably appoints the Collateral Agent (such appointment being coupled with an interest) as such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor, the Collateral Agent or otherwise, from time to time in the Collateral Agent's discretion, upon the occurrence and during the continuance of an Event of Default, to take any action and to execute any instrument that the Collateral Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, the following: (a) to obtain and adjust insurance required to be maintained by such Pledgor or paid to the Collateral Agent pursuant to the Credit Agreement; (b) to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) to file any claims or take any action or institute any proceedings that the Collateral Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Collateral Agent with respect to any of the Collateral; (e) to prepare, sign and file any UCC financing statements in the name of such Pledgor as debtor; (f) to take or cause to be taken all actions necessary to perform or comply or cause performance or compliance with the terms of this Agreement, including, without limitation, access to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by the Collateral Agent in its sole discretion, any such payments made by the Collateral Agent to become obligations of such Pledgor to the Collateral Agent, due and payable immediately without demand; and (g) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent's option and such Pledgor's expense, at any time or from time to time, all acts and things that the Collateral Agent deems reasonably necessary to protect, preserve or realize upon the Collateral and the 13 246 Collateral Agent's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as such Pledgor might do. 5.2. NO DUTY ON THE PART OF COLLATERAL AGENT OR SECURED PARTIES. The powers conferred on the Collateral Agent hereunder are solely to protect the interests of the Secured Parties in the Collateral and shall not impose any duty upon the Collateral Agent or any Secured Party to exercise any such powers. The Collateral Agent and the Secured Parties shall be account able only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. SECTION 6. REMEDIES. 6.1. GENERALLY. (a) If any Event of Default shall have occurred and be continuing, the Collateral Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it at law or in equity, all the rights and remedies of the Collateral Agent on default under the UCC (whether or not the UCC applies to the affected Collateral), and also may pursue any of the following separately, successively or simultaneously: (i) require any Pledgor to, and each Pledgor hereby agrees that it shall at its expense and promptly upon request of the Collateral Agent forthwith, assemble all or part of the Collateral as directed by the Collateral Agent and make it available to the Collateral Agent at a place to be designated by the Collateral Agent that is reasonably convenient to both parties; (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process; (iii) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent the Collateral Agent deems appropriate; (iv) without notice except as specified below, sell, assign, lease, license (on an exclusive or non-exclusive basis) or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as the Collateral Agent may deem commercially reasonable; and 14 247 (v) exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit account maintained with the Collateral Agent constituting part of the Collateral. (b) The Collateral Agent or any Secured Party may be the purchaser of any or all of the Collateral at any such sale and the Collateral Agent, as collateral agent for and representative of the Secured Parties, shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by the Collateral Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Pledgor, and each Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days notice to such Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Pledgor hereby waives any claims against the Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Pledgors shall be liable for the deficiency and the fees of any attorneys employed by the Collateral Agent to collect such deficiency. Each Pledgor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to the Collateral Agent, that the Collateral Agent has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against such Pledgor, and such Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section shall in any way alter the rights of the Collateral Agent hereunder. (c) The Collateral Agent may sell the Collateral without giving any warranties as to the Collateral. The Collateral Agent may specifically disclaim any warranties of title or the like. This procedure will not be considered to adversely effect the commercial reasonableness of any sale of the Collateral. (d) If the Collateral Agent sells any of the Collateral on credit, the Secured Obligations will be credited only with payments actually made by the purchaser and received by 15 248 the Collateral Agent and applied to the indebtedness of the purchaser. In the event the purchaser fails to pay for the Collateral, the Collateral Agent may resell the Collateral. (e) The Collateral Agent shall have no obligation to marshall any of the Collateral. 6.2. INVESTMENT PROPERTY. Each Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, the Collateral Agent may be compelled, with respect to any sale of all or any part of the Investment Property conducted without prior registration or qualification of such Investment Property under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Investment Property for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sale may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, each Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Investment Property for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. If the Collateral Agent determines to exercise its right to sell any or all of the Investment Property, upon written request, each Pledgor shall and shall cause each issuer of any Pledged Stock to be sold hereunder, each partnership and each limited liability company from time to time to furnish to the Collateral Agent all such information as the Collateral Agent may request in order to determine the number and nature of interest, shares or other instruments included in the Investment Property which may be sold by the Collateral Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. 6.3. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere in this Agreement or as otherwise provided in Section 2.4(i) of the Credit Agreement with respect to the Collateral Account, all proceeds received by the Collateral Agent in respect of any sale, any collection from, or other realization upon all or any part of the Collateral shall be applied in full or in part by the Collateral Agent against, the Secured Obligations in the following order of priority: first, to the payment of all costs and expenses of such sale, collection or other realization, including reasonable compensation to the Collateral Agent and its agents and counsel, and all other expenses, liabilities and advances made or incurred by the Collateral Agent in connection therewith, and all amounts for which the Collateral Agent is entitled to indemnification hereunder (in its capacity as the Collateral Agent and not as a Lender) and all advances made by the Collateral Agent hereunder for the account of the applicable Pledgor, and to the payment of all costs and expenses paid or incurred by the Collateral Agent in connection with the exercise of any right or remedy hereunder or under the Credit Agreement, all in accordance with the terms hereof or thereof; second, to the extent of 16 249 any excess, to the payment of all other Secured Obligations for the ratable benefit of the Lenders and the Lender Counterparties; and third, to the extent of any excess such proceeds, to the payment to or upon the order of such Pledgor or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. SECTION 7. COLLATERAL AGENT. The Collateral Agent has been appointed to act as Collateral Agent hereunder by Lenders and, by their acceptance of the benefits hereof, the other Secured Parties. The Collateral Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided, the Collateral Agent shall, after payment in full of all Obligations under the Credit Agreement and the other Credit Documents, exercise, or refrain from exercising, any remedies provided for herein in accordance with the instructions of the holders of a majority of the aggregate notional amount (or, with respect to any Hedge Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Hedge Agreement) under all Hedge Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section, each Lender Counterparty, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Lender Counterparty that all rights and remedies hereunder may be exercised solely by the Collateral Agent for the benefit of Lenders and Lender Counterparties in accordance with the terms of this Section. The Collateral Agent shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to terms of the Credit Agreement shall also constitute notice of resignation as the Collateral Agent under this Agreement; removal of Administrative Agent pursuant to the terms of the Credit Agreement shall also constitute removal as the Collateral Agent under this Agreement; and appointment of a successor Administrative Agent pursuant to the terms of the Credit Agreement shall also constitute appointment of a successor Collateral Agent under this Agreement. Upon the acceptance of any appointment as Administrative Agent under the terms of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereby also be deemed the successor Collateral Agent and such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Collateral Agent under this Agreement, and the retiring or removed Collateral Agent under this Agreement shall promptly (i) transfer to such successor Collateral Agent all sums, Securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Collateral Agent under this Agreement, and (ii) execute and deliver to such successor Collateral Agent such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection 17 250 with the assignment to such successor Collateral Agent of the security interests created hereunder, whereupon such retiring or removed Collateral Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Collateral Agent's resignation or removal hereunder as the Collateral Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was the Collateral Agent hereunder. SECTION 8. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Collateral and shall remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, be binding upon each Pledgor, its successors and assigns, and inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Collateral Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing, but subject to the terms of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon (i) the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, or (ii) receipt by the Parent of an Investment Grade Status rating and subject to the terms of Section 3.3 of the Credit Agreement, the security interest granted hereby shall immediately and automatically terminate hereunder and all rights to the Collateral shall revert to Pledgors. In addition, the security interest granted hereby shall immediately and automatically be released with respect to any Collateral sold, transferred or otherwise disposed of in connection with a Permitted Sale. Upon any such termination the Collateral Agent shall, at Pledgors' expense, execute and deliver to Pledgors such documents as Pledgors shall reasonably request to evidence such termination. SECTION 9. STANDARD OF CARE; COLLATERAL AGENT MAY PERFORM. The powers conferred on the Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property. Neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the 18 251 request of any Pledgor or otherwise. If any Pledgor fails to perform any agreement contained herein, the Collateral Agent may itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent incurred in connection therewith shall be payable by each Pledgor under Section 10.2 of the Credit Agreement. SECTION 10. INDEMNITY AND EXPENSES. (a) Each Pledgor agrees: (i) to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless each Indemnitee, from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result from such Indemnitee's gross negligence or willful misconduct; and (ii) to pay to the Collateral Agent promptly following written demand the amount of any and all reasonable costs and reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents in accordance with the terms and conditions of the Credit Agreement. (b) The obligations of each Pledgor in this Section 10 shall survive the termination of this Agreement and the discharge of such Pledgor's other obligations under this Agreement, the Hedge Agreements, the Credit Agreement and any other Credit Documents. SECTION 11. MISCELLANEOUS. Any notice required or permitted to be given under this Agreement shall be given in accordance with Section 10.1 of the Credit Agreement. No failure or delay on the part of the Collateral Agent in the exercise of any power, right or privilege hereunder or under any other Credit Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Credit Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of a 19 252 Default or an Event of Default if such action is taken or condition exists. This Agreement shall be binding upon and inure to the benefit of the Collateral Agent and Pledgors and their respective successors and assigns. No Pledgor shall, without the prior written consent of the Collateral Agent, assign any right, duty or obligation hereunder. This Agreement and the other Credit Documents embody the entire agreement and understanding between Pledgors and the Collateral Agent and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Credit Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. [Remainder of page intentionally left blank] 20 253 IN WITNESS WHEREOF, each Pledgor and the Collateral Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. PAYLESS SHOESOURCE FINANCE, INC. By:______________________________________ Name: Title: PAYLESS SHOESOURCE, INC. By:______________________________________ Name: Title: PSS DELAWARE COMPANY 1, INC. By:______________________________________ Name: Title: PSS DELAWARE COMPANY 2, INC. By:______________________________________ Name: Title: 21 254 PSS DELAWARE COMPANY 3, INC. By:______________________________________ Name: Title: PSS DELAWARE COMPANY 4, INC. By:_____________________________________ Name: Title: PAYLESS SHOESOURCE, INC. By:______________________________________ Name: Title: EASTBOROUGH, INC. By:______________________________________ Name: Title: PAYLESS SHOESOURCE WORLDWIDE, INC. By:______________________________________ Name: Title: 22 255 PSS LABOR LEASING, INC. By:______________________________________ Name: Title: PSS INVESTMENT I, INC. By:______________________________________ Name: Title: PSS INVESTMENT III, INC. By:______________________________________ Name: Title: PAYLESS SHOESOURCE DISTRIBUTION, INC. By:______________________________________ Name: Title: PAYLESS SHOESOURCE MERCHANDISING, INC. By:______________________________________ Name: Title: 23 256 PSS CANADA, INC. By:______________________________________ Name: Title: BANK ONE, NA, as the Collateral Agent By:______________________________________ Name: Title: 24 257 SCHEDULE 3.1 TO PLEDGE AGREEMENT (L) Full Legal Name and Chief Executive Office of each Pledgor:
Pledgor Chief Executive Office - ------- ---------------------- Payless ShoeSource, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 Payless ShoeSource Finance, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Delaware Company 1, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Delaware Company 2, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Delaware Company 3, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 Payless ShoeSource, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Delaware Company 4, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 Eastborough, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 Payless ShoeSource Worldwide, Inc. Jay Hawk Towers 700 S.W. Jackson St. Suite 202 Topeka, KS 66603 PSS Labor Leasing, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Investment I, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Investment III, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607
SCHEDULE 3.1-1 258
Pledgor Chief Executive Office - ------- ---------------------- Payless ShoeSource Distribution, Inc. 5040 Northwest Highway #24 Topeka, KS 66618 Payless ShoeSource Merchandising, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607 PSS Canada, Inc. 3231 Southeast 6th Avenue Topeka, Kansas 66607
(B) Jurisdiction of Organization of each Pledgor:
Pledgor Jurisdiction of Organization - ------- ---------------------------- Payless ShoeSource, Inc. Delaware Payless ShoeSource Finance, Inc. Nevada PSS Delaware Company 1, Inc. Delaware PSS Delaware Company 2, Inc. Delaware PSS Delaware Company 3, Inc. Delaware Payless ShoeSource, Inc. Missouri PSS Delaware Company 4, Inc. Delaware Eastborough, Inc. Kansas Payless ShoeSource Worldwide, Inc. Kansas PSS Labor Leasing, Inc. Kansas PSS Investment I, Inc. Nevada PSS Investment III, Inc. Kansas Payless ShoeSource Distribution, Inc. Kansas Payless ShoeSource Merchandising, Inc. Kansas PSS Canada, Inc. Kansas
(C) Other Names (including any Trade-Name or Fictitious Business Name) under which each Pledgor has conducted Business for the past Five (5) Years: SCHEDULE 3.1-2 259
Pledgor Other Names - ------- ------------- Payless ShoeSource, Inc. None Payless ShoeSource Finance, Inc. None PSS Delaware Company 1, Inc. None PSS Delaware Company 2, Inc. None PSS Delaware Company 3, Inc. None Payless ShoeSource, Inc. Parade of Shoes Parade PSS Delaware Company 4, Inc. None Eastborough, Inc. None Payless ShoeSource Worldwide, Inc. None PSS Labor Leasing, Inc. None PSS Investment I, Inc. None PSS Investment III, Inc. None Payless ShoeSource Distribution, Inc. None Payless ShoeSource Merchandising, Inc. None PSS Canada, Inc. None
(D) Financing Statements:
Pledgor Filing Jurisdiction(s) - ------- ---------------------- Payless ShoeSource, Inc. Kansas; Delaware Payless ShoeSource Finance, Inc. Kansas; Nevada PSS Delaware Company 1, Inc. Kansas; Delaware PSS Delaware Company 2, Inc. Kansas; Delaware PSS Delaware Company 3, Inc. Kansas; Delaware Payless ShoeSource, Inc. Kansas; Missouri PSS Delaware Company 4, Inc. Kansas; Delaware
SCHEDULE 3.1-3 260
Pledgor Filing Jurisdiction(s) - ------- ---------------------- Eastborough, Inc. Kansas Payless ShoeSource Worldwide, Inc. Kansas PSS Labor Leasing, Inc. Kansas PSS Investment I, Inc. Kansas; Nevada PSS Investment III, Inc. Kansas Payless ShoeSource Distribution, Inc. Kansas Payless ShoeSource Merchandising, Inc. Kansas PSS Canada, Inc. Kansas
SCHEDULE 3.1-4 261 SCHEDULE 3.2 TO PLEDGE AGREEMENT INVESTMENT RELATED PROPERTY Pledged Stock:
% OF OUTSTANDING STOCK CLASS OF CERTIFICATED STOCK PAR NO. OF STOCK OF THE PLEDGOR ISSUER STOCK (Y/N) CERTIFICATE NO. VALUE PLEDGED STOCK STOCK ISSUER - ------- ------ -------- ------------ --------------- ----- ------------- ------------- Payless Payless Common Yes 5 1.00 99 100% ShoeSource, ShoeSource Inc. (DE) Finance, Inc (NV) Payless Payless ShoeSource ShoeSource, Inc. Finance, Inc. (MO) Common Yes Two 1.00 1 100% (NV) Payless PSS Delaware ShoeSource Company 1, Inc. Finance, Inc. (DE) Common Yes 1 .01 1,500 100% (NV) Payless PSS Delaware ShoeSource Company 2, Inc. Finance, Inc. (DE) Common Yes 1 .01 1,500 100% (NV) Payless PSS Delaware ShoeSource Company 3, Inc. Finance, Inc. (DE) Common Yes 1 .01 1,500 100% (NV) Payless PSS Delaware ShoeSource Company 4, Inc. Finance, Inc. (DE) Common Yes 1 .01 1,500 100% (NV) Payless Eastborough, Inc. ShoeSource (KS) Finance, Inc. Common Yes 1 .01 1,000 100% (NV)
SCHEDULE 3.2-1 262
% OF OUTSTANDING STOCK CLASS OF CERTIFICATED STOCK PAR NO. OF STOCK OF THE PLEDGOR ISSUER STOCK (Y/N) CERTIFICATE NO. VALUE PLEDGED STOCK STOCK ISSUER - ------- ------ -------- ------------ --------------- ----- ------------- ------------- Payless Payless ShoeSource, ShoeSource Inc. (MO) Worldwide, Inc. Common Yes 1 1.00 100 100% (KS) Payless PSS Labor ShoeSource, Leasing, Inc. (KS) Common Yes 1002 1.00 100 100% Inc. (MO) Payless Payless ShoeSource, ShoeSource 100 Inc. (MO) International Common Yes 15 HK 1,300 65% Limited (HK) Payless PSS Investment I, ShoeSource, Inc. (NV) Common Yes 2 1.00 100 100% Inc. (MO) Payless PSS Investment ShoeSource, III, Inc. (KS) Common Yes 1 1.00 100 100% Inc. (MO) Payless Payless ShoeSource, ShoeSource Inc. (MO) Distribution, Inc. Common Yes 1 1.00 100 100% (KS) Payless Payless ShoeSource, ShoeSource Inc. (MO) Merchandising, Common Yes 1 1.00 100 100% Inc. (KS) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4158, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4154, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4157, Inc. (PR)
SCHEDULE 3.2-2 263
% OF OUTSTANDING STOCK CLASS OF CERTIFICATED STOCK PAR NO. OF STOCK OF THE PLEDGOR ISSUER STOCK (Y/N) CERTIFICATE NO. VALUE PLEDGED STOCK STOCK ISSUER - ------- ------ -------- ------------ --------------- ----- ------------- ------------- Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4162, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4152, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4153, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4163, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4150, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4164, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4166, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4167, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4168, Inc. (PR)
SCHEDULE 3.2-3 264
% OF OUTSTANDING STOCK CLASS OF CERTIFICATED STOCK PAR NO. OF STOCK OF THE PLEDGOR ISSUER STOCK (Y/N) CERTIFICATE NO. VALUE PLEDGED STOCK STOCK ISSUER - ------- ------ -------- ------------ --------------- ----- ------------- ------------- Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4204, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4206, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4207, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4208, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4219, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4220, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4221, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4238, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4242, Inc. (PR)
SCHEDULE 3.2-4 265
% OF OUTSTANDING STOCK CLASS OF CERTIFICATED STOCK PAR NO. OF STOCK OF THE PLEDGOR ISSUER STOCK (Y/N) CERTIFICATE NO. VALUE PLEDGED STOCK STOCK ISSUER - ------- ------ -------- ------------ --------------- ----- ------------- ------------- Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico No. Common Yes 2 1.00 650 65% 4940, Inc. (PR) Payless Payless ShoeSource, ShoeSource of Inc. (MO) Puerto Rico, Inc. Common Yes 2 1.00 650 65% (PR) Payless PSS Canada, Inc. ShoeSource (KS) Worldwide, Common Yes 1001 1.00 100 100% Inc. (KS) Payless Payless ShoeSource ShoeSource Worldwide, Saipan, Inc. Common Yes 1 1.00 4,875 65% Inc. (KS) (NMI) PSS Canada Payless Common Yes 1 n/a 65 65% Inc. (KS) ShoeSource Canada Inc. (Canada)
Pledged LLC Interests: None Pledged Partnership Interests: None Pledged Trust Interests: None SCHEDULE 3.2-5 266 EXHIBIT A TO PLEDGE AGREEMENT PLEDGE SUPPLEMENT This PLEDGE SUPPLEMENT, dated [MM/DD/YY], is delivered pursuant to the Pledge Agreement, dated as of [MM/DD/YY] (as it may be from time to time amended, modified or supplemented, the "PLEDGE AGREEMENT"), among [NAME OF COMPANY], the other Pledgors named therein, and [NAME OF COLLATERAL AGENT], as the Collateral Agent. Capitalized terms used herein not otherwise defined herein shall have the meanings ascribed thereto in the Pledge Agreement. Pledgor hereby confirms the grant to the Collateral Agent set forth in the Pledge Agreement of a security interest in all of Pledgor's right, title and interest in and to all Collateral, in each case whether now or hereafter existing or in which Pledgor now has or hereafter acquires an interest and wherever the same may be located. Pledgor represents and warrants that the attached Supplements to Schedules accurately and completely set forth all additional information required pursuant to the Pledge Agreement and hereby agrees that such Supplements to Schedules shall constitute part of the Schedules to the Pledge Agreement. IN WITNESS WHEREOF, Pledgor has caused this Pledge Supplement to be duly executed and delivered by its duly authorized officer as of [MM/DD/YY]. [NAME OF PLEDGOR] By:_______________________ Name: Title: EXHIBIT A-1 267 SUPPLEMENT TO SCHEDULE 3.1 TO PLEDGE AGREEMENT Additional Information: (E) Full Legal Name and Chief Executive Office of each Pledgor(1): (F) Jurisdiction of Organization of each Pledgor: (G) Other Names (including any Trade-Name or Fictitious Business Name) under which each Pledgor has conducted Business for the past Five (5) Years: (H) Financing Statements: Name of Pledgor Filing Jurisdiction(s) - ------------- (1) If the principal place of business of any Pledgor is located outside of the United States, include the address of the major executive office in the United States, if any, of such Pledgor. EXHIBIT A-2 268 SUPPLEMENT TO SCHEDULE 3.2 TO PLEDGE AGREEMENT Additional Information: Pledged Stock: Pledged Partnership Interests: Pledged LLC Interests: Pledged Trust Interests: EXHIBIT A-3 269 EXHIBIT B TO PLEDGE AGREEMENT UNCERTIFICATED SECURITIES CONTROL AGREEMENT This Uncertificated Securities Control Agreement dated as of _________, 2000 among ________________ (the "Pledgor"), Bank One, NA, as collateral agent for the Secured Parties, (the "Collateral Agent") and ____________, a ________corporation (the "Issuer"). Capitalized terms used but not defined herein shall have the meaning assigned in the Pledge Agreement dated as of April 17, 2000, among the Pledgor, the other Pledgors party thereto and the Collateral Agent (the "Pledge Agreement"). All references herein to the "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York. 1. REGISTERED OWNERSHIP OF SHARES. The Issuer hereby confirms and agrees that as of the date hereof the Pledgor is the registered owner of __________ shares of the Issuer's [common] stock (the "Pledged Shares") and the Issuer shall not change the registered owner of the Pledged Shares without the prior written consent of the Collateral Agent. 2. INSTRUCTIONS. If at any time the Issuer shall receive instructions originated by the Collateral Agent relating to the Pledged Shares, the Issuer shall comply with such instructions without further consent by the Pledgor or any other person. 3. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE ISSUER. The Issuer hereby represents and warrants to the Collateral Agent: (a) It has not entered into, and until the termination of the this agreement will not enter into, any agreement with any other person relating the Pledged Shares pursuant to which it has agreed to comply with instructions issued by such other person; and (b) It has not entered into, and until the termination of this agreement will not enter into, any agreement with the Pledgor purporting to limit or condition the obligation of the Issuer to comply with Instructions as set forth in Section 2 hereof. (c) Except for the claims and interest of the Collateral Agent and of the Pledgor in the Pledged Shares, the Issuer does not know of any claim to, or interest in, the Pledged Shares. If any person asserts any lien, EXHIBIT B-1 270 encumbrance or adverse claim (including any writ, garnishment, judgment, warrant of attachment, execution or similar process) against the Pledged Shares, the Issuer will promptly notify the Collateral Agent and the Pledgor thereof. (d) This Uncertificated Securities Control Agreement is the valid and legally binding obligation of the Issuer. 4. CHOICE OF LAW. This Agreement shall be governed by the laws of the State of New York. 5. CONFLICT WITH OTHER AGREEMENTS. In the event of any conflict between this Agreement (or any portion thereof) and any other agreement now existing or hereafter entered into, the terms of this Agreement shall prevail. No amendment or modification of this Agreement or waiver of any right hereunder shall be binding on any party hereto unless it is in writing and is signed by all of the parties hereto. 6. VOTING RIGHTS. Until such time as the Collateral Agent shall otherwise instruct the Issuer in writing, the Pledgor shall have the right to vote the Pledged Shares. 7. SUCCESSORS; ASSIGNMENT. The terms of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective corporate successors or heirs and personal representatives who obtain such rights solely by operation of law. The Collateral Agent may assign its rights hereunder only with the express written consent of the Issuer and by sending written notice of such assignment to the Pledgor. 8. INDEMNIFICATION OF ISSUER. The Pledgor and the Collateral Agent hereby agree that (a) the Issuer is released from any and all liabilities to the Pledgor and the Collateral Agent arising from the terms of this Agreement and the compliance of the Issuer with the terms hereof, except to the extent that such liabilities arise from the Issuer's gross negligence or willful misconduct and (b) the Pledgor, its successors and assigns shall at all times indemnify and save harmless the Issuer from and against any and all claims, actions and suits of others arising out of the terms of this Agreement or the compliance of the Issuer with the terms hereof, except to the extent that such arises from the Issuer's gross negligence or willful misconduct, and from and against any and all liabilities, losses, damages, costs, charges, counsel fees and other expenses of every nature and character arising by reason of the same, until the termination of this Agreement. 9. NOTICES. Any notice or other communication herein required or permitted to be given under this Agreement shall be sent to such party's address as EXHIBIT B-2 271 set forth below unless otherwise indicated to each of the counterparties hereto in writing. Each notice hereunder shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service and signed for against receipt thereof, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided, no notice to any Agent shall be effective until received by such Agent. Pledgor: [INSERT ADDRESS] Attention: Telecopier: Collateral Agent: [INSERT ADDRESS] Attention: Telecopier: Issuer: [INSERT ADDRESS] Attention: Telecopier:
10. TERMINATION. The obligations of the Issuer to the Collateral Agent pursuant to this Control Agreement shall continue in effect until the security interests of the Collateral Agent in the Pledged Shares have been terminated pursuant to the terms of the Pledge Agreement and the Collateral Agent has notified the Issuer of such termination in writing. The Collateral Agent agrees with Pledgor and Issuer to provide Notice of Termination in substantially the form of Exhibit A hereto to the Issuer upon the request of the Pledgor on or after the termination of the Collateral Agent's security interest in the Pledged Shares pursuant to the terms of the Pledge Agreement. The termination of this Control Agreement shall not terminate the Pledged Shares or alter the obligations of the Issuer to the Pledgor pursuant to any other agreement with respect to the Pledged Shares. EXHIBIT B-3 272 11. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing and delivering one or more counterparts. [NAME OF PLEDGOR] By:________________________________ Name: Title: BANK ONE, NA, as Collateral Agent By:________________________________ Name: Title: [NAME OF ISSUER] By:________________________________ Name: Title: EXHIBIT B-4 273 Exhibit A [Letterhead of Bank One, NA] [Date] [Name and Address of Issuer] Attention: __________________ Re: Termination of Control Agreement You are hereby notified that the Uncertificated Securities Control Agreement between you, [THE PLEDGOR] and the undersigned (a copy of which is attached) is terminated and you have no further obligations to the undersigned pursuant to such Agreement. Notwithstanding any previous instructions to you, you are hereby instructed to accept all future directions with respect to Pledged Shares (as defined in the Uncertificated Control Agreement) from [THE PLEDGOR]. This notice terminates any obligations you may have to the undersigned with respect to the Pledged Shares, however nothing contained in this notice shall alter any obligations which you may otherwise owe to [THE PLEDGOR] pursuant to any other agreement. You are instructed to deliver a copy of this notice by facsimile transmission to [insert name of Pledgor]. Very truly yours, BANK ONE, NA, as Collateral Agent By:________________ Title: EXHIBIT B-A-1 274 EXHIBIT C TO PLEDGE AGREEMENT DEPOSIT ACCOUNT CONTROL AGREEMENT This Deposit Account Control Agreement dated as of _________, 2000 (this "AGREEMENT") among ____________________________ (the "DEBTOR"), Bank One, NA, as collateral agent for the Secured Parties (the "COLLATERAL AGENT") and ____________, in its capacity as a "bank" as defined in Section 9-102 of Revised Article 9 (in such capacities, the "FINANCIAL INSTITUTION"). Capitalized terms used but not defined herein shall have the meaning assigned thereto in the Pledge Agreement, dated as of April 17, 2000, among the Debtor, the other Grantors party thereto and the Collateral Agent (the "PLEDGE AGREEMENT"). All references herein to the "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York. 1. ESTABLISHMENT OF DEPOSIT ACCOUNT. The Financial Institution hereby confirms and agrees that: (a) The Financial Institution has established account number [IDENTIFY ACCOUNT NUMBER] in the name "[IDENTIFY EXACT TITLE OF ACCOUNT]" (such account and any successor account, the "DEPOSIT ACCOUNT") and the Financial Institution shall not change the name or account number of the Deposit Account without the prior written consent of the Collateral Agent; (b) The Deposit Account is a "deposit account" within the meaning of Section 9-102(a)(29) of Revised Article 9; and (c) The Deposit Account is the "Collateral Account" referred to in Section 2.3(h) of the Credit Agreement. 2. CONTROL OF THE DEPOSIT ACCOUNT. If at any time the Financial Institution shall receive any instructions originated by the Collateral Agent directing the disposition of funds in the Deposit Account, the Financial Institution shall comply with such instructions without further consent by the Debtor or any other person. [The Financial Institution hereby acknowledges that for purposes of Section 9-302 of the [California Uniform Commercial Code/Illinois Uniform Commercial Code] it has received notice of the security interest of the Collateral Agent in the Deposit Account and hereby acknowledges and consents to such lien.] 3. SUBORDINATION OF LIEN; WAIVER OF SET-OFF. In the event that the Financial Institution has or subsequently obtains by agreement, by operation of EXHIBIT C-1 275 law or otherwise a security interest in the Deposit Account or any funds credited thereto, the Financial Institution hereby agrees that such security interest shall be subordinate to the security interest of the Collateral Agent. Money and other items credited to the Deposit Account will not be subject to deduction, set-off, banker's lien, or any other right in favor of any person other than the Collateral Agent (except that the Financial Institution may set off (i) all amounts due to the Financial Institution in respect of customary fees and expenses for the routine maintenance and operation of the Deposit Account and (ii) the face amount of any checks which have been credited to such Deposit Account but are subsequently returned unpaid because of uncollected or insufficient funds). 4. CHOICE OF LAW. This Agreement and the Deposit Account shall each be governed by the laws of the State of New York. Regardless of any provision in any other agreement, for purposes of the UCC and Revised Article 9, New York shall be deemed to be the Financial Institution's jurisdiction (within the meaning of Section 9-304 of Revised Article 9 and the Deposit Account shall be governed by the laws of the State of New York. 5. CONFLICT WITH OTHER AGREEMENTS. (a) In the event of any conflict between this Agreement (or any portion thereof) and any other agreement now existing or hereafter entered into, the terms of this Agreement shall prevail; (b) No amendment or modification of this Agreement or waiver of any right hereunder shall be binding on any party hereto unless it is in writing and is signed by all of the parties hereto; and (c) The Financial Institution hereby confirms and agrees that: (i) Other than the Credit Agreement and the Pledge Agreement, there are no other agreements entered into between the Financial Institution and the Debtor with respect to the Deposit Account; and (ii) It has not entered into, and until the termination of this Agreement, will not enter into, any agreement with any other person relating the Deposit Account and/or any funds credited thereto pursuant to which it has agreed to comply with instructions originated by such persons as contemplated by Section 9-104 of Revised Article 9. EXHIBIT C-2 276 6. ADVERSE CLAIMS. The Financial Institution does not know of any liens, claims or encumbrances relating to the Deposit Account. If any person asserts any lien, encumbrance or adverse claim (including any writ, garnishment, judgment, warrant of attachment, execution or similar process) against the Deposit Account, the Financial Institution will promptly notify the Collateral Agent and the Debtor thereof. 7. MAINTENANCE OF DEPOSIT ACCOUNT. In addition to, and not in lieu of, the obligation of the Financial Institution to honor instructions as set forth in Section 2 hereof, the Financial Institution agrees to maintain the Deposit Account as follows: (a) Statements and Confirmations. The Financial Institution will promptly send copies of all statements, confirmations and other correspondence concerning the Deposit Account simultaneously to each of the Debtor and the Collateral Agent at the address for each set forth in Section 11 of this Agreement; and (b) Tax Reporting. All interest, if any, relating to the Deposit Account, shall be reported to the Internal Revenue Service and all state and local taxing authorities under the name and taxpayer identification number of the Debtor. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FINANCIAL INSTITUTION. The Financial Institution hereby makes the following representations, warranties and covenants: (a) The Deposit Account has been established as set forth in Section 1 and such Deposit Account will be maintained in the manner set forth herein until termination of this Agreement; and (b) This Agreement is the valid and legally binding obligations of the Financial Institution. 9. INDEMNIFICATION OF FINANCIAL INSTITUTION. The Debtor and the Collateral Agent hereby agree that (a) the Financial Institution is released from any and all liabilities to the Debtor and the Collateral Agent arising from the terms of this Agreement and the compliance of the Financial Institution with the terms hereof, except to the extent that such liabilities arise from the Financial Institution's gross negligence or willful misconduct and (b) the Debtor, its successors and assigns shall at all times indemnify and save harmless the Financial Institution from and against any and all claims, actions and suits of others arising out of the terms of this Agreement or the compliance of the Financial Institution with the terms hereof, EXHIBIT C-3 277 except to the extent that such arises from the Financial Institution's gross negligence or willful misconduct, and from and against any and all liabilities, losses, damages, costs, charges, counsel fees and other expenses of every nature and character arising by reason of the same, until the termination of this Agreement. 10. SUCCESSORS; ASSIGNMENT. The terms of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective corporate successors or heirs and personal representatives who obtain such rights solely by operation of law. The Collateral Agent may assign its rights hereunder only with the express written consent of the Financial Institution and in accordance with the terms of the Credit Agreement and upon written notice to the Debtor. 11. NOTICES. Any notice or other communication herein required or permitted to be given under this Agreement shall be sent to such party's address as set forth below unless otherwise indicated to each of the counterparties hereto in writing. Each notice hereunder shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service and signed for against receipt thereof, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided, no notice to any Agent shall be effective until received by such Agent. Debtor: [INSERT ADDRESS] Attention: Telecopier: Collateral Agent: [INSERT ADDRESS] Attention: Telecopier: Financial Institution: [INSERT ADDRESS] Attention: Telecopier: 12. TERMINATION. The obligations of the Financial Institution to the Collateral Agent pursuant to this Agreement shall continue in effect until the EXHIBIT C-4 278 interest of the Collateral Agent in the Deposit Account has been terminated pursuant to the terms of the Pledge Agreement and the Collateral Agent has notified the Financial Institution of such termination in writing. The Collateral Agent agrees to provide Notice of Termination in substantially the form of Exhibit A hereto to the Financial Institution upon the request of the Debtor on or after the termination of the Collateral Agent's interest in the Deposit Account pursuant to the terms of the Pledge Agreement. The termination of this Agreement shall not terminate the Deposit Account or alter the obligations of the Financial Institution to the Debtor pursuant to any other agreement with respect to the Deposit Account. 13. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing and delivering one or more counterparts. EXHIBIT C-5 279 IN WITNESS WHEREOF, the parties hereto have caused this Deposit Account Control Agreement to be executed as of the date first above written by their respective officers thereunto duly authorized. [DEBTOR] By:___________________________________ Name: Title: BANK ONE, NA, as Collateral Agent By:___________________________________ Name: Title: [NAME OF INSTITUTION SERVING AS FINANCIAL INSTITUTION] By:___________________________________ Name: Title: EXHIBIT C-6 280 EXHIBIT A TO DEPOSIT ACCOUNT CONTROL AGREEMENT [Letterhead of the Collateral Agent] [Date] [Name and Address of Financial Institution] Attention: Re: Termination of Deposit Account Control Agreement You are hereby notified that the Deposit Account Control Agreement dated as of __________, 2000 among [NAME OF THE DEBTOR], you and the undersigned (a copy of which is attached) is terminated and you have no further obligations to the undersigned pursuant to such Agreement. Notwithstanding any previous instructions to you, you are hereby instructed to accept all future directions with respect to account number(s) __________________ from [NAME OF THE DEBTOR]. This notice terminates any obligations you may have to the undersigned with respect to such account, however nothing contained in this notice shall alter any obligations which you may otherwise owe to [NAME OF THE DEBTOR] pursuant to any other agreement. You are instructed to deliver a copy of this notice by facsimile transmission to [NAME OF THE DEBTOR]. Very truly yours, [NAME OF COLLATERAL AGENT], as Collateral Agent By:___________________________________ Name: Title: Exhibit C-A-1 EX-10.5 3 1996 STOCK INCENTIVE PLAN AS AMENDED 3-16-00 1 Exhibit 10.5 PAYLESS SHOESOURCE, INC. 1996 STOCK INCENTIVE PLAN AMENDED MARCH 16, 2000 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., a Delaware corporation. (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. 3 (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. (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". 2 4 (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 III, 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. Notwithstanding anything in the Plan to the contrary, with respect to any employee who is a resident outside the United States, the Committee may, in its sole discretion, amend the terms of the Plan in order to conform such terms with the requirements of local law or to meet the objectives of the Plan. The Committee may, where appropriate, establish one or more sub-Plans for this purpose. 4. SHARES SUBJECT TO THE PLAN. (a) Maximum Number of Shares. Stock issued under the Plan shall be treasury shares or previously authorized but unissued shares, subject to the following limitations: (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 3 5 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 4 6 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. 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 5 7 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. 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. 6 8 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. 7 9 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. 8 10 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 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 9 11 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. 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 10 12 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: (a) shall not be sold, assigned, conveyed, transferred, pledged, hypothecated, or otherwise disposed of, and (b) 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 11 13 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 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 12 14 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, (a) 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 (b) 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 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 13 15 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 14 16 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 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 (i) cancel at any time any unexercised Option or Right; or (ii) 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 15 17 (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 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. 16 18 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: (a) 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; (b) the number of shares with respect to which Rights may be exercised (both in the aggregate and with respect to each Participant); and (c) 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: (a) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange 17 19 Act")) (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 4, none of the following shall constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 4(c)(A), 4(c)(B) and 4(c)(C) or (v) any acquisition by the Company which, by reducing the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities, increases the proportionate number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by any Person to 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities; provided, however, that, if such Person shall thereafter become the beneficial owner of any additional shares of Outstanding Company Common Stock or Outstanding Company Voting Securities and beneficially owns 20% or more of either the Outstanding Company Common Stock or the Outstanding Company Voting Securities, then such additional acquisition shall constitute a Change of Control; or (b) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") is consummated, in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination, (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in 18 20 substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (d) the stockholders of the Company approve of a complete liquidation or dissolution of the Company. 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 (a) 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 (b) 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 19 21 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. 6. 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. 7. 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. 20 EX-10.9 4 FORM OF EMPLOYMENT AGREEMENT 1 Exhibit 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into on the 22nd day of March, 2000, by and between PAYLESS SHOESOURCE, INC., a Delaware corporation, ("Payless") and __________________ ("Executive"). In consideration of mutual promises and agreements set forth in this Employment Agreement, Payless and Executive agree as follows: 1. (a) Payless agrees to employ Executive, and Executive agrees to render personal services to Payless, for the period commencing on the date of this Employment Agreement through [May 31, 2002 or 2003] (the "Contract Term") as ________________________________ of Payless ShoeSource, Inc. (b) Payless agrees to pay Executive basic compensation for such services during the Contract Term at the annual rate of $____________, payable in equal bi-weekly installments, and in accordance with Paragraph 5, which annual rate will be subject to an annual review during Payless' regularly scheduled review time. (c) If Executive is eligible to participate in one of Payless' bonus plans (the "Incentive Plan"), then Executive shall be entitled to such Awards, if any, which may be payable under the Incentive Plan, determined in accordance with and subject to all of the terms and provisions of the Incentive Plan. (d) Payless shall reimburse Executive for all items of normal expense incurred by Executive as an employee of Payless in accordance with Payless' reimbursement policies in effect from time to time. (e) The Executive Compensation Change Memorandum from time to time in effect, as initialed on behalf of Payless and by Executive, is hereby incorporated by reference herein and made a part hereof. In addition, Payless has adopted certain employee benefit plans and has established certain arrangements concerning executive perquisites which may, from time to time, confer rights and benefits on the Executive in accordance with their terms, and Payless may, in the future, adopt additional employee benefit plans and establish additional arrangements concerning executive perquisites, and may in the future amend, modify or terminate any of the aforesaid employee benefit plans and arrangements, all in accordance with their terms and in accordance with applicable law. Executive shall be entitled to whatever rights and benefits may be conferred on Executive, from time to time in accordance with the terms of such plans and arrangements, as they may be amended from time to time, independent of this Agreement. All references to payment dates or vesting dates in this Paragraph 1 or in such plans and arrangements, shall require that Executive be employed by Payless on such date to receive such payment or be vested in such benefit. (f) Executive will be eligible for future grants of restricted stock and stock options as may be made under the terms of the Stock Incentive Plan in accordance with the levels established by the Compensation Committee of the Board of Directors. 2 2. (a) At all times during the Contract Term, Executive will: (i) faithfully and diligently perform Executive's duties in conformity with the directions of Payless and serve Payless to the best of Executive's ability; and (ii) devote Executive's undivided time and attention to the business of Payless, subject to reasonable vacations in accordance with Payless' vacation policy as it applies from time to time, to such extent as may be reasonably necessary for the proper performance of the personal services to be rendered by Executive under this Agreement; and (iii) maintain Executive's residence in the Topeka, Kansas metropolitan area or the environs thereof within reasonable access to the business activities of Payless therein for the Contract Term. (b) At all times during the Contract Term, Executive will not: (i) engage in any activity which conflicts or interferes with or adversely affects Executive's performance of Executive's duties hereunder, or (ii) accept any other employment, whether as an Executive or as a consultant or in any other capacity, and whether or not compensated therefor, or (iii) violate the terms of any of the policies described in Payless' Policy of Business Conduct distributed from time to time to Executive. 3. (a) At all times during the Contract Term and for a period of [one or two] years from actual termination of employment or, if there are more than one year remaining in the Contract Term at the time of termination of employment, for the remainder of the Contract Term, Executive will not: (i) directly or indirectly, own, manage, operate, finance, join, control, or participate in the ownership, management, operation, financing or control of, or be employed by or connected in any manner with any Competing Business, or (ii) solicit for employment, hire or offer employment to, or disclose information to or otherwise aid or assist any other person or entity other than Payless or any subsidiary of Payless in soliciting for employment, hiring or offering employment to, any employee of Payless or any subsidiary of Payless, or (iii) take any action which is intended to harm Payless or its reputation, which Payless reasonably concludes could harm Payless or its reputation or which Payless reasonably concludes could lead to unwanted or unfavorable publicity to Payless. Ownership of an investment of less than the greater of $25,000 or 1% of any class of equity or debt security of a Competing Business shall not constitute ownership or participation in ownership in violation of Paragraph 3(a). (b) The term "Competing Business" shall include, but not be limited to, 2 3 (i) any retail business with gross sales or revenue in the prior fiscal year of more than $25 million (or which is a subsidiary, affiliate or joint venture partner of a business with gross sales or revenue in the prior fiscal year of more than $25 million) which sells footwear at retail to consumers at price points competitive, or likely to be competitive with Payless (e.g., including, without limitation, Wal-Mart, K-Mart, Target, Ames, Mervyn's Pic-N-Pay, Foot Star, Inc., Edison, Aldo, Genesco, Venator, Famous Footwear, Shoe Carnival, Jones Apparel Group, Kohl's, Liz Claiborne, Big Five, J.C. Penney and Sears) within 20 miles of any Payless store or the store of any wholesale customer of Payless in the United States, or anywhere in any foreign country in which Payless has retail stores, franchisees or wholesale customers; (ii) any franchising or wholesaling business with gross sales or revenue in the prior fiscal year of more than $25 million (or which is a subsidiary, affiliate or joint venture partner of a business with gross sales or revenue in the prior fiscal year of more than $25 million) which sells footwear at wholesale to franchisees, retailers or other footwear distributors located within 20 miles of any Payless store or the store of any wholesale customer of Payless in the United States, or anywhere in any foreign country in which Payless has retail stores, franchisees or wholesale customers: (iii) any footwear manufacturing business with gross sales or revenue in the prior fiscal year of more than $25 million (or which is a subsidiary, affiliate or joint venture partner of a business with gross sales or revenue in the prior fiscal year of more than $25 million) which sells footwear to retailers or other footwear distributors located within 20 miles of any Payless store or the store of any wholesale customer of Payless in the United States, or anywhere in any foreign country in which Payless has retail stores, franchisees, or wholesale customers; (e.g., including, without limitation, Jones Apparel Group, Dexter, Stride Rite, Liz Claiborne, Wolverine Worldwide, Timberland, Nike, Reebok, K-Swiss, Keds and Adidas); or (iv) any business which provides buying office services to any store or group of stores or businesses referred to in Paragraph 3.(b) (i), 3. (b) (ii) and 3.(b)(iii). (c) Background of non-compete restriction: (i) Payless is one of the leading retail companies in North America, with self-service shoe stores throughout the United States and its territories and Canada; and (ii) In connection with its business, Payless has expended a great deal of time, money and effort to develop and maintain its confidential, proprietary and trade secret information; this information, if misused or disclosed, could be very harmful to Payless' business and its competitive position in the marketplace; and (iii) Executive desires to be employed by Payless, to be eligible for opportunities for advancement within Payless, to be eligible for potential compensation increases and to be given access to confidential and proprietary information of Payless necessary for Executive to perform Executive's job, but which Payless would not make available to Executive but for 3 4 Executive's signing and agreeing to abide by the terms of this Agreement as a condition of Executive's employment by Payless; and (iv) Executive recognizes and acknowledges that Executive's position with Payless provides Executive with access to Payless' confidential and proprietary trade secret information and other confidential business information; and (v) Payless compensates its associates to, among other things, develop and preserve goodwill and relationships on Payless' behalf and to develop and preserve business information for Payless' exclusive ownership and use; and (vi) long-term customer and supplier relationships often can be difficult to develop and require a significant investment of time, effort and expense; and (vii) Executive recognizes and acknowledges that if Executive's employment with Payless were to cease, Payless needs certain protections in order to ensure that Executive does not appropriate and use any confidential information entrusted to Executive during the course of Executive's employment by Payless or take any other action which could result in a loss of Payless' goodwill that was generated on Payless' behalf and at its expense, and, more generally, to prevent Executive from having an unfair competitive advantage over Payless. (d) Reasonableness of non-compete restriction. Executive acknowledges and agrees that the restrictions in Paragraph 3(a) are reasonable and enforceable in view of the background for the non-compete restriction set forth in Paragraph 3(c) and in view of, among other things, (i) the markets in which Payless and its subsidiaries operate their business; and (ii) the confidential information to which Executive has access; and (iii) Executive's training and background, which are such that neither Payless nor Executive believe that the restraint will pose an undue hardship on Executive; and (iv) the fact that a Competing Business could benefit greatly if it were to obtain Payless' confidential information; and (v) the fact that Payless would not have adequate protection if Executive were permitted to work for any Competing Business since Payless would be unable to verify whether its confidential information was being disclosed or misused; and (vi) the limited duration of, the limited scope of, and the limited activities prohibited by, the restrictions in Paragraph 3(a); and (vii) Payless' legitimate interests in protecting its confidential information, goodwill and relationships. (e) If Executive violates Executive's obligations under Paragraph 3(a), then Payless shall be entitled to an injunction and other relief provided for in this Agreement to prevent such violation, 4 5 and the time during which Executive violated the obligations shall not count toward satisfying the time during which the restriction shall apply. For example, if Executive were to join a competitor at the end of the Contract Term in violation of the restrictions in Paragraph 3(a) and work for such competitor for one month before a court enjoined such violation, then the two year time period of the restriction would begin when such injunction were issued; the one month during which Executive violated such restriction would not count toward the time that the restriction applies. 4. If Executive becomes Totally Disabled and remains continuously so Totally Disabled for a period of 180 days, then Payless' obligations under this Employment Agreement, at Payless' option, may be terminated by notice in writing to that effect given during the continuance of such Total Disability, such termination to take effect the later of (a) the last day of the month during which such notice is given or (b) the last day of such 180 day period. If Executive has made a previous election to participate in Payless' Long Term Disability Plan (subject to the terms and provisions of that plan), then the terms of that plan shall apply. "Total Disability" or "Totally Disabled" shall mean the inability of Executive to perform the normal duties of Executive's job under this Agreement. 5. (a) If Executive's employment terminates during the Contract Term by reason of Executive's death or Total Disability, by Executive's voluntary termination of employment or by Payless for Cause, (i) Executive's basic compensation and employee benefits shall cease on the date of such termination, except as otherwise provided herein or in any applicable employee benefit plan or program; and (ii) Executive (or Executive's legal representative(s)) shall be entitled to such portion of any incentive compensation as shall be payable under the terms of the Incentive Plan. (b) In addition, if Executive's employment is terminated by reason of death, then Executive's obligations under Paragraphs 1 and 2 shall cease on the effective date of such termination. (c) In addition, if Executive's employment is terminated by reason of Total Disability, by Executive voluntarily or by Payless for Cause, then Executive's obligations under Paragraphs 1 and 2 shall cease on the effective date of such termination and Executive's obligations under Paragraphs 3 and 6 remain in full force and effect, and Payless shall be entitled to all legal and equitable rights and remedies under this Agreement, including all of its rights and remedies referred to in Paragraph 8 of this Agreement, and Payless shall be entitled to enjoin Executive from violating the provisions of Paragraphs 3 and 6 of this Agreement. (d) If Executive's employment is terminated by Payless without Cause, then (i) Executive's employment (and status as an employee) shall cease immediately; and (ii) Executive shall be entitled, subject to the provisions of Paragraph 5(d)(vi), to continue to receive for the remainder of the Contract Term the higher of (x) Executive's 5 6 basic compensation specifically stated in Paragraph 1(b) as of the date of this Agreement, and (y) Executive's basic compensation at the time Executive employment terminates; and (iii) Executive shall be entitled to such portion of any incentive compensation as shall be payable under the terms of the Incentive Plan; and (iv) Executive shall be entitled to post-termination benefits that are payable under Payless' employee benefit plans in accordance with their terms based on Executive's service through, and termination of employment on, the termination date, including any rights Executive may have to continued participation in Payless' medical plans under COBRA; and (v) except as expressly provided in this Paragraph 5(d), Executive's post-termination obligations under this Agreement, including, without limitation, the provisions of Paragraphs 3 and 6, shall continue to apply following such termination; and (vi) Executive shall use Executive's best efforts to find other employment which does not violate the provisions of Paragraph 3 hereof. If Executive accepts such other employment, Executive shall promptly notify Payless of such employment and of the compensation received, to be received or receivable from Executive's subsequent employer attributable to the remainder of the Contract Term, and all basic compensation otherwise payable under Paragraph 5(d) for the remainder of the Contract Term shall be reduced to the extent of Executive's similar compensation received, to be received or receivable from such other employer or other business. (e) "Cause" means (i) an intentional act of fraud, embezzlement, theft or any other material violation of law in connection with Executive's duties or in the course of Executive's employment with Payless; or (ii) intentional damage to assets of Payless; or (iii) intentional disclosure of confidential information of Payless contrary to the policy of Payless; or (iv) breach of Executive's obligations under this Agreement; or (iv) intentional engagement in any competitive activity which would constitute a breach of Executive's duty of loyalty or of Executive's obligations under this Agreement; or (v) intentional breach of any policy of Payless; or (vi) the willful and continued failure by Executive to substantially perform Executive's duties with Payless (other than any such failure resulting from Executive's incapacity due to physical or mental illness); or 6 7 (vii) the willful engaging by Executive in conduct which is demonstrably and materially injurious to Payless, monetarily or otherwise. For purposes of this Paragraph 5(e), an act, or a failure to act, shall not be deemed "willful" or "intentional" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive's action or omission was in the best interest of Payless. Failure to meet performance standards or objectives, by itself, will not constitute "Cause". (f) Executive agrees that, in addition to any other remedies, Payless shall be permitted, as part of the computation of any final amount or amounts due to Executive as wages, compensation, bonus, deferred compensation or otherwise, and before any such amount shall be due and owing, to reduce any amount which Payless may otherwise owe to Executive by any unpaid amount which Executive owes to Payless. 6. (a) Executive will not, at any time, directly or indirectly, use or disclose any of Payless' Confidential Information except as authorized and within the scope of Executive's employment with Payless. (b) At Payless' request and/or termination of Executive's employment with Payless, Executive will return to Payless all documents, records, notebooks, computer diskettes and tapes and anything else containing Payless' Confidential Information, including all copies thereof, as well as any other Payless property, in Executive's possession, custody or control. Executive will also delete from Executive's own computer or other electronic storage medium any of Payless' proprietary or Confidential Information. Not later than 20 days after Executive's employment is terminated, Executive will certify in writing to Payless that Executive has complied with these obligations. (c) During Executive's employment with Payless and thereafter, Executive will (i) notify and provide Payless immediately with the details of any unauthorized possession, use or knowledge of any of Payless' Confidential Information, (ii) assist in preventing any reoccurrence of this possession, use or knowledge, and (iii) cooperate with Payless in any litigation or other action to protect or retrieve Payless' Confidential information. (d) "Confidential Information" means any non-public information pertaining to Payless' business. Confidential Information includes information disclosed by Payless to Executive, and information developed or learned by Executive during the course of or as a result of Executive's employment with Payless, which Executive also agrees is Payless' property. Executive further agrees that any item of intellectual or artistic property generated or prepared by Executive, for Executive or with others, in connection with Executive's employment by Payless is Payless' sole property and shall remain so unless Payless otherwise specifically agrees in writing. Confidential Information includes, without limitation, information and documents concerning Payless' processes; suppliers (including Payless' terms, conditions and other business arrangements with suppliers); supplier and customer lists; advertising, marketing plans and strategies; profit margins; seasonal plans, goals, objectives and projections, compilations, analyses and projections regarding Payless' 7 8 divisions, businesses, product segments, product lines, suppliers, sales and expenses; files; trade secrets and patent applications (prior to their being public); salary, staffing and employment information (including information about performance of other executives); and "know-how," techniques or any technical information not of a published nature relating, for example, to how Payless conducts its business. (e) Executive agrees that Executive will not disclose to Payless or use, or induce Payless to use, any proprietary information, trade secret or confidential business information of any other person or entity, including any previous employer of Executive. Executive also represents that Executive has returned property, proprietary information, trade secret and confidential business information belonging to any prior employer. 7. (a) If any court of competent jurisdiction determines that, but for the provisions of this Paragraph 7, any provision of this Agreement is illegal, void as against public policy or otherwise unenforceable because it is deemed to be overbroad, then such provision shall automatically be amended to the extent (but only to the extent) necessary to make it sufficiently narrow in scope, time and geographic area that it is not illegal, void as against public policy or overbroad. All other remaining terms and provisions shall remain in full force and effect. (b) If Executive raises any question regarding the enforceability of any aspect of this Agreement, including, without limitation, Paragraphs 3 or 6, Executive specifically agrees that Executive will abide fully by such provisions unless and until a court of competent jurisdiction has rendered a final judgment that such provisions are not fully enforceable. Following any such final judgment, Executive and Payless will abide fully by such judgment. 8. (a) Payless and Executive shall each be entitled to pursue all legal and equitable rights and remedies to secure performance of the obligations and duties of the other under this Agreement, and enforcement of one or more of such rights and remedies shall in no way preclude Payless or Executive from pursuing any and all other rights and remedies available to each of them. (b) Executive acknowledges and agrees that the individualized services and capabilities that Executive will render and provide to Payless during the Contract Term are of a personal, special, unique, unusual, extraordinary and intellectual character. (c) Executive acknowledges and agrees that the restrictions in this Agreement on Executive are reasonable in order to protect Payless' expectations and rights under this Agreement and to provide Payless with the protections that Payless needs to, among other things, safeguard its confidential information. Payless shall be entitled to injunctive relief in addition to any other remedy it may have, and Executive expressly consents to injunctive and such other equitable relief as Payless in good faith believes it may need. Without limiting the generality of the foregoing, if Executive breaches or threatens to breach Executive's obligations under Paragraphs 3 or 6 hereof, Executive consents to entry of an order enjoining Executive from rendering personal services to or in connection with a Competing Business and from using or disclosing any confidential information. (d) If Executive's employment is terminated by Executive voluntarily or by Payless for Cause, Executive shall be liable for all attorneys' fees and costs incurred by Payless in seeking to enforce its rights under this Agreement. 8 9 9. Payless Work-Product, The Executive agrees to disclose fully to Payless, and hereby assigns and transfers to Payless, and agrees to execute any additional documentation Payless may reasonably request to evidence the assignment and transfer, immediately upon the conception, development, making or acquisition thereof, the right, title, and interest in and to any and all inventions, discoveries, improvements, innovations, and/or designs (the "Work Product") conceived, discovered, developed, acquired or secured by the Executive, solely or jointly with others or otherwise, together with all associated U.S. and foreign intellectual property rights (i.e. patents, copyrights, trademarks or trade secrets) either: (a) during the period of Executive's employment, if such Work Product is related directly or indirectly, to the business of, or to the research or development work of Payless; (b) with the use of the time, materials, or facilities of Payless; or (c) within one year after termination of such employment if conceived as a result of and is attributable to work done during such employment and relates to Work Product within the scope of the business of Payless, together with rights to all intellectual property rights which may be granted thereon. Upon discovery, development or acquisitions or any such Work Product, Executive shall notify Payless and shall execute and deliver to Payless, without further compensation, such documents prepared by Payless as may be reasonable or necessary to prepare or prosecute applications for such Work Product and to assign and transfer to Payless Executive's right, title and interest in and to such Work Product and intellectual property rights thereof. Executive acknowledges that Executive has carefully read and considered the provisions of this paragraph and, having done so, agrees that the restrictions set forth herein are fair and reasonable and are reasonably required for the protection of the interests of Payless, its officers, directors, and other executives. 10. The entire understanding and agreement between the parties has been incorporated into this Agreement, and this Agreement supersedes all other agreements and understandings between the Executive and Payless and its parents and subsidiaries, with respect to the employment of Executive by Payless and its parents and subsidiaries. This Agreement shall inure to the benefit of, and shall be binding upon, Payless, its successors and assigns and upon Executive and Executive's heirs, successors and assigns; provided, however, that, since this is an agreement for the rendering of personal services, Executive cannot assign any of Executive's obligations under this Agreement to anyone else. This Agreement may be executed in counterparts, in which case each of the two counterparts shall be deemed to be an original and the final counterpart shall be deemed to have been executed in Topeka, Kansas. 11. Executive agrees that this Agreement may be assigned by Payless to a subsidiary of Payless; such assignment, however, shall not relieve Payless of any of its obligations hereunder except to the extent that such obligations are actually discharged by such subsidiary. 12. This Agreement has been executed by Payless at Payless' corporate headquarters and principal executive offices in Topeka, Kansas. Any questions or other matter arising under this Agreement, whether of validity, interpretation, performance or otherwise, shall be governed by and 9 10 construed in accordance with the laws of the State of Kansas applicable to agreements made and to be performed in such state without regard to such state's conflicts of law provision. All actions and proceedings arising out of or relating directly or indirectly to this Agreement shall be filed and litigated exclusively in any state court or federal court located in the City of Topeka, Kansas or in Shawnee County, Kansas. The parties hereto expressly consent to the jurisdiction of any such court and to venue therein and consent to service of process if made upon Payless' registered agent or if made at Executive's last known address on the records of Payless. BY SIGNING THIS AGREEMENT, EXECUTIVE HEREBY CERTIFIES THAT EXECUTIVE (A) HAS RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE SIGNING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT OPPORTUNITY TO REVIEW THE AGREEMENT WITH ANY ADVISOR WHICH EXECUTIVE MAY DESIRE TO CONSULT, INCLUDING LEGAL COUNSEL; (D) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING IT TO ASK ANY QUESTIONS EXECUTIVE HAS ABOUT THIS AGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; AND (E) UNDERSTANDS EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT. IN WITNESS WHEREOF, this Agreement has been executed by Executive, and then by Payless in Topeka, Kansas, effective as of the date first above written. ---------------------------------- PAYLESS SHOESOURCE, INC. By: ------------------------------- Name: Title: 10 EX-10.10 5 SUPPLEMENTARY RETIREMENT PLAN AS AMENDED 3-16-00 1 Exhibit 10.10 PAYLESS SHOESOURCE, INC. SUPPLEMENTARY RETIREMENT PLAN AMENDED MARCH 16, 2000 2 TABLE OF CONTENTS Section 1. Definitions......................................................................................1 1.1 Act............................................................................................1 1.2 Actuarial Equivalent...........................................................................1 1.3 Annual Compensation............................................................................1 1.4 Annual Estimated Social Security Benefits......................................................1 1.5 Annual Minimum Benefit Amount..................................................................2 1.6 Annual Retirement Income.......................................................................2 1.7 Annual Retirement Benefits Offset..............................................................3 1.8 Average Annual Compensation....................................................................3 1.9 Associate......................................................................................3 1.10 Committee......................................................................................3 1.11 Company........................................................................................3 1.12 Compensability.................................................................................3 1.13 Competing Business.............................................................................4 1.14 Effective Date.................................................................................4 1.15 Employer.......................................................................................4 1.16 Gender.........................................................................................4 1.17 May............................................................................................4 1.18 May Profit Sharing Plan........................................................................4 1.19 May Retirement Plan............................................................................4 1.20 Member.........................................................................................4 1.21 Payless........................................................................................4 1.22 Payless Profit Sharing Plan....................................................................5
3 1.23 Retirement Date................................................................................5 1.24 Plan Service...................................................................................5 Section 2. Membership.......................................................................................5 2.1 Eligibility for Membership.....................................................................5 2.2 Eligibility for Benefits.......................................................................5 Section 3. Benefits.........................................................................................5 3.1 Normal Retirement..............................................................................5 3.2 Early Retirement...............................................................................6 3.3 Cessation of Benefits..........................................................................9 3.4 Form of Benefit................................................................................9 3.5 Standard Payment Period.......................................................................10 3.6 Limitation on Payments........................................................................10 3.7 Indirect Payment of Benefits..................................................................12 3.8 Termination and Rehire........................................................................12 3.9 Withholding...................................................................................12 Section 4. Administration of the Plan......................................................................12 4.1 The Committee.................................................................................12 4.2 Delegation of Duties..........................................................................12 4.3 Authority.....................................................................................12 Section 5. Certain Rights and Obligations..................................................................13 5.1 Rights of Members, Members' Spouses and Beneficiaries.........................................13
4 5.2 Employer-Associate Relationship...............................................................13 5.3 Unfunded Nature of Plan.......................................................................13 Section 6. Non-Alienation of Benefits....................................................................13 6.1 Provisions with Respect to Assignment and Levy................................................13 6.2 Alternate Application.........................................................................13 Section 7. Amendment and Termination.....................................................................13 7.1 Company's Rights..............................................................................14 7.2 Rights to Terminate...........................................................................14 Section 8. Construction..................................................................................14
5 Payless ShoeSource, Inc. Supplementary Retirement Plan This document constitutes and sets forth the terms of the Payless ShoeSource, Inc. Supplementary Retirement Plan (hereinafter referred to as the "Plan"), effective as of the date Payless ShoeSource, Inc. was "spun-off" from and ceased to be a subsidiary of The May Department Stores Company, May 4, 1996 (the "Effective Date"). Capitalized terms, not otherwise defined herein, which are defined in the Payless Profit Sharing Plan shall have the meanings set forth in such plan. SECTION 1. DEFINITIONS. 1.1 Act means the Social Security Act as in effect from time to time. 1.2 Actuarial Equivalent means a benefit of equivalent value when computed on the basis of the actuarial principles and tables adopted or otherwise approved by the Committee. 1.3 Annual Compensation means an Associate's Compensation during a fiscal year of the Company, on an accrual basis, and shall include all of the Associate's Compensation accrued for services during such fiscal year, regardless of when such Compensation is paid or credited. 1.4 Annual Estimated Social Security Benefits means: (a) the estimated initial annual amount of the Primary Insurance Amount or the Disability Insurance Benefit (as such terms are defined in the Act), whichever is applicable, determined by the Committee from available records and such other information as the Committee may request the Member to furnish, to which the Member would be entitled under the Act as in effect at the beginning of the calendar year in which cessation of employment occurs assuming the Member is not thereafter in employment covered under the Act. The estimated Primary Insurance Amount shall be applicable under this Plan in all cases except as hereinafter provided in certain cases of Total Disability and shall be adjusted in the manner provided in the Act as of the date of retirement if such retirement occurs on or after the Member's 62nd birthday or as if the Member's age at retirement were 62 if such retirement occurs before the Member's 62nd birthday. The estimated Disability Insurance Benefit shall be applicable to a Member who sustains Total Disability and qualifies for LTD Plan benefits which are reduced on account of Disability Insurance Benefits under the Act; and (b) the estimated initial annual amount of benefit to which the Member would be entitled under any public pension or welfare system of any country other than the United States of America which is similar to the Primary Insurance Amount or the Disability Insurance benefit under the Act, as determined by the Committee in its sole and absolute discretion. 6 1.5 Annual Minimum Benefit Amount means: (a) for all years in which the Member participated in the Payless Profit Sharing Plan or the May Profit Sharing Plan, the amount of the Company contribution and forfeitures which would have been allocated to the Member's Company Accounts in the May and Payless Profit Sharing Plans but for the limitation on annual additions imposed by Section 415(c)(1) and Section 415(c)(2) of the Internal Revenue Code (the "Code"), and the limitation under Code Section 401(a)(17) on the amount of such Member's Compensation which may be taken into account in determining 1) the Member's basic contributions under the May Profit Sharing Plan and 2) the Member's Allocation Pay Amount under the Payless Profit Sharing Plan. The Minimum Benefit Amount with respect to the Payless Profit Sharing Plan shall be determined as if the Company Contribution for the applicable year or years was invested in the investment fund(s) in which the Company Contribution actually allocated for the Member was invested. (The amount determined under this paragraph shall be converted to an annual benefit which would be produced if the amount determined were paid in the form of an Actuarially Equivalent immediate life annuity with appropriate adjustments to the amount on account of investment experience actually experienced by the Profit Sharing Plan); and (b) the difference between the annual amount of Retirement Pension, if any, to which the Member is entitled under the May Retirement Plan paid in the form of an immediate life annuity and the annual amount of such Retirement Pension which would be payable to the Member but for (i) the limitation on benefits under Section 415(b) of the Code, (ii) the limitation under Code Section 401(a) (17) on the amount of such Member's Compensation which may be taken into account in determining such Member's annual amount of Retirement Pension, and (iii) the limitation under Code Section 415(e) on the benefit payable to a Member who participates in both a defined benefit plan and a defined contribution plan, to the extent applicable. 1.6 Annual Retirement Income means the amount determined by multiplying two percent (2%) of the Member's Average Annual Compensation by the number of years and fractions thereof (to the closest one-twelfth) of Plan Service, up to a maximum of twenty-five (25) years of Plan Service, completed by the Member on his actual Retirement Date. 1.7 Annual Retirement Benefits Offset means the total of the following annual amounts: (a) the annual amount of Retirement Pension that would be produced if the benefits payable under the May Retirement Plan were paid to the Member in the form of an immediate life annuity, (b) the annual amount of Retirement Pension that would be produced under any other retirement plan to which the Company or a related entity contributes and which 2 7 credits employment included in Plan Service if the benefits thereunder were payable in the form of an Actuarially Equivalent immediate life annuity, (c) the annual amount of benefits that would be produced if the amount payable from the Member's Company Accounts under the Payless Profit Sharing Plan (including Company Accounts which were Employer or Company Accounts under the May Profit Sharing Plan or Plans merged into the May Profit Sharing Plan) were paid in the form of an Actuarially Equivalent immediate life annuity, assuming that: (i) for each calendar year that the Member was eligible to participate as a Member of the May Profit Sharing Plan and for such period of time that the Member is eligible to share in Company matching contributions under the Payless Profit Sharing Plan, the Company Contribution and forfeitures allocated to the Member's Company Accounts were and are deemed to be in an amount equal to the product of the May or Company matching rate (as applicable) actually applicable to such year or period of time multiplied by the maximum basic contributions under the May or Payless Profit Sharing Plan(s) which could have been contributed by the Member for such calendar year or other period of time; (ii) appropriate adjustments on account of investment experience were made to such amount based on the actual investment experience of the May Profit Sharing Plan, as the Committee shall determine, (d) the May Retirement Plan and May Profit Sharing Plan offsets set forth in this Section 1.7 shall apply only if the period of membership in those Plans is included in Plan Service under this Plan. 1.8 Average Annual Compensation means the average of the three highest amounts of Annual Compensation of the Member accrued with respect to three (not necessarily consecutive) of the most recent five fiscal years of the Company ending before the Member's actual Retirement Date. 1.9 Associate means any associate of an Employer under the Payless Profit Sharing Plan. 1.10 Committee means the committee established by Section 4 of this Plan. 1.11 Company means Payless ShoeSource, Inc., a Delaware corporation, and any other organization which may be a successor to it. 1.12 Compensation means the total compensation from an Employer (or, for the period prior to the date Payless ceases to be a subsidiary of May, from an Employer or from any member of the controlled group of corporations determined in accordance with Section 3 8 414(b) of the Code or is a trade or business under common control in accordance with Section 414(c) of the Code, which includes an Employer) with respect to an Associate for services rendered prior to the Associate's actual Retirement Date, including all regular pay commissions, overtime pay, cash incentives, prize awards, amounts which an Associate elected to have the Employer contribute directly to the May or Payless Profit Sharing Plans on the Associate's behalf in accordance with Section 4.01(b) of each such Plan, amounts not otherwise includable in the Associate's taxable income pursuant to Section 125 of the Code, and amounts subject to the Deferred Compensation Plan of May or Payless. Compensation shall not include a pension, retirement allowance, severance pay, retainer or fee under contract, any special payments, cash or otherwise, relating to the spinoff of Payless or distributions from the Profit Sharing Plan. 1.13 Competing Business means any single (i) retail department store; (ii) discount department store; (iii) catalog showroom store; (iv) specialty store; (v) furniture store; (vi) shoe store; (vii) clothing store; or a group of any of the type of stores referred to in (i) through (vii) hereof, which such store or group of stores had, in its fiscal year ending within the twelve month period immediately preceding the date of such Member's Retirement Date, a gross sales volume, including sales in leased or licensed departments, in excess of $25,000,000. 1.14 Effective Date means May 4, 1996. The effective date of this amendment and restatement is the effective date of the Merger. 1.15 Employer means an employer designated as an Employer under the Payless Profit Sharing Plan. 1.16 Gender. Wherever applicable, the masculine pronoun as used herein shall include the feminine pronoun. 1.17 May means The May Department Stores Company. 1.18 May Profit Sharing Plan means The May Department Stores Company Profit Sharing Plan. 1.19 May Retirement Plan means The May Department Stores Company Retirement Plan. 1.20 (a) Member means any person included in the membership of the Plan as provided in Section 2. (b) Retired Member means a Member who retires after the Effective Date and becomes entitled to a supplementary retirement benefit under this Plan in accordance with its provisions. 1.21 Payless means Payless ShoeSource, Inc., a Delaware corporation. 4 9 1.22 Payless Profit Sharing Plan means the Payless ShoeSource, Inc. 401(k) Profit Sharing Plan, as amended from time to time, and any other successor retirement plan which may be designated by the Committee, including the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates. 1.23 Plan Service means Years of Service determined using the elapsed time method. Plan Members shall receive a Year of Plan Service on each anniversary date of their commencement of employment with an Employer, subject to any limitations or restrictions as may be imposed in connection with such Employer's adoption of the Plan. 1.24 Retirement Date means the last day of the month in which a Member retires under the Payless Profit Sharing Plan. SECTION 2. MEMBERSHIP. 2.1 Eligibility for Membership. Each Associate who is a member of The May Department Stores Company Supplementary Retirement Plan on the day Payless ceased to be a subsidiary of May shall become a Member of the Plan as of that date. Each other Associate of an Employer who has Compensation from an Employer in any later calendar year completed prior to his Retirement Date equal to at least twice the amount of "wages" which are subject to the payment of F.I.C.A. tax by the Associate in such year shall become a Member as of the January 1 thereafter. The Committee, in its discretion, may permit any other Associate to become a Member if the Committee determines that the Associate's Compensation from an Employer in any calendar year does not adequately reflect the Associate's full Compensation for such year. 2.2 Eligibility for Benefits. A Member shall become entitled to benefits under the Plan only if, and to the extent that, the Plan so provides. The fact that an Associate becomes a Member shall not, by itself, entitle the Associate to any benefit under the Plan. SECTION 3. BENEFITS. 3.1 Normal Retirement. (a) Subject to the remaining provisions of this Section 3, the annual supplementary retirement benefit payable to a Member who retires on or after attaining age 65 shall be equal to the excess, if any, of: (i) such Members Annual Retirement Income, over (ii) the sum of: o his Annual Estimated Social Security Benefits, and o his Annual Retirement Benefits Offset. 5 10 (b) If the benefit payable under subsection (a) above is less than the Annual Minimum Benefit Amount computed pursuant to Section 1.5, the Member shall receive the Annual Minimum Benefit Amount. 3.2 Early Retirement. (a) A Member may retire early under this Plan at any time after attaining age 55 and completing 5 years of Plan Service. Subject to the remaining provisions of this Section 3, the annual supplementary retirement benefit determined under Sections 3.1(a) and 3.1(b) above, payable to a Member who retires prior to attaining age 65 shall be first computed on the basis provided by Section 3.1(a), taking into account only years of Plan Service and Average Annual Compensation to the Member's Retirement Date or, if applicable, on the basis provided by Section 3.1(b), which amount shall be reduced as follows: Age at Retirement Reduction in Payment - ----------------- -------------------- 65 or older No reduction 64 2.0% of Average Annual Compensation 63 4.0% of Average Annual Compensation 62 6.0% of Average Annual Compensation 61 6.5% of Average Annual Compensation 60 7.0% of Average Annual Compensation 59 7.5% of Average Annual Compensation 58 8.0% of Average Annual Compensation 57 8.5% of Average Annual Compensation 56 9.0% of Average Annual Compensation 55 9.5% of Average Annual Compensation (b) Notwithstanding the other provisions of this Section 3.2, if a Member's retirement occurs prior to his 62nd birthday, then during the period between his Retirement Date and the Member's 62nd birthday only, in the calculation of the Member's supplementary retirement benefit, such Member's supplementary retirement benefit shall not be reduced by his Annual Estimated Social Security Benefits. (c) Notwithstanding anything to the contrary provided in this Section 3.2 or otherwise in the Plan, if, during the five-year period following the occurrence of a Change in Control of the Company, the Company or an Employer terminates a Member's employment other than for cause and such Member had attained age 50 on the date on which the Change in Control occurred, then such Member's annual supplementary retirement benefit shall be computed and paid to such Member as if such Member had retired at age 55 with at least five years of service on the date of termination with benefits to be determined as if such Member had been employed through age 55 at a level of Compensation equal to the Member's Average Annual Compensation. For this purpose, 6 11 the Average Annual Compensation of such Member shall be deemed to be the greater of his Average Annual Compensation determined (i) as of the date of the Change in Control or (ii) as of the date of termination of employment. (d) A "Change in Control of the Company" shall be deemed to have occurred if: (i) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then- outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 3.2(d), none of the following shall constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 3.2(d)(iii)(A), 3.2(d)(iii)(B) and 3.2(d)(iii)(C) or (v) any acquisition by the Company which, by reducing the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities, increases the proportionate number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by any Person to 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities; provided, however, that, if such Person shall thereafter become the beneficial owner of any additional shares of Outstanding Company Common Stock or Outstanding Company Voting Securities and beneficially owns 20% or more of either the Outstanding Company Common Sock or the Outstanding Company Voting Securities, then such additional acquisition shall constitute a Change of Control; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though 7 12 such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") is consummated, in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then- outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (iv) the stockholders of the Company approve of a complete liquidation or dissolution of the Company. (e) "Termination by the Company or by an Employer of employment for cause" means termination upon: 8 13 (i) the willful and continued failure by the Member to substantially perform his duties with the Company or an Employer (other than any such failure resulting from disability or any such actual or anticipated failure after the Member notifies the Company or an Employer of termination for good reason) after a written demand for substantial performance is delivered to the Member by the Company or Employer, which demand specifically identifies the manner in which the Company or Employer believes the Member has not substantially performed his duties, or (ii) the willful engaging by the Member in conduct that is demonstrably and materially injurious to the Company or Employer, monetarily or otherwise. For the purposes of this subparagraph, "good reason" means, without the Member's express written consent, the occurrence of any of the following circumstances during the one-year period following a Change in Control of the Company, unless such circumstances are fully corrected (effective retroactive to and including the date the circumstances first occurred) within 30 days of the Company or Employer receiving notice of the Member's termination: (i) a reduction by the Company or Employer or a subsidiary, as appropriate, in the Member's annual base salary, bonus opportunity or benefits as the same may be increased from time to time except for across-the-board salary, bonus opportunity or benefit reductions similarly affecting all management personnel of the Company, Employer and/or subsidiaries (and all management personnel of any person in control of the Company or Employer and of all persons, firms, corporations and partnerships and other entities controlled by such person); or (ii) the relocation of the Company's or Employer's (or subsidiary's) offices at which the Member is principally employed to a location more than 35 miles from such location. or the Company's or Employer's (or subsidiary's) requiring the Member to be based anywhere other than the Company's or Employer's (or subsidiary's) offices at such location. 3.3 Cessation of Benefits. Subject to the provisions of Sections 3.4, 3.5 and 3.6, all payments of supplementary retirement benefits hereunder shall cease upon the death of the Member. 3.4 Form of Benefit. Subject to subsection (b) below, the standard form of the supplementary retirement benefit payable hereunder shall be an immediate life annuity; provided, however, that one of the following optional forms of payment may also be elected: 9 14 (a) 100% Joint Annuity. This option is an actuarially reduced benefit payable to a Member during his life and, after his death, payable for life to such person he shall have designated as his contingent annuitant. (b) 50% Joint and Survivor Annuity. This option is an actuarially reduced benefit payable to a Member during his life and, after his death, a benefit at one-half the rate of such actuarially reduced benefit payable for life to such person as he shall have designated as his contingent annuitant. Unless the Member's spouse consents to another optional form of payment, this will be the standard form of payment for a Member who is married at Retirement Date. The Member's spouse will be the contingent annuitant. (c) Period Certain Annuity (10 years). This option is an actuarially reduced benefit payable to a Member during his life with periodic payments certain terminating at the end of ten years, with provision that if the Member dies before receiving all the periodic payments for such ten year period, (i) periodic payments for the remainder of such period shall be paid to a designated beneficiary, and (ii) if there is no such designated beneficiary, to his estate. (d) Period Certain Annuity. (15 years). This option is an actuarially reduced benefit payable to a Member during his life with periodic payments certain terminating at the end of fifteen years, with provision that if the Member dies before receiving all the periodic payments for such fifteen year period, (i) periodic payments for the remainder of such period shall be paid to a designated beneficiary, and (ii) if there is no such designated beneficiary, to his estate. The supplementary retirement benefit payable under an optional form shall be the Actuarial Equivalent of the supplementary retirement benefit otherwise payable in the form of an immediate life annuity. 3.5 Standard Payment Period. Supplementary retirement benefit payments shall be made in monthly installments, except that the Committee may, in its discretion at any time and from time to time prior or subsequent to retirement, direct that such payments be made other than at monthly intervals, or direct that either a lump sum settlement or a different form of payment be made equal to the Actuarial Equivalent of the benefit or remainder thereof otherwise payable. 3.6 Limitation on Payments. (a) It is recognized that a Member's duties during the period of employment with the Company or an Employer entail the receipt of confidential information concerning not 10 15 only the current operations and procedures of the Company or an Employer but also its short-range and long-range plans. If (A) the Member during any portion of the period of two (2) years following his retirement (1) has an aggregate investment (as determined from time to time) in a Competing Business equal to at least the greater of (i) $100,000, (ii) 1% in value of such Competing Business or (iii) such greater amount as the Committee may establish on a case by case basis or (2) personally renders services to a Competing Business in any manner, including without limitation, as owner, partner, director, trustee, officer, employee, consultant or advisor thereof, and (B) the Committee determines, in its discretion, that such investment or rendering of personal services is contrary to the best interests of the Company, then all rights to receive any benefits under the Plan shall immediately cease if the Member does not reduce such aggregate investment to an amount permitted hereunder or cease rendering such personal services, within 60 days of receipt of written notice of such determination from the Committee. The term "value" as used herein shall mean the net worth of such Competing Business, as disclosed by the balance sheet of such Competing Business, as of the close of the last preceding fiscal year; provided, however. that with respect to an investment in stock or other securities of a Competing Business, if such stock or other securities are part of a class of stock or other securities listed on any stock exchange, the term "value" shall mean the market value of such class of stock or other securities of such Competing Business, as of the date of any such determination by the Committee. (b) Any and all rights to benefits payable to or for the account of a Member shall at all times be subject to termination (i) if the Committee shall find such Member guilty of dishonesty or any other unlawful act causing injury or harm to the Company or an Employer or their employees or customers, or (ii) if such Member voluntarily terminates his employment without the written consent of the Company or his Employer or in violation of a written contract of employment. (c) Notwithstanding any other provisions of the Plan, in the event that the aggregate amount of benefits paid under this Plan in any benefit year (the period commencing on July 1 of any year and ending on the following June 30), after taking into account the tax effect on the Company or an Employer, shall exceed five percent (5%) of the average consolidated net earnings of the Company as shown in the Company's annual report to shareowners for the three (3) most recent consecutive fiscal years, ending prior to the conclusion of the benefit year, then all benefits otherwise payable hereunder during the next following benefit year shall be reduced or if necessary terminated. Such reduction shall be made by reducing the benefits otherwise payable during such next following benefit year in the same proportion that the benefits for the immediately preceding benefit year (before the imposition of the limitations provided for by this paragraph) would have had to have been reduced so that no excess would have occurred during such immediately preceding benefit year. (d) Notwithstanding anything provided in this Section 3.6 or otherwise in the Plan, to the contrary, the terms of subsections (a), (b) and (c) of this Section 3.6 shall cease to apply and shall be null and void immediately upon the occurrence of a Change in Control of the Company, as defined in Section 3.2(d) of the Plan. 11 16 3.7 Indirect Payment of Benefits. If any retired Member or his beneficiary is, in the judgment of the Committee, legally, physically or mentally incapable or incompetent, payment may be made to the guardian or other legal representative of such retired Member or beneficiary or, if there be none, to such other person or institution who or which, in the opinion of the Committee, based on information furnished to the Committee, is then maintaining or has custody of such retired Member or beneficiary. Such payment shall constitute a full discharge with respect thereto. 3.8 Termination and Rehire. In the event a Member's employment is terminated prior to eligibility for early retirement, as described in Section 3.2, (for any reason other than Total Disability), or in the event that a Member dies prior to the date as of which supplementary retirement benefits hereunder would otherwise commence, then no benefits shall be payable under this Plan. If a terminated Member is rehired under circumstances which result in reinstatement of membership under the Payless Profit Sharing Plan, reinstatement of membership under this Plan will occur at the same time. Such reinstatement will result in cessation of payment of benefits under this Plan. Upon the subsequent retirement of a Member whose benefits had ceased by reason of this Section 3.8, supplementary retirement benefits shall again be payable based upon such adjustments in amounts as the Committee may deem equitable. 3.9 Withholding. The Employer shall withhold from amounts otherwise payable under this Plan any amounts required to be withheld under federal, state or local law or regulations, such amounts to be remitted on a timely basis to the appropriate governmental authorities. SECTION 4. ADMINISTRATION OF THE PLAN. 4.1 The Committee. Except as otherwise provided herein, the Plan shall be administered by the Committee constituted under the Payless Profit Sharing Plan. 4.2 Delegation of Duties. In the administration of the Plan, the Committee may, from time to time, appoint agents and delegate to such agents and to the Administrative Subcommittee such duties as it considers appropriate and to the extent that such duties have been so delegated, the Administrative Subcommittee or agent, as the case may be, shall be exclusively responsible for the proper discharge of such duties. The Committee, the Administrative Subcommittee or any agent may from time to time consult with counsel who may be counsel to the Company. 4.3 Authority. Any decision or action of the Committee (or, with respect to any duty delegated to it, any decision or action of the Administrative Subcommittee or of a duly appointed agent) in respect of any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations thereunder shall be in its absolute discretion and shall be final, conclusive and binding upon all persons having any interest in the Plan. 12 17 SECTION 5. CERTAIN RIGHTS AND OBLIGATIONS. 5.1 Rights of Members, Members' Spouses and Beneficiaries. The rights of the Members, their spouses, their beneficiaries and other persons are hereby expressly limited as set forth herein and shall be determined solely in accordance with the provisions of the Plan. 5.2 Employer-Associate Relationship. The establishment of the Plan shall not be construed as conferring any legal or other rights upon any Associate or any other person for a continuation of employment or as interfering with or affecting in any manner the right of the Company or any Employer to discharge any Associate or otherwise act with relation to such Associate. The Company or an Employer may take action (including discharge) with respect to any Associate or other person and may treat him without regard to the effect which such action or treatment might have upon him under the Plan. 5.3 Unfunded Nature of Plan. The Plan shall be unfunded. Neither an Employer nor the Committee shall be required to segregate any assets in connection with benefits provided by the Plan. Neither the Company, an Employer nor the Committee shall be deemed to be a trustee of any amounts to be paid under the Plan. Any liability of the Company or an Employer to any person with respect to benefits payable under the Plan shall be based solely upon such contractual obligations, if any, as shall be created by the Plan and shall be only a claim against the general assets of the Company or the Employer, and no such liability shall be deemed to be secured by any pledge or any other encumbrance on any specific property of the Company or any Employer. SECTION 6. NON-ALIENATION OF BENEFITS. 6.1 Provisions with Respect to Assignment and Levy. No benefit payable under the Plan shall be subject in any manner to anticipation, alienation. sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, levy upon or charge the same shall be void; nor shall any such benefit be in any manner liable for or, subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit, except as specifically provided herein. 6.2 Alternate Application. If any Member, Member's spouse or beneficiary under the Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under the Plan, except as specifically provided herein, or any benefit shall be levied upon, garnished or attached, then such benefit shall, in the discretion of the Committee, cease, and in that event the Committee may hold or apply the same or any part thereof to or for the benefit of such Member, Member's spouse or beneficiary, children or other dependents, or any of them, or in such other manner and in such proportion as the Committee may deem proper. SECTION 7. AMENDMENT AND TERMINATION. 7.1 Company's Rights. The Company reserves the right at any time and from time to time in its sole discretion to modify or amend in whole or in part any or all of the provisions 13 18 of the Plan, provided that no amendment shall reduce any supplementary retirement benefit with respect to a Member who had already retired and no amendment shall reduce the amount of any supplementary retirement benefit with respect to a Member who, at the time of amendment, was eligible for retirement under the terms of the Plan, to a level below that determined as if retirement were effective at the time of amendment. Notwithstanding anything provided to the contrary in this Section 7.1 or the next Section 7.2, following a Change in Control of the Company the Plan may not be amended or terminated in a manner that would adversely affect the rights of any Member to his vested annual supplementary retirement benefits. Without limiting the generality of the foregoing, Section 3.2(c) through (e) may not be amended or deleted following a Change of Control of the Company. 7.2 Rights to Terminate. Except as provided in the previous Section 7.1, the Company reserves the right at any time and from time to time in its sole discretion to terminate the Plan, in whole or in part. In the event the Plan is terminated, the Employer shall be under no further obligation to provide benefits under the Plan, except to the extent of any supplementary retirement benefit with respect to a Member who had already retired and to the extent of any supplementary retirement benefit with respect to a Member who, at the time of termination, was eligible for retirement under the terms of the Plan, determined as if retirement were effective at the time of Plan termination. If the Plan is partially terminated, the preceding sentence shall apply to Members in the class with respect to which the Plan is terminated. SECTION 8. CONSTRUCTION. The provisions of the Plan shall be construed, regulated, administered and enforced according to the laws of the State of Kansas. 14 EX-10.11 6 PROFIT SHARING PLAN AS AMENDED AND RESTATED 4/6/00 1 Exhibit 10.11 PAYLESS SHOESOURCE, INC. 401(K) PROFIT SHARING PLAN As Amended March 16, 2000, or as otherwise specified 2 TABLE OF CONTENTS PAGE SECTION 1......................................................................2 DEFINITIONS.................................................................2 1.01 ACCOUNTS.............................................................2 1.02 ADMINISTRATIVE DELEGATE..............................................2 1.03 AFTER-TAX CONTRIBUTIONS..............................................2 1.04 ALLOCATION PAY AMOUNT................................................2 1.05 ASSOCIATE............................................................2 1.06 AUTHORIZED LEAVE OF ABSENCE..........................................3 1.07 BEFORE-TAX CONTRIBUTIONS.............................................3 1.08 BENEFICIARY..........................................................3 1.09 BOARD................................................................3 1.10 CODE.................................................................3 1.11 COMMITTEE............................................................3 1.12 COMPANY..............................................................3 1.13 COMPANY ACCOUNTS.....................................................3 1.14 COMPANY MATCHING CONTRIBUTIONS.......................................3 1.15 COMPANY PROFIT SHARING CONTRIBUTIONS.................................3 1.16 EFFECTIVE DATE.......................................................3 1.17 EMPLOYER.............................................................3 1.18 ERISA................................................................3 1.19 FIDUCIARY............................................................4 1.20 FISCAL YEAR..........................................................4 1.21 GROUP................................................................4 1.22 HOUR OF SERVICE......................................................4 1.23 INVESTMENT FUND......................................................4 1.24 MAY PLAN.............................................................4 1.25 MEMBER...............................................................4 1.26 MEMBER ACCOUNTS......................................................4 1.27 MEMBER AFTER-TAX ACCOUNTS............................................5 1.28 MEMBER BEFORE-TAX ACCOUNTS...........................................5 1.29 MEMBER CONTRIBUTIONS.................................................5 1.30 MEMBER ROLLOVER CONTRIBUTION ACCOUNTS................................5 1.31 MILITARY SERVICE.....................................................5 1.32 NET PROFITS..........................................................5 1.33 PAY..................................................................5 1.34 POOLED INVESTMENT ACCOUNT............................................5 1.35 PLAN.................................................................6 1.36 PLAN YEAR............................................................6 1.37 PRIOR PLAN...........................................................6 1.38 QUALIFIED DOMESTIC RELATIONS ORDER...................................6 1.39 RETIREMENT...........................................................6 1.40 ROLLOVER CONTRIBUTIONS...............................................6 1.41 SOCIAL SECURITY WAGE BASE............................................6 1.42 TOTAL AND PERMANENT DISABILITY OR DISABILITY.........................6 1.43 TRANSFERRED ACCOUNTS.................................................6 1.44 TRUST AGREEMENT......................................................6 1.45 TRUST FUND...........................................................6 1.46 TRUSTEE..............................................................6 1.47 UNIT.................................................................6 1.48 UNIT VALUE...........................................................7 1.49 VALUATION DATE.......................................................7 1.50 YEAR OF SERVICE......................................................7 1.51 VESTING SERVICE......................................................7 i 3 SECTION 2......................................................................9 MEMBERSHIP..................................................................9 2.01 CONDITIONS OF ELIGIBILITY............................................9 2.02 RE-EMPLOYMENT.......................................................10 SECTION 3.....................................................................11 COMPANY CONTRIBUTIONS......................................................11 3.01 AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION.......................11 3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION.............................11 3.03 ALLOCATION OF COMPANY CONTRIBUTIONS.................................11 3.04 PROFIT SHARING ALLOCATION FORMULA...................................11 3.05 INVESTMENT OF THE COMPANY CONTRIBUTION..............................11 3.06 RETURN OF COMPANY CONTRIBUTIONS.....................................12 SECTION 4.....................................................................13 MEMBER CONTRIBUTIONS.......................................................13 4.01 PROCEDURE FOR MAKING CONTRIBUTIONS..................................13 4.02 LIMITATIONS ON AND DISTRIBUTIONS ON BEFORE-TAX CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES........................................15 4.03 DISTRIBUTIONS OF EXCESS DEFERRALS...................................15 4.04 LIMITATIONS ON AND DISTRIBUTIONS OF AFTER-TAX EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES...........................................................16 4.05 LIMITATIONS ON MULTIPLE USE OF ALTERNATIVE LIMITATION...............17 SECTION 5.....................................................................18 INVESTMENT PROVISIONS......................................................18 5.01 INVESTMENT FUNDS....................................................18 5.02 INVESTMENT DIRECTION................................................18 SECTION 6.....................................................................20 ACCOUNTS...................................................................20 6.01 MEMBER ACCOUNTS.....................................................20 6.02 COMPANY ACCOUNTS....................................................20 6.03 MAINTENANCE OF ACCOUNTS.............................................20 6.04 VALUATION OF ACCOUNTS...............................................20 6.05 MEMBER STATEMENTS...................................................20 6.06 SHARES OF PAYLESS SHOESOURCE, INC. (................................20 6.07 VESTING IN MEMBER AND COMPANY ACCOUNTS..............................21 SECTION 7.....................................................................25 EXPENSES...................................................................25 7.01 ADMINISTRATIVE EXPENSES.............................................25 SECTION 8.....................................................................26 WITHDRAWALS DURING EMPLOYMENT..............................................26 8.01 WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED...............26 8.02 AUTHORIZED WITHDRAWALS..............................................26 SECTION 9.....................................................................28 BENEFITS UPON RETIREMENT, DEATH, DISABILITY OR TERMINATION OF EMPLOYMENT...28 9.01 BENEFITS............................................................28 9.02 BENEFICIARY.........................................................28 SECTION 10....................................................................29 PAYMENT OF BENEFITS........................................................29 10.01 TIME OF PAYMENT....................................................29 10.02 FORM OF PAYMENT....................................................30 10.03 INDIRECT PAYMENT OF BENEFITS.......................................30 10.04 INABILITY TO FIND MEMBER...........................................30 10.05 COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBERS....................30 10.06 COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY................30 10.07 COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE............30 SECTION 11....................................................................32 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS...................................32 ii 4 11.01 ROLLOVER TO OTHER PLANS............................................32 11.02 ROLLOVER FROM OTHER PLANS..........................................32 11.03 DEFINITIONS........................................................33 SECTION 12....................................................................34 LOANS......................................................................34 12.01 AVAILABILITY OF LOANS..............................................34 12.02 AMOUNT OF LOANS....................................................34 12.03 TERMS OF LOANS.....................................................34 SECTION 13....................................................................36 LIMIT ON CONTRIBUTIONS TO THE PLAN.......................................36 13.01 LIMIT ON CONTRIBUTIONS.............................................36 13.02 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS..........................36 SECTION 14....................................................................38 ADMINISTRATION OF THE PLAN.................................................38 14.01 PLAN ADMINISTRATOR.................................................38 14.02 DELEGATION OF AUTHORITY............................................38 14.03 COMMITTEE AND SUBCOMMITTEES........................................38 14.04 ACCOUNTS AND REPORTS...............................................39 14.05 NON-DISCRIMINATION.................................................40 SECTION 15....................................................................41 MANAGEMENT OF THE TRUST FUND...............................................41 15.01 USE OF THE TRUST FUND..............................................41 15.02 TRUSTEES...........................................................41 15.03 INVESTMENTS AND REINVESTMENTS......................................41 SECTION 16....................................................................43 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS....................43 16.01 DISCLAIMER OF EMPLOYER LIABILITY...................................43 16.02 EMPLOYER-ASSOCIATE RELATIONSHIP....................................43 16.03 BINDING EFFECT.....................................................43 16.04 CORPORATE ACTION...................................................43 16.05 CLAIM AND APPEAL PROCEDURE.........................................43 SECTION 17....................................................................45 NON-ALIENATION OF BENEFITS.................................................45 17.01 PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY.....................45 17.02 ALTERNATE APPLICATION..............................................45 SECTION 18....................................................................46 AMENDMENTS.................................................................46 18.01 COMPANY'S RIGHTS...................................................46 18.02 PROCEDURE TO AMEND.................................................46 18.03 PROVISION AGAINST DIVERSION........................................46 SECTION 19....................................................................47 TERMINATION................................................................47 19.01 RIGHT TO TERMINATE.................................................47 19.02 WITHDRAWAL OF AN EMPLOYER..........................................47 19.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST......................47 19.04 ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST....................47 19.05 MERGER, CONSOLIDATION OR TRANSFER..................................47 SECTION 20....................................................................48 CONSTRUCTION...............................................................48 20.01 APPLICABLE LAW.....................................................48 20.02 GENDER AND NUMBER..................................................48 SECTION 21....................................................................49 TOP-HEAVY REQUIREMENTS.....................................................49 21.01 GENERALLY..........................................................49 21.02 MINIMUM ALLOCATIONS................................................49 21.03 PARTICIPANTS UNDER DEFINED BENEFIT PLANS...........................49 iii 5 21.04 DETERMINATION OF TOP HEAVINESS.................................50 21.05 CALCULATION OF TOP-HEAVY RATIOS................................50 21.06 CUMULATIVE ACCOUNTS AND CUMULATIVE ACCRUED BENEFITS............50 21.07 OTHER DEFINITIONS..............................................51 iv 6 PAYLESS SHOESOURCE, INC. 401(K) PROFIT SHARING PLAN INTRODUCTION Effective April 1, 1996, Payless ShoeSource, Inc. withdrew from and ceased to be a participating Employer in The May Department Stores Company Profit Sharing Plan (the "May Plan"), and established the Payless ShoeSource, Inc. Profit Sharing Plan (the "Plan"). Effective January 1, 1997, a portion of the Plan covering Associates of Payless ShoeSource of Puerto Rico, Inc. was spun off. As of August 1, 1997, Payless amended and restated the Plan, primarily to establish a company matching contribution based on Members' contributions effective January 1, 1998, to institute automatic enrollment in before-tax contributions by Members, and to comply with certain changes in the law. On June 1, 1998, Payless restructured its corporate organization into a holding company structure with Payless ShoeSource, Inc., a Delaware corporation, as the parent corporation and the named Company for this Plan. Now, effective March 20, 2000, or as otherwise specified, the Company is amending and restating the Plan, primarily to include provisions for loans and the acceptance of rollover contributions from other qualified plans, a change to daily valuation and other miscellaneous changes. Such amendment and restatement applies only to Associates or former Associates who were employed by an Employer on or after the effective date(s) of the respective amended provisions, and the rights and benefits of persons thereunder are to be determined solely in accordance with the provisions of the Plan in effect on the date an Associate's employment was or is terminated. Notwithstanding the preceding sentence, the change in valuation date shall be effective for all Associates and former Associates, without regard to employment after the effective date. The terms and provisions of this new plan are as follows: 1 7 SECTION 1 DEFINITIONS 1.01 ACCOUNTS means the Company Accounts and Member Accounts established under Section 6. 1.02 ADMINISTRATIVE DELEGATE means one or more persons or institutions to which the Committee has delegated certain administrative functions pursuant to a written agreement. 1.03 AFTER-TAX CONTRIBUTIONS means Member Contributions which are not Before-Tax Contributions and which are made by the Member in accordance with Section 4.01(a). 1.04 ALLOCATION PAY AMOUNT means with respect to each eligible Member, (a) one (1) times the amount of Pay as defined in Section 1.33 up to the Social Security Wage Base ("SSWB") for the Plan Year, plus (b) two (2) times the amount of such Pay in excess of the SSWB for the Plan Year. Notwithstanding any provision of this Section 1.04 or of Section 3.03 to the contrary, in no event shall the percentage of Members' Pay to be allocated for any year below the SSWB be less than fifty percent (50%) of the percentage of Pay allocated with respect to Members' Pay in excess of the SSWB, nor may the latter percentage of Pay (above the SSWB) exceed the former percentage of Pay (below the SSWB) by more than 5.7% (or such other percentage as may be the maximum permitted differential under Code Section 401(1) from time to time). In determining each eligible Member's Allocation Pay Amount, only Pay received during the part of the Plan Year the Member is eligible for the Company Contribution feature of the Plan, pursuant to Section 2, shall be considered, and the SSWB to be applied for such Member shall be proportionally prorated if such eligibility is for less than a full Plan Year. Notwithstanding the foregoing, with respect to any Plan Year for which applying the definition of Allocation Pay Amount set forth above would cause the allocation made pursuant to Section 3.03 to violate the permitted disparity limitations of Treas. Reg. Section 1.401(l)-2, Allocation Pay Amount shall be adjusted to permit Section 3.03 to operate in compliance with the limitations of Treas. Reg. Section 1.401(l)-2. 1.05 ASSOCIATE means any person who is classified as an employee by an Employer and who receives Pay from an Employer. The term Associate also may include, based upon the express written determination of the Company or the Committee, a U.S. citizen employed, at the request of the Company, by a member of the Group (defined in Section 1.21) to the extent such employee otherwise qualifies for membership under Section 2, in which case such Group member shall be deemed to be an "Employer" hereunder, as to such person or persons only. The term "Associate" shall not include (i) any person covered under a collective bargaining agreement unless and until the Employer and the collective bargaining representatives so agree, (ii) any non-resident alien, and (iii) any "leased employee" within the meaning of Code Section 414(n)(2). 2 8 1.06 AUTHORIZED LEAVE OF ABSENCE means any leave of absence authorized by the Employer under rules established by the Employer. 1.07 BEFORE-TAX CONTRIBUTIONS means contributions which the Member elects (in accordance with Section 4.01(b)) to have the Employer make directly to the Plan on behalf of the Member, which election shall constitute an election under Code Section 401(k)(2)(A). The "Member's Before-Tax Contributions" shall refer to Before-Tax Contributions made to the Plan by the Employer on behalf of the Member. 1.08 BENEFICIARY means the person or persons entitled under Section 9.02 to receive any payments payable under this Plan on account of a Member's death. 1.09 BOARD means the Board of Directors of the Company. 1.10 CODE means the Internal Revenue Code of 1986, as amended from time to time. 1.11 COMMITTEE means the Profit Sharing Committee comprised of three or more members as determined and appointed from time to time by the Board. 1.12 COMPANY means Payless ShoeSource, Inc., a Delaware corporation, and any other organization which may be a successor to it. 1.13 COMPANY ACCOUNTS means accounts reflecting the portion of each Member's interest in the Investment Funds which are attributable to Company Matching Contributions ("Company Matching Accounts") and to Company Profit Sharing Contributions ("Company Profit Sharing Accounts") and to any contributions made by an Employer under prior plans, as well as to any income and/or earnings attributable to such Company Contributions and prior plan contributions. 1.14 COMPANY MATCHING CONTRIBUTIONS means contributions made by the Company or an Employer, based on a Member's Before-Tax and/or After-Tax Contributions, pursuant to Section 3.02. 1.15 COMPANY PROFIT SHARING CONTRIBUTIONS means discretionary contributions made by the Company or an Employer, based on Net Profits, pursuant to Section 3.03. 1.16 EFFECTIVE DATE originally meant April 1, 1996. However, the effective date of this amendment and restatement of the Plan shall be March 20, 2000, unless otherwise specified herein. 1.17 EMPLOYER means the Company and, if authorized by the Company to participate herein, any subsidiary of the Company or any affiliated corporation, partnership or sole proprietorship which elects to participate herein. 1.18 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. 3 9 1.19 FIDUCIARY means the Employer, the Trustee, each of the members of the Committee described in Section 14, and any investment manager designated pursuant to Section 15. 1.20 FISCAL YEAR means the Company's Fiscal Year. 1.21 GROUP means the Company and any other company which is related to the Company as a member of a controlled group of corporations in accordance with Code Section 414(b), as a trade or business under common control in accordance with Code Section 414(c) or as an affiliated service group in accordance with Code Section 414(m) or the regulations under Code Section 414(o). For the purposes of the Plan, for determining whether or not a person is an employee of the Group and the period of employment of such person, each such other company shall be included in the "Group" only for such period or periods during which such other company is a member with the Company of a controlled group or under common control. 1.22 HOUR OF SERVICE means any hour for which an Associate (including a leased employee) is directly or indirectly compensated, or entitled to compensation, by the Employer or by any member of the Group, whether or not such Group member has adopted the Plan, for any of the following: (a) the performance of duties during the applicable computation period; (b) a period during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, Military Service, or Authorized Leave of Absence; (c) a period for which back pay is awarded or agreed to, provided that no Hour of Service has been credited under subsection (a) or (b) with respect to the same period. Hours of Service and applicable computation periods shall be determined in accordance with the requirements of 29 C.F.R. Section 2530.200b. 1.23 INVESTMENT FUND means any fund for investment of contributions as described in Section 5.01. 1.24 MAY PLAN means The May Department Stores Company Profit Sharing Plan. 1.25 MEMBER means any person included in the membership of this Plan as provided in Section 2. 1.26 MEMBER ACCOUNTS means the Member Before-Tax Accounts, the Member After-Tax Accounts and the Member Rollover Contribution Accounts. To the extent an Associate makes a Rollover Contribution pursuant to Section 11.02 and the Associate is otherwise eligible but has not yet completed the participation requirements of Section 2.01, such contribution shall also be a Member Account. 4 10 1.27 MEMBER AFTER-TAX ACCOUNTS means the Member Accounts with respect to a Member's After-Tax Contributions. 1.28 MEMBER BEFORE-TAX ACCOUNTS means the Member Accounts with respect to a Member's Before-Tax Contributions. 1.29 MEMBER CONTRIBUTIONS means the Member's Before-Tax Contributions and After-Tax Contributions. 1.30 MEMBER ROLLOVER CONTRIBUTION ACCOUNTS means the Member Accounts with respect to an Associate's or Member's Rollover Contributions. 1.31 MILITARY SERVICE means effective December 13, 1996, any period of obligatory military service with the Armed Forces of the United States of America, or voluntary service in lieu of such obligatory service, provided that the Associate returns to active employment with the Employer within the period during which the Employer would be required to re-employ the Associate under Federal law. Notwithstanding any provision of this Plan to the contrary, contributions, benefits, loan repayment and service credit with respect to qualified Military Service will be provided in accordance with Code Section 414(u). 1.32 NET PROFITS means the consolidated net profits of the Company for any given Fiscal Year, determined by generally accepted accounting principles except that (i) no deduction or provision shall be made for any federal, state or other taxes measured by net income, nor for any contributions to the Trust or to any other pension or profit sharing plan, and (ii) there shall be excluded any proceeds from life insurance of which the Company is beneficiary (whether paid in a single sum or otherwise) and any gains or losses on the sale of capital assets. Such term shall also mean any accumulated and undistributed Net Profits (as defined in the preceding sentence) earned in prior Fiscal Years to the extent that such accumulated and undistributed Net Profits constitute surplus of the Company and its subsidiaries available for contributions hereunder. 1.33 PAY means the aggregate of (i) all regular pay, commissions, overtime pay, cash incentives, prizes and cash awards, plus (ii) amounts which the Associate elects to have the Employer contribute directly to the Plan on the Associate's behalf in accordance with Section 4.01(b). Pay shall include any amounts not otherwise includable in the Member's taxable income pursuant to Code Section 125. Pay shall not include amounts for a pension, a retirement allowance, a retainer or a fee under contract, deferred compensation (including amounts deferred under the Deferred Compensation Plan of The May Department Stores Company and the Deferred Compensation Plan of Payless ShoeSource, Inc.), severance pay, distributions from this Plan or items of extraordinary income including but not limited to amounts resulting from the exercise of stock options, spinoff cash, spinoff stock and restricted stock awards. Pay in excess of $170,000 shall be disregarded, although such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). 1.34 POOLED INVESTMENT ACCOUNT means an account established pursuant to an administrative services agreement between the Company and the Trustee. 5 11 1.35 PLAN means this Payless ShoeSource Inc. 401(k) Profit Sharing Plan. 1.36 PLAN YEAR means a calendar year ending each December 31. 1.37 PRIOR PLAN means either The May Department Stores Company Profit Sharing Plan, the Volume Shoe Corporation Profit Sharing Plan, or such other qualified plan as may be so designated by the Committee. 1.38 QUALIFIED DOMESTIC RELATIONS ORDER means a "qualified domestic relations order" as that term is defined in Code Section 414(p), provided that such order was entered on or after January 1, 1985. 1.39 RETIREMENT means a Member's termination of employment on or after age 55 and after completing at least five (5) Years of Service or attaining the fifth anniversary of participation, as of which date the Member's benefit shall be nonforfeitable. 1.40 ROLLOVER CONTRIBUTIONS means contributions which the Associate or Member, as applicable, elects to make in accordance with Section 11.02. 1.41 SOCIAL SECURITY WAGE BASE means, with respect to each Plan Year, the maximum amount of wages which are subject to tax in such year under the Federal Old Age, Survivors and Disability Insurance System. 1.42 TOTAL AND PERMANENT DISABILITY OR DISABILITY means the total incapacity of a Member for the continued performance of regular active employment with an Employer, which disability is expected to be permanent, as determined by the Committee, provided that a Member shall not be considered totally and permanently disabled for purposes of this Plan unless he qualifies for disability benefits under Title 11 of the Federal Social Security Act. 1.43 TRANSFERRED ACCOUNTS means Member and Company Accounts transferred from the May Plan. 1.44 TRUST AGREEMENT means the agreement or agreements provided for in Section 14, as amended from time to time. 1.45 TRUST FUND means all the assets of the Investment Funds and any other assets which are held in one or more trusts by the Trustee or Trustees for the purposes of this Plan. 1.46 TRUSTEE means the corporation(s), person or persons which may at any time be acting as Trustee or Trustees under the Trust Agreement. 1.47 UNIT means one of the units representing an interest in an Investment Fund as provided in Section 6.03. 6 12 1.48 UNIT VALUE means the value of each Unit in an Investment Fund as of the Valuation Date as determined pursuant to Section 6.04. 1.49 VALUATION DATE means any day that the New York Stock Exchange is open for business or any other date chosen by the Committee. Prior to March 31, 2000, Valuation Date means the last business day of each calendar month and any other date chosen to perform a valuation. 1.50 YEAR OF SERVICE for purposes of determining eligibility under Section 2 means a year of employment during which the Associate has been paid for not less than 1,000 Hours of Service for an Employer or any other member of the Group. An Associate shall be credited with a year of employment on each anniversary date of his commencement of employment with an Employer during which he earns not less than 1,000 Hours of Service for an Employer or any other member of the Group. Periods of temporary illness, temporary layoff, Military Service, and Authorized Leaves of Absence shall not be deemed as breaking continuity of employment and shall be counted in determining Years of Service. The term "Year of Service" shall also include an employment year during which, except to the extent otherwise provided in Treasury Regulations, a "leased employee" within the meaning of Code Section 414(n) has been paid for not less than 1,000 Hours of Service for the Employer even though during such period the leased employee was not an Associate as defined in Section 1.05. The term "Year of Service" shall include any period required to be included by the Family and Medical Leave Act of 1993. The extent to which service with another organization, part or all of whose business operations are acquired by the Company (or by an Employer), shall be credited as "Years of Service" hereunder or as "Vesting Service" under Section 1.51 shall be determined by the Company or by the Committee on a case-by-case basis. 1.51 VESTING SERVICE for purposes of determining a Member's vested interest under Section 6.07 is based on "elapsed time" and is to be determined in accordance with the following definitions: (a) "EMPLOYMENT COMMENCEMENT DATE" means the date upon which an Associate first performs an Hour of Service. (b) "HOUR OF SERVICE" means an hour for which an Associate is paid or entitled to payment for the performance of duties for the Employer or any other member of the Group. (c) "PERIOD OF SERVICE" means a period beginning on the Associate's Employment Commencement Date (or Reemployment Commencement Date, as the case may be) and ending on his Severance from Service Date. (d) "SEVERANCE FROM SERVICE DATE" means the earlier to occur of: 7 13 (i) the last date upon which an Associate terminates employment with the Employer or any other member of the Group (either voluntarily or involuntarily), retires or dies; or (ii) the first anniversary of the date upon which the Associate was first absent from service with the Employer (with or without pay) for any other reason (i.e., vacation, sickness, disability, leave of absence or layoff). Notwithstanding the foregoing, the Severance from Service Date of an Associate who is absent from service with the Employer beyond the first anniversary of the first day of such absence on account of maternity or paternity (as described in Code Sections 410(a)(5)(E) or 411(a)(6)(E)) shall be the second anniversary of the first day of such absence; and the period of time between such first and second anniversaries shall not be treated as a Period of Service or as a Period of Severance. (e) "PERIOD OF SEVERANCE" means a period beginning on an Associate's Severance from Service Date and ending upon the Associate's Reemployment Commencement Date. (f) "REEMPLOYMENT COMMENCEMENT DATE" means the first date, following a Severance from Service Date, upon which the Associate performs an Hour of Service for the Employer or any other member of the Group. (g) "SERVICE SPANNING RULES." In determining whether or not an Associate has completed a twelve month Period of Service for purposes of vesting, the following Periods of Severance shall be treated as Periods of Service: (i) If an Associate terminates employment with the Employer (either voluntarily or involuntarily) or retires, and then performs an Hour of Service within the twelve month period beginning on the Severance from Service Date, such Period of Severance shall be treated as a Period of Service; and (ii) If an Associate terminates employment with the Employer (either voluntarily or involuntarily) or retires during an absence from service of twelve months or less for any reason other than a termination or retirement, and then performs an Hour of Service within a period of twelve months from the date the Employee was first absent from service, the Period of Severance shall be treated as a Period of Service. 8 14 SECTION 2 MEMBERSHIP 2.01 CONDITIONS OF ELIGIBILITY. (a) Each Associate who on March 19, 2000 was a Member of or is eligible to be a Member of the Plan shall continue to be a Member of this Plan entitled to make Member Contributions pursuant to Section 4 and eligible to share in Company Contributions pursuant to Section 3. (b) Each other Associate shall be eligible to become a Member of the Plan when the Associate has completed one Year of Service and attained age 21, with membership to commence as of the first day of the month coincident with or following the date he has met these eligibility requirements. Such Associate shall be eligible: (i) to make Member Contributions pursuant to Section 4; (ii) to share in Company Matching Contributions pursuant to Section 3.02; (iii) to share in Company Profit Sharing Contributions, if any, pursuant to Section 3.01. (c) Each Member shall be deemed to have elected to make a three percent (3%) Before-Tax Contribution pursuant to Section 4.01(b), commencing with the first paycheck issued with respect to the first payroll period beginning on or after the first day of the month coincident with or following the date the Employer determines he met the foregoing eligibility requirements. Notwithstanding this "deemed" election, an Associate or Member may elect pursuant to procedures established by the Committee to not make, or to suspend making, said three percent (3%) automatic Before-Tax Contribution, or pursuant to Section 4.01(a) or (b) to make an After-Tax or a Before-Tax Contribution of an amount other than three percent (3%). (d) All Years of Service with an Employer and Years of Service with The May Department Stores Company ("May") while the Employer was part of the Group which included May are counted toward eligibility, provided that, if an Associate has a 1-year break in service before a Year of Service, service with an Employer or May before such break will not be taken into account. For the purposes of this Section 2.01, "break in service" means a 12 consecutive month employment year as used in Section 1.50 during which the Associate does not complete more than 500 Hours of Service with the Employer and/or May while part of the Group. (e) Associates employed by the Company's Puerto Rican Subsidiaries are not eligible for membership hereunder. If any such Associate has Accounts in this Plan, such Accounts shall continue to be revalued as of each succeeding Valuation Date pursuant to Section 6.04. 9 15 2.02 RE-EMPLOYMENT. A former Member who has retired or has otherwise terminated employment and is rehired shall become a Member on the first day of the calendar month after the Employer becomes aware of his rehire. 10 16 SECTION 3 COMPANY CONTRIBUTIONS 3.01 AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION. The Company or an Employer may contribute to the Trust, as of the end of each Plan Year, a percentage of the Company's Net Profits as a Company Profit Sharing Contribution. The amount of such contribution, if any, shall be determined by the Board of Directors in its discretion. Any such contribution shall be made as soon as practicable after the close of the Company's Fiscal Year. All such contributions advanced to the Plan by the Company shall be reimbursed to the Company by the Employer. 3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION. The Company shall, in its discretion, contribute to the Trust, as of the end of each Plan Year, a total combined amount as to this Plan and the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates ("Puerto Rico Plan") equal to 2 1/2% of its Net Profits, until determined otherwise by the Board of Directors, in the form of a Company Matching Contribution. Such contribution may be made by an Employer, rather than by the Company, as to that Employer's participating Associates. The total amount of such contribution shall be allocated in proportion to the amount that each Member's Contributions under Sections 4.01(a) and (b) for such Plan Year, up to a total of 5% of such Member's Pay, bears to the total amount of all Member Contributions up to 5% of such Members' Pay. Such Company Matching Contribution shall be determined and paid to the Trustee as soon as practicable after the close of each Fiscal Year. 3.03 ALLOCATION OF COMPANY CONTRIBUTIONS. The Company Contributions shall be allocated only to the Company Accounts of Members who are employed by the Employer on the last day of the Plan Year and on behalf of Members whose employment has terminated during the Plan Year by reason of Retirement, death or Disability. Company Profit Sharing Contributions shall be credited to eligible Members' Company Profit Sharing Contribution Accounts. Company Profit Sharing Contributions allocated prior to or as of July 31, 1997 shall be fully vested; Company Profit Sharing Contributions allocated thereafter shall be subject to the vesting provisions of Section 6.07. Company Matching Contributions shall be subject to the vesting provisions of Section 6.07 and to the withdrawal penalty provisions of Section 8.02(a). No Company Matching Contribution shall be made with respect to a Member Before-Tax Contribution in excess of the Code Section 402(g) limit, as revised from time to time. 3.04 PROFIT SHARING ALLOCATION FORMULA. The Company Profit Sharing Contribution, if any, shall be allocated to all Members eligible to share in the contribution according to the ratio that each Member's Allocation Pay Amount for the Plan Year bears to the total Allocation Pay Amount for all eligible Members for the Plan Year. For this purpose the term eligible Members includes Members in both the Puerto Rico Plan and this Plan. 3.05 INVESTMENT OF THE COMPANY CONTRIBUTION. The amounts allocated to each Member pursuant to Section 3.03 shall be credited to his Company Accounts and invested in one or more of the Investment Funds described in Section 5.01 and in the percentages designated by 11 17 the Member in the investment election filed pursuant to Section 5.02 effective at the time the amount is allocated. 3.06 RETURN OF COMPANY CONTRIBUTIONS. (a) If, after the Company Contribution has been made and allocated, it should appear that, through oversight or a mistake of fact or law, a Member (or an Associate who should have been considered a Member) who should have been entitled to share in such contribution, receives no allocation or receives an allocation which was less than he should have received, the Company may, at its election and in lieu of reallocating such contribution, make a special make-up contribution for the Company Account of such Member in an amount sufficient to provide for him the same addition to his Company Account as he should have received. Similarly, if a Member received an allocation which was more than he should have received (or an Associate was inappropriately included in the Plan), the Company, at its election, may reallocate such contribution, offset other Company contributions against such allocation, or use such allocation to pay Plan expenses. (b) Each contribution made to the Trust shall be made on the condition that it is currently deductible by the Company or Employer under Code Section 404 for the taxable year with respect to which the contribution is made. If a contribution subsequently is determined, whether in whole or in part, not to be currently deductible as provided in the preceding sentence, then, within one year of the date of disallowance of the deduction of such Company Contribution, an amount equal to the disallowed deduction shall be returned to the Company or Employer. (c) Earnings attributable to a contribution that is returned pursuant to Subsection (a) or (b) above shall not be withdrawn, but losses attributable thereto shall reduce the amount returned to the Company and/or Employer. 12 18 SECTION 4 MEMBER CONTRIBUTIONS 4.01 PROCEDURE FOR MAKING CONTRIBUTIONS. (a) AFTER-TAX CONTRIBUTIONS. Subject to the limitations set forth in Sections 4.02, 4.03 and 4.04, each Member may contribute to the Plan an amount equal to not less than 1% nor more than 15% (in whole percentage points) of his Pay as he shall have designated pursuant to procedures established by the Company (which may establish lower permissible After-Tax Contributions for Highly Compensated Employees); provided, however, that a Member shall not contribute, or elect to have contributed on his behalf, amounts with respect to Pay received by him after the close of the calendar year during which his employment terminates and further provided that any Before-Tax Contributions made on behalf of the Member shall reduce, by the percentage which he elects to have contributed pursuant to Section 4.01(b)(i), the percentage of Pay that the Member may contribute pursuant to this Section 4.01(a). (b) BEFORE-TAX CONTRIBUTIONS. (i) Subject to the limitations set forth below, each Member may elect that his Employer shall contribute directly to the Trust Fund an amount equal to a whole percentage of his Pay, not less than 1% nor greater than such percentage as may be determined from time to time by the Company which amount shall be his Before-Tax Contribution. The maximum Before-Tax Contribution by a Member determined to be a Highly Compensated Employee under Section 4.02, for the Plan Year in question, may be further restricted or limited by the Company or Committee from time to time. (ii) Pursuant to Section 2.01(c), each eligible Member shall be deemed to have elected to make a three percent (3%) Before-Tax Contribution, unless the Member elects otherwise in accordance with procedures established by the Committee. (c) Notwithstanding any election in accordance with Section 4.01(b), if the Committee at any time determines that all or any portion of the Member's Before-Tax Contributions should be treated as After-Tax Contributions in order for the Before-Tax Contribution provisions of the Plan to qualify as a "qualified cash or deferred arrangement" for purposes of Code Section 401(k), or if the Actual Deferral Percentage standards set forth in Code Section 401(k)(3) are not met at the end of the Plan Year, then the Committee, in its sole and absolute discretion, (i) may, in accordance with Section 4.02 below, limit the amount which shall be contributed by the Employer as Before-Tax Contributions after the date of such determination on behalf of all or any portion of the Members and, 13 19 (ii) may, except with respect to situations in which Section 4.01(h) applies, (and prior to March 15 of the calendar year following the Plan Year in which such contributions are made) declare all or such portion of the Before-Tax Contributions theretofore or thereafter made on behalf of all or a portion of the Members to be After-Tax Contributions. (d) The Employer shall (i) deduct a Member's After-Tax Contributions from the Pay of the Member in such installments as the Employer may deem appropriate, (ii) contribute a Member's Before-Tax Contributions on behalf of the Member, and (iii) reduce the Pay that is paid to the Member directly in cash by an amount equal to the Member's Before-Tax Contributions in such installments as the Employer shall deem appropriate. The amounts so deducted and so contributed shall be paid by the Employer to the Trustee not later than 15 days following the end of the month with respect to which such amounts are to be so deducted and contributed or within such shorter period of time as may be designated under the Code, ERISA or related regulations. The Employer may, from time to time, make estimated contribution payments to the Trustee during each month. (e) Effective with the first payroll period beginning in any calendar month, or as of such other effective time as may be determined by the Committee, a Member may elect to change the rate of his After-Tax Contributions to any other rate permitted by Subsection (a) of this Section 4.01 and may elect to change the amount to be contributed by the Employer directly to the Trust Fund as Before-Tax Contributions to an amount equal to an amount permitted by Subsection (b) of this Section 4.01 with respect to such contributions to be made after the effective date of the election, pursuant to procedures established by the Committee. (f) Not later than 15 days prior to the beginning of a payroll period of a Member, or not later than such other date as may be determined by the Committee, such Member may elect, pursuant to procedures established by the Committee, (i) to suspend making After-Tax Contributions and (ii) that the Employer should suspend making Before-Tax Contributions on his behalf, all as of the beginning of such payroll period. Not later than 15 days prior to the beginning of a payroll period of a Member, or not later than such other date as may be determined by the Committee, such Member may elect (i) to resume making After-Tax Contributions and, (ii) that the Employer shall resume making Before-Tax Contributions on his behalf, by indicating any amount of contributions permitted under Subsection (a) and designating an amount equal to any amount of Pay as Before-Tax Contributions that is permitted under Subsection (b) hereof. (g) Contributions pursuant to this Section 4.01 shall be credited to Member Accounts. (h) Notwithstanding any election in accordance with Subsection (b), the total amount of a Member's Before-Tax Contributions and other contributions made by the Member under Code Section 401(k) to another plan qualified under Code Section 401(a) for any calendar year shall not exceed $10,500 (as adjusted from time to time by the Secretary of the Treasury or his delegate, pursuant to Code Section 415(d)). If any Member may reach the $10,500 limit (as adjusted) the Committee can direct that all or any portion of such 14 20 Member's Contributions during such year shall be After-Tax Contributions regardless of such Member's elections pursuant to Sections 4.01(a) and 4.01(b). (i) As of April 1, 2000, all then currently existing flat dollar Member Contributions shall be converted to Member Contributions based on 1% increments calculated by dividing such flat dollar amount by the Member's Pay for the prior year and rounding the product to the nearest whole percent; provided that no flat dollar contribution shall be converted to a percent contribution of less than 1%. (j) Notwithstanding this Section 4.01, effective March 20, 2000, during the black out period as determined by the Committee and the Trustee established to change to daily valuation or a change in recordkeepers, no contribution rate changes or suspensions may be made by a Member except as provided by the Committee. 4.02 LIMITATIONS ON AND DISTRIBUTIONS OF BEFORE-TAX CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES. The Committee is authorized to reduce to the extent necessary the maximum contributions under Section 4.01(b) for Highly Compensated Employees prior to the close of the Plan Year if the Committee reasonably believes that the reduction is necessary to prevent the Plan from failing Code Section 401(k)(3). Such adjustments shall be made in accordance with rules prescribed by the Employer. If the Plan fails to satisfy Code Section 401(k)(3), the Plan shall correct the failure within 12 months after the last day of such Plan Year under any method of combination of methods allowed under Code Section 401(k)(8) or Treasury Regulation Section 1.401(k)-1(f), taking into account any adjustments necessary due to changes to Code Section 401(k)(8)(C) that are reflected in the regulations. For purposes of this Section 4.01, the actual deferral percentage of Non-Highly Compensated Employees shall be determined as of the Plan Year for which the Plan must satisfy one of the tests in Code Section 401(k)(3), unless the Employer elects to determine such actual deferral percentage as of the Plan Year preceding the Plan Year for which the Plan must satisfy one of the tests in Code Section 401(k)(3). Any such election shall not be changed except as provided by the Secretary of the Treasury. 4.03 DISTRIBUTIONS OF EXCESS DEFERRALS. (a) Notwithstanding any other provision of the Plan, Excess Before-Tax Deferrals (as hereinafter defined) and earnings allocable thereto as determined pursuant to such rules and regulations as are prescribed by the Internal Revenue Service, shall be distributed no later than April 15 to Members who claim such allocable Excess Before-Tax Amounts (which shall be the "Excess Before-Tax Deferrals" plus earnings, if any) for the preceding calendar year. 15 21 (b) For purposes of this Section 4.03, "Excess Before-Tax Deferral" means the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) which is a Member Contribution under Section 4.01 for a calendar year that the Member allocates to this Plan pursuant to the claim procedure set forth in subsection 4.03(c) hereof. (c) The Member's claim shall be in writing; shall be submitted to the Committee no later than March 1; shall specify the amount of the Member's Excess Before-Tax Deferral for the preceding calendar year; and shall be accompanied by the Member's written statement that if such amounts are not distributed, the Excess Before-Tax Deferrals, when added to amounts deferred under other plans or arrangements described in Code Sections 401(k), 408(k) or 403(b), exceeds the limit imposed on the Member in accordance with the applicable provisions of the Code for the year in which the deferral occurred. (d) Notwithstanding any provision of Sections 3 or 4 to the contrary, any Company Matching Allocation which would have been attributable to an Excess Before-Tax Deferral distributed to a Member under Section 4.02(a) shall not be retained or distributed, but shall be held unallocated in a suspense account and, as of the end of the Plan Year, forfeited and added to and allocated with Company Contributions in the next following Plan Year. 4.04 LIMITATIONS ON AND DISTRIBUTIONS OF AFTER-TAX EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES . The Committee is authorized to reduce to the extent necessary the maximum amount of Employee After-Tax Contributions and Employer Matching Contributions under Sections 4.01(a) and 3.02 contributed on behalf of any Highly Compensated Employee prior to the close of the Plan Year if the Committee reasonably believes that such adjustment is necessary to prevent the Plan from failing Code Section 401(m)(2). Such reduction shall be made in accordance with rules prescribed by the Employer. If the Plan fails to satisfy Code Section 401(m)(2), the Plan shall correct the failure within 12 months after the last day of such Plan Year under any method or combination of methods allowed under Treasury Regulation 1.401(m)-1(e), taking into account any adjustments necessary due to changes to Code Section 401(m)(6)(c) that are not reflected in the regulations. For purposes of this Section 4.04, the actual contribution percentage of Non-Highly Compensated Employees shall be determined as of the Plan Year for which the Plan must satisfy one of the tests in Code Section 401(m)(2), unless the Employer elects to determine such actual contribution percentage as of the Plan Year preceding the Plan Year for which the Plan must satisfy one of the tests in Code Section 401(m)(2). Any such election shall not be changed except as provided by the Secretary of the Treasury. 16 22 4.05 LIMITATIONS ON MULTIPLE USE OF ALTERNATIVE LIMITATION. (a) Determination of Multiple Use. The Committee will determine whether or not multiple use of the alternative limitation has occurred. Such determination will be made in accordance with Section 401(m)(9) of the Code. (b) Correction Of Multiple Use. If a multiple use of the alternative limitation occurs, the Committee shall correct such multiple use by reducing the actual contribution percentages of Highly Compensated Employees in the manner set forth in Section 4 so that there is no multiple use of the alternative limitation. (c) Special Definitions. All terms used in this Section 4 shall have the meaning given such terms in Code Sections 401(k) and 401(m) and the regulations thereunder. 17 23 SECTION 5 INVESTMENT PROVISIONS 5.01 INVESTMENT FUNDS. (a) There shall be established as part of the Trust Fund a reasonable range of investment options. The Committee may from time to time, in its discretion, change, delete or add Investment Funds available within the Trust Fund; provided that unless and until the Plan is amended accordingly, the Plan shall continue to provide a Payless Common Stock Fund as an investment option. (b) Income from and proceeds of sales of investments in each Investment Fund shall be reinvested in the same Investment Fund. Any income or other taxes payable with respect to a Fund shall be charged to such Fund. (c) A Trustee may, from time to time, make temporary investments in short term obligations of the United States Government, commercial paper, or other investments of a short term nature, pending investment in an Investment Fund. 5.02 INVESTMENT DIRECTION. (a) A Member may elect that his Member Contributions be invested in 1% increments totaling 100% in one or more of the Investment Funds. Such election must be made pursuant to procedures prescribed by the Committee. Such election shall be effective until and unless a Member makes a different election for any period, but only as provided for under Subsection 5.02(b) and Subsection 5.02(c). If the Member fails to file a timely initial investment election, he shall be deemed to have elected to have 100% of his Member Contributions invested in the stable, fixed income investment as may be determined by the Committee. Until such time as the Committee determines otherwise and so notifies Members, a Member's share of any Company Contributions, when allocated as of Plan Year-end, shall be invested in the same Investment Funds in the same proportions as the Member has elected in connection with investment of his Member Contributions at the time the Company Contribution is contributed to the Trust. (b) A Member may change his election with respect to future Member and Company Contributions effective pursuant to procedures prescribed by the Committee and may not change his election in any other manner except as provided in Subsection 5.02(c). (c) Effective as of the date determined by the Committee, and pursuant to procedures prescribed by the Committee, a Member may elect to have any or all of the value in any of the Investment Funds which are credited to his Member and/or Company Accounts transferred and invested in any one or more of the Investment Funds. (d) Notwithstanding this Section 5.02, effective March 20, 2000, during the black out period as determined by the Committee and the Trustee established to change to daily 18 24 valuation or a change in recordkeepers, no investment transfers or changes may be made by a Member unless provided in Section 6.06. Notwithstanding anything to the contrary, no loans, withdrawals or distributions shall be made during any such blackout period except as provided by the Committee. 19 25 SECTION 6 ACCOUNTS 6.01 MEMBER ACCOUNTS. The Committee shall maintain or cause to be maintained for each Member under each Investment Fund in which his Member Contributions are invested separate Member Accounts which shall reflect the portion of his interest in such Investment Fund which is attributable to his contributions. The Member's After-Tax Contributions shall be credited to a separate Member After-Tax Account. The Member's Before-Tax Contributions shall be credited to a separate Member Before-Tax Account. The Member's or Associate's Rollover Contribution shall be credited to a separate Member Rollover Contribution Account. 6.02 COMPANY ACCOUNTS. The Committee shall maintain or cause to be maintained for each Member under each Investment Fund in which his Company Contributions are invested separate Company Accounts which shall reflect the portion of his interest in such Investment Fund which is attributable to Company Contributions, as well as to contributions made by an Employer under prior plans and to any income or earnings attributable to such Company Contributions and prior plan contributions. The Member's Company Matching Contributions shall be credited to a separate Company Matching Contribution Account. The Member's Company Profit Sharing Contribution, if any, shall be credited to a separate Company Profit Sharing Contribution Account. 6.03 MAINTENANCE OF ACCOUNTS. For the purposes of maintaining Accounts pursuant to this Section 6, each Investment Fund shall be divided into Units, and the Interest of each Member in such Investment Fund shall be evidenced by the number of Units in such Investment Fund credited to his Accounts. 6.04 VALUATION OF ACCOUNTS. As of each Valuation Date the Committee shall determine the value of a Unit in each Account by dividing the current market value of all property in each such Account as of such Valuation Date (after deducting any expenses or other amounts including withdrawals properly chargeable against such Account) by the number of Units then outstanding to the credit of all Members in each such Account. 6.05 MEMBER STATEMENTS. The Committee shall furnish or cause to be furnished to each Member a statement of his Company and Member Accounts, at least once each year, or more frequently if required by applicable law. 6.06 SHARES OF PAYLESS SHOESOURCE, INC. ("PAYLESS STOCK") IN THE PAYLESS COMMON STOCK FUND. (a) Each Member (or beneficiary of a deceased Member) who has Accounts invested in the Payless Common Stock Fund shall, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, have the right to direct the Trustee with respect to the vote of the number of shares of Payless Stock attributable to Units credited to him in the Payless Common Stock Fund as of the latest practicable Valuation Date prior to or contemporaneous with the record date set by the Company for each meeting of 20 26 shareowners of the Company. For such purpose the Trustee shall furnish to each such Member prior to each such meeting the proxy statement for such meeting, together with a form to be returned to the Trustee on which may be set forth the Member's instructions as to the manner of voting such shares of stock. Upon receipt of such instructions, the Trustee shall vote such shares in accordance therewith. If a Member's instructions are not received by the Trustee in a timely manner, the Trustee shall vote such Member's shares in the same proportion as the shares of Common Stock for which instructions were actually timely received from Members. The Trustee shall not divulge the instructions of any Member. (b) Each Member (or beneficiary of a deceased Member) who has Accounts invested in the Payless Common Stock Fund shall, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, have the right with respect to the number of shares of Payless Stock attributable to Units credited to him in the Payless Common Stock Fund as of the latest practicable Valuation Date, to direct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to Payless Stock, and the Trustee shall respond in accordance with the instructions so received. The Trustee shall utilize its best efforts to timely distribute or cause to be distributed to each Member such information as will be distributed to shareowners of the Company in connection with any such tender or exchange offer, together with a form requesting instructions on whether or not such shares will be tendered or exchanged. If the Trustee shall not receive timely direction from a Member as to the manner in which to respond to such a tender or exchange offer, the Trustee shall not tender or exchange any shares of Payless Stock with respect to which such Member has the right of direction. Tenders as a result of a self-tender offer by the Company shall continue notwithstanding any investment change blackout. The Trustee shall not divulge the instructions of any member. The proceeds from the tender or exchange of shares attributable to Units in Payless Common Stock Investment Fund accounts of Members shall be transferred to one of the Investment Funds described in Section 5.01 pursuant to a procedure established by the Committee. 6.07 VESTING IN MEMBER AND COMPANY ACCOUNTS. (a) VESTING SCHEDULE. A Member shall have a fully vested interest at all times (i) in his Member Accounts and (ii) in his Company Profit Sharing Contribution Account balance determined as of July 31, 1997. A Member who has completed at least two full Years of Service as of August 1, 1997 also shall be fully vested at all times (i) in his Company Matching Contribution Account and (ii) in his Company Profit Sharing Contribution Account determined at any time after July 31, 1997. The Company Matching Contribution Account of a Member who is not or was not credited with at least two Years of Service as of August 1, 1997 and his Company Profit Sharing Contribution Account attributable to Company Profit Sharing Contributions, if any, based on such Member's eligibility for such contributions after August 1, 1997, shall vest according to the following schedule: 21 27
Vesting Service Vested Interest Fewer than 2 years 0% 2 years 25% 3 years 50% 4 years 75% 5 years or more 100%
Notwithstanding the foregoing, a Member's interest in his Company Matching Contribution Account and his Company Profit Sharing Contribution Account shall become fully vested if the Member terminates employment on account of Retirement, death or Disability. (b) CASH-OUT DISTRIBUTIONS TO PARTIALLY VESTED MEMBERS AND RESTORATION OF FORFEITURES. If, pursuant to Section 10.01, a partially-vested Member receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in Subsection (e) below), the cash-out distribution will result in an immediate forfeiture of the nonvested portion(s) of the Member's Company Matching and Company Profit Sharing Contribution Account(s). See Subsection (e) below. A partially-vested Member is a Member whose Vested Interest, determined under Section 6.07(a), in either his Company Matching Contribution Account or his Company Profit Sharing Contribution Account, or both, is less than 100%. A cash-out distribution is a distribution of the entire vested portion of the Member's Account(s). (i) A partially-vested Member who is reemployed by an Employer after receiving a cash-out distribution of the vested portion of his Account(s) shall have such forfeited amount restored, unless the Member no longer has a right to restoration under this subparagraph (i). The amount restored by the Plan Administrator shall be the same dollar amount as the dollar amount of his Account(s) on the Valuation Date immediately preceding the date of the cash-out distribution, unadjusted for any gains or losses occurring subsequent to that Valuation Date but reduced by the amount of the prior cash-out distribution. Restoration of the Member's Account balance(s) includes restoration of all Code Section 411(d)(6) protected benefits with respect to the restored Account(s) in accordance with applicable Treasury regulations. The Plan Administrator will not restore a reemployed Member's Account balance(s) under this subparagraph (i) if the Member has incurred a Forfeiture Break in Service (as defined in Subsection (d) below). (ii) If restoration of the Member's Account(s) is permitted under subparagraph (i) above, the Plan Administrator will restore the Member's Account(s) on the same day as the date of allocation of the Company Contribution for the Plan Year during which such Member was reemployed by an Employer. To restore the Member's Account(s), the Plan Administrator, to the extent necessary, will allocate to the Member's Account(s): 22 28 (A) first, the amount, if any, of Member forfeitures otherwise available for allocation under Subsection (f) below; (B) second, deductible Employer contributions for the Plan Year to the extent made under a discretionary formula; and (C) third, as otherwise permitted by law. The Plan Administrator will not take into account any allocation under this Subsection (b) in applying the limitation on allocations under Section 13. (iii) The deemed cash-out rule applies to a 0% vested Member. A 0% vested Member is a Member whose Account(s) derived from Employer contributions is (are) entirely forfeitable at the time of his termination of employment. Under the deemed cash-out rule, the Plan Administrator will treat the 0% vested Member as having received a cash-out distribution on the date of the Member's termination of employment or, if the Member's Account(s) is (are) entitled to an allocation of Employer contributions for the Plan Year in which he terminates employment, on the last day of that Plan Year. (c) DETERMINATION OF VESTING SERVICE. For purposes of determining a Member's Vested Interest in his Company Contributions Account(s) under Subsection (a) above, a Member shall be credited with that number of years of Vesting Service determined by adding together all of the Associates's Periods of Service, whether or not consecutive. Notwithstanding the foregoing, Vesting Service shall not include any Period of Service before the Plan Year in which an Associate attains age eighteen (18). Only whole years of service shall be taken into account for purposes of applying the schedule set forth in Subsection (a) above, and, for purposes of determining a Member's number of whole years of service, non-successive Periods of Service must be aggregated, with 365 days of service being deemed to constitute one year. For purposes of determining a Member's Period of Service, the Service Spanning rules described in Section 1.51(g) shall apply. (d) FORFEITURE BREAK IN SERVICE. For purposes of this Section 6.07, a "Break in Service" is a Period of Severance of at least 365 consecutive days. A "Forfeiture Break in Service" occurs when a Member or former Member incurs 5 consecutive Breaks in Service. (e) FORFEITURE OCCURS. A Member's forfeiture, if any, of his Account balance(s) derived from Company contributions occurs under the Plan on the earlier of: (i) the last day of the last pay period ending within the Plan Year in which the Member first incurs a Forfeiture Break in Service; or (ii) the date the Member receives a cash-out distribution. The Plan Administrator shall determine the percentage of a Member's Account(s) forfeiture, if any, under this Subsection (e) solely by reference to the vesting schedule of 23 29 Section 6.07(a). As of the last day of each Plan Year, the total amount of forfeitures which occurred during such Plan Year shall be calculated and such amount shall be applied (i) to restore under (b) above any amounts previously forfeited from rehired Members' Accounts, (ii) to pay Administrative Expenses under Section 7.01 and (iii) the balance, if any, shall be added to and allocated with the Company Matching Contribution for that Plan Year. (f) FORMER MAY PLAN MEMBERS. The provisions of this Subsection (f) apply to a Member who previously was employed by the Employer, when it was part of the Group which included The May Department Stores Company, and who at the termination of his employment had Company Accounts in the May Plan which were forfeited as a result of termination of employment. If such Member has not incurred five consecutive Breaks in Service as defined in Section 6.07(b), the value of the Member's Company Account forfeited under the May Plan will be restored under this Plan (in the manner described in Subsection (b) above) and will be 100% vested. 24 30 SECTION 7 EXPENSES 7.01 ADMINISTRATIVE EXPENSES. To the extent permitted by applicable law, the costs and expenses for administering this Plan, consisting of Trustee fees and expenses, Investment Manager fees and expenses, fees and expenses of outside experts, expenses of maintaining records under Section 6 of the Plan, and all other administrative expenses of the Plan, shall be paid out of the Trust Fund unless the Company elects to pay them with its own funds. Costs incident to the purchase and sale of securities, such as brokerage fees, commissions and stock transfer fees, are not regarded as administrative expenses and shall be borne by the appropriate Investment Fund as determined by the Trustee or Committee. 25 31 SECTION 8 WITHDRAWALS DURING EMPLOYMENT 8.01 WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED. No withdrawal from the Plan shall be permitted prior to a Member's termination of employment, except as provided in Section 8.02. 8.02 AUTHORIZED WITHDRAWALS. (a) Prior to his termination of employment, a Member may elect to withdraw, in cash, any or all of the value in his Member After-Tax Accounts. However, in the event a Member elects to withdraw all or a portion of his After-Tax Contributions made after August 1, 1997, such Member shall forfeit his right to fifty percent (50%) of the Company Matching Contribution, if any, otherwise allocable in connection with his Member Contributions for the Plan Year in which the withdrawal occurs. (b) Prior to his termination of employment, a Member may elect to withdraw, in the event of a "hardship", an amount in cash up to (i) the total amount of the Before-Tax Contributions made to the Trust on his behalf, or (ii) the value in his Member Before-Tax Account, whichever is less. In any event the amount withdrawn may not be greater than the amount determined by the Committee as being required to meet the immediate financial need created by the "hardship" and not reasonably available from other resources of the Member, whichever amount is less. The term "hardship" means a heavy financial hardship in light of immediate and heavy financial needs as determined by the Committee in accordance with Internal Revenue Service regulations. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state or local taxes or penalties reasonably anticipated to result from the distribution. The determination shall be made in a nondiscriminatory manner. Hardship shall include but not be limited to the following: (i) Medical expenses described in Code Section 213(d) previously incurred by the Member, the Member's spouse, or any of the Member's dependents (as defined in Code Section 125) or necessary for these persons to obtain medical care described in Section 213(d); (ii) Purchase (excluding mortgage payments) of a principal residence for the Member; (iii) Payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the Member, his or her spouse, children, or dependents (as defined in Code Section 152); (iv) The need to prevent the eviction of the Member from his or her principal residence or foreclosure on the mortgage of the Member's principal residence. 26 32 The Committee may adopt written guidelines which identify additional circumstances constituting hardship and which provide procedures to be followed in the administration of hardship withdrawal requests, which guidelines are hereby incorporated herein. In addition, such hardship must be one which in the judgment of the Committee, based on the Member's representations, cannot be relieved (1) through reimbursement or compensation by insurance or otherwise, (2) by reasonable liquidation of the Member's assets to the extent such liquidation would not itself cause an immediate and heavy financial need, (3) by cessation of Member Contributions under the Plan, (4) by other distributions or loans from employee benefit plans, including this Plan, maintained by the Company or any other employer or (5) by borrowing from commercial sources on reasonable commercial terms. The Member shall be required to submit documentation, to be determined by the Committee, with his hardship withdrawal request to enable the Committee to make a judgment regarding the validity of such hardship withdrawal request. For any Member who has attained age 59 1/2, the "hardship" requirement shall be deemed waived. (c) A Member who was a Participant in or eligible to be a Participant in the Volume Shoe Corporation Profit Sharing Plan (the "Volume Plan") as of December 31, 1988 and who had an account balance in the Volume Plan attributable to Employer Contributions made to the Volume Plan before July 31, 1976 and which account became a Company Account under The May Department Stores Company Profit Sharing Plan and which has been transferred to this Plan, shall be entitled to withdraw the market value of such account balance determined (and frozen) as of December 31, 1988. (d) Associates with Member Rollover Contribution Accounts may elect to withdraw their Member Rollover Contribution Accounts prior to termination of employment. (e) A withdrawal election shall be made pursuant to application procedures established by the Committee. For any withdrawal under this Section 8.02, if the amount which may be withdrawn exceeds $100, the Member may not withdraw less than $100, and if the amount which may be withdrawn is less than $100, the Member shall be required to withdraw all of such amount. Contribution totals and Account values shall be determined as of the Valuation Date coinciding with or next following the filing of the withdrawal election. If the Member Accounts from which withdrawal is made are in more than one Investment Fund, the withdrawal shall be pro rata from each such Investment Fund except in the case the Member is subject to Section 16 of the Securities Exchange Act of 1934 or has been designated as a "Designated Insider," in which case such Member's withdrawal will be taken first from such Member's Investment Funds other than the Payless Common Stock Fund. 27 33 SECTION 9 BENEFITS UPON RETIREMENT, DEATH, DISABILITY OR TERMINATION OF EMPLOYMENT 9.01 BENEFITS. Upon a Member's Retirement, death, Disability, or other termination of employment, the value of his Member Accounts and of his vested Company Accounts shall be determined as of the Valuation Date prior to the date the distribution is calculated. A temporary Authorized Leave of Absence for Military Service or for other purposes approved by the Employer shall not, while any such Authorized Leave of Absence is validly in effect, be regarded as a termination of employment. 9.02 BENEFICIARY. Any benefits payable on account of a Member's death shall be paid to such Member's spouse. If such Member has no spouse or if such Member's spouse shall have consented to the naming of another beneficiary, such benefits shall be paid to the person or persons (including, without limitation, estates, trust, or other entities) last named as beneficiary by such Member on an appropriate form filed with the Committee. A spouse's consent shall acknowledge the effect of the consent and be in writing, witnessed by a Plan representative or notary public. A spouse's consent shall be irrevocable. If no beneficiary has been so named or the named beneficiary does not survive the Member, any payment to be made under this Plan on account of a Member's death shall be paid to such Member's spouse, or, if he has no spouse, to such Member's estate. Whenever permitted by the Code or regulations thereunder, the Committee may waive the requirements that a spouse's consent be obtained. Such waiver may be on a case by case basis or by categories. 28 34 SECTION 10 PAYMENT OF BENEFITS 10.01 TIME OF PAYMENT. (a) All amounts distributable to a Member or Beneficiary pursuant to Section 9 shall, unless the Member makes an approved election pursuant to Section 10.01(b) or 10.01(c), be paid in a lump sum payment to be made as soon as practicable after the Valuation Date as of which the Account values are determined pursuant to Section 9.01; provided, however, that any additional amounts which may be allocated to a Member's Company Accounts resulting from a Company Contribution in respect of the calendar year in which employment terminates shall be paid as soon as practicable after such contribution. Notwithstanding any provision of this Section 10 to the contrary, if the present value of the nonforfeitable accrued benefit of a Member, including Company and Member Contributions (but excluding accumulated deductible employee contribution, if any) exceeds (or for distributions made prior to March 22, 1999, ever has exceeded) $5,000, no partial or total distribution shall be made unless the Member has consented thereto in writing in the manner required by law. (b) A Member who was a Member of the May Plan as of June 30, 1990 may elect that all Transferred Accounts distributable to him pursuant to Section 9 shall be paid in annual installments over a period not to exceed ten years beginning with the Valuation Date as of which the lump sum payment would otherwise be made. In the event of the death of a Member prior to the expiration of such period, all amounts which have not been distributed to him shall be paid in a lump sum to his designated Beneficiary or his estate if there is no designated Beneficiary. Subject to the foregoing, each such installment shall be paid as of a Valuation Date and, until all the Accounts of the Member have been fully distributed, they shall continue to be revalued as of each succeeding Valuation Date pursuant to Section 6.04. Notwithstanding the paragraph above, a Member who as of December 31, 1988 was or was entitled to be a Participant in the Volume Shoe Corporation Profit Sharing Plan may elect that all Transferred Accounts distributable to him pursuant to Section 9 be paid in the form of equal monthly installments over a period not to exceed 120 months. Such payments shall otherwise be made in accordance with the foregoing portion of this Subsection 10.01(b). (c) A Member who is entitled to receive a distribution in excess of $5,000 may elect to defer such distribution to age 65. An election to defer distribution shall conform to such requirements as to form, content, manner, and timing as shall be determined by the Committee and which requirements shall be applied in a manner which does not discriminate in favor of Members who are highly compensated employees (within the meaning of Code Section 414(q)). All Accounts of a Member who elects to defer his distribution shall continue to be revalued as of each succeeding Valuation Date pursuant to 29 35 Section 6.04. A deferred distribution shall be paid when such Member attains the age of 65 years or at such earlier or later time as shall be determined by the Committee as permitted by law. In the event of the death of a Member prior to distribution of the deferred amounts, all amounts shall be distributed in a lump sum to his designated Beneficiary or to his estate if there is no designated Beneficiary. The value for payment shall be determined as of the Valuation Date coincident with or next following such Member's 65th birthday or such other payment date determined by the Committee. 10.02 FORM OF PAYMENT. All distributions shall be made in the form of cash, except that distributions from the Payless Common Stock Fund shall be made in the form of full shares of Payless Common Stock, as applicable (with payment in cash for a fraction of a share) or in cash if elected by the Member or Beneficiary. The rights extended to a Member hereunder shall also apply to any Beneficiary or alternate payee of such Member. 10.03 INDIRECT PAYMENT OF BENEFITS. If any Member or Beneficiary has been adjudged to be legally, physically or mentally incapable or incompetent, payment may be made to the legal guardian or other legal representative of such Member or Beneficiary as determined by the Committee. Such payments shall constitute a full discharge with respect thereto. 10.04 INABILITY TO FIND MEMBER. If a Member or Beneficiary or other person to whom a benefit payment is due cannot be found during the three years subsequent to the date a distribution was required to be made under this Plan, the Accounts shall be forfeited at the end of such three-year period. The value of such Accounts as of the date the distribution was required to be made shall be restored if such Member or Beneficiary or other person makes a claim. 10.05 COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBERS. In accordance with Code Section 401(a)(9) and Treasury Regulations promulgated thereunder, distributions to a Member must commence not later than the first day of April following the calendar year in which the Member attains age 70 1/2. Notwithstanding the foregoing, distribution to a Member who is not a "five percent owner" as defined in Section 20.10(f)(3) shall commence not later than April 1 following the calendar year in which the Member attains age 70 1/2 or, if later, the calendar year in which the Member retires. 10.06 COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY. Distributions to the Beneficiary entitled under Section 9.02 to receive any payments payable under this Plan on account of a Member's death shall be made in a lump sum payment not later than December 31 of the calendar year following the calendar year in which the Member died. 10.07 COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE. Distributions to an alternate payee entitled under Section 16.01 to receive any payments payable under this Plan pursuant to the terms of a Qualified Domestic Relations Order shall be made in accordance with the terms of such Qualified Domestic Relations Order and this Plan on or after the date on which the Member has attained his "earliest retirement age" (as defined under Code Section 414(p)) under the Plan. Notwithstanding the foregoing, distribution to an alternate payee may be made prior to the Member's attainment of his earliest retirement age if, but only if: (1) the Qualified Domestic Relations Order specifies distribution at that time or permits an agreement between the 30 36 Plan and the alternate payee to authorize an earlier distribution; (2) the distribution is a single sum distribution of the alternate payee's entire benefit entitlement under the Plan; and (3) in the event the present value of the alternate payee's benefits under the Plan exceeds $5,000, the alternate payee consents to any distribution occurring prior to the Member's attainment of earliest retirement age. Nothing in this Section 10.07 shall be construed to permit a Member to (1) receive a distribution at a time not otherwise permitted under the Plan, (2) permit the alternate payee to receive a form of payment not otherwise permitted under the Plan, or (3) cause his Plan accounts to be valued or otherwise determined in a manner not otherwise permitted under the Plan. 31 37 SECTION 11 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS 11.01 ROLLOVER TO OTHER PLANS. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and pursuant to procedures prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. Such distribution may commence no less than thirty (30) days nor more than ninety (90) after any notice required under Treas. Reg. Section 1.411(a)-11(c) (or its successor) and explanation of his right to rollover his distribution and tax explanation in accordance with Internal Revenue Rules are given to a Member or other distributee, provided that the Member has been clearly informed that he has a right to a period of at least thirty (30) days after receiving said notice to consider the decision as to whether to elect a distribution or, if applicable, a distribution option, and the Member nevertheless affirmatively elects distribution preceding the expiration of thirty (30) days. 11.02 ROLLOVER FROM OTHER PLANS. An Associate eligible to participate in the Plan, regardless of whether he has satisfied the participation requirements of Section 2.01, may transfer to the Plan an Eligible Rollover Distribution provided that such distribution is from an Eligible Retirement Plan. If such transfer is not a direct transfer, such a transfer may be made only if the following conditions are met: (a) the transfer occurs on or before the 60th day following the Associate's receipt of the distribution from the Eligible Retirement Plan; and (b) The amount transferred is equal to any portion of the distribution the Associate received from the Eligible Retirement Plan, not in excess of the fair market value of all property received in such a distribution reduced by employee contributions, as defined in Code Section 402(a)(5)(E). The Committee shall develop such procedures, and may require such information, from a Member desiring to make such a transfer, as it deems necessary or desirable to determine that the proposed transfer will meet the requirements of the Section. Upon approval by the Committee or its Administrative Delegate, the amount transferred shall be deposited in the Trust Fund and shall be credited to the Member's account. Such rollover amount shall be one hundred percent (100%) vested in the Member, shall share in the income allocations in accordance with Section 5, but shall not share in the Company Profit Sharing Contributions, the Company Matching Contributions or the forfeiture allocations. Upon termination of employment, the total amount of the rollover contribution shall be distributed in accordance with the terms of the Plan. Upon such a transfer by an Associate who is otherwise eligible to participate in the Plan but who has not yet completed the participation requirement of Section 2.01, 32 38 his rollover amount shall represent his sole interest in the Plan until he becomes a Member. 11.03 DEFINITIONS. The following definitions shall apply for the purposes of this Section 11: (a) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee as defined in Code Section 402(c), except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's beneficiary or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any hardship distribution attributable to Before-Tax Contributions. (b) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Code Section 408(u), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), which accepts or will make, as applicable, an Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to a Member's surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) DISTRIBUTEE. A distributee includes a Member or former Member. In addition, the Member or former Member's surviving spouse and the Member's or former Member's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (d) DIRECT TRANSFER. A direct transfer is a payment by the Plan to the eligible retirement plan specified by the distributee as described in Code Section 401(a)(31). 33 39 SECTION 12 LOANS 12.01 AVAILABILITY OF LOANS. Loans shall be permitted under this Plan as established by the policy of the Committee. Any such loan shall be subject to such conditions and limitations as the Committee deems necessary for administrative convenience and to preserve the tax-qualified status of the Plan. Loans are available to Associates who have a Member Rollover Contribution Account. 12.02 AMOUNT OF LOANS. No loan to any Associate, Member or Beneficiary may be made to the extent that such loan, when added to the outstanding balance of all other loans to the Associate, Member or Beneficiary, would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one-year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the loan is made, or (b) one-half the present value of the nonforfeitable accrued benefit of the Participant. For the purpose of the above limitation, all loans from all plans of the Employer and other members of a group of employers described in Code Sections 414(b), 414(c), 414(m) and 414(o) are aggregated. Furthermore, any loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond four and one-half years from the date of the loan. If such loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the Participant, the repayment period shall not extend beyond twenty nine and one-half years from the date of the loan. An assignment or pledge of any portion of the Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the Plan will be treated as a loan under this paragraph. 12.03 TERMS OF LOANS. (a) Loans shall be made available to all Associates, Members and Beneficiaries on a reasonably equivalent basis. (b) Loans shall not be made available to Highly Compensated Employees (as defined in Code Section 414(q)) in an amount greater than the amount made available to other Employees. (c) Loans must be adequately secured using not more than fifty percent (50%) of the Member's Vested Account balance, and bear a reasonable interest rate as determined from time to time by the Committee. (d) An Associate or Member loan for less than $1,000 is not permitted; provided, however, that if such Associate or Member also receives a loan from the Puerto Rico Plan, such minimum amount limitation shall not apply. (e) In the event of a default, foreclosure on the note and attachment of security will not occur until a distributable event occurs under the Plan with respect to the Member. 34 40 (f) No loans will be made to any Associate or Member who on any day during the Company's applicable fiscal year is a beneficial owner of more than five percent (5%) of the outstanding stock of the Company. (g) All loans shall be made pursuant to a written Member loan program incorporated herein by reference. (h) Loans are available from the following accounts, and will be withdrawn from the Members accounts in the following hierarchy: (a) Member Accounts (b) Vested Company Accounts (c) Member Rollover Contribution Accounts (i) Loans will be taken and repaid from and to the Investment Funds on a pro rata basis, except in the case the Member is subject to Section 16 of the Securities Exchange Act of 1934 or has been designated as a "Designated Insider," in which case such Member's loan will be taken first from such Member's Investment Funds other than the Payless Common Stock Fund. 35 41 SECTION 13 LIMIT ON CONTRIBUTIONS TO THE PLAN This Section 13 is intended to conform the Plan to the requirements of Code Section 415 and limits the contributions that can be made by and for an individual under the Plan. 13.01 LIMIT ON CONTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary: (a) The amounts allocated to a Participant during the Limitation Year under the Plan and allocated to the Participant under any other defined contribution plan to which the Employer or any other member of the Group has contributed shall be proportionately reduced, to the extent necessary, so that the Annual Addition does not exceed the least of: (1) $30,000; or (2) 25% of the Participant's remuneration from the Employer or any member of the Group during the Limitation Year; or (3) such other limits set forth in Code Section 415. The amount set forth in subparagraph (1) above shall automatically be adjusted to reflect adjustments made by applicable law. Remuneration for purposes of this Section means remuneration as defined in Treasury Regulation Section 1.415-2(d) and shall also include the deferrals described in Code Section 415(c)(3)(D). (b) For purposes of this Section, Limitation Year means the 12 month period commencing on January 1 and ending on December 31. (c) For purposes of this Section, Annual Additions means the sum for the Limitation Year of Employer contributions, Employee contributions (determined without regard to any rollover contributions as defined in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3) and without regard to Employee contributions to a simplified employee pension plan which are excludible from gross income under 408(k)(6) of the Code) and forfeitures. 13.02 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS. (a) If, as a result of the allocation of forfeitures, a reasonable error in estimating a Member's Pay or other facts and circumstances to which Treasury Regulation Section 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum "annual additions" to be exceeded for any Member, the Committee shall (1) return any Member Contributions credited for the "limitation year" to the extent that the return would reduce the "excess amount" in the Member's Accounts, (2) hold any "excess amount" remaining after the return of any member Contributions in a "Section 415 suspense account", (3) use the "Section 415 suspense account" in the next "limitation 36 42 year" (and succeeding "limitation years" if necessary) to reduce either Company Contributions for that Member if that Member is covered by the Plan as of the end of the "limitation year" or if such Member is not covered by the Plan at the end of the "limitation year" to reduce Company Contributions for all Members in the Plan, before any Company Contributions or Member Contributions which would constitute "annual additions" are made to the Plan for such "limitation year," (4) reduce Company Contributions for such "limitation year" by the amount of the "Section 415 suspense account" allocated and reallocated during such "limitation year." For purposes of (3) above, the Plan may not distribute "excess amounts" to Members or former Members. (b) For purposes of this Section, "EXCESS AMOUNT" for any Member for a "limitation year" shall mean the excess, if any, of (1) the "annual additions" which would be credited to his account under the terms of the Plan without regard to the limitations of Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 13.01(a). (c) For purposes of this Section, "SECTION 415 SUSPENSE ACCOUNT" shall mean an unallocated account equal to the sum of "excess amount" for all Members in the Plan during the "limitation year." The "Section 415 suspense account" shall not share in any earnings or losses of the Trust Fund. 37 43 SECTION 14 ADMINISTRATION OF THE PLAN 14.01 PLAN ADMINISTRATOR. The Company shall be the Plan Administrator of the Plan for purposes of ERISA and shall be a "named fiduciary" as determined in ERISA Section 402(a)(2). 14.02 DELEGATION OF AUTHORITY. (a) Authority to administer the Plan has been delegated to the Committee and the Administrative Subcommittee, if any, in accordance with Sections 1.42 (Total and Permanent Disability), 4.01 (Member Contributions), 6.01 (Member Accounts), 6.02 (Company Accounts), 6.05 (Member Statements), 8.02 (Authorized Withdrawals), 13.02 (Adjustment for Excessive Annual Additions), 20.02 (Withdrawal of an Employer) and this Section 14. (b) Authority with respect to the Investment Funds of the Plan has been delegated to the Trustee in accordance with Sections 7.01 (Administrative Expenses), 5.01(c) (Investment Funds), 15 (Management of the Trust Fund) and 6.06 (shares of Payless ShoeSource, Inc. (Payless Stock) in the Payless Common Stock Fund). (c) Authority to direct the investment of the Plan's funds has been delegated to the Investment Subcommittee, if any, in accordance with Section 15.03(b), (c) and (d) (Investments and Reinvestments). (d) The Committee shall also have the authority and discretion to engage an Administrative Delegate who shall perform, without discretionary authority or control, administrative functions within the frame work of policies, interpretations, rules practices and procedures made by the Committee or other Plan Fiduciary. Any action made or taken by the Administrative Delegate may be appealed by an affected Member to the Committee in accordance with the claims review procedure in Section 16.05. Any decisions which call for interpretations of the Plan provisions not previously made by the Committee shall be made only by the Committee. The Administrative Delegate shall not be considered a fiduciary with respect to the services it provides. 14.03 COMMITTEE AND SUBCOMMITTEES. (a) The Committee may appoint two subcommittees (an "Administrative Subcommittee" and an "Investment Subcommittee"), each Subcommittee to consist of at least three persons, who need not be members of the Board. The Committee and each Subcommittee, if appointed, shall elect from its members a Chairman and a Secretary, and may appoint one or more Assistant Secretaries who may, but need not be, members of the Committee or such Subcommittee, and may employ such agents, such legal counsel and such clerical, medical, accounting, actuarial and other services as it may from time to time deem advisable to assist in the administration of the Plan. The Committee and each Subcommittee may, from time to time, appoint agents and delegate to such agents such duties as it considers appropriate and to the extent 38 44 that such duties have been so delegated, the agent shall be exclusively responsible for the proper discharge of such duties. (b) The Administrative Subcommittee shall have the general responsibility for the administration of the Plan and the carrying out of its provisions, and shall have general powers with respect to Plan administration, including, but not limited to, the powers listed in this Section 14.03. The Administrative Subcommittee shall have the discretionary authority to interpret and construe the Plan, the power to establish rules for the administration of the Plan and the transaction of its business, the power to remedy and resolve inconsistencies and omissions, and the power to determine all questions which arise in the administration, interpretation, or application of the Plan, including but not limited to questions regarding the eligibility, status, Account value and any rights of any Member, Beneficiary, and any other person hereunder. (c) The Investment Subcommittee shall have the powers provided for in Section 15.03(b). (d) The Committee and each Subcommittee shall act by a majority of its members and the action of such majority expressed by a vote at a meeting, or in writing without a meeting, shall constitute the action of the Committee or such Subcommittee. All decisions, determinations, actions or interpretations with respect to the Plan by the Committee or either Subcommittee and the individual committee or subcommittee members shall be in the Committee's, Subcommittee's or individual member's sole discretion. The decision, determination, action or interpretation of the Committee or either Subcommittee and the respective individual members of the Committee or Subcommittee in respect to all matters within the scope of its authority shall be conclusive and binding on all persons. No member of the Committee or either Subcommittee shall have any liability to any person for any action or omission except each for his own individual willful misconduct. If a Subcommittee is not appointed, the Committee shall exercise such Subcommittee's authority and perform its duties as described herein. (e) Nothing in this Section 14 or in any other provision of the Plan shall be deemed to relieve any person who is a fiduciary under the Plan for purposes of ERISA from any responsibility or liability for any responsibility, obligation or duty which Part 4 of Title I of ERISA shall impose upon such person with respect to this Plan. 14.04 ACCOUNTS AND REPORTS. The Committee shall maintain or cause to be maintained accounts reflecting the fiscal transactions of the Plan and shall keep in convenient form such data as may be necessary for the administration of the Plan. The Committee shall prepare annually a report showing in reasonable detail the assets and liabilities of the Plan and setting forth a brief account of the operation of the Plan for the preceding year. 39 45 14.05 NON-DISCRIMINATION. Neither the Committee nor either Subcommittee shall exercise its discretion in such a way as to result in discrimination in favor of officers, shareholders or highly compensated employees (within the meaning of Code Section 414(q)). 40 46 SECTION 15 MANAGEMENT OF THE TRUST FUND 15.01 USE OF THE TRUST FUND. All assets of the Plan shall be held as a Trust Fund in one or more trusts and shall be used to provide the benefits of this Plan. No part of the corpus or income shall be used for, or diverted to, purposes other than for the exclusive benefit of Members and their Beneficiaries under this Plan and administrative expenses of this Plan. 15.02 TRUSTEES. The Trust Fund may, at the direction of the Company, be divided into one or more separate trusts, each of which may have a separate Trustee appointed from time to time by the Company and subject to removal by the Company. The Trustee or Trustees of each trust shall have complete authority and discretion with respect to the investment and reinvestment of the assets of each trust, subject, however, to (i) the provisions in the Trust Agreements between the Trustee or Trustees and the Company, and (ii) the provisions of this Plan. Any or all of such separate trusts shall be referred to collectively from time to time as the Trust Fund. Any division of the Trust Fund into one or more separate trusts shall be at the direction of the Company. 15.03 INVESTMENTS AND REINVESTMENTS. The investment and reinvestment of the assets of the Trust Fund shall be in accordance with the following: (a) The Company shall have the authority to instruct the Trustee or Trustees to accept and follow the instructions of any designated investment manager (within the meaning of ERISA Section 3(38)) with respect to the investment and reinvestment of the assets constituting a money market or stable value fund, a fixed income fund, a common stock fund, or any other Investment Funds the Company may designate. (b) The Investment Subcommittee shall have the powers, with respect to investment and reinvestment of the assets constituting the Investment Funds, to promulgate limitations, restrictions, rules or guidelines with respect to the investment policies and classes of investments in which the assets of the Investment Funds may be invested or reinvested by the Trustee or Trustees, including any such investments made pursuant to the instructions of any investment manager. In the event an investment manager designated pursuant to Section 15.03(a) resigns or otherwise is unable to act, the Investment Subcommittee shall have such power and authority as otherwise would be exercisable by such Investment Manager. (c) In the event that the assets of the Trust Fund shall be divided into one or more separate trusts pursuant to the authority provided for in Section 15.02, then the powers of the Investment Subcommittee as provided for in Section 15.03(b) may be exercised with respect to one or more of such trusts within the discretion of the Investment Subcommittee. (d) The powers of the Investment Subcommittee as provided in Section 15.03(b) may be exercised at any time or from time to time by the Investment Subcommittee within the discretion of the Investment Subcommittee and shall be pursuant to a written agreement between 41 47 the Investment Subcommittee and the Trustee or Trustees or, if an investment manager has been appointed, between the Investment Subcommittee and the investment manager. (e) The Trust Agreement between the Company and the Trustee or Trustees implementing the Plan shall contain provisions effectuating the provisions of this Section 15 of the Plan. 42 48 SECTION 16 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS 16.01 DISCLAIMER OF EMPLOYER LIABILITY. (a) No liability shall attach to any Employer with respect to a benefit or claim hereunder and Members and their Beneficiaries, and all persons claiming under or through them, shall have recourse only to the Trust Fund for payment of any benefit hereunder. (b) The rights of the Members, their Beneficiaries and other persons are hereby expressly limited and shall be only in accordance with the provisions of the Plan. Nothing contained herein shall be deemed to give a Member any interest in any specific property of the Trust or any interest other than a right to receive payments pursuant to the provisions of the Plan. 16.02 EMPLOYER-ASSOCIATE RELATIONSHIP. Neither the establishment of this Plan nor its communication through a Summary Plan Description (or otherwise) shall be construed as conferring any legal or other rights upon any Associate or any other person to continue in employment or as interfering with or affecting in any manner the right of an Employer to discharge any Associate or otherwise act with relation to him. Each Employer may take any action (including discharge) with respect to any Associate or other person and may treat him without regard to the effect which such action or treatment might have upon him as a Member of this Plan. 16.03 BINDING EFFECT. Each Member, by executing an enrollment form, beneficiary designation and otherwise agreeing to participate in the Plan agrees for himself, his beneficiary(ies), heirs, successors and assigns to be bound by all of the provisions of the Plan. 16.04 CORPORATE ACTION. With respect to any action permitted or required by the Plan, the Company may act through its appropriate officers. 16.05 CLAIM AND APPEAL PROCEDURE. A Member or beneficiary may file with the Committee or its designee at any time a written claim in connection either with a benefit payable hereunder or otherwise. The Committee or its designee, normally within 90 days after receipt of a written claim, shall render a written decision on the claim, unless an additional 90 days is required by special circumstances which shall be explained to the claimant. If the claim is denied, either in whole or in part, the decision shall include the reason or reasons for the denial; a specific reference to the Plan provision or provisions which are the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why the information or material is necessary; and an explanation of the Plan's entire claim procedure. The claimant may file with the Committee, within 60 days after receiving the written decision from the Committee, a written notice of request for review of the Committee's decision. The review shall be made by a committee of up to three individuals (which may include members of the Committee) appointed by the Company or by the Committee. Said committee shall render a written decision on the claim containing the specific reasons for their decision, including a reference to the Plan's provisions, normally within 60 days after receipt of the request 43 49 for review, unless an additional 60 days is required by special circumstances which shall be explained to the claimant. If a Member or beneficiary does not file written notice of a claim with the Committee or its designee at the times set forth above, he shall have waived any right to a benefit other than as originally proposed by the Company or the Committee. 44 50 SECTION 17 NON-ALIENATION OF BENEFITS 17.01 PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY. No benefit payable under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, encumber, levy upon or charge the same shall be void; nor shall any such benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit, except as specifically provided herein. Notwithstanding the foregoing, the creation, assignment, or recognition of a right to any benefit payable to an alternate payee with respect to a Qualified Domestic Relations Order shall not be treated as an assignment or alienation prohibited by this Section. Any other provision of the Plan to the contrary notwithstanding, if a Qualified Domestic Relations order requires the distribution of all or part of a Member's benefits under the Plan, the establishment or acknowledgment of the alternate payee's right to benefits under the Plan in accordance with the terms of such Qualified Domestic Relations Order shall in all events be deemed to be consistent with the terms of the Plan. Notwithstanding the above a Member's benefit will be offset against any amount he or she is ordered or required to pay to the Plan pursuant to an order or requirement which arises under a judgment of conviction for a crime involving the Plan, under a civil judgment entered by a court in an action involving a fiduciary breach, or pursuant to a settlement agreement between the Participant and the Department of Labor or the Pension Benefit Guaranty Corporation. Any such offset shall be made pursuant to Section 206(d) of ERISA. 17.02 ALTERNATE APPLICATION. If a Member or Beneficiary under this Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under this Plan, except as specifically provided herein, or if any benefit shall, in the discretion of the Committee, cease, and in that event the Committee may hold or apply the same or any part thereof to or for the benefit of such Member or Beneficiary, his spouse, children or other dependents, or any of them, or in such other manner and in such proportion as the Committee may deem proper. 45 51 SECTION 18 AMENDMENTS 18.01 COMPANY'S RIGHTS. The Company reserves the right at any time and from time to time in its sole discretion to alter, amend, or modify, in whole or in part, any or all of the provisions of this Plan, provided, however, no such alteration, amendment or modification shall be made which shall decrease the accrued benefit of any Member. Anything in this Plan to the contrary notwithstanding, the Company in its sole discretion may make any modifications or amendments, additions or deletions in or to this Plan as to benefits or otherwise and retroactively if necessary, and regardless of the effect thereof on the rights of any particular Member or Beneficiary, which it deems appropriate and/or necessary in order to comply with or satisfy any conditions of any law or regulation relating to the qualification of this Plan and the trust or trusts created pursuant hereto and to keep this Plan and said trusts qualified under Code Section 401(a) and to have the trust or trusts declared exempt from taxation under Code Section 501(a). 18.02 PROCEDURE TO AMEND. This Plan may be amended by action of the Company's Board of Directors and evidenced by a written amendment signed by the Company's Secretary or by any other person so authorized by or pursuant to authority of the Board of Directors. 18.03 PROVISION AGAINST DIVERSION. No part of the assets of the Trust Fund shall, by reason of any modification or amendment or otherwise, be used for, or diverted to, purposes other than for the exclusive benefit of Members and their Beneficiaries under this Plan and administrative expenses of this Plan. 46 52 SECTION 19 TERMINATION 19.01 RIGHT TO TERMINATE. The Company reserves the right to terminate this Plan, in whole or in part, at any time and, if this Plan shall be terminated, the provisions of Section 19.03 shall apply and the Accounts of affected Members shall become (or remain) fully vested and nonforfeitable. 19.02 WITHDRAWAL OF AN EMPLOYER. If an Employer shall cease to be a participating Employer in this Plan, the Trust Fund and the Accounts of the Members of the withdrawing Employer and their Beneficiaries shall be revalued as if such withdrawal date were a Valuation Date. The Committee shall then direct the Trustee either to distribute the Accounts of the Members of the withdrawing Employer as of the date of such withdrawal on the same basis as if the Plan had been terminated pursuant to Section 19.03 or to deposit in a trust established by the withdrawing Employer pursuant to a plan substantially similar to this Plan assets equal in value to the assets of the Trust Fund allocable to the Accounts of the Members of the withdrawing Employer. 19.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST. If this Plan is terminated at any time including a partial termination as defined in US Code Section 411(d)(3), or if contributions are completely discontinued and the Company determines that the trust shall be terminated, in whole or in part, the Trust Fund and all Accounts shall be revalued as if the termination date were a Valuation Date and the affected Members' Accounts shall be distributed in accordance with Section 10. 19.04 ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST. If this Plan shall be terminated in whole or in part or contributions completely discontinued but the Company determines that the trust shall be continued pursuant to the terms of the Trust Agreement, the trust shall continue to be administered as though the Plan were otherwise in effect. Upon the subsequent termination of the trust, in whole or in part, the provisions of Section 19.03 shall apply. 19.05 MERGER, CONSOLIDATION OR TRANSFER. In the case of any merger or consolidation with, or transfer of Plan assets or liabilities to, any other plan each Member shall be entitled to receive a benefit immediately after the merger, consolidation or transfer (if the transferee plan then terminated) which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). 47 53 SECTION 20 CONSTRUCTION 20.01 APPLICABLE LAW. The provisions of this Plan except as otherwise governed by ERISA shall be construed, regulated, administered and enforced according to the laws of Puerto Rico and, whenever possible, to be in conformity with the applicable requirements of ERISA, of the US Code to the extent applicable and of the PR Code of 1994. 20.02 GENDER AND NUMBER. Wherever applicable, the masculine pronoun as used herein shall include the feminine pronoun and the singular pronoun shall include the plural. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by a duly authorized officer this ______ day of _____________, 2000. PAYLESS SHOESOURCE, INC. By:________________________ 53 54 Ex.10.11.doc SECTION 21 TOP-HEAVY REQUIREMENTS 21.01 GENERALLY. For any Plan Year in which the Plan is a Top-Heavy Plan, the provisions of Sections 21.02 and 21.03 shall automatically take effect in accordance with Code Section 416. 21.02 MINIMUM ALLOCATIONS. (a) Minimum Employer Allocations and allocations of Plan forfeitures for a Member who is not a Key Employee shall be required under the Plan for the Plan Year as set forth in Section 21.02 (b) and(c). (b) The amount of the minimum allocation shall be the lesser of the following, percentages of Pay: (i) four percent (4%) or, (ii) the highest percentage at which such allocations are made under the Plan for the Plan Year on behalf of a Key Employee. For purposes of this paragraph (b), all defined contribution plans required to be included in an Aggregation Group shall be treated as one plan. This paragraph (b) shall not apply if the Plan is required to be included in an Aggregation Group and the Plan enables a defined benefit plan required to be included in the Aggregation Group to meet the requirement of Code Sections 401(a)(4) or 410. For purposes of this paragraph (b), the calculation of the percentage at which allocations are made for a Key Employee shall be based only on his Pay not in excess of $170,000, such amount to be adjusted periodically for increases in the cost of living in accordance with Code Section 401(a)(17). The minimum allocation described in this paragraph (b) shall be in addition to (and shall not be reduced by) any Member Contributions under Section 4 (whether Before-Tax or After-Tax) and any allocation of forfeitures, if any, to which a Member may be entitled. (c) For purposes of this Section 21.02, the term "Member" shall be deemed to refer to all Members who have not separated from service at the end of the Plan Year including, without limitation, individuals who declined to make contributions to the Plan. 21.03 PARTICIPANTS UNDER DEFINED BENEFIT PLANS. If any Member other than a Key Employee is also a participant under a defined benefit plan of an Employer which is a Top-Heavy Plan, then Section 21.03(a) shall not apply and the required minimum annual contribution for such Member under this Plan shall be 7 percent (7 %) of such Member's Pay. Such contribution shall be made without regard to the amount of contribution, if any, made to the Plan on behalf of Employees. 49 55 21.04 DETERMINATION OF TOP HEAVINESS. (a) The determination of whether a plan is Top-Heavy shall be made in accordance with paragraphs (b) through (d) of this Section 21.04. (b) If the Plan is not required to be included in an Aggregated Group with other plans, then it shall be Top-Heavy only if when considered by itself, it is a Top-Heavy Plan and it is not included in a permissive Aggregation Group that is not a Top-Heavy Group. (c) If the Plan is required to be included in an Aggregation Group with other plans, it shall be Top-Heavy only if the Aggregation Group, including any permissively aggregated plans, is Top-Heavy. (d) If a plan is not a Top-Heavy Plan and is not required to be included in an Aggregation Group, then it shall not be Top-Heavy even if it is permissively aggregated in an Aggregation Group which is a Top-Heavy Group. 21.05 CALCULATION OF TOP-HEAVY RATIOS. A plan shall be Top-Heavy and an Aggregation Group shall be a Top-Heavy Group with respect to any Plan Year as of the Determination Date if the sum as of the Determination Date of the Cumulative Accrued Benefits and the Cumulative Accounts of Employees who are Key Employees for the Plan Year exceeds 60 percent (60%) of a similar sum determined for all Employees, excluding former Key Employees. 21.06 CUMULATIVE ACCOUNTS AND CUMULATIVE ACCRUED BENEFITS. (a) The Cumulative Accounts and Cumulative Accrued Benefits for any Employee shall be determined in accordance with paragraphs (b) through (e) of this Section 21.06. (b) Cumulative Account shall mean the sum of the amount of an Employee's accounts under a defined contribution plan (for an unaggregated plan) or under all defined contribution plans included in an Aggregation Group (for aggregated plans) determined as of the most recent plan Valuation Date within a 12-month period ending on the Determination Date, increased by any allocations due after such Valuation Date and before the Determination Date. (c) Cumulative Accrued Benefit means the sum of the present value of an Employee's accrued benefits under a defined benefit plan (for an unaggregated plan) or under all defined benefit plans included in an Aggregation Group (for aggregated plans), determined under the actuarial assumptions set forth in such plan or plans, as of the most recent plan Valuation Date within a 12-month period ending on the Determination Date as if the Employee voluntarily terminated service as of such Valuation Date. (d) Accounts and benefits shall be calculated to include all amounts attributable to both Matching Allocations and Employee contributions but excluding amounts attributable to voluntary deductible Employee contributions. 50 56 (e) Accounts and benefits shall be increased by the aggregate distributions during the five-year period ending on the Determination Date made with respect to an Employee under the plan or plans as the case may be or under a terminated plan which, if it had not been terminated, would have been required to be included in the Aggregation Group. (f) Rollovers and direct plan-to-plan transfers shall be handled as follows: (i) If the transfer is initiated by the Employee and made from a plan maintained by one Employer to a plan maintained by another Employer, the transferring plan continues to count the amount transferred under the rules for counting distributions. The receiving plan does not count the amount if accepted after December 31, 1983, but does count it if accepted prior to December 31, 1983. (ii) If the transfer is not initiated by the Employee or is made between plans maintained by the Employers, the transferring plan shall no longer count the amount transferred and the receiving plan shall count the amount transferred. (iii) For purposes of this subsection (f), all Employers aggregated under the rules of Code Sections 414(b), (c) and (m) shall be considered a single employer. 21.07 OTHER DEFINITIONS. (a) Solely for purposes of this Section 21, the definitions in paragraphs (b) through (i) of this Section 21.07 shall apply, to be interpreted in accordance with the provisions of Code Section 416 and the regulations thereunder. (b) AGGREGATION GROUP means a plan or group of plans which included all plans maintained by the Employer in which a Key Employee is a participant or which enables any plan in which a Key Employee is a participant to meet the requirements of Code Section 401(a)(4) or Code Section 410, as well as all other plans selected by the Company for permissive aggregation, the inclusion of which would not prevent the group of plans from continuing to meet the requirements of such Code sections. (c) DETERMINATION DATE means, with respect to any Plan Year, the last day of the preceding Plan Year. (d) EMPLOYEE means any person employed by an Employer and shall also include any Beneficiary of such persons, provided that the requirements of Sections 21.02 and 21.03 shall not apply to any person included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between Employee representatives and one or more Employers if there is evidence that retirement benefits were the subject of good faith bargaining between such Employee representatives and such Employer or Employers. (e) EMPLOYER means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Company or any 51 57 trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)) with the Company, or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company, (f) KEY EMPLOYEE means any Employee or former Employee who is, at any time during the Plan Year, or was, during any one of the four preceding Plan Years any one or more of the following: (1) an officer of an Employer who has annual Pay of more than 50% of the amount in effect under Code Section 415(b)(1)(A) for such Plan Year, unless fifty (50) other such officers have higher annual Pay; (2) one of the 10 persons employed by an Employer having annual Pay greater than the limitation in effect under Code Section 415(c)(1)(A), and owning (or considered as owning within the meaning of Code Section 318) the largest interests in the Employers (if two Employees have the same interest, the one with the greater Compensation shall be treated as owning the larger interest); (3) any person owning (or considered as owning within the meaning of the Code Section 318) more than five percent of the outstanding stock of an Employer or stock possessing more than five percent of the total combined voting power of such stock; (4) a person who would be described in subsection (3) above if "one percent" were substituted for "five percent" each place it appears in subsection (3) above, and who has annual Pay of more than $150,000 (for purposes of determining ownership under this subsection, Code Section 318(a)(2)(C) shall be applied by substituting "five percent" for "50 percent" and the rules of subsections (b), (c) and (m) of Code Section 414 shall not apply). IN WITNESS WHEREOF, the Company has caused this Plan to be executed by a duly authorized officer this ____________ day of __________________, 2000. PAYLESS SHOESOURCE, INC. By:______________________________ 52 EX-10.12 7 DEFERRED COMPENSATION PLAN, AS AMENDED 3-16-00 1 Exhibit 10.12 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN Amended March 16, 2000 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 Delaware corporation. (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. 2 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. (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 2 3 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 (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 3 4 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. 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 4 5 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. 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). 5 6 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. 6 7 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, 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 7 8 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 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 the purposes of this Plan, a "Change in Control" shall be deemed to have occurred if: (a) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 13, none of the following shall constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that 8 9 complies with Sections 13(c)(A), 13(c)(B) and 13(c)(C) or (v) any acquisition by the Company which, by reducing the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities, increases the proportionate number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by any Person to 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities; provided, however, that, if such Person shall thereafter become the beneficial owner of any additional shares of Outstanding Company Common Stock or Outstanding Company Voting Securities and beneficially owns 20% or more of either the Outstanding Company Common Sock or the Outstanding Company Voting Securities, then such additional acquisition shall constitute a Change of Control; or (b) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; (c) a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") is consummated, in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then- outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination, (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or 9 10 (d) the stockholders of the Company approve of a complete liquidation or dissolution of the Company. 10 EX-10.14 8 FORM OF CONTROL AGREEMENT 1 Exhibit 10.14 CHANGE OF CONTROL AGREEMENT AGREEMENT, dated as of the 10th day of March, 2000 (this "Agreement"), by and between Payless ShoeSource, Inc., a Delaware corporation (the "Company"), and _________________________ (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the current Company and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: SECTION 1. CERTAIN DEFINITIONS. (a) "Effective Date" means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then "Effective Date" means the date immediately prior to the date of such termination of employment. Further, notwithstanding anything in this Agreement to the contrary, if a Potential Change of Control occurs and if the Executive's employment with the Company is terminated as provided in Section 5(e), then "Effective Date" means the date immediately prior to the date of such termination of employment. (b) "Change of Control Period" means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. (c) "affiliated company" means any company controlled by, controlling or under common control with the Company. 2 (d) "Change of Control" means: (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 1(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C); or (2) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the 2 3 combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (e) "Potential Change of Control" means: (1) At least two directors of a particular class of directors, as of the date hereof, are replaced for any reason by directors who are not members of the Incumbent Board at the time of such replacement; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (2) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change of Control has occurred. SECTION 2. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the "Employment Period"). SECTION 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (1) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 35 miles from such office. (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this 3 4 Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (1) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary (the "Annual Base Salary"), which Annual Base Salary shall be paid at a monthly rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the affiliated companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" shall refer to the Annual Base Salary as so increased. (2) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's annual and long-term incentive plans, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized, in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (3) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if 4 5 more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the affiliated companies. (4) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the affiliated companies. (5) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. (6) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. (7) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. (8) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to 5 6 the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies. SECTION 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of "Disability"), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. "Disability" means the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. "Cause" means: (1) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or any affiliated company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive's duties, or (2) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company. For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the 6 7 good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. "Good Reason" means: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a), or any other action by the Company that results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (3) the Company's requiring the Executive to be based at any office or location other than as provided in Section 3(a)(1)(B) or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (4) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (5) any failure by the Company to comply with and satisfy Section 10(c). For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of a Change of Control shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). "Notice of Termination" means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to 7 8 a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's respective rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, as the case may be, (2) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (3) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. SECTION 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (A) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or Disability or the Executive terminates employment for Good Reason: (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: (A) the sum of (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (ii) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365, and (iii) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the "Accrued Obligations"); and (B) the amount equal to the product of (i) three and (ii) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and (C) an amount equal to the excess of (i) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Effective Date) and the any excess or supplemental retirement plan in which 8 9 the Executive participates (collectively, the "SERP") that the Executive would receive if the Executive's employment continued for three years after the Date of Termination, assuming for this purpose that all accrued benefits are fully vested and assuming that the Executive's compensation in each of the three years is that required by Sections 3(b)(1) and 3(b)(2), over (ii) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; and (D) in lieu of the receipt of shares of common stock of the Company ("Common Stock") issuable upon the exercise of outstanding options (other than stock options qualifying as incentive stock options ("ISOs") under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code") which ISOs were granted on or prior to [SET FORTH DATE OF PRIOR AGREEMENT]) ("Options"), stock appreciation rights ("SARs") and performance units ("Units"), if any (the Options, SARs and Units shall be referred to herein collectively as the "Awards"), granted to the Executive under the Company's 1996 Stock Incentive Plan or any successor or substitute plans thereto, an amount equal to the product of (i) the excess of (x) in the case of an ISO granted after [SET FORTH DATE OF PRIOR AGREEMENT], the closing price of Common Stock as reported on the New York Stock Exchange on the Date of Termination or the last full trading day immediately prior to the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading value in the Common Stock is highest) (the "Closing Price") and, in the case of all other Awards, the higher of the Closing Price and the highest per share price for Common Stock actually paid in connection with any Change of Control, over (y) the per share exercise price (if any) of each Award, and (2) the number of shares of Common Stock covered by each such Award, whether or not such Award is exercisable on the Date of Termination; and (2) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b)(4) if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the affiliated companies and their families, provided, however, that, if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. If the Executive has attained age 50 on the Date of Termination and if, with five additional years of age and service beyond the Executive's age and years of service as of the Date of Termination, the Executive would have been entitled to receive post-retirement medical and life benefits under the Company's post-retirement programs as in effect immediately prior to the Effective Date, then the Executive shall be entitled to such benefits as if the 9 10 Executive had attained those five additional years of age and been employed by the Company for those five additional years of service, as of the Date of Termination, and such post-retirement medical and life benefits shall [COMMENCE IMMEDIATELY AND] be determined and provided under the terms of such plans as in effect immediately prior to the Effective Date, without regard to any amendments subsequent to the Effective Date that adversely affect the rights of participants thereunder; and (3) if the Executive has attained age 50 but has not attained age 55 on the Date of Termination, then for purposes of determining benefits under Section 3.2(c) of the Company's Supplementary Retirement Plan or any successor plan, as in effect immediately prior to the Effective Date (the "Supplemental Plan"), the Executive shall be deemed to be entitled to the benefits under Section 3.2(c) of the Supplemental Plan if, during the five-year period following the Effective Date, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason (it being expressly agreed that, notwithstanding anything to the contrary contained herein, the rights under this Section 5(a)(3) shall survive for the five-year period following the Effective Date); the benefits under this Section 5(a)(3) shall not be in duplication of the benefits set forth in Section 5(a)(1)(C); and (4) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion; and (5) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the affiliated companies (such other amounts and benefits, the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of the Other Benefits. The Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the affiliated companies to the estates and beneficiaries of peer executives of the Company and the affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and the affiliated companies and their beneficiaries. 10 11 (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of the Other Benefits. The Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term "Other Benefits" as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the affiliated companies and their families. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment is terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (1) the Executive's Annual Base Salary through the Date of Termination, (2) the amount of any compensation previously deferred by the Executive, and (3) the Other Benefits, in each case, to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for the Accrued Obligations and the timely payment or provision of the Other Benefits. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. (e) OBLIGATIONS OF THE COMPANY AND THE EXECUTIVE UPON A POTENTIAL CHANGE OF CONTROL. If, during the Change of Control Period, a Potential Change of Control occurs, the Executive hereby agrees to remain in the employ of the Company, on the same basis and terms and conditions as the Executive is employed by the Company immediately prior to the Potential Change of Control, for the 12-month period following such Potential Change of Control. If the Executive's employment is terminated by the Company other than for Cause, death or Disability, or the Executive terminates his employment for Good Reason, during the 12-month period following the occurrence of a Potential Change of Control, without regard to whether a Change of Control has actually occurred or is likely to occur, the Executive's employment shall be deemed to have been terminated by the Company in anticipation of a Change of Control, and the Executive shall be entitled to receive the payments and benefits provided in Section 5(a) hereof. SECTION 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or the affiliated companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such 11 12 rights as the Executive may have under any contract or agreement with the Company or the affiliated companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or the affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. SECTION 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. SECTION 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or the affiliated companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise but determined without regard to any additional payments required under this Section 8) (the "Payment") would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively, the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to the Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount that could be paid to the Executive such that the receipt of the Payments would not give rise to any Excise Tax (the "Reduced Amount"), then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. 12 13 (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Anderson, LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") that shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order effectively to contest such claim, and 13 14 (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. SECTION 9. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the affiliated companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the affiliated companies and which 14 15 information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. SECTION 10. SUCCESSORS. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. SECTION 11. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Executive: _________________________ _________________________ _________________________ 15 16 if to the Company: Payless ShoeSource, Inc., 3231 SE Sixth Avenue Topeka, Kansas 66607 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) From and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof; provided, however, in no event shall this Agreement supersede or replace the Indemnification Agreement between the Executive and the Company, dated as of March 10, 2000. 16 17 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. _________________________ PAYLESS SHOESOURCE, INC. By_______________________ Name: Title: 17 EX-10.15 9 FORM OF DIRECTOR'S AND OFFICER'S INDEMNITY AGRMT. 1 Exhibit 10.15 INDEMNIFICATION AGREEMENT AGREEMENT, dated as of the 22nd day of March, 2000, between Payless ShoeSource, Inc., a Delaware corporation (the "Company") and ____________(the "Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; and WHEREAS, Indemnitee is a director or officer of the Company; and WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today's environment; and WHEREAS, basic protection against undue risk of personal liability of directors and officers heretofore has been provided through insurance coverage providing reasonable protection at reasonable cost, and Indemnitee has relied on the availability of such coverage; but as a result of substantial changes in the marketplace for such insurance it generally has become more difficult to obtain such insurance on terms providing reasonable protection at reasonable cost; and WHEREAS, the Delaware legislature, in recognition of the need to secure the continued service of competent and experienced people in senior corporate positions and to assure that they will be able to exercise judgment without fear of personal liability so long as they fulfill the basic duties of honesty, care and good faith, has so enacted Section 145 of The Delaware General Corporation Law (the "DGCL"), which empowers the Company to indemnify its officers, directors, employees and agents and expressly provides that the indemnification provided by the statute is not exclusive; and WHEREAS, the Certificate of Incorporation of the Company requires the Company to indemnify and advance expenses to its directors and officers to the fullest extent now or hereafter authorized or permitted by law and authorizes the Company to enter into agreements providing for such indemnification and advancement of expenses; and WHEREAS, in recognition of the fact that the Indemnitee continues to serve as a director or officer of the Company, in part in reliance on the aforesaid By-laws, and of the fact of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner, and in part to provide Indemnitee with specific contractual assurance that the protection promised by such Certificate of Incorporation will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Certificate of Incorporation or any change in the composition of the Company's Board of Directors or any acquisition transaction relating to the Company), and due to the possibility that the Company's directors' and officers' liability insurance coverage could at some future time become inadequate, the Company wishes to provide in this Agreement for the 2 indemnification of, and the advancing of expenses to, Indemnitee to the fullest extent (whether partial or complete) now or hereafter authorized or permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies, NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS: (1) "Approved Law Firm" shall mean any law firm (i) located in New York or Delaware, (ii) having 50 or more attorneys and (iii) rated "av" by Martindale-Hubbell Law Directory; provided, however, that such law firm shall not, for a five- year period prior to the Indemnifiable Event, have been engaged by the Company, an Acquiring Person or the Indemnitee. (2) "Applicable Standard of Conduct" shall mean the standard established by Section 145(a)-(b) of the DGCL. (3) "Board of Directors" shall mean the Board of Directors of the Company. (4) A "Change of Control" shall be deemed to have occurred upon: (A) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 1(d), none of the following shall constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company, (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C) or (v) any acquisition by the Company which, by reducing the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities, increases the proportionate number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by any Person to 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities; provided, however, that, if such Person shall thereafter become the beneficial owner of any additional shares of Outstanding Company Common 2 3 Stock or Outstanding Company Voting Securities and beneficially owns 20% or more of either the Outstanding Company Common Sock or the Outstanding Company Voting Securities, then such additional acquisition shall constitute a Change of Control; or (B) The cessation, for any reason, of individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (C) The consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of 3 4 the initial agreement or of the action of the Board providing for such Business Combination; or (D) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (5) "Claim" shall mean any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil, criminal, administrative, investigative or other. (6) "Expenses" shall include attorneys' fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any Claim relating to any Indemnifiable Event, together with interest, computed at the Company's average cost of funds for short-term borrowings, accrued from the date of payment of such expense to the date Indemnitee receives reimbursement therefor. (7) "Indemnifiable Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation of any type or kind, domestic or foreign, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. Without limitation of any indemnification provided hereunder, an Indemnitee serving (i) another corporation, partnership, joint venture or trust of which 20 percent or more of the voting power or residual economic interest is held, directly or indirectly, by the Company, or (ii) any employee benefit plan of the Company or any entity referred to in clause (i), in any capacity shall be deemed to be doing so at the request of the Company. (8) "Reviewing Party" shall be (i) the Board of Directors acting by majority vote of directors who are not parties to the particular Claim with respect to which Indemnitee is seeking indemnification, even through less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, (A) by independent legal counsel in a written opinion that indemnification is proper in the circumstances because the indemnification is not precluded by circumstances described in the last sentence of Section 2 of this Agreement and the Applicable Standard of Conduct set forth in Section 145 of the DGCL has been met by the Indemnitee or (B) the shareholders upon a finding that the Indemnitee has met the Applicable Standard of Conduct referred to in clause (iii)(A) of this definition. (9) "Voting Securities" shall mean any securities of the Company which vote generally in the election of directors. 4 5 2. BASIC INDEMNIFICATION ARRANGEMENT. If Indemnitee was, is or becomes at any time a party to, or witness or other participant in, or is threatened to be made a party to, or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent now or hereafter authorized or permitted by law as soon as practicable but in any event no later than 30 days after written demand is presented to the Company, against any and all Expenses, judgments, fines (including excise taxes assessed against an Indemnitee with respect to an employee benefit plan), penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with, or in respect of, such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim. If so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding anything in this Agreement to the contrary, (i) Indemnitee shall not be entitled to indemnification pursuant to this Agreement in any action in which the Indemnitee's conduct has been finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct; (ii) in any derivative action in which Indemnitee has been finally adjudged to be liable to the Company, unless and only to the extent that the Court of Chancery or the court in which the proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper, and (iii) prior to a Change in Control Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim. 3. PAYMENT. Notwithstanding the provisions of Section 2, the obligations of the Company under Section 2 (which shall in no event be deemed to preclude any right to indemnification to which Indemnitee may be entitled under Section 145(c) of the DGCL) shall be subject to the condition that the Reviewing Party shall have authorized such indemnification in the specific case by having determined that the indemnification is not precluded by circumstances described in the last sentence of Section 2 of this Agreement and Indemnitee is permitted to be indemnified under the Applicable Standard of Conduct set forth in Section 145(a)-(b) of the DGCL. The Company shall promptly call a meeting of the Board of Directors with respect to a Claim and agrees to use its best efforts to facilitate a prompt determination by the Reviewing Party with respect to the Claim. Indemnitee shall be afforded the opportunity to make submissions to the Reviewing Party with respect to the Claim. The obligation of the Company to make an Expense Advance pursuant to Section 2 shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under Section 2 and applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees and undertakes to the full extent required by Section 145(e) of the DGCL to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under 5 6 applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the State of Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 4. CHANGE IN CONTROL. If there is a Change in Control (other than a Change in Control which has been approved by a majority of the Board of Directors who were directors immediately prior to such Change in Control) then (i) all determinations by the Company pursuant to the first sentence of Section 3 hereof and Section 145(d) of the DGCL shall be made by independent legal counsel in a written opinion pursuant to Section 145(d) of the DGCL and (ii) with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or By-law of the Company now or hereafter in effect relating to Claims for Indemnifiable Events (including, but not limited to, any such legal opinion provided under Section 145 (d) of the DGCL) the Company (including the Board of Directors) shall seek legal advice from (and only from) special, independent counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company (or any subsidiary of the Company) or an Acquiring Person (or any affiliate or associate of such Acquiring Person) or Indemnitee within the last five years (other than in connection with such matters). Unless Indemnitee has theretofore selected counsel pursuant to this Section 4 and such counsel has been approved by the Company, any Approved Law Firm selected by Indemnitee shall be deemed to be approved by the Company. Such counsel, among other things, shall render its written opinion to the Company, the Board of Directors and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the special, independent counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. As used in this Agreement, the terms "affiliate" and "associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Act and in effect on the date of this Agreement. 5. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee, which are reasonably incurred by Indemnitee in connection with any claim asserted or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the 6 7 Company under this Agreement or any other agreement or By-law of the Company now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 6. PARTIAL INDEMNITY, ETC. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified, to the extent permitted by law, against all Expenses incurred in connection with such Indemnifiable Event. 7. BURDEN OF PROOF. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. 8. NO PRESUMPTION. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, whether civil or criminal, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 9. NONEXCLUSIVITY, ETC. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Certificate of Incorporation of the Company, the DGCL, or otherwise. To the extent that a change in the DGCL (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Certificate of Incorporation of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 10. LIABILITY INSURANCE. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any director or officer of the Company. 11. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any affiliate of the Company 7 8 against Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company or any affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 12. AMENDMENTS, ETC. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be effective unless in writing and no written waiver shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 13. SUBROGATION. In the event of payment under the Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 14. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, By-law or otherwise) of the amounts otherwise indemnifiable hereunder. 15. SPECIFIC PERFORMANCE. The parties recognize that if any provision of this Agreement is violated by the Company, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, the Indemnitee shall be entitled, if Indemnitee so elects, to institute proceedings, either in law or at equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue. 16. BINDING EFFECT, ETC. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or of any other enterprise at the Company's request. 17. SEVERABILITY. The provisions of this Agreement shall be severable if any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise 8 9 unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 18. GOVERNING LAW. This Agreement shall be governed by, and be construed and enforced in accordance with, the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. 19. EFFECTIVE TIME. This Agreement shall become effective as of the date first above written. The contractual rights of Indemnitee with respect to Indemnifiable Events occurring before the Effective Time are governed by the Indemnification Agreement between Indemnitee and Payless ShoeSource, Inc., a Missouri corporation or Payless ShoeSource, Inc., a Delaware corporation, if any, (the "Prior Agreements") and Indemnitee shall have no rights under this Agreement with respect to such Indemnifiable Events. The contractual rights of Indemnitee with respect to Indemnifiable Events occurring after the Effective Time are governed by this Agreement, and Indemnitee shall have no rights against Payless ShoeSource, Inc., a Missouri corporation or Payless ShoeSource, Inc., a Delaware corporation, under any Prior Agreements with respect to such Indemnifiable Events. IN WITNESS WHEREOF, the Company and Indemnitee have executed this Agreement as of the date first above written. ------------------------------------ PAYLESS SHOESOURCE, INC. By: --------------------------------- Name: Steven J. Douglass Title: Chairman and Chief Executive Officer 9 EX-10.16 10 DEFERRED COMPENSATION PLAN FOR NON-MGMNT DIRECTORS 1 Exhibit 10.16 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN FOR NON-MANAGEMENT DIRECTORS EFFECTIVE JULY 17, 1997 Amended March 16, 2000 2 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN FOR NON-MANAGEMENT DIRECTORS SECTION 1. PURPOSE. The purpose of this Plan is to provide an opportunity for Non-Management Directors of Payless ShoeSource, Inc. to defer all or a portion of their Initial Grant and Annual Retainer(s) under the Restricted Stock Plan, as well as cash compensation for service on the Board. SECTION 2. DEFINITIONS. (a) Annual Retainer means the annual grant of restricted Stock under the Restricted Stock Plan for Non-Management Directors of Payless ShoeSource, Inc. and any annual award of cash compensation payable for service on the Board. (b) Board means the Board of Directors of Payless, as hereinafter defined. (c) Fiscal Year means the fiscal year of Payless as established from time to time. (d) Initial Grant means the initial grant of restricted Stock to an eligible Non- Management Director under the Restricted Stock Plan and any initial award of cash compensation payable for service on the Board. (e) Non-Management Director means a member of the Board who is not, at the time an election to defer is made, an officer of Payless. (f) Payless means Payless ShoeSource, Inc., a Delaware corporation. (g) Participant means a Non-Management Director who has elected to participate in the Plan. (h) Plan means the Deferred Compensation Plan for Non-Management Directors of Payless, as described herein. (i) Restricted Stock Plan means the Restricted Stock Plan for Non-Management Directors of Payless ShoeSource, Inc., all of the relevant terms of which are incorporated herein. (j) Stock means the common stock of Payless, as hereinafter defined. (k) Stock Unit means an accounting equivalent of one share of Stock. 3 (l) Stock Unit Account means an account on the records of Payless 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 effective date of an individual first becoming an eligible Non-Management Director and as of the first day of each calendar year thereafter while such individual remains an eligible Non-Management Director, each Participant shall be afforded the opportunity to make an election to have either of the following alternative methods of payment applied to all or any portion of the Initial Grant and/or the Annual Retainer under the Restricted Stock Plan and of any additional cash compensation which such Participant shall be entitled to receive as awarded at the annual shareowners' meeting during said calendar year. (i) Alternative (i): Payment of the Initial Grant and of the Annual Retainer in the form of restricted Stock pursuant to the terms of the Restricted Stock Plan and payment in cash of any additional compensation that is payable initially or annually as of the date of the annual shareowners' meeting. (ii) Alternative (ii): Payment of any cash compensation at a deferred date or dates either in a lump sum or in annual installments, as may be elected by the Participant, such deferred cash payment when made to include interest, as hereinafter provided, from the first day of May next following the date of the annual shareowners' meeting as of which the compensation was awarded to the date of payment. (iii) Alternative (iii): Payment of the amount of the Initial Grant and of the Annual Retainer, otherwise payable in the form of restricted Stock, at a deferred date or dates either in a lump sum or in annual installments, as may be elected by the Participant, such deferred payment in the form of Stock to be made for Stock Units 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 Initial Grant or Annual Retainer, as applicable, for such year. The Participant shall make an irrevocable 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 for which such Alternative was elected by the Participant, or, if a Participant is newly elected or appointed to the Board, prior to the first meeting following such election or appointment. (b) Consistent with the provisions of Sections 2 and 3 of Part II of the Restricted Stock Plan, except in the event of death or disability as described therein, all or any portion of an Initial Grant or of an Annual Retainer under the Restricted Stock Plan 2 4 which is deferred hereunder shall not vest and shall be forfeited in the event the Participant shall cease to be a member of the Board within six months following the date of such grant and deferral, and a deferred Initial Grant only shall vest and cease to be forfeitable one-fifth for each Year of Service (as defined in the Restricted Stock Plan) and a deferred Annual Retainer under the Restricted Stock Plan only shall vest and cease to be forfeitable one-half on the first November 1 following the annual shareowner's meeting as of which such Annual Retainer is granted and deferred and the remaining one-half of such Annual Retainer shall vest as of the first May 1 following the end of the calendar year in which such grant was made. The cash portion, if any, of an Annual Retainer shall vest, provided the Participant's membership on the Board has not ceased, as of the earlier of one-fifth on the date of each regularly scheduled Board meeting following the shareowners' meeting at which such cash compensation was awarded, or in full as of the May 1 following the date of such annual shareowners' meeting. Notwithstanding any provision of this Section 3(b) to the contrary, in the event of a Participant's death or disability as defined in the Restricted Stock Plan, all outstanding Initial Grants and Annual Retainers shall be deemed to be fully vested and nonforfeitable. Vesting of any pro rata Annual Retainer deferred shall occur in the same manner as described in Section 2 of Part II of the Restricted Stock Plan and vesting may be accelerated by action of the Committee under the terms of the Restricted Stock Plan. (c) Except as provided in Section 12 and Section 13, in no event shall payments under Alternatives (ii) or (iii) commence prior to the earlier of (I) the first day of May following the end of the calendar year during which the Participant's service as a director of Payless terminates; or (ii) the occurrence of a severe financial hardship. Upon the written request of the Participant (or if applicable, the beneficiary or distributee) the payment schedule elected by the Participant under Alternatives (ii) or (iii) above may be revised by the Board, 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 Board may revise the payment schedule that the Participant had previously established only to the extent that the Board considers necessary to eliminate or lessen the severe financial hardship. (d) In the case of a Participant who elects to have all or any part of his Initial Grant and/or Annual Retainer, as applicable, 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 with respect to such Initial Grant and/or Annual Retainer 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 Initial Grant or Annual Retainer compensation, as applicable, as is to be so applied to Alternative (iii) by the average of the high and low trading prices of the Stock on the New York Stock Exchange as of the date of Payless' annual shareowners' meeting (or, it applicable, the date the Participant 3 5 first joins the Board) or, if the New York Stock Exchange is not open on such date, the first preceding day it was open; plus (ii) the quotient, disregarding fractions, resulting from dividing the aggregate dollar amount of cash dividends which would have been paid to the Participant during the "Year" had the Stock Units standing in his Stock Unit Account from time to time during the Year been shares of Stock by the average of the high and low trading prices of the Stock on the New York Stock Exchange as of the date of Payless' annual shareowners' meeting (or, if applicable, the date the Participant first joins the Board) or, if the New York Stock Exchange is not open on such date, the first preceding day it was open (for purposes of these subparagraphs (ii) and (iii), the "Year" is the twelve month period preceding each annual shareowners' meeting); plus (iii) the number of shares of Stock, disregarding fractions, which would have been received by the Participant as stock dividends during the 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 Stock. Any allocation of Stock Units to a Participant's Stock Unit Account required to be made pursuant to this paragraph (d) shall be made as of the date of Payless' annual shareowners' meeting (or, if applicable, the date the Participant first joins the Board) as of which such Stock Units were determined. The aggregate value of the fraction or fractions remaining after making the applicable calculations referred to in subparagraphs (d)(i), (d)(ii) and (d)(iii) of this Section 3 shall be converted into Stock Units, to be accumulated in the Participant's Stock Unit Account until paid or distributed. (e) Notwithstanding the provisions of Section 3(d) to the contrary, in the event of a recapitalization of Payless pursuant to which the outstanding shares of 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 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. (f) Interest to be paid under Alternative (ii) shall be credited annually as of the first day of May next following the date of Payless' annual shareowners' meeting each year and shall be at a rate 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 May 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 Board shall substitute therefor such alternative method of determining such interest rate as it, in its discretion, shall deem appropriate. SECTION 4. LIMITATION OF STOCK UNITS. 4 6 In no event shall the aggregate number of Stock Units allocated under this Plan, when added to the total number of shares of Restricted Stock granted under the Restricted Stock Plan, exceed 300,000 shares of Stock, as adjusted hereunder or under the Restricted Stock Plan. SECTION 5. DISTRIBUTION FROM THE STOCK UNIT ACCOUNT. (a) Distribution from a Participant's Stock Unit Account shall be made in accordance with elections made by the Participant and the determinations made by the Board, 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 Participant has determined that a distribution is to be made in a lump sum in Stock, the number of shares of 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 Stock to be distributed on a particular annual installment distribution date, the Board shall make its calculations as if that annual installment and all subsequent annual installments were in fact to be made in shares of Stock, as follows: the number of shares of 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 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 Stock distributed to a Participant. Any fractional Stock Unit shall not be distributed in Stock, but shall be distributed in cash based on the average of the high and low trading prices of the Stock on the New York Stock Exchange as of the date of distribution or, if the New York Stock Exchange is not open on such date, the first preceding day it was open. 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 the Participant pursuant to such Alternatives, shall be distributed to such beneficiary as the Participant shall have designated in writing delivered to the Board, or, in the absence of such designation, shall be distributable to the Participant's personal representative. Such distribution shall be made at such date or dates, either in a lump sum or in annual installments as elected by the Participant prior to the beginning of the calendar year for which such Alternative was elected, as determined by the Board and provided further that in the event of a severe financial hardship, the Board may revise its determination in accordance with Section 3(c). 5 7 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 Payless. Nothing in this Agreement shall require Payless to invest any amount, the payment of which has been deferred under Alternative (ii) or (iii), in Stock or in any other medium. SECTION 8. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by the Board. 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 in (i) the maximum number of shares or Stock Units deliverable or allocable in respect of any Fiscal Year under the plan or (ii) the provisions of subparagraphs (d)(i) and (d)(ii) of Section 3 of this Plan relating to the method of determining the number of Stock Units allocable to a Participant. (b) The Board 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 Board may determine and shall designate: (i) the Alternative or Alternatives elected by the Participant pursuant to Section 3(a); (ii) the Participant's determination of the time or times when payment of such compensation will be made to the Participant pursuant to Section 3(a); (iii) the beneficiary (if any) designated by the Participant pursuant to Section 6; and (iv) the Board's determination of the time or times when payment of such compensation will be made after the Participant's death pursuant to Section 6. (c) The Board shall be authorized to interpret and construe the Plan; to make, 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, consistent with the terms of the Plan. 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. 6 8 (a) Subject to the provisions of Section 6 and paragraph (b) of this Section 10, no amount, the payment of which has 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, 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 Board 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 Board determines that such action is in the best interests of Payless, the Participants and their beneficiaries. (b) In the event that the Board 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 Board so as to reflect fairly and equitably appropriate interest and dividends since the preceding May 1 and so as to reflect fairly and equitably such other facts and circumstances as the Board 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); 7 9 (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 Payless 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 Board 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 (ii) 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 Payless or as soon thereafter as practicable, but in no event later than five days after the Change in Control of Payless. 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 Board so as to reflect fairly and equitably appropriate interest and any dividends since the preceding allocation date and so as to reflect fairly and equitably such other facts and circumstances as the Board deems appropriate, including, without limitation, recent price of the stock. For purposes of payments under this Section 13, the value of a Stock Unit shall be computed as the greater of (a) the closing price of shares of 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 Stock is highest) or (b) the highest per share price for shares of Stock actually paid in connection with any Change in Control. For the purposes of this Plan, a "Change in Control" shall be deemed to have occurred if: (a) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding 8 10 Company Voting Securities"); provided, however, that, for purposes of this Section 13, none of the following shall constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 13(c)(A), 13(c)(B) and 13(c)(C) or (v) any acquisition by the Company which, by reducing the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities, increases the proportionate number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by any Person to 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities; provided, however, that, if such Person shall thereafter become the beneficial owner of any additional shares of Outstanding Company Common Stock or Outstanding Company Voting Securities and beneficially owns 20% or more of either the Outstanding Company Common Sock or the Outstanding Company Voting Securities, then such additional acquisition shall constitute a Change of Control; or (b) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") is consummated, in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then- outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination, (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business 9 11 Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then- outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (d) the stockholders of the Company approve of a complete liquidation or dissolution of the Company. 10 EX-10.18 11 STOCK APPRECIATION AND PHANTOM STOCK UNIT PLAN 1 Exhibit 10.18 THE STOCK APPRECIATION AND PHANTOM STOCK UNIT PLAN OF PAYLESS SHOESOURCE, INC. AND ITS SUBSIDIARIES FOR PAYLESS SHOESOURCE INTERNATIONAL EMPLOYEES Amended March 16, 2000 PART I. GENERAL 1. PURPOSE. The purpose of the Plan is to aid Payless ShoeSource, Inc. and its subsidiaries in attracting, retaining, motivating and rewarding certain management employees. 2. DEFINITIONS. Whenever used herein, the following terms shall have the meanings set forth below: (a) "Agreement" means the agreement between the Company or any International Subsidiary and a Participant evidencing the award of Stock Appreciation Units or Phantom Stock Units and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Units. (b) "Award" means an award of Units under the Plan. (c) "Exercise Price" means, with respect to a Stock Appreciation Unit, the Fair Market Value of a share of Stock on the date the Stock Appreciation Unit is granted. (d) "Board" means the Board of Directors of Payless ShoeSource, Inc., a Delaware corporation. (e) "Committee" means a committee designated by the Board which shall consist of not less than 2 members of the Board who shall be appointed by and serve at the pleasure of the Board and who shall be "outside" directors within the meaning of Section 162(m) of the Code. (f) "Company" means Payless ShoeSource, Inc., a Delaware corporation. (g) "Disability" means a total and permanent disability which enables the Participant to be eligible for and to receive disability benefits under (i) the Social Security Act of the United States of America or (ii) under any comparable governmental arrangements in the country in which the Participant resides. 2 (h) "Fair Market Value" of a share of Stock means the average of the high and low price of the Stock on the New York Stock Exchange on the date in question, or if no sales occurred on such day, on the last preceding day on which Stock was traded. (i) "International Subsidiary" means any Subsidiary primarily engaged in business outside of the United States of America. (j) "Participant" means an individual to whom an Award for Stock Appreciation Units or a Phantom Stock Units is made under the Plan. (k) "Phantom Stock Unit" means a non-transferrable, non-assignable right described in Part II of the Plan awarded by the Company or any Subsidiary and approved by the Committee under or pursuant to the Plan which provides for the payment of an amount in cash in accordance with such terms and conditions, not inconsistent with the Plan, that are applicable to such Unit. (l) "Plan" means The Stock Appreciation and Phantom Stock Unit Plan of Payless ShoeSource, Inc. and Its Subsidiaries For Payless ShoeSource International Employees. (m) "Retirement" means "retirement" as that word is defined in any retirement plan sponsored by an International Subsidiary which is applicable to the Participant or, if there is no such plan, as defined in the Company's Profit Sharing Plan. (n) "Subsidiary" means any company owned, directly or indirectly by the Company or any subsidiary thereof. (o) "Stock" means common stock of the Company. (p) "Stock Appreciation Unit" means a non-transferrable, non- assignable right described in Part II of the Plan awarded by the Company or any Subsidiary and approved by the Committee under or pursuant to the Plan which provides for the payment of an amount in cash in accordance with such terms and conditions, not inconsistent with the Plan, that are applicable to such Unit and whose Exercise Price is the Fair Market Value of a share of Stock on the date of the Award. (q) "Unit" means a Stock Appreciation Unit or a Phantom Stock Unit. Each Phantom Stock Unit shall represent the right to receive 100% of the value of a share of Stock on the day the Unit vests. Each Stock Appreciation Unit shall represent the right to receive the difference, if positive, between the Fair Market Value of a share of stock on the date the Unit is exercised and the 2 3 Exercise Price of the Unit. Units are not shares of stock and do not entitle Participants to receive Stock or exercise any rights incident to ownership of Stock, except that the Committee may provide in an agreement that holders of Phantom Stock Units will receive dividend equivalents if any cash dividends are paid on its Stock by the Company. 3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to all the applicable provisions of the Plan, including, without limitation, Section 4 of Part I of the Plan, the Committee is authorized to approve Awards of Units 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. PARTICIPANTS. The individuals who are eligible to receive Awards for Units hereunder shall be limited to management employees of any Subsidiary who, on the date of the award of Units under the Plan, are not citizens of the United States of America and who are employed and reside out of the boundaries of the United States of America. From time to time the Committee shall in its sole discretion, but subject to all of the provisions of the Plan, determine which eligible employees will receive Awards of Units under the Plan and the size, terms and conditions of the Unit or Units to be awarded to each Participant. In any year, the Committee may approve the award to any eligible employee of Units subject to differing terms and conditions. Neither the Committee's decision to approve the award of a Unit to that employee in any other year or to any other employee in any other year, nor the Committee's decision with respect to the size, terms and conditions of the Award(s) to be made to an employee in any year, require the Committee to approve the award of the Unit(s) of the same size or with the same terms and conditions to such employee in any other year or to any other employee in any year. The Committee shall not be precluded from approving the award of a Unit to any eligible employee solely because such employee may previously have received an Award under the Plan. 5. EMPLOYMENT. In the absence of any specific agreement to the contrary, no Award of Units to a Participant under the Plan shall affect any right of the Participant's employer to terminate the Participant's employment at any time. 3 4 PART II. UNITS 1. UNITS. The Committee may from time to time in its discretion approve the award of Units to employees who are eligible to receive an Award in accordance with Section 4 of Part I of the Plan. An Award shall be evidenced by an Agreement which shall contain such terms and conditions (which may include vesting provisions and other restrictions not inconsistent with the Plan as the Committee shall determine); provided, however, that an Award shall satisfy the requirements set forth in Part II of the Plan. 2. GRANT. An Award may be granted by the Committee and shall be effective upon the date approved by the Committee. 3. EXERCISE AND VESTING. Stock Appreciation Unit Awards may be exercised by the Participant only at such time or times, and only upon such terms and conditions, as shall be set forth in the Agreement relating to such Stock Appreciation Unit Award. A Phantom Stock Unit Award will vest on the date or dates as are set forth in the Agreement respecting such Phantom Stock Unit Award. 4. AMOUNT OF PAYMENT. Upon the exercise of a Stock Appreciation Unit Award, a Participant shall be entitled to receive the excess of the Fair Market Value of a share of Stock over the Exercise Price of a Unit with respect to each Unit exercised. Upon vesting of a Phantom Stock Unit, a participant shall be entitled to receive an amount for such Unit equal to the Fair Market Value of a share of Stock on the date the Unit vests. 5. FORM OF PAYMENT. Any amount which becomes payable upon exercise or vesting of an Award under the Plan shall be paid entirely in cash. The Committee may determine that amounts shall be payable in United States dollars or in local currency, converted on such basis and at such conversion rate as the Committee shall deem reasonable. 6. TERMINATION. (a) GENERAL. A Stock Appreciation Unit Award shall terminate as of the earlier of (i) the date of exercise of Award, to the extent that it is exercised, or (ii) the expiration date specified in the Agreement with respect to such Award. If an unexercised Stock Appreciation Unit Award is otherwise exercisable on the date that it expires, and if the Fair Market Value of Stock with respect to which it was granted, determined as of the date of such expiration, exceeds the Exercise Price of the Units (under such Award as set forth in the Stock Appreciation Unit Agreement), then the Award shall automatically be deemed to have been exercised as of the date of such expiration. 4 5 (b) TERMINATION OF EMPLOYMENT. If a Participant ceases to be an employee of the Company or of a Subsidiary, for any reason other than such Participant's Disability, Retirement or Death, then any Award not theretofore exercised or vested, as applicable, shall immediately be terminated and may not thereafter be exercised, and no payment shall be made hereunder pursuant to such Award. Each Agreement shall provide that the Committee may terminate any Award prior to the date on which the Unit is exercised or vested, as applicable, if the Participant engages during the life of the Award in employment or activities contrary, in the opinion of the Committee, to the best interests of the Company or of any Subsidiary. (c) DISABILITY. If a Participant ceases to be an employee of the Company or of a Subsidiary by reason of such Participant's Disability, then the Participant's rights under the Award after the date of such Disability shall be determined by the provisions of the Agreement applicable to such Award. (d) DEATH. If a Participant ceases to be an employee of the Company or of a Subsidiary by reason of the Participant's death, the participant's rights under the Award shall be determined by the provisions of the Agreement applicable to such Award. (e) RETIREMENT. If a Participant ceases to be an employee of the Company or of a Subsidiary by reason of the Participant's Retirement, any unvested Phantom Stock Units shall expire. The right to exercise all or any portion of any Award of Stock Appreciation Units shall be determined by the provisions of the Agreement applicable to such Award. 7. NON-ASSIGNABILITY. An Award shall not be transferable (other than by will or the laws of descent and distribution) and, during the Participant's lifetime, shall be exercisable by, and payable to, only the Participant. 8. RESTRICTIONS. Awards shall be subject to the condition that if at any time the Company shall determine in its discretion that the registration of the Plan with any regulatory authority, the satisfaction of withholding tax or other withholding liabilities under the law of any applicable jurisdiction or the consent or approval of any regulatory body is necessary or desirable as a condition of, or in connection with, the exercise or vesting of such Award, then, in any such event, such exercise or vesting shall not be effective unless such registrations withholding, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. 9. REPRICING PROHIBITED. There shall be no grant of a Stock Appreciation Unit in exchange for a Participant's agreement to cancellation of a Stock Appreciation Unit with a higher Exercise Price that was previously granted to such Participant. 5 6 PART III. CANCELLATION AND RESCISSION 1. COMPETITION; CONFIDENTIAL INFORMATION. (a) Unless 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 Stock Appreciation Unit; or (2) rescind any exercise of a Stock Appreciation Unit 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 Stock Appreciation Unit, 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 Stock Appreciation Unit. Following receipt of such notice, the Participant shall have no further rights with respect to such Stock Appreciation Unit. 6 7 (d) The Company shall notify the Participant in writing of any rescission of an exercise of a Stock Appreciation Unit within one year after the activity referred to in Part III, Section 1(a). Within ten days after receiving such a notice from the Company, the Participant shall pay to the Company the excess of the Fair Market Value of the Stock on the date of exercise of a Stock Appreciation Unit over the Exercise Price for the Unit. 2. AGREEMENT BY PARTICIPANT REGARDING DEDUCTION. The Participant shall agree and consent to a deduction from any amounts the Company or a Subsidiary 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 or a subsidiary), to the extent of the amounts the Participant owes the Company under this Article III. 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 III, then the Participant agrees to pay immediately the unpaid balance to the Company. PART IV. MISCELLANEOUS 1. EFFECTIVE DATE. The Plan shall become effective on May 14, 1997. 2. DURATION OF PLAN. The Plan shall remain in effect until it is terminated by the Company. 3. WITHHOLDING. The Company or any Subsidiary shall have the right to deduct from the amount of any payment arising from the exercise or vesting of an Award any taxes required by applicable law to be withheld from such amount. 4. UNFUNDED PLAN. The Plan shall be unfunded. Neither the Company nor any Subsidiary nor the Committee shall be required to segregate any assets that may at any time be represented by Awards 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 an Award shall be based solely upon any contractual obligations created by the Plan or an Agreement, and no such obligation shall be deemed to be secured by any pledge or any encumbrance on any property of the Company or of any Subsidiary. 5. CHANGES IN CAPITAL STRUCTURE. In the event that there is any change in the capital structure of the Company, through merger, consolidation, reorganization, recapitalization, spinoff or otherwise, or if there shall be any dividend on the Stock, payable in such Stock, or if there shall be a stock split or combination of shares, the number and/or the Exercise Price of the Units shall be proportionately adjusted by the Board as it deems equitable, in its absolute discretion, to prevent dilution or enlargement of the Participant's Award. The issuance of Stock for consideration and 7 8 the issuance of Stock rights shall not be considered a change in the Company's capital structure. No adjustment provided for in this section will result in fractional Units. 6. AMENDMENT OR TERMINATION. The Board may, by resolution, amend or terminate the Plan at any time; provided, however, that the Board may not, without the consent of the holder of the Unit, alter or impair any Award previously granted 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 United States Federal income tax purposes under Section 162(m) of the Code without regard to the foregoing proviso and any such amendment shall be effective as of such date as is necessary to make such income under the Plan so deductible. 7. CHANGE OF CONTROL. If while unexercised awards remain outstanding under the Plan: (a) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 7, none of the following shall constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 7(c)(A), 7(c)(B) and 7(c)(C) or (v) any acquisition by the Company which, by reducing the number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities, increases the proportionate number of shares of Outstanding Company Common Stock or Outstanding Company Voting Securities beneficially owned by any Person to 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities; provided, however, that, if such Person shall thereafter become the beneficial owner of any additional shares of Outstanding Company Common Stock or Outstanding Company Voting Securities and beneficially owns 20% or more of either the Outstanding Company Common Sock or the Outstanding Company Voting Securities, then such additional acquisition shall constitute a Change of Control; or (b) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was 8 9 approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") is consummated, in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50%, respectively, of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination, (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (d) the stockholders of the Company approve of a complete liquidation or dissolution of the Company. then from and after the date of the first of the foregoing events to occur, all outstanding Stock Appreciation Unit Awards held by active employees on such date shall be exercised in full, whether or not otherwise exercisable, and all outstanding Phantom Stock Unit Awards held by active employees on such date shall vest in full, and shall be deemed fully payable. 9 EX-10.19 12 PROFIT SHARING PLAN 1 Exhibit 10.19 PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN FOR PUERTO RICO ASSOCIATES Amended March 16, 2000 or as otherwise specified. Exhibit_10_19_ Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Assocites.WPD 2 TABLE OF CONTENTS
PAGE ---- SECTION 1 DEFINITIONS.............................................................................2 1.01 ACCOUNTS.......................................................................2 1.02 ADMINISTRATIVE DELEGATE........................................................2 1.03 AFTER-TAX CONTRIBUTIONS .......................................................2 1.04 ALLOCATION PAY AMOUNT..........................................................2 1.05 ASSOCIATE......................................................................2 1.06 AUTHORIZED LEAVE OF ABSENCE....................................................3 1.07 BEFORE-TAX CONTRIBUTIONS.......................................................3 1.08 BENEFICIARY ...................................................................3 1.09 BOARD..........................................................................3 1.10 COMMITTEE......................................................................3 1.11 COMPANY OR PAYLESS.............................................................3 1.12 COMPANY ACCOUNTS...............................................................3 1.13 COMPANY MATCHING CONTRIBUTIONS.................................................3 1.14 COMPANY PROFIT SHARING CONTRIBUTIONS ..........................................3 1.15 EFFECTIVE DATE.................................................................4 1.16 EMPLOYER OR PAYLESS PR.........................................................4 1.17 ERISA..........................................................................4 1.18 FIDUCIARY .....................................................................4 1.19 FISCAL YEAR....................................................................4 1.20 GROUP..........................................................................4 1.21 HOUR OF SERVICE................................................................4 1.22 INVESTMENT FUND................................................................5 1.23 MAY PLAN ......................................................................5 1.24 MEMBER.........................................................................5 1.25 MEMBER ACCOUNTS................................................................5 1.26 MEMBER AFTER-TAX ACCOUNTS......................................................5 1.27 MEMBER BEFORE-TAX ACCOUNTS ....................................................5 1.28 MEMBER CONTRIBUTIONS ..........................................................5 1.29 MEMBER ROLLOVER CONTRIBUTION ACCOUNTS..........................................5 1.30 MILITARY SERVICE...............................................................5 1.31 NET PROFITS....................................................................5 1.32 PAY............................................................................6 1.33 PLAN...........................................................................6 1.34 PLAN YEAR .....................................................................6 1.35 POOLED INVESTMENT ACCOUNT......................................................6 1.36 PR CODE........................................................................6 1.37 PRIOR PLAN.....................................................................6 1.38 QUALIFIED DOMESTIC RELATIONS ORDER.............................................6 1.39 RETIREMENT.....................................................................6 1.40 ROLLOVER CONTRIBUTIONS.........................................................6 1.41 SOCIAL SECURITY WAGE BASE......................................................6
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PAGE ---- 1.42 TOTAL AND PERMANENT DISABILITY.................................................6 1.43 TRANSFERRED ACCOUNTS...........................................................7 1.44 TRUST AGREEMENT................................................................7 1.45 TRUST FUND.....................................................................7 1.46 TRUSTEE........................................................................7 1.47 UNIT...........................................................................7 1.48 UNIT VALUE.....................................................................7 1.49 US CODE........................................................................7 1.50 VALUATION DATE.................................................................7 1.51 YEAR OF SERVICE................................................................7 1.52 VESTING SERVICE................................................................8 SECTION 2 MEMBERSHIP.............................................................................10 2.01 CONDITIONS OF ELIGIBILITY.....................................................10 2.02 RE-EMPLOYMENT.................................................................11 SECTION 3 COMPANY CONTRIBUTIONS..................................................................12 3.01 AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION.................................12 3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION.......................................12 3.03 ALLOCATION OF COMPANY CONTRIBUTIONS...........................................12 3.04 PROFIT SHARING ALLOCATION FORMULA.............................................12 3.05 INVESTMENT OF THE COMPANY.....................................................12 3.06 RETURN OF COMPANY CONTRIBUTIONS...............................................13 SECTION 4 MEMBER CONTRIBUTIONS...................................................................14 4.01 PROCEDURE FOR MAKING CONTRIBUTIONS............................................14 4.02 LIMITATIONS ON BEFORE-TAX CONTRIBUTIONS.......................................16 4.03 DISTRIBUTIONS OF EXCESS DEFERRALS.............................................18 4.04 LIMITATIONS ON AFTER-TAX CONTRIBUTIONS........................................19 4.05 LIMITATIONS ON COMPANY MATCHING CONTRIBUTIONS.................................19 4.06 AGGREGATE LIMITATIONS.........................................................19 SECTION 5 INVESTMENT PROVISIONS..................................................................20 5.01 INVESTMENT FUNDS..............................................................20 5.02 INVESTMENT DIRECTION..........................................................20 SECTION 6 ACCOUNTS...............................................................................22
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PAGE ---- 6.01 MEMBER ACCOUNTS...............................................................22 6.02 COMPANY ACCOUNTS..............................................................22 6.03 MAINTENANCE OF ACCOUNTS.......................................................22 6.04 VALUATION OF ACCOUNTS.........................................................22 6.05 MEMBER STATEMENTS.............................................................22 6.06 SHARES OF PAYLESS SHOESOURCE, INC.............................................22 6.07 VESTING IN MEMBER AND COMPANY ACCOUNTS .......................................23 SECTION 7 EXPENSES...............................................................................27 7.01 ADMINISTRATIVE EXPENSES.......................................................27 SECTION 8 WITHDRAWALS DURING EMPLOYMENT..........................................................28 8.01 WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED.........................28 8.02 AUTHORIZED WITHDRAWALS........................................................28 SECTION 9 BENEFITS UPON RETIREMENT, DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT.............................................................................30 9.01 BENEFITS......................................................................30 9.02 BENEFICIARY...................................................................30 SECTION 10 PAYMENT OF BENEFITS...........................................................31 10.01 TIME OF PAYMENT...............................................................31 10.02 FORM OF PAYMENT...............................................................32 10.03 INDIRECT PAYMENT OF BENEFITS..................................................32 10.04 INABILITY TO FIND MEMBER......................................................32 10.05 COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBER................................32 10.06 COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY...........................32 10.07 COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE. .....................32 SECTION 11 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS......................................34 11.01 ROLLOVER AMOUNT TO OTHER PLANS. .............................................34 11.02 ROLLOVER AMOUNT FROM OTHER PLANS..............................................34 11.03 DEFINITIONS...................................................................34 SECTION 12 LOANS.........................................................................36
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PAGE ---- 12.01 AVAILABILITY OF LOANS.........................................................36 12.02 AMOUNTS OF LOANS..............................................................36 12.03 TERMS OF LOANS................................................................36 SECTION 13 LIMIT ON CONTRIBUTIONS TO THE PLAN............................................38 13.01 LIMIT ON CONTRIBUTIONS........................................................38 13.02 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS.....................................39 SECTION 14 ADMINISTRATION OF THE PLAN....................................................40 14.01 PLAN ADMINISTRATOR............................................................40 14.02 DELEGATION OF AUTHORITY.......................................................40 14.03 COMMITTEE AND SUBCOMMITTEES...................................................40 14.04 ACCOUNTS AND REPORTS..........................................................41 14.05 NON-DISCRIMINATION. .........................................................41 SECTION 15 MANAGEMENT OF THE TRUST FUND..................................................43 15.01 USE OF THE TRUST FUND.........................................................43 15.02 TRUSTEES......................................................................43 15.03 INVESTMENTS AND REINVESTMENTS.................................................43 SECTION 16 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS.......................45 16.01 DISCLAIMER OF EMPLOYER LIABILITY..............................................45 16.02 EMPLOYER-ASSOCIATE RELATIONSHIP...............................................45 16.03 BINDING EFFECT................................................................45 16.04 CORPORATE ACTION..............................................................45 16.05 CLAIM AND APPEAL PROCEDURE....................................................45 SECTION 17 NON-ALIENATION OF BENEFITS....................................................47 17.01 PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY................................47 17.02 ALTERNATE APPLICATION.........................................................47 SECTION 18 AMENDMENTS....................................................................48 18.01 COMPANY'S RIGHTS..............................................................48 18.02 PROCEDURE TO AMEND............................................................48 18.03 PROVISION AGAINST DIVERSION...................................................48
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PAGE ---- SECTION 19 TERMINATION...................................................................49 19.01 RIGHT TO TERMINATE. .........................................................49 19.02 WITHDRAWAL OF AN EMPLOYER.....................................................49 19.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST.................................49 19.04 ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST. ............................49 19.05 MERGER, CONSOLIDATION OR TRANSFER.............................................49 SECTION 20 CONSTRUCTION..................................................................50 20.01 APPLICABLE LAW................................................................50 20.02 GENDER AND NUMBER.............................................................50
v 7 PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN FOR PUERTO RICO ASSOCIATES INTRODUCTION Effective April 1, 1996, Payless ShoeSource, Inc. ("Payless") withdrew from and ceased to be a participating Employer in The May Department Stores Company Profit Sharing Plan (the "May Plan") and established the Payless ShoeSource, Inc. Profit Sharing Plan (the "Payless Plan"). The Payless Plan, as adopted, covered eligible Associates employed in Puerto Rico by Payless ShoeSource of Puerto Rico, Inc. ("Payless PR"). Effective January 1, 1997, a portion of the Payless Plan covering Associates employed by Payless PR was spun off and established a new plan, Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates (the "Plan"), which was adopted by Payless PR as an adopting Employer. Now, effective March 20, 2000, or as otherwise specified, Payless is amending and restating the Plan primarily to include provisions for loans, the acceptance of rollover contributions from other qualified plans, a change to daily valuation, other miscellaneous changes and to comply with the tax laws of Puerto Rico. Such amendment and restatement applies only to Associates or former Associates who were employed by an Employer on or after the effective date(s) of the respective amended provisions, and the rights and benefits of persons thereunder are to be determined solely in accordance with the provisions of the Plan in effect on the date an Associate's employment was or is terminated. Notwithstanding the preceding sentence, the change in valuation date shall be effective for all Associates after the effective date. The terms and provisions of this new Plan are as follows: 1 8 SECTION 1 DEFINITIONS 1.01 ACCOUNTS means the Company Accounts and Member Accounts established under Section 6. 1.02 ADMINISTRATIVE DELEGATE means one or more persons or institutions to which the Committee has delegated certain administrative functions pursuant to a written agreement. 1.03 AFTER-TAX CONTRIBUTIONS means Member Contributions which are not Before-Tax Contributions and which are made by the Member in accordance with Section 4.01(a). 1.04 ALLOCATION PAY AMOUNT means with respect to each eligible Member, (a) one (1) times the amount of Pay as defined in Section 1.33 up to the Social Security Wage Base ("SSWB") for the Plan Year, plus (b) two (2) times the amount of such Pay in excess of the SSWB for the Plan Year. Notwithstanding any provision of this Section 1.04 or of Section 3.03 to the contrary, in no event shall the percentage of Members' Pay to be allocated for any year below the SSWB be less than fifty percent (50%) of the percentage of Pay allocated with respect to Members' Pay in excess of the SSWB, nor may the latter percentage of Pay (above the SSWB) exceed the former percentage of Pay (below the SSWB) by more than 5.7% (or such other percentage as may be the maximum permitted differential under US Code Section 401(1) from time to time). In determining each eligible Member's Allocation Pay Amount, only Pay received during the part of the Plan Year the Member is eligible for the Company Contribution feature of the Plan, pursuant to Section 2, shall be considered, and the SSWB to be applied for such Member shall be proportionally prorated if such eligibility is for less than a full Plan Year. Notwithstanding the foregoing, with respect to any Plan Year for which applying the definition of Allocation Pay Amount set forth above would cause the allocation made pursuant to Section 3.03 to violate the permitted disparity limitations of US Treas. Reg. Section 1.401(l)-2, Allocation Pay Amount shall be adjusted to permit Section 3.03 to operate in compliance with the limitations of US Treas. Reg. Section 1.401(l)-2. 1.05 ASSOCIATE means any person employed by Payless PR who receives Pay from Payless PR. The term Associate also may include, based upon the express written determination of the Company or the Committee, a person who receives Pay from sources within Puerto Rico and who is employed, at the request of the Company or the Employer, by a member of the Group (defined in Section 1.21) to the extent such employee otherwise qualifies for membership under Section 2, in which case such Group member shall be deemed to be an "Employer" hereunder, as to such person or persons only. The term "Associate" shall not include (i) any person covered under a collective bargaining agreement unless and until the Employer and the collective bargaining representatives so 2 9 agree, (ii) any non-resident alien who received no earned income from the Employer from sources within Puerto Rico, and (iii) any "leased employee" within the meaning of US Code Section 414(n)(2). The term "Associate" may include, where appropriate, Associates of Payless or other related Employers who are transferred to the Employer or as otherwise may be necessary or appropriate in construing the Plan under applicable law. In the event that an individual who was not classified as an employee or a common-law employee is legally reclassified as an employee or a common-law employee of the Employer, such employee shall only be considered to be an employee at the time of such reclassification, or, if later, at the time that such individual is initially treated as an employee or common-law employee on the payroll records of the Company. 1.06 AUTHORIZED LEAVE OF ABSENCE means any leave of absence authorized by the Employer under rules established by the Employer. 1.07 BEFORE-TAX CONTRIBUTIONS means contributions which the Member elects (in accordance with Section 4.01(b)) to have the Employer make directly to the Plan on behalf of the Member, which election shall constitute an election under PR Code Section 1165(e)(2)(A). The "Member's Before-Tax Contributions" shall refer to Before-Tax Contributions made to the Plan by the Employer on behalf of the Member. 1.08 BENEFICIARY means the person or persons entitled under Section 9.02 to receive any payments payable under this Plan on account of a Member's death. 1.09 BOARD means the Board of Directors of the Company. 1.10 COMMITTEE means the Profit Sharing Committee comprised of three or more members as determined and appointed from time to time by the Board. Unless determined otherwise by the Board, the Committee shall constitute the Profit Sharing Committee of the Payless ShoeSource, Inc. 401(k) Profit Sharing Plan from time to time. 1.11 COMPANY OR PAYLESS means Payless ShoeSource, Inc., a Delaware corporation, and any other organization which may be a successor to it. 1.12 COMPANY ACCOUNTS means accounts reflecting the portion of each Member's interest in the Investment Funds which are attributable to Company Matching Contributions ("Company Matching Accounts") and to Company Profit Sharing Contributions ("Company Profit Sharing Accounts") and to any contributions made by an Employer under Prior Plans, as well as to any income and/or earnings attributable to such Company Contributions and Prior Plan contributions. 1.13 COMPANY MATCHING CONTRIBUTIONS means contributions made by the Company, based on a Member's Before-Tax and/or After-Tax Contributions, pursuant to Section 3.02. 1.14 COMPANY PROFIT SHARING CONTRIBUTIONS means discretionary contributions made by the Company, based on Net Profits, pursuant to Section 3.01. 3 10 1.15 EFFECTIVE DATE means March 20, 2000 or as otherwise specified herein. 1.16 EMPLOYER OR PAYLESS PR means Payless ShoeSource of Puerto Rico, Inc. and any other entity affiliated with the Company which elects, with the consent of the Company, to participate herein. 1.17 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, to the extent applicable to the Plan. 1.18 FIDUCIARY means the Employer, the Trustee, each of the members of the Committee described in Section 14, and any investment manager designated pursuant to Section 15. 1.19 FISCAL YEAR means the Company's Fiscal Year. 1.20 GROUP means the Company, the Employer, and any other company which is related to the Company or Employer as a member of a controlled group of corporations in accordance with ERISA Section 210(c), or as a trade or business under common control in accordance with ERISA Section 210(d). For the purposes of the Plan, for determining whether or not a person is an employee of the Group and the period of employment of such person, each such other company shall be included in the "Group" only for such period or periods during which such other company is a member with the Company or Employer of a controlled group or under common control. In determining Hours of Service, Years of Service and Vesting Service for all purposes hereunder, employment with any member of the Group shall be included. Members of an affiliated service group under US Code Section 414(m) will also be part of the Group. 1.21 HOUR OF SERVICE means any hour for which an Associate (including a leased employee) is directly or indirectly compensated, or entitled to compensation, by the Company, the Employer or any other member of the Group, whether or not such Group member has adopted the Plan, for any of the following: (a) the performance of duties during the applicable computation period; (b) a period during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, Military Service, or Authorized Leave of Absence; (c) a period for which back pay is awarded or agreed to, provided that no Hour of Service has been credited under subsection (a) or (b) with respect to the same period. Hours of Service and applicable computation periods shall be determined in accordance with the requirements of 29 C.F.R. Section 2530.200b. 4 11 1.22 INVESTMENT FUND means any fund for investment of contributions as described in Section 5.01. 1.23 MAY PLAN means The May Department Stores Company Profit Sharing Plan. 1.24 MEMBER means any person included in the membership of this Plan as provided in Section 2. 1.25 MEMBER ACCOUNTS means the Member Before-Tax Accounts, the Member After-Tax Accounts and the Member Rollover Contribution Accounts. To the extent an Associate makes a Rollover Contribution pursuant to Section 11.02 and the Associate is otherwise eligible but has not yet completed the participation requirements of Section 2.01, such contribution shall also be a Member Account. 1.26 MEMBER AFTER-TAX ACCOUNTS means the Member Accounts with respect to a Member's After-Tax Contributions. 1.27 MEMBER BEFORE-TAX ACCOUNTS means the Member Accounts with respect to a Member's Before-Tax Contributions. 1.28 MEMBER CONTRIBUTIONS means the Member's Before-Tax Contributions and After-Tax Contributions. 1.29 MEMBER ROLLOVER CONTRIBUTION ACCOUNTS means the Member Accounts with respect to an Associate's or Member's Rollover Contributions. 1.30 MILITARY SERVICE means effective December 13, 1996, any period of obligatory military service with the Armed Forces of the United States of America, or voluntary service in lieu of such obligatory service, provided that the Associate returns to active employment with the Employer within the period during which the Employer would be required to re-employ the Associate under Federal law. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified Military Service will be provided in accordance with the Uniform Services Employment and Reemployment Rights Act and US Code Section 414(u). 1.31 NET PROFITS means the consolidated net profits of the Company for any given Fiscal Year, determined by generally accepted accounting principles except that (i) no deduction or provision shall be made for any federal, state or other taxes measured by net income nor for any contributions to the Trust or to any other pension or profit sharing plan, and (ii) there shall be excluded any proceeds from life insurance of which the Company or the Employer is beneficiary (whether paid in a single sum or otherwise) and any gains or losses on the sale of capital assets. Such term shall also mean any accumulated and undistributed Net Profits (as defined in the preceding sentence) earned in prior Fiscal Years to the extent that such accumulated and undistributed Net Profits constitute surplus of the Company and its subsidiaries available for contributions hereunder. 5 12 1.32 PAY means the aggregate of (i) all regular pay, commissions, overtime pay, cash incentives, and prizes and cash awards, plus (ii) amounts which the Associate elects to have the Employer contribute directly to the Plan on the Associate's behalf in accordance with Section 4.01(b). Pay shall include any amounts not otherwise includable in the Member's taxable income pursuant to US Code Section 125. Pay shall not include amounts for a pension, a retirement allowance, a retainer or a fee under contract, deferred compensation (including amounts deferred under the Deferred Compensation Plan of Payless ShoeSource, Inc.), severance pay, distributions from this Plan or items of extraordinary income including but not limited to amounts resulting from the exercise of stock options, spinoff cash, spinoff stock and restricted stock awards. Pay in excess of $170,000 shall be disregarded, although such amount shall be adjusted at the same time and in such manner as permitted under US Code Section 415(d). 1.33 PLAN means this Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates, as amended from time to time. 1.34 PLAN YEAR means a calendar year ending each December 31. 1.35 POOLED INVESTMENT ACCOUNT means an account established pursuant to an administrative services agreement between the Company and the Trustee. 1.36 PR CODE means the Puerto Rico Internal Revenue Code of 1994, as amended from time to time. 1.37 PRIOR PLAN means The May Department Stores Company Profit Sharing Plan, the Volume Shoe Corporation Profit Sharing Plan, the Payless ShoeSource, Inc. Profit Sharing Plan and such other qualified plan as may be so designated by the Committee. 1.38 QUALIFIED DOMESTIC RELATIONS ORDER means a "qualified domestic relations order" as that term is defined in ERISA Section 206(d)(3), provided that such order was entered on or after January 1, 1985. 1.39 RETIREMENT means a Member's termination of employment on or after age 55 and after completing at least five (5) Years of Service or attaining the fifth anniversary of participation, as of which date the Member's benefit shall be nonforfeitable. 1.40 ROLLOVER CONTRIBUTIONS means contributions which the Associate or Member, as applicable, elects to make in accordance with Section 11.02. 1.41 SOCIAL SECURITY WAGE BASE means, with respect to each Plan Year, the maximum amount of wages which are subject to tax in such year under the Federal Old Age, Survivors and Disability Insurance System. 1.42 TOTAL AND PERMANENT DISABILITY or DISABILITY means the total incapacity of a Member for the continued performance of regular active employment with 6 13 an Employer, which disability is expected to be permanent, as determined by the Committee, provided that a Member shall not be considered totally and permanently disabled for purposes of this Plan unless he qualifies for disability benefits under Title 11 of the Federal Social Security Act. 1.43 TRANSFERRED ACCOUNTS means Member and Company Accounts transferred from a Prior Plan. 1.44 TRUST AGREEMENT means the agreement or agreements provided for in Section 15, as amended from time to time. 1.45 TRUST FUND means all the assets of the Investment Funds, including assets transferred from a Prior Plan, which are held in one or more trusts by the Trustee or Trustees for the purposes of this Plan. 1.46 TRUSTEE means the corporation(s), person or persons which may at any time be acting as Trustee or Trustees under the Trust Agreement. 1.47 UNIT means one of the units representing an interest in an Investment Fund as provided in Section 6.03. 1.48 UNIT VALUE means the value of each Unit in an Investment Fund as of the Valuation Date as determined pursuant to Section 6.04. 1.49 US CODE means the U.S. Internal Revenue Code of 1986, as amended from time to time. 1.50 VALUATION DATE means any day that the New York Stock Exchange is open for business or any other date chosen by the Committee. Prior to March 31, 2000, Valuation Date means the last business day of each calendar month and any other date chosen to perform a valuation. 1.51 YEAR OF SERVICE for purposes of determining eligibility under Section 2 means a year of employment during which the Associate has been paid for not less than 1,000 Hours of Service for an Employer or any other member of the Group. An Associate shall be credited with a year of employment on each anniversary date of his commencement of employment with an Employer. Periods of temporary illness, temporary layoff, Military Service, and Authorized Leaves of Absence shall not be deemed as breaking continuity of employment and shall be counted in determining Years of Service. The term "Year of Service" shall also include an employment year during which, except to the extent otherwise provided in the US Treasury Regulations, a "leased employee" within the meaning of US Code Section 414(n) has been paid for not less than 1,000 Hours of Service for the Employer even though during such period the leased employee was not an Associate as defined in Section 1.05. The term "Year of Service" shall include any period required to be included by the Family and Medical Leave Act of 1993. 7 14 The extent to which service with another organization, part or all of whose business operations are acquired by the Company (or by an Employer), shall be credited as "Years of Service" hereunder or as "Vesting Service" under Section 1.52 shall be determined by the Company or by the Committee on a case-by-case basis. 1.52 Vesting Service for purposes of determining a Member's vested interest under Section 6.07 is based on "elapsed time" and is to be determined in accordance with the following definitions: (a) "EMPLOYMENT COMMENCEMENT DATE" means the date upon which an Associate first performs an Hour of Service. (b) "HOUR OF SERVICE" means an hour for which an Associate is paid or entitled to payment for the performance of duties for the Employer or any other member of the Group. (c) "PERIOD OF SERVICE" means a period beginning on the Associate's Employment Commencement Date (or Reemployment Commencement Date, as the case may be) and ending on his Severance from Service Date. (d) "SEVERANCE FROM SERVICE DATE" means the earlier to occur of: (i) the last date upon which an Associate terminates employment with the Employer or any other member of the Group (either voluntarily or involuntarily), retires or dies; or (ii) the first anniversary of the date upon which the Associate was first absent from service with the Employer (with or without pay) for any other reason (i.e., vacation, sickness, disability, leave of absence or layoff). Notwithstanding the foregoing, the Severance from Service Date of an Associate who is absent from service with the Employer beyond the first anniversary of the first day of such absence on account of maternity or paternity (as described in ERISA Sections 202(b)(5)(A) or 203(b)(3)(E)) shall be the second anniversary of the first day of such absence; and the period of time between such first and second anniversaries shall not be treated as a Period of Service or as a Period of Severance. (e) "PERIOD OF SEVERANCE" means a period beginning on an Associate's Severance from Service Date and ending upon the Associate's Reemployment Commencement Date. (f) "REEMPLOYMENT COMMENCEMENT DATE" means the first date, following a Severance from Service Date, upon which the Associate performs an Hour of Service for the Employer or any other member of the Group. 8 15 (g) "SERVICE SPANNING RULES" In determining whether or not an Associate has completed a twelve month Period of Service for purposes of vesting, the following Periods of Severance shall be treated as Periods of Service: (i) If an Associate terminates employment with the Employer (either voluntarily or involuntarily) or retires, and then performs an Hour of Service within the twelve month period beginning on the Severance from Service Date, such Period of Severance shall be treated as a Period of Service; and (ii) If an Associate terminates employment with the Employer (either voluntarily or involuntarily) or retires during an absence from service of twelve months or less for any reason other than a termination or retirement, and then performs an Hour of Service within a period of twelve months from the date the Employee was first absent from service, the Period of Severance shall be treated as a Period of Service. 9 16 SECTION 2 MEMBERSHIP 2.01 CONDITIONS OF ELIGIBILITY. (a) Each Associate who on March 19, 2000, was a Member of or is eligible to be a Member of the Plan shall continue to be a Member of the Plan entitled to make Member Contributions pursuant to Section 4 and eligible to share in Company Contributions pursuant to Section 3. (b) Each other Associate shall be eligible to become a Member of the Plan when the Associate has completed one Year of Service and attained age 21, with membership to commence as of the first day of the month coincident with or following the date he has met these eligibility requirements. Such Associate shall be eligible: (i) to make Member Contributions pursuant to Section 4; (ii) to share in Company Matching Contributions pursuant to Section 3.02; (iii) to share in Company Profit Sharing Contributions, if any, pursuant to Section 3.01. (c) Each Member shall be deemed to have elected to make a three percent (3%) Before-Tax Contribution pursuant to Section 4.01(b), commencing with the paycheck issued with respect to the first payroll period beginning on or after the first day of the month coincident with or following the date he met the foregoing eligibility requirements. Notwithstanding this "deemed" election, an Associate or Member may elect pursuant to procedures established by the Committee to not make, or to suspend making, said three percent (3%) automatic Before-Tax Contribution, or pursuant to Section 4.01(a) or (b) to make an After-Tax or a Before-Tax Contribution of an amount other than three percent (3%). (d) All Years of Service with an Employer including the Company and Years of Service with The May Department Stores Company ("May") while the Employer was part of the Group which included May are counted toward eligibility, provided that, if an Associate has a 1-year break in service before a Year of Service, service with an Employer or May before such break will not be taken into account. For the purposes of this Section 2.01, "break in service" means a 12 consecutive month employment year as used in Section 1.51 during which the Associate does not complete more than 500 Hours of Service with the Employer, and/or May while part of the Group. (e) Only Associates employed by the Company's Puerto Rican subsidiaries are eligible for membership hereunder. Any other Associate who has Accounts in this Plan, such Accounts shall continue to be revalued as of each succeeding Valuation Date pursuant to Section 6.04. 10 17 2.02 RE-EMPLOYMENT. A former Member who has retired or has otherwise terminated employment and is rehired shall become a Member on the first day of the calendar month coinciding with or next following the date of his rehire. 11 18 SECTION 3 COMPANY CONTRIBUTIONS 3.01 AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION. The Company or an Employer may contribute to the Trust, as of the end of each Plan Year, a percentage of the Company's Net Profits as a Company Profit Sharing Contribution. The amount of such contribution, if any, shall be determined by the Board of Directors in its discretion. Any such contribution shall be made as soon as practicable after the close of the Company's Fiscal Year. All such contributions advanced to the Plan by the Company shall be reimbursed to the Company by the Employer. 3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION. The Company, in its discretion, shall contribute to the Trust, as of the end of each Plan Year, such that the amount contributed to this Plan and to the Payless ShoeSource, Inc. Profit Sharing Plan shall be equal to 2 1/2% of Net Profits, until determined otherwise by the Board of Directors, in the form of a Company Matching Contribution. The total amount of such contribution shall be allocated in proportion to the amount that each Member's Contributions under Sections 4.01(a) and (b), up to a total of 5% of such Member's Pay for a Plan Year, bears to the total amount of all Member Contributions up to 5% of such Members' Pay for a Plan Year. Such Company Matching Contribution shall be determined and paid to the Trustee as soon as practicable after the close of each Fiscal Year and shall be reimbursed to the Company by the Employer when paid. 3.03 ALLOCATION OF COMPANY CONTRIBUTIONS. The Company Contributions shall be allocated only to the Company Accounts of Members who are employed by the Employer on the last day of the Plan Year and on behalf of Members whose employment has terminated during the Plan Year by reason of Retirement, death or Disability. Company Profit Sharing Contributions shall be credited to eligible Members' Company Profit Sharing Contribution Accounts. Company Profit Sharing Contributions allocated prior to or as of July 31, 1997 shall be fully vested; Company Profit Sharing Contributions allocated thereafter shall be subject to the vesting provisions of Section 6.07. Company Matching Contributions shall be subject to the vesting provisions of Section 6.07 and to the withdrawal penalty provisions of Section 8.02(a). No Company Matching Contribution shall be made with respect to a Member Before-Tax Contribution in excess of the PR Code Section 1165(e)(7)(A) limit, as referred to in Section 4.01(h) and as revised from time to time. 3.04 PROFIT SHARING ALLOCATION FORMULA. The Company Profit Sharing Contribution, if any, shall be allocated to all Members eligible to share in the contribution according to the ratio that each Member's Allocation Pay Amount for the Plan Year bears to the total Allocation Pay Amount for all eligible Members for the Plan Year. For this purpose the term "eligible Members" includes Members in both the Payless ShoeSource, Inc. 401(k) Profit Sharing Plan and this Plan. 3.05 INVESTMENT OF THE COMPANY. The amounts allocated to each Member pursuant to Section 3.03 shall be credited to his Company Accounts and invested in one or 12 19 more of the Investment Funds described in Section 5.01 and in the percentages designated by the Member in the investment election filed pursuant to Section 5.02 effective at the time the amount is allocated. 3.06 RETURN OF COMPANY CONTRIBUTIONS. (a) If, after the Company Contribution has been made and allocated, it should appear that, through oversight or a mistake of fact or law, a Member (or an Associate who should have been considered a Member) who should have been entitled to share in such contribution, receives no allocation or received an allocation which was less than he should have received, the Company may, at its election and in lieu of reallocating such contribution, make a special make-up contribution for the Company Account of such Member in an amount sufficient to provide for him the same addition to his Company Account as he should have received. Similarly, if a Member received an allocation which was more than he should have received (or a Member was inappropriately included in the Plan), the Company, at its election, may reallocate such contribution, offset other Company contributions against such allocation, or use such allocation to pay Plan expenses. (b) To the extent permitted by ERISA, each contribution made to the Trust shall be made on the condition that it is currently deductible by the Employer under PR Code Section 1023(n) for the taxable year with respect to which the contribution is made. If a contribution subsequently is determined, whether in whole or in part, not to be currently deductible as provided in the preceding sentence, then, within one year of the date of disallowance of the deduction of such Company Contribution, an amount equal to the disallowed deduction shall be returned to the Company and/or Employer, as applicable. (c) Earnings attributable to a contribution that is returned pursuant to Subsection (a) or (b) above shall not be withdrawn, but losses attributable thereto shall reduce the amount returned to the Company and/or Employer. 13 20 SECTION 4 MEMBER CONTRIBUTIONS 4.01 PROCEDURE FOR MAKING CONTRIBUTIONS. (a) After-Tax Contributions. Subject to any limitations set forth in the PR Code from time to time, each Member may designate, pursuant to procedures established by the Company, and contribute to the Plan an amount equal to not less than 1% nor more than 15% (in whole percentage points) of his Pay as he shall have designated pursuant to procedures established by the Company (which may establish lower permissible After-Tax Contributions for Highly Compensated Employees); provided, however, that a Member shall not contribute, or elect to have contributed on his behalf, amounts with respect to Pay received by him after the close of the calendar year during which his employment terminated and further provided that any Before-Tax Contributions made on behalf of the Member shall reduce by the percentage which he elects to have contributed pursuant to Section 4.01(b)(i), the percentage of Pay that the Member may contribute pursuant to this Section 4.01(a). Notwithstanding any provision in the Plan to the contrary, in no event may After-Tax Contributions exceed 10% of the Members accumulated Pay since he or she became a Member in the Plan without taking into consideration any Member's After-Tax Contribution subject to Company Matching Contributions. (b) Before-Tax Contributions. (i) Subject to the limitations set forth below, each Member may elect that his Employer shall contribute directly to the Trust Fund an amount equal to a whole percentage of his Pay, not less than 1% nor greater than such percentage as may be determined from time to time by the Company which amount shall be his Before-Tax Contribution. The maximum Before-Tax Contribution by a Member who is determined to be a Highly Compensated Employee under Section 4.02, for the Plan Year in question, may be further restricted or limited by the Company or the Committee from time to time. (ii) Pursuant to Section 2.01(c), each eligible Member shall be deemed to have elected to make a three percent (3%) Before-Tax Contribution, unless the Member elects otherwise in accordance with procedures established by the Committee. (c) Notwithstanding any election in accordance with Section 4.01 (b), if the Committee at any time determines that all or any portion of the Member's Before- Tax Contributions should be treated as After-Tax Contributions in order for the Before- Tax Contribution provisions of the Plan to quality as a "qualified cash or deferred arrangement" for purposes of Section 1165(e) of the PR Code, or if the Actual Deferral Percentage standards set forth in the PR Code are not met at the end of the Plan Year; then 14 21 the Committee, in its sole and absolute discretion, (i) may, in accordance with Section 4.02(b) below, limit the amount which shall be contributed by the Employer as Before-Tax Contributions after the date of such determination on behalf of all or any portion of the Members and (ii) shall distribute any excess Before-Tax Contributions made with respect to the Plan Year to the affected Members as soon as practicable after the end of the Plan Year. (d) The Employer shall (i) deduct a Member's After-Tax Contributions from the Pay of the Member in such installments as the Employer may deem appropriate, (ii) contribute a Member's Before-Tax Contributions on behalf of the Member, and (iii) reduce the Pay that is paid to the Member directly in cash by an amount equal to the Member's Before-Tax Contributions in such installments as the Employer shall deem appropriate. The amounts so deducted and so contributed shall be paid by the Employer to the Trustee not later than 15 days following the end of the month with respect to which such amounts are to be so deducted and contributed or within such shorter period of time as may be designated under the Code, ERISA or related regulations. The Employer may, from time to time, make estimated contribution payments to the Trustee during each month. (e) Effective with the paycheck issued with respect to the first payroll period beginning in any calendar month, or as of such other effective time as may be determined by the Committee, a Member may elect to change the rate of his After-Tax Contributions to any other rate permitted by Subsection (a) of this Section 4.01 and may elect to change the amount to be contributed by the Employer directly to the Trust Fund as Before-Tax Contributions to an amount equal to an amount permitted by Subsection (b) of this Section 4.01 with respect to such contributions to be made after the effective date of the election, pursuant to procedures established by the Committee. (f) Not later than 15 days prior to the beginning of a payroll period of a Member, or not later than such other date as may be determined by the Committee, such Member may elect, pursuant to procedures established by the Committee, (i) to suspend making After-Tax Contributions and (ii) that the Employer should suspend making Before-Tax Contributions on his behalf, all as of the beginning of such payroll period. Not later than 15 days prior to the beginning of a payroll period of a Member, or not later than such other date as may be determined by the Committee, such Member may elect (i) to resume making After-Tax Contributions and (ii) that the Employer shall resume making Before-Tax Contributions on his behalf, by indicating any amount of contributions permitted under Subsection (a) and designating an amount equal to any amount of Pay as Before-Tax Contributions that is permitted under Subsection (b) hereof. (g) Contributions pursuant to this Section 4.01 shall be credited to Member Accounts. (h) Notwithstanding any election in accordance with paragraph (b) of this Section 4.01, the total amount of a Member's Before-Tax Contributions for any calendar year shall not exceed $8,000 or 10% of the Member's annual Pay or such other amount as may be adjusted from time to time under applicable Puerto Rico law (the 15 22 "Deferral Limit"). In addition, Before-Tax Contributions by a Member will be further limited by contributions to an individual retirement account as described in PR Code Section 1169. If a Member reaches the Deferral Limit, the Committee can direct that all or any portion of such Member's Contributions during such year shall be After-Tax Contributions regardless of such Member's elections pursuant to Sections 4.01(a) and 4.01(b). (i) As of the Effective Date, all then currently existing flat dollar Member Contributions shall be converted to Member Contributions based on 1% increments calculated by dividing such flat dollar amount by the Member's Pay for the prior year and rounding the product to the nearest whole percent; provided, that no flat dollar contribution shall be converted to a percent contribution of less than 1%. 4.02 LIMITATIONS ON BEFORE-TAX CONTRIBUTIONS. (a) Notwithstanding the foregoing provisions of this Section 4, the Committee shall limit the amount of Before-Tax Contributions made on behalf of each "Highly Compensated Employee" (as hereinafter defined) to the extent necessary to ensure that either of the following tests is satisfied: (i) The "Actual Deferral Percentage" (as hereinafter defined) of the group of eligible Highly Compensated Employees for the Plan Year is not more than the Actual Deferral Percentage of all other eligible Associates ("non-Highly Compensated Employees") multiplied by 1.25; or (ii) The excess of the Actual Deferral Percentage for the group of eligible Highly Compensated Employees over that of all other eligible Associates for the Plan Year is not more than two percentage points, and the Actual Deferral Percentage for the group of eligible Highly Compensated Employees for the Plan Year is not more than the Actual Deferral Percentage of all other eligible Associates multiplied by 2.0. (iii) To the extent permitted by the PR Code, the Actual Deferral Percentage for non-Highly Compensated Employees used in satisfying the tests set forth in (i) and/or (ii) above may be, for any Plan Year, the Actual Deferral Percentage for non-Highly Compensated Employees for the immediately preceding Plan Year, as determined by the Company in the manner permitted by law. For the purposes of this Section 4.02, Section 4.04 and Section 4.05, "eligible" means eligible to be a Member of this Plan pursuant to Section 2.01(b)(1). For purposes of Sections 4.02, 4.04 and 4.05, the term "Highly Compensated Employee" shall mean any employee whose Pay is greater than the Pay of two-thirds of all eligible employees, taking into account only Pay which is considered for the purpose of Section 4.01. To the extent permitted by the PR Code and its regulations, the Committee 16 23 may elect to include all other non-eligible employees for the purposes of determining compliance by the Plan with the actual deferral percentage test of PR Code Section 1165. For purposes of this Section 4.02, the term "Actual Deferral Percentage" shall mean, for a specified group of Associates for a Plan Year, the average of the ratios (calculated separately for each person in such group) of (i) The aggregate of the Before-Tax Contributions (and such other contributions which, in accordance with applicable rules and regulations promulgated under the PR Code, may be aggregated with such Before-Tax Contributions for purposes of demonstrating compliance with the requirements of the PR Code) which are actually payable to the Trust on behalf of each such Associate, to (ii) Such Associate's Pay for such Plan Year. In the event it is determined prior to any payroll period that the amount of Before- Tax Contributions elected to be made thereafter would cause the limitation prescribed in this Section 4.02 to be exceeded, the amount of Before-Tax Contributions allowed to be made on behalf of Highly Compensated Employees (and/or such other Members as the Committee may prescribe) shall be reduced to a rate determined by the Committee, and any elections of future Before-Tax Contributions which exceed the rate determined by the Committee shall be deemed to be After-Tax Contributions for the remainder of the Plan Year, notwithstanding the limitations on contribution rate changes in Section 4.01(e). Except as is hereinafter provided, the Members to whom such reduction is applicable and the amount of such reduction shall be determined pursuant to such uniform and nondiscriminatory rules as the Committee shall prescribe. (b) Notwithstanding the provisions of the foregoing paragraph, with respect to any Plan Year in which Before-Tax Contributions on behalf of Highly Compensated Employees exceed the applicable limit set forth in this Section 4.02, the Committee shall reduce the amount of the excess Before-Tax Contributions made on behalf of the Highly Compensated Employees (by reducing such contributions in order of Actual Deferral Percentages beginning with the highest), and shall distribute such excess Before-Tax Contributions (along with earnings attributable to such excess Before-Tax Contributions, as determined pursuant to such rules and regulations as shall be prescribed by the Puerto Rico Department of the Treasury) to the affected Highly Compensated Employees as soon as practicable after the end of such Plan Year, and in all events prior to the end of the next following Plan Year. Any excess Before-Tax Contributions to be returned to Highly Compensated Employees shall be calculated (i.e., reduced) and distributed using the methods allowed under the PR Code and its regulation with preference given to the method using the largest dollar amount deferred by the Highly Compensated Employees rather than the highest percentage. In lieu of such distribution of excess Before-Tax Contributions, the Committee may, to the extent permitted by applicable rules and regulations (and (i) except with respect to situations in which Section 4.01 (h) applies, and (ii) prior to March 15 of the calendar year following the Plan Year in which such contributions are made or such later date as may be permitted under the PR 17 24 Code), recharacterize as After-Tax Contributions for such Plan Year all or a portion of the Before-Tax Contributions for Members who are Highly Compensated Employees to the extent necessary to comply with the applicable limit set forth in this Section 4.02. In lieu of either distributing or recharacterizing excess Before-Tax Contributions, the Company may, to the extent permitted by applicable rules and regulations, make a qualified nonelective contribution on behalf of non-Highly Compensated Employees in an amount sufficient to satisfy one of the non-discrimination tests set forth above, which Company contribution (if any) shall be reimbursed by the Employer. Allocation of any such qualified non-elective contribution would be to the Member Before-Tax Accounts of each non-Highly Compensated Employee in the same proportion that such Member's Before-Tax Contributions for the year bears to the total Member Before-Tax Contributions for the year for all non-Highly Compensated Employees of the Employer. However, the maximum annual addition credited to a Member's Account shall be limited by Section 4.06. (c) Notwithstanding any provision of Sections 4.02(c) to the contrary, if Before-Tax Contributions on behalf of Highly Compensated Employees in excess of the applicable limit set forth in Section 4.02 either are distributed or are recharacterized, any Company Matching Allocation which would have been attributable to the amounts distributed or recharacterized shall be held unallocated in a suspense account and, as of the end of the Plan Year, forfeited and added to and allocated with Company Contributions in the next following Plan Year. 4.03 DISTRIBUTIONS OF EXCESS DEFERRALS (a) Notwithstanding any other provision of the Plan, Excess Before-Tax Deferrals (as hereinafter defined) and earnings allocable thereto as determined pursuant to such rules and regulations as are prescribed by the Puerto Rico Department of the Treasury, may be distributed no later than April 15 (or such later date as may be permitted under the PR Code) to Members who claim such allocable Excess Before-Tax Amounts (which shall be the "Excess Before-Tax Deferrals" plus earnings, if any) for the preceding calendar year. (b) For purposes of this Section 4.03, "Excess Before-Tax Deferral" means the amount of Pay which a Member has elected to have the Employer contribute to the Trust rather than receive it in cash, which is a Member Contribution under Section 4.01 for a calendar year that the Member allocates to this Plan pursuant to the claim procedure set forth in subsection 4.03(c) hereof. (c) The Member's claim shall be in writing; shall be submitted to the Committee no later than March 1 (or such other date as the Committee may specify); shall specify the amount of the Member's Excess Before-Tax Deferral for the preceding calendar year; and shall be accompanied by the Member's written statement that if such amounts are not distributed, the Excess Before-Tax Deferrals, when added to amounts deferred under other plans or arrangements described in PR Code Section 1165(e) exceeds 18 25 the limit imposed on the Member in accordance with the applicable provisions of the PR Code for the year in which the deferral occurred. (d) Notwithstanding any provision of Sections 3 or 4 to the contrary, any Company Matching Allocation which would have been attributable to an Excess Before-Tax Deferral distributed to a Member under Section 4.02(a) shall not be retained or distributed (unless and to the extent permitted under the PR Code and so determined by the Company in a uniform, nondiscriminatory manner), but shall be held unallocated in a suspense account and, as of the end of the Plan Year, forfeited and added to and allocated with Company Contributions in the next following Plan Year. 4.04 LIMITATIONS ON AFTER-TAX CONTRIBUTIONS. Notwithstanding the foregoing provisions of this Section 4, the Company or the Committee, in their respective discretion, may limit the amount of After-Tax Contributions made by or on behalf of each eligible Member to the extent determined appropriate. 4.05 LIMITATIONS ON COMPANY MATCHING CONTRIBUTIONS. Notwithstanding the foregoing provisions of Sections 3.02 or this Section 4, the Company or the Committee, in their respective discretion, may limit the amount of Company Matching Contributions allocated on behalf of each eligible Member to the extent determined appropriate. 4.06 AGGREGATE LIMITATIONS. To the extent required under the PR Code or as so determined by the Company or the Committee, in their respective discretion, Company Matching Contributions and Member After-Tax Contributions may be aggregated on a Member by Member basis and limited, as determined appropriate. 19 26 SECTION 5 INVESTMENT PROVISIONS 5.01 INVESTMENT FUNDS. (a) There shall be established as part of the Trust Fund a reasonable range of investment options. The Committee may from time to time, in its discretion, change, delete or add Investment Funds available within the Trust Fund; provided that unless and until the Plan is amended accordingly, the Plan shall provide a Payless Common Stock Fund as an investment option. (b) Income from and proceeds of sales of investments in each Investment Fund shall be reinvested in the same Investment Fund. Any income or other taxes payable with respect to a Fund shall be charged to such Fund. (c) A Trustee may, from time to time, make temporary investments in short term obligations of the United States Government, commercial paper, or other investments of a short term nature, pending investment in an Investment Fund. 5.02 INVESTMENT DIRECTION. (a) A Member may elect that his Member Contributions for each Payroll period be invested in 1% increments totaling 100% in one or more of the Investment Funds. Such election must be made pursuant to procedures prescribed by the Committee. Such election shall be effective until and unless a Member makes a different election for any period, but only as provided for under Subsection 5.02(b) and Subsection 5.02(c). If the Member fails to file a timely initial investment election, he shall be deemed to have elected to have 100% of his Member Contributions and his Company Profit Sharing Contributions invested in the stable, fixed income investment as may be determined by the Committee and 100% of his Company Matching Contributions in the Payless Common Stock Fund. Until such time as the Committee determines otherwise and so notifies Members, a Member's share of any Company Contributions, when allocated as of Plan Year-end, shall be invested in the same Investment Funds in the same proportions as the Member has elected in connection with investment of his Member Contributions at the time the amount is allocated. (b) A Member may change his election with respect to future Member and Company Contributions effective pursuant to procedures prescribed by the Committee, and may not change his election in any other manner except as provided in Subsection 5.02(c). (c) Effective as of the date determined by the Committee and pursuant to procedures prescribed by the Committee, a Member may elect to have any or all of the value in any of the Investment Funds which are credited to his Member and/or Company Accounts transferred and invested in any one or more of the Investment Funds. 20 27 (d) Notwithstanding this Section 5.02, effective March 12, 2000, during the black out period as determined by the Committee and the Trustee, no investment transfers or changes may be made by any Member unless provided by Section 6.06. 21 28 SECTION 6 ACCOUNTS 6.01 MEMBER ACCOUNTS. The Committee shall maintain or cause to be maintained for each Member under each Investment Fund in which his Member Contributions are invested separate Member Accounts which shall reflect the portion of his interest in such Investment Fund which is attributable to his contributions. The Member's After-Tax Contributions shall be credited to a separate Member After-Tax Account. The Member's Before-Tax Contributions shall be credited to a separate Member Before-Tax Account. The Member's or Associate's Rollover Contribution shall be credited to a separate Member Rollover Contribution Account. 6.02 COMPANY ACCOUNTS. The Committee shall maintain or cause to be maintained for each Member under each Investment Fund in which his Company Contributions are invested separate Company Accounts which shall reflect the portion of his interest in such Investment Fund which is attributable to Company Contributions, as well as to contributions made by an Employer under Prior Plans and to any income or earnings attributable to such Company Contributions and Prior Plan contributions. The Member's Company Matching Contributions shall be credited to a separate Company Matching Contribution Account. The Member's Company Profit Sharing Contribution, if any, shall be credited to a separate Company Profit Sharing Contribution Account. 6.03 MAINTENANCE OF ACCOUNTS. For the purposes of maintaining Accounts pursuant to this Section 6, each Investment Fund, shall be divided into Units, and the Interest of each Member in such Investment Fund shall be evidenced by the number of Units in such Investment Fund credited to his Accounts. 6.04 VALUATION OF ACCOUNTS. As of each Valuation Date the Committee shall determine the value of a Unit in each Account by dividing the current market value of all property in each such Account as of such Valuation Date (after deducting any expenses or other amounts including withdrawals property chargeable against such Account) by the number of Units then outstanding to the credit of all Members in each such Account. 6.05 MEMBER STATEMENTS. The Committee shall furnish or cause to be furnished to each Member a statement of his Company and Member Accounts, at least once each year, or more frequently if required by applicable law. 6.06 Shares of Payless ShoeSource, Inc. ("Payless Stock") in the Payless Common Stock Fund. (a) Each Member (or beneficiary of a deceased Member) who has Accounts invested in the Payless Common Stock Fund shall, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, have the right to direct the Trustee with respect to the vote of the number of shares of Payless Stock attributable to Units credited to him in the Payless Common Stock Fund as of the latest practicable Valuation Date prior to or contemporaneous with the record date set by the Company for each meeting of 22 29 shareowners of the Company. For such purpose the Trustee shall furnish to each such Member prior to each such meeting the proxy statement for such meeting, together with a form to be returned to the Trustee on which may be set forth the Member's instructions as to the manner of voting such shares of stock. Upon receipt of such instructions, the Trustee shall vote such shares in accordance therewith. If Member's instructions are not received by the Trustee in a timely manner, the Trustee shall vote such Member's shares in the same proportion as the shares of Common Stock for which instructions were actually received from Members. The Trustee shall not divulge the instructions of any Member. (b) Each Member (or beneficiary of a deceased Member) who has Accounts invested in the Payless Common Stock Fund shall, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, have the right with respect to the number of shares of Payless Stock attributable to Units credited to him in the Payless Common Stock Fund as of the latest practicable Valuation Date, to direct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to Payless Stock, and the Trustee shall respond in accordance with the instructions so received. The Trustee shall utilize its best efforts to timely distribute or cause to be distributed to each Member such information as will be distributed to shareowners of the Company in connection with any such tender or exchange offer, together with a form requesting instructions on whether or not such shares will be tendered or exchanged. If the Trustee shall not receive timely direction from a Member as to the manner in which to respond to such a tender or exchange offer, the Trustee shall not tender or exchange any shares of Payless Stock with respect to which such Member has the right of direction. Tenders as a result of a self-tender offer by the Company shall continue notwithstanding any investment change blackout. The Trustee shall not divulge the instructions of any member. The proceeds from the tender or exchange of shares attributable to Units in Payless Common Stock Investment Fund accounts of Members shall be transferred to one of the Investment Funds described in Section 5.01 and pursuant to a procedure established by the Committee. 6.07 VESTING IN MEMBER AND COMPANY ACCOUNTS (a) Vesting Schedule. A Member shall have a fully vested interest at all times (i) in his Member Accounts and (ii) in his Company Profit Sharing Contribution Account balance determined as of July 31, 1997. A Member who has completed at least two full Years of Service as of August 1, 1997 also shall be fully vested at all times (i) in his Company Matching Contributions Account and (ii) in his Company Profit Sharing Contribution Account determined at any time after July 31, 1997. The Company Matching Contribution Account of a Member who is not or was not credited with at least two Years of Service as of August 1, 1997 and his Company Profit Sharing Contribution Account attributable to Company Profit Sharing Contributions, if any, based on such Member's eligibility for such contributions after August 1, 1997, shall vest according to the following schedule:
Vesting Service Vested Interest ------------------- --------------- Fewer than 2 years 0%
23 30
Vesting Service Vested Interest --------------- --------------- 2 years 25% 3 years 50% 4 years 75% 5 years or more 100%
Notwithstanding the foregoing, a Member's interest in his Company Matching Contribution Account and his Company Profit Sharing Contribution Account shall become fully vested upon the Member's Retirement, death or Disability. (b) Cash-Out Distributions to Partially Vested Members and Restoration of Forfeitures. If, pursuant to Section 10.01, a partially-vested Member receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in Subsection (e) below), the cash-out distribution will result in an immediate forfeiture of the nonvested portion(s) of the Member's Company Matching and Company Profit Sharing Contribution Account(s). See Subsection (e) below. A partially-vested Member is a Member whose Vested Interest, determined under Section 6.07(a), in either his Company Matching Contribution Account or his Company Profit Sharing Contribution Account, or both, is less than 100%. A cash-out distribution is a distribution of the entire vested portion of the Member's Account(s). (i) A partially-vested Member who is reemployed by an Employer after receiving a cash-out distribution of the vested portion of his Account(s) shall have such forfeited amount restored, unless the Member no longer has a right to restoration under this subparagraph (i). The amount restored by the Plan Administrator shall be the same dollar amount as the dollar amount of his Account(s) on the Valuation Date immediately preceding the date of the cash- out distribution, unadjusted for any gains or losses occurring subsequent to that Valuation Date but reduced by the amount of the prior cash-out distribution. Restoration of the Member's Account balance(s) includes restoration of all US Code Section 411(d)(6) protected benefits with respect to the restored Account(s) in accordance with applicable Treasury regulations. The Plan Administrator will not restore a reemployed Member's Account balance(s) under this subparagraph (i) if the Member has incurred a Forfeiture Break in Service (as defined in Subsection (d) below). (ii) If restoration of the Member's Account(s) is permitted under subparagraph (i) above, the Plan Administrator will restore the Member's Account(s) as of the last day of the Plan Year during which such Member was reemployed by an Employer. To restore the Member's Account(s), the Plan Administrator, to the extent necessary, will allocate to the Member's Account(s): (A) first, the amount, if any, of Member forfeitures otherwise available for allocation under Subsection (e) below; 24 31 (B) second, deductible Employer contributions for the Plan Year to the extent made under a discretionary formula; and (C) third, as otherwise permitted by law. The Plan Administrator will not take into account any allocation under this subsection (b) in applying the limitation on allocations under Section 13. (iii) The deemed cash-out rule applies to a 0% vested Member. A 0% vested Member is a Member whose Account(s) derived from Employer contributions is (are) entirely forfeitable at the time of his termination of employment. Under the deemed cash-out rule, the Plan Administrator will treat the 0% vested Member as having received a cash-out distribution on the date of the Member's termination of employment or, if the Member's Account(s) is (are) entitled to an allocation of Employer contributions for the Plan Year in which he terminates employment, on the last day of that Plan Year. (c) Determination of Vesting Service. For purposes of determining a Member's Vested Interest in his Company Contributions Account(s) under subsection (a) above, a Member shall be credited with that number of years of Vesting Service determined by adding together all of the Associate's Periods of Service, whether or not consecutive. Notwithstanding the foregoing, Vesting Service shall not include any Period of Service before the Plan Year in which an Associate attains age eighteen (18). Only whole years of service shall be taken into account for purposes of applying the schedule set forth in subsection (a) above, and, for purposes of determining a Member's number of whole years of service, non-successive Periods of Service must be aggregated, with 365 days of service being deemed to constitute one year. For purposes of determining a Member's Period of Service, the Service Spanning rules described in Section 1.52(g) shall apply. (d) Forfeiture Break in Service. For purposes of this Section 6.07, a "Break in Service" is a Period of Severance of at least 365 consecutive days. A "Forfeiture Break in Service" occurs when a Member of former Member incurs 5 consecutive Breaks in Service. (e) Forfeiture Occurs. A Member's forfeiture, if any, of his Account balance(s) derived from Company contributions occurs under the Plan on the earlier of: (i) the last day of the last pay period ending within the Plan Year in which the Member first incurs a Forfeiture Break in Service; or (ii) the date the Member receives a cash-out distribution. The Plan Administrator shall determine the percentage of a Member's Account(s) forfeiture, if any, under this Subsection (e) solely by reference to the vesting schedule of Section 6.07(a). As of the last day of each Plan Year, the total amount of forfeitures which occurred during such Plan Year shall be calculated and such amount shall be 25 32 applied (i) to restore under (b) above any amounts previously forfeited from rehired Members' Accounts and (ii) the balance, if any, shall be added to and allocated with the Company Matching Contribution for that Plan Year. (f) Former May Plan Members. The provisions of this subsection (g) apply to a Member who previously was employed by the Employer, when it was part of the Group which included The May Department Stores Company, and who at the termination of his employment had Company Accounts in the May Plan which were forfeited as a result of termination of employment. If such Member has not incurred five consecutive one-year Breaks in Service as defined in Section 6.07(d), the value of the Member's Company Account forfeited under the May Plan will be restored under this Plan (in the manner described in Subsection (b) above) and will be 100% vested. 26 33 SECTION 7 EXPENSES 7.01 ADMINISTRATIVE EXPENSES. To the extent permitted by applicable law, the costs and expenses for administering this Plan, consisting of Trustee fees and expenses, Investment Manager fees and expenses, fees and expenses of outside experts, expenses of maintaining records under Section 6 of the Plan, and all other administrative expenses of the Plan, shall be paid out of the Trust Fund unless the Company or the Employer elects to pay them with its own funds. Costs incident to the purchase and sale of securities, such as brokerage fees, commissions and stock transfer fees, are not regarded as administrative expenses and shall be borne by the appropriate Investment Fund as determined by the Trustee or Committee. 27 34 SECTION 8 WITHDRAWALS DURING EMPLOYMENT 8.01 WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED. No withdrawal from the Plan shall be permitted prior to a Member's termination of employment, except as provided in Section 8.02. 8.02 AUTHORIZED WITHDRAWALS. (a) Prior to his termination of employment, a Member may elect to withdraw, in cash, any or all of the value in his Member After-Tax Accounts. However, in the event a Member elects to withdraw all or a portion of his After-Tax Contributions made after August 1, 1997, such Member shall forfeit his right to fifty percent (50%) of the Company Matching Contribution, if any, otherwise allocable in connection with his Member Contributions for the Plan Year in which the withdrawal occurs. (b) Prior to his termination of employment, a Member may elect to withdraw, in the event of a "hardship", an amount in cash equal to (i) the total amount of the Before-Tax Contributions made to the Trust on his behalf, or (ii) the value in his Member Before-Tax Account whichever is less provided, however, that no withdrawal will be permitted to the extent that loans from the Plan are available to the Member. In any event the amount withdrawn may not be greater than the amount determined by the Committee as being required to meet the immediate financial need created by the "hardship" and not reasonably available from other resources of the Member, whichever amount is less. The term "hardship" means a heavy financial hardship in light of immediate and heavy financial needs as determined by the Committee in accordance with the PR Code regulations. The amount of an immediate and heavy financial need may include any amounts necessary to pay any federal, state or local taxes or penalties reasonably anticipated to result from the distribution. The determination shall be made in a nondiscriminatory manner. Hardship shall include but not be limited to the following: (i) Medical expenses described in PR Code Section 1023(aa)(2)(P), previously incurred by the Member, the Member's spouse, or any of the Member's dependents (as defined in PR Code Section 1025); (ii) Purchase (excluding mortgage payments) of a principal residence for the Member; (iii) Payment of tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the Member, his or her spouse, children, or dependents (as defined in PR Code Section 1025); (iv) The need to prevent the eviction of the Member from his or her principal residence or foreclosure on the mortgage of the Member's principal residence. 28 35 The Committee may adopt written guidelines which identify additional circumstances constituting hardship and which provide procedures to be followed in the administration of hardship withdrawal requests, which guidelines are hereby incorporated herein. In addition, such hardship must be one which in the judgment of the Committee, based on the Member's representations, cannot be relieved (1) through reimbursement or compensation by insurance or otherwise, (2) by reasonable liquidation of the Member's assets to the extent such liquidation would not itself cause an immediate and heavy financial need, (3) by cessation of Member Contributions under the Plan or (4) by other distributions from employee benefit plans maintained by the Company or any other employer or by borrowing from commercial sources on reasonable commercial terms. The Member shall be required to submit documentation, to be determined by the Committee, with his hardship withdrawal request to enable the Committee to make a judgment regarding the validity of such hardship withdrawal request. For any Member who has attained age 59 1/2, the "hardship" requirement shall be deemed waived. (c) A withdrawal election shall be made pursuant to application procedures established by the Committee. For any withdrawal under paragraph (a) or (b), if the amount which may be withdrawn exceeds $100, the Member may not withdraw less than $100, and if the amount which may be withdrawn is less than $100, the Member shall be required to withdraw all of such amount. Contribution totals and Account values shall be determined as of the Valuation Date coinciding with or next following the filing of the withdrawal election. If the Member Accounts from which withdrawal is made are in more than one Investment Fund, the withdrawal shall be pro rata from each such Investment Fund, except in the case the Member is subject to Section 16 of the Securities Exchange Act of 1934 or has been designated as a "Designated Insider," in which case such Member's withdrawal will be taken first from such Member's Investment Funds other than the Payless Common Stock Fund. (d) Any Member who was a Participant in or eligible to be a Participant in the Volume Shoe Corporation Profit Sharing Plan (the "Volume Plan") as of December 31, 1988 and who had an account balance in the Volume Plan attributable to Employer Contributions made to the Volume Plan before July 31, 1976 and which account became a Company Account under The May Department Stores Company Profit Sharing Plan and which has been transferred to this Plan from the Payless Plan, shall be entitled to withdraw the market value of such account balance determined (and frozen) as of December 31, 1988. If the Member Accounts from which withdrawal is made are in more than one Investment Fund, the withdrawal shall be pro rata from each such Investment Fund. (e) Associates with Member Rollover Contribution Accounts may elect to withdraw their Member Rollover Contribution Accounts prior to termination of employment. 29 36 SECTION 9 BENEFITS UPON RETIREMENT, DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT 9.01 BENEFITS. Upon a Member's Retirement, Death, Disability, or other termination of employment, the value of his Member Accounts and of his vested Company Accounts shall be determined as of the Valuation Date prior to the date the distribution is calculated. A temporary Authorized Leave of Absence for Military Service or for other purposes approved by the Company and/or the Employer shall not, while any such Authorized Leave of Absence is validly in effect be regarded as a termination of employment. 9.02 BENEFICIARY. Any benefits payable on account of a Member's death shall be paid to such Member's spouse. If such Member has no spouse or if such Member's spouse shall have consented to the naming of another beneficiary, such benefits shall be paid to the person or persons (including, without limitation, estates, trust, or other entities) last named as beneficiary by such Member on an appropriate form filed with the Committee. A spouse's consent shall designate a beneficiary, acknowledge the effect of the consent and be in writing, witnessed by a Plan representative or notary public. A spouse's consent shall be irrevocable. If no beneficiary has been so named or the named beneficiary does not survive the Member, any payment to be made under this Plan on account of a Member's death shall be paid to such Member's spouse, or, if he has no spouse, to such Member's estate. Whenever permitted by ERISA or regulations thereunder, the Committee may waive the requirements that a spouse's consent be obtained. Such waiver may be on a case by case basis or by categories. 30 37 SECTION 10 PAYMENT OF BENEFITS 10.01 TIME OF PAYMENT. (a) All amounts distributable to a Member or Beneficiary pursuant to Section 9 shall, unless the Member makes an approved election pursuant to Section 10.01 (b) or 10.01 (c), be paid in a lump sum payment to be made as soon as practicable after the request is received, provided however, that any additional amounts which may be allocated to a Member's Company Accounts resulting from a Company Contribution in respect of the calendar year in which employment terminates shall be paid as soon as practicable after such contribution. Notwithstanding any provision of this Section 10 to the contrary, if the present value of the nonforfeitable accrued benefit of a Member, including Company and Member Contributions (but excluding accumulated deductible employee contribution, if any) exceeds (or for distributions prior to March 22, 1999, ever has exceeded) $5,000, no partial or total distribution shall be made unless the Member has consented thereto in writing in the manner required by law. (b) Any Member who was a Member of the May Plan as of June 30, 1990 may elect that all Transferred Accounts distributable to him pursuant to Section 9 shall be paid in annual installments over a period not to exceed ten years beginning with the Valuation Date as of which the lump sum payment would otherwise be made. In the event of the death of a Member prior to the expiration of such period, all amounts which have not been distributed to him shall be paid in a lump sum to his designated Beneficiary or his estate if there is no designated Beneficiary. Subject to the foregoing, each such installment shall be paid as of a Valuation Date and, until all the Accounts of the Member have been fully distributed, they shall continue to be revalued as of each succeeding Valuation Date pursuant to Section 6.04. Notwithstanding the paragraph above, any Member who as of December 31, 1988 was or was entitled to be a Participant in the Volume Shoe Corporation Profit Sharing Plan may elect that all Transferred Accounts distributable to him pursuant to Section 9 be paid in the form of equal monthly installments over a period not to exceed 120 months. Such payments shall otherwise be made in accordance with the foregoing portion of this Subsection 10.01 (b). (c) A Member who is entitled to receive a distribution in excess of $5,000 may elect to defer such distribution to age 65. An election to defer distribution shall conform to such requirements as to form, content, manner, and timing as shall be determined by the Committee and which requirements shall be applied in a manner which does not discriminate in favor of Members who are highly compensated employees (within the meaning of Code Section 414(q)). All Accounts of a Member who elects to defer his distribution shall continue to be revalued as of each succeeding Valuation Date pursuant to Section 6.04. A deferred distribution shall be paid when such Member attains 31 38 the age of 65 years or at such earlier or later time as shall be determined by the Committee as permitted by law. In the event of the death of a Member prior to distribution of the deferred amounts, all amounts shall be distributed in a lump sum to his designated Beneficiary or to his estate if there is no designated Beneficiary. The value for payment shall be determined as of the Valuation Date coincident with or next following such Member's 65th birthday or such other payment date determined by the Committee. 10.02 FORM OF PAYMENT. All distributions shall be made in the form of cash, except that distributions from the Payless Common Stock Fund shall be made in the form of full shares of Payless Common Stock, as applicable (with payment in cash for a fraction of a share) or in cash if elected by the Member or Beneficiary. The rights extended to a Member hereunder shall also apply to any Beneficiary or alternate payee of such Member. 10.03 INDIRECT PAYMENT OF BENEFITS. If any Member or Beneficiary has been adjudged to be legally, physically or mentally incapable or incompetent, payment may be made to the legal guardian or other legal representative of such Member or Beneficiary as determined by the Committee. Such payments shall constitute a full discharge with respect thereto. 10.04 INABILITY TO FIND MEMBER. If a Member or Beneficiary or other person to whom a benefit payment is due cannot be found during the three years subsequent to the date a distribution was required to be made under this Plan, the Accounts shall be forfeited at the end of such three-year period. The value of such Accounts as of the date the distribution was required to be made shall be restored if such Member or Beneficiary or other person makes a claim. 10.05 COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBER. In accordance with US Code Section 401 (a)(9) and Treasury Regulations promulgated thereunder, distributions to a Member must commence not later than the first day of April following the calendar year in which the Member attains age 70 1/2. Notwithstanding the foregoing, distribution to a Member who is not a "five percent owner" as defined in Section 20.10(f)(3) shall commence not later than April 1 following the calendar year in which the Member attains age 70 1/2 or, if later, the calendar year in which the Member retires. 10.06 COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY. Distributions to the Beneficiary entitled under Section 10.02 to receive any payments payable under this Plan on account of a Member's death shall be made in a lump sum payment not later than December 31 of the calendar year following the calendar year in which the Member died. 10.07 COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE. Distributions to an alternate payee entitled under Section 16.01 to receive any payments payable under this Plan pursuant to the terms of a Qualified Domestic Relations Order shall be made in accordance with the terms of such Qualified Domestic Relations Order and this Plan on or after the date on which the Member has attained his "earliest retirement age" (as defined under ERISA Section 206(d)(3)) under the Plan. Notwithstanding the foregoing, distribution to an alternate payee may be made prior to the Member's attainment of his earliest retirement age if, but only if: (1) the Qualified Domestic 32 39 Relations Order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; (2) the distribution is a single sum distribution of the alternate payee's entire benefit entitlement under the Plan; and (3) in the event the present value of the alternate payee's benefits under the Plan exceeds $5,000, the alternate payee consents to any distribution occurring prior to the Member's attainment of earliest retirement age. Nothing in this Section 10.07 shall be construed to permit a Member to (1) receive a distribution at a time not otherwise permitted under the Plan, (2) permit the alternate payee to receive a form of payment not otherwise permitted under the Plan, or (3) cause his Plan accounts to be valued or otherwise determined in a manner not otherwise permitted under the Plan. 33 40 SECTION 11 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS 11.01 ROLLOVER AMOUNT TO OTHER PLANS. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and pursuant to procedures prescribed by the Committee, to have his entire Plan distribution paid directly to a qualified retirement plan described in the PR Code Section 1165(a) or to an individual retirement account as described in PR Code Section 1165(b)(2) specified by him. 11.02 ROLLOVER AMOUNT FROM OTHER PLANS. An Associate eligible to participate in the Plan, regardless of whether he has satisfied the participation requirements of Section 2.01, may transfer to the Plan an Eligible Rollover Distribution provided that such distribution is from an Eligible Retirement Plan. If such transfer is not a direct transfer, such a transfer may be made only if the following conditions are met: (a) the transfer occurs on or before the 60th day following the Associate's receipt of the distribution from the Eligible Retirement Plan; and (b) the amount transferred is equal to any portion of the distribution the Associate received from the Eligible Retirement Plan, not in excess of the fair market value of all property received in such a distribution reduced by employee contributions, as defined in US Code Section 402 (a)(5)(E). The Committee shall develop such procedures, and may require such information, from a Member desiring to make such a transfer, as it deems necessary or desirable to determine that the proposed transfer will meet the requirements of the Section. Upon approval by the Committee or its Administrative Delegate, the amount transferred shall be deposited in the Trust Fund and shall be credited to the Member's account. Such rollover amount shall be one hundred percent (100%) vested in the Member, shall share in the income allocations in accordance with Section 5, but shall not share in the Company Profit Sharing Contributions, the Company Matching Contributions or the forfeiture allocations. Upon termination of employment, the total amount of the rollover contribution shall be distributed in accordance with the terms of the Plan. Upon such a transfer by an Associate who is otherwise eligible to participate in the Plan but who has not yet completed the participation requirements of Section 2.01, his rollover amount shall represent his sole interest in the Plan until he becomes a Member. 11.03 DEFINITIONS. The following definitions shall apply for the purposes of this Section 11: (a) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution is any distribution of all or any portion of the balance of the credit of the distributee from a qualified trust as described in PR Code Section 1165(b)(2). 34 41 (b) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in PR Code Section 1169(a), an individual retirement annuity described in PR Code Section 1169(b), or a qualified trust described in PR Code Section 1165(a), which accepts or will make, as applicable, an Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to a Member's surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity, as described above. (c) DISTRIBUTEE. A distributee includes a Member or former Member. In addition, the Member or former Member's surviving spouse and the Member's or former Member's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in ERISA Section 206(d)(3), are distributees with regard to the interest of the spouse or former spouse. (d) DIRECT TRANSFER. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee as described in Article 1165-6(5) of the regulations issued under the PR Code. 35 42 SECTION 12 LOANS 12.01 AVAILABILITY OF LOANS. Loans shall be permitted under this Plan as established by the policy of the Committee. Any such loan shall be subject to such conditions and limitations as the Committee deems necessary for administrative convenience and to preserve the tax-qualified status of the Plan. 12.02 AMOUNTS OF LOANS. No loan to any Member or Beneficiary may be made to the extent that such loan, when added to the outstanding balance of all other loans to the Member or Beneficiary, would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one-year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the loan is made, or (b) one-half the present value of the nonforfeitable accrued benefit of the Member. For the purpose of the above limitation, all loans from all plans of the Employer and other member of a group of employers described in US Code Sections 414(b), 414(c), 414(m), and 414(o) are aggregated. Furthermore, any loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five years from the date of the loan. If such loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the Member, the repayment period shall not extend beyond twenty nine and one-half years from the date of the loan. An assignment or pledge of any portion of the Member's interest in the Plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the Plan, will be treated as a loan under this paragraph. 12.03 TERMS OF LOANS. (a) Loans shall be made available to all Members and Beneficiaries on a reasonably equivalent basis. (b) Loans shall not be made available to Highly Compensated Employees (as defined in US Code Section 414(q)) in an amount greater than the amount made available to other Employees. (c) Loans must be adequately secured using not more than fifty percent (50%) of the Member's Vested Account balance, and bear a reasonable interest rate as determined from time to time by the Committee. (d) A Member loan for less than $1,000 is not permitted; provided, however, that if such Member also receives a loan from the Payless ShoeSource, Inc. 401(k) Profit Sharing Plan, such minimum amount limitation shall not apply. (e) In the event of default, foreclosure on the note and attachment of security will not occur until a distributable event occurs in the Plan. 36 43 (f) No loans will be made to any Member who on any day during the Company's applicable fiscal year is a beneficial owner of more than five percent (5%) of the outstanding stock of the Company. (g) All loans shall be made pursuant to a written Member loan program incorporated herein by reference. (h) Loans are available from the following accounts, and will be withdrawn from the Member's accounts in the following hierarchy: (1) Member Accounts (2) Vested Company Accounts (3) Member Rollover Contribution (i) Loans will be taken and repaid from and to the Investment Funds on a pro rata basis, except in the case the Member is subject to Section 16 of the Securities Exchange Act of 1934 or has been designated as a "Designated Insider," in which case such Member's loan will be taken first from such Member's Investment Funds other than the Payless Common Stock Fund. 37 44 SECTION 13 LIMIT ON CONTRIBUTIONS TO THE PLAN This Section 13 is intended to conform the Plan to the requirements of US Code Section 415 and limits the contributions that can be made by and for an individual under the Plan. 13.01 LIMIT ON CONTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary: (a) The amounts allocated to a Participant during the Limitation Year under the Plan and allocated to the Participant under any other defined contribution plan to which the Employer or any other member of the Group has contributed shall be proportionately reduced, to the extent necessary, so that the Annual Addition does not exceed the least of: (1) $30,000; or (2) 25% of the Participant's remuneration from the Employer or any member of the Group during the Limitation Year; or (3) such other limits set forth in US Code Section 415. The amount set forth in subparagraph (1) above shall automatically be adjusted to reflect adjustments made by applicable law. Remuneration for purposes of this Section means remuneration as defined in US Treasury Regulation Section 1.415- 2(d) and shall also include the deferrals described in US Code Section 415(c)(3)(D). (b) For purposes of this Section, Limitation Year means the 12 month period commencing on January 1 and ending on December 31. (c) For purposes of this Section, Annual Additions means the sum for the Limitation Year of Employer contributions, Employee contributions (determined without regard to any rollover contributions as defined in US Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3) and without regard to Employee contributions to a simplified employee pension plan which are excludible from gross income under US Code Section 408(k)(6)) and forfeitures. 38 45 13.02 Adjustment for Excessive Annual Additions (a) If, as a result of the allocation of forfeitures, a reasonable error in estimating a Member's Pay or other facts and circumstances to which US Treasury Regulation Section 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum "annual additions" to be exceeded for any Member, the Committee shall (1) return any Member Contributions credited for the "limitation year" to the extent that the return would reduce the "excess amount" in the Member's Accounts, (2) hold any "excess amount" remaining after the return of any Member Contributions in a "Section 415 suspense account", (3) use the "Section 415 suspense account" in the next "limitation year" (and succeeding "limitation years" if necessary) to reduce either Company Contributions for that Member if that Member is covered by the Plan as of the end of the "limitation year" or if such Member is not covered by the Plan at the end of the "limitation year" to reduce Company Contributions for all Members in the Plan, before any Company Contributions or Member Contributions which would constitute "annual additions" are made to the Plan for such "limitation year," (4) reduce Company Contributions for such "limitation year" by the amount of the "Section 415 suspense account" allocated and reallocated during such "limitation year." For purposes of (3) above, the Plan may not distribute "excess amounts" to Members or former Members. (b) For purposes of this Section, "excess amount" for any Member for a "limitation year" shall mean the excess, if any, of (1) the "annual additions" which would be credited to his account under the terms of the Plan without regard to the limitations of US Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 13.01(a). (c) For purposes of this Section, "Section 415 suspense account" shall mean an unallocated account equal to the sum of "excess amount" for all Members in the Plan during the "limitation year." The "Section 415 suspense account" shall not share in any earnings or losses of the Trust Fund. 39 46 SECTION 14 ADMINISTRATION OF THE PLAN 14.01 PLAN ADMINISTRATOR. The Company shall be the Plan Administrator of the Plan for purposes of ERISA and shall be a "named fiduciary" as determined in ERISA Section 402(a)(2). 14.02 DELEGATION OF AUTHORITY. (a) Authority to administer the Plan has been delegated to the Committee and the Administrative Subcommittee, if any, in accordance with Sections 1.43 (Total and Permanent Disability), 4.01 (Member Contributions), 6.01 (Member Accounts), 6.02 (Company Accounts), 6.05 (Member Statements), 8.02 (Authorized Withdrawals), 13.02 (Adjustment for Excessive Annual Additions), 20.02 (Withdrawal of an Employer) and this Section 14. (b) Authority with respect to the Investment Funds of the Plan has been delegated to the Trustee in accordance with Sections 5.01(c) (Investment Funds), 6.06 (shares of Payless ShoeSource, Inc. ("Payless Stock") in the Payless Common Stock Fund), 7.01 (Administrative Expenses) and 15 (Management of the Trust Fund). (c) Authority to direct the investment of the Plan's funds has been delegated to the Investment Subcommittee, if any, in accordance with Section 15.03(b), (c) and (d) (Investments and Reinvestments). (d) The Committee shall also have the authority and discretion to engage on Administrative Delegate who shall perform, without discretionary authority or control, administrative functions within the frame work of policies, interpretations, rules practices and procedures made by the Committee or other Plan Fiduciary. Any action made or taken by the Administrative Delegate may be appealed by an affected Member to the Committee in accordance with the claims review procedure in Section 16.05. Any decisions which call for interpretations of the Plan provisions not previously made by the Committee shall be made only by the Committee. The Administrative Delegate shall not be considered a fiduciary with respect to the services it provides. 14.03 COMMITTEE AND SUBCOMMITTEES. (a) The Committee may appoint two subcommittees (an Administrative Subcommittee" and an "Investment Subcommittee"), each Subcommittee to consist of at least three persons, who need not be members of the Board. The Committee and each Subcommittee, if appointed, shall elect from its members a Chairman and a Secretary, and may appoint one or more Assistant Secretaries who may, but need not be, members of the Committee or such Subcommittee, and may employ such agents, such legal counsel and such clerical, medical, accounting, actuarial and other services as it may from time to time deem advisable to assist in the administration of the Plan. The Committee and each Subcommittee may, from time to time, appoint agents and delegate to such agents such 40 47 duties as it considers appropriate and to the extent that such duties have been so delegated, the agent shall be exclusively responsible for the proper discharge of such duties. (b) The Administrative Subcommittee shall have the general responsibility for the administration of the Plan and the carrying out of its provisions, and shall have general powers with respect to Plan administration, including, but not limited to, the powers listed in this Section 14.03. The Administrative Subcommittee shall have the power to interpret and construe the Plan, the power to establish rules for the administration of the Plan and the transaction of its business, the power to remedy and resolve inconsistencies and omissions, and the power to determine all questions which arise in the administration, interpretation, or application of the Plan, including but not limited to questions regarding the eligibility, status, Account value and any rights of any Member, Beneficiary, and any other person hereunder. (c) The Investment Subcommittee shall have the powers provided for in Section 15.03(b). (d) The Committee and each Subcommittee shall act by a majority of its members and the action of such majority expressed by a vote at a meeting, or in writing without a meeting, shall constitute the action of the Committee or such Subcommittee. All decisions, determinations, actions or interpretations with respect to the Plan by the Committee or either Subcommittee and the individual committee or subcommittee members shall be in the Committee's, Subcommittee's or individual member's sole discretion. The decision, determination, action or interpretation of the Committee or either Subcommittee and the respective individual members of the Committee or Subcommittee in respect to all matters within the scope of its authority shall be conclusive and binding on all persons. No member of the Committee or either Subcommittee shall have any liability to any person for any action or omission except each for his own individual willful misconduct. If a Subcommittee is not appointed, the Committee shall exercise such Subcommittee's authority and perform its duties as described herein. (e) Nothing in this Section 14 or in any other provision of the Plan shall be deemed to relieve any person who is a fiduciary under the Plan for purposes of ERISA from any responsibility or liability for any responsibility, obligation or duty which Part 4 of Title I of ERISA shall impose upon such person with respect to this Plan. 14.04 ACCOUNTS AND REPORTS. The Committee shall maintain or cause to be maintained accounts reflecting the fiscal transactions of the Plan and shall keep in convenient form such data as may be necessary for the administration of the Plan. The Committee shall prepare annually a report showing in reasonable detail the assets and liabilities of the Plan and setting forth a brief account of the operation of the Plan for the preceding year. 14.05 NON-DISCRIMINATION. Neither the Committee nor either Subcommittee shall exercise its discretion in such a way as to result in discrimination in favor of officers, shareholders or highly compensated employees (within the meaning of US Code Section 414(q)). 41 48 SECTION 15 MANAGEMENT OF THE TRUST FUND 15.01 USE OF THE TRUST FUND. All assets of the Plan shall be held as a Trust Fund in one or more trusts and shall be used to provide the benefits of this Plan. No part of the corpus or income shall be used for, or diverted to, purposes other than for the exclusive benefit of Members and their Beneficiaries under this Plan and administrative expenses of this Plan. 15.02 TRUSTEES. The Trust Fund may, at the direction of the Company, be divided into one or more separate trusts, each of which may have a separate Trustee appointed from time to time by the Company and subject to removal by the Company. The Trustee or Trustees of each trust shall have complete authority and discretion with respect to the investment and reinvestment of the assets of each trust, subject, however, to (i) the provisions in the Trust Agreements between the Trustee or Trustees and the Company, and (ii) the provisions of this Plan. Any or all of such separate trusts shall be referred to collectively from time to time as the Trust Fund. Any division of the Trust Fund into one or more separate trusts shall be at the direction of the Company. 15.03 INVESTMENTS AND REINVESTMENTS. The investment and reinvestment of the assets of the Trust Fund shall be in accordance with the following: (a) The Company shall have the authority to instruct the Trustee or Trustees to accept and follow the instructions of any designated investment manager (within the meaning of ERISA Section 3(38)) with respect to the investment and reinvestment of the assets in any Investment Funds the Company may designate. (b) The Investment Subcommittee shall have the powers, with respect to investment and reinvestment of the assets constituting the Investment Funds, to promulgate limitations, restrictions, rules or guidelines with respect to the investment policies and classes of investments in which the assets of the Funds may be invested or reinvested by the Trustee or Trustees, including any such investments made pursuant to the instructions of any investment manager. In the event an investment manager designated pursuant to Section 15.03(a) resigns or otherwise is unable to act, the Investment Subcommittee shall have such power and authority as otherwise would be exercisable by such Investment Manager. (c) In the event that the assets of the Trust Fund shall be divided into one or more separate trusts pursuant to the authority provided for in Section 15.02, then the powers of the Investment Subcommittee as provided for in Section 15.03(b) may be exercised with respect to one or more of such trusts within the discretion of the Investment Subcommittee. (d) The powers of the Investment Subcommittee as provided in Section 14.03(b), may be exercised at any time or from time to time by the Investment Subcommittee within the discretion of the Investment Subcommittee and shall be pursuant 43 49 to a written agreement between the Investment Subcommittee and the Trustee or Trustees or, if an investment manager has been appointed, between the Investment Subcommittee and the investment manager. (e) The Trust Agreement between the Company (and/or the Employer) and the Trustee or Trustees implementing the Plan shall contain provisions effectuating the provisions of this Section 15 of the Plan. 44 50 SECTION 16 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS 16.01 DISCLAIMER OF EMPLOYER LIABILITY. (a) No liability shall attach to the Company or any Employer with respect to a benefit or claim hereunder and Members and their Beneficiaries, and all persons claiming under or through them, shall have recourse only to the Trust Fund for payment of any benefit hereunder. (b) The rights of the Members, their Beneficiaries and other persons are hereby expressly limited and shall be only in accordance with the provisions of the Plan. Nothing contained herein shall be deemed to give a Member any interest in any specific property of the Trust or any interest other than a right to receive payments pursuant to the provisions of the Plan. 16.02 EMPLOYER-ASSOCIATE RELATIONSHIP. Neither the establishment of this Plan nor its communication through a Summary Plan Description (or otherwise) shall be construed as conferring any legal or other rights upon any Associate or any other person to continue in employment or as interfering with or affecting in any manner the right of the Company or the Employer to discharge any Associate or otherwise act with relation to him. The Company and the Employer may take any action (including discharge) with respect to any Associate or other person and may treat him without regard to the effect which such action or treatment might have upon him as a Member of this Plan. 16.03 BINDING EFFECT. Each Member, by executing an enrollment form, beneficiary designation and otherwise agreeing to participate in the Plan agrees for himself, his beneficiary(ies), heirs, successors and assigns to be bound by all of the provisions of the Plan. 16.04 CORPORATE ACTION. With respect to any action permitted or required by the Plan, the Company and/or the Employer may act through its appropriate officers: 16.05 CLAIM AND APPEAL PROCEDURE. A Member or beneficiary may file with the Committee or its designee at any time a written claim in connection either with a benefit payable hereunder or otherwise. The Committee or its designee, normally within 90 days after receipt of a written claim, shall render a written decision on the claim, unless an additional 90 days is required by special circumstances which shall be explained to the claimant. If the claim is denied, either in whole or in part, the decision shall include the reason or reasons for the denial; a specific reference to the Plan provision or provisions which are the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why the information or material is necessary; and an explanation of the Plan's entire claim procedure. The claimant may file with the Committee, within 60 days after receiving the written decision from the Committee, a written notice of request for review of the Committee's decision. The review shall be made by a committee of up to three individuals (which may include 45 51 members of the Committee) appointed by the Company or by the Committee. Said committee shall render a written decision on the claim containing the specific reasons for their decision, including a reference to the Plan's provisions, normally within 60 days after receipt of the request for review, unless an additional 60 days is required by special circumstances which shall be explained to the claimant. If a Member or beneficiary does not file written notice of a claim with the Committee or its designee at the times set forth above, he shall have waived any right to a benefit other than as originally proposed by the Company or the Committee. 46 52 SECTION 17 NON-ALIENATION OF BENEFITS 17.01 PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY. No benefit payable under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, encumber, levy upon or charge the same shall be void; nor shall any such benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit, except as specifically provided herein. Notwithstanding the foregoing, the creation, assignment, or recognition of a right to any benefit payable to an alternate payee with respect to a Qualified Domestic Relations Order shall not be treated as an assignment or alienation prohibited by this Section. Any other provision of the Plan to the contrary notwithstanding, if a Qualified Domestic Relations order requires the distribution of all or part of a Member's benefits under the Plan, the establishment or acknowledgment of the alternate payee's right to benefits under the Plan in accordance with the terms of such Qualified Domestic Relations Order shall in all events be deemed to be consistent with the terms of the Plan. Notwithstanding the above a Member's benefit will be offset against any amount he or she is ordered or required to pay to the Plan pursuant to an order or requirement which arises under a judgment of conviction for a crime involving the Plan, under a civil judgment entered by a court in an action involving a fiduciary breach, or pursuant to a settlement agreement between the Participant and the Department of Labor or the Pension Benefit Guaranty Corporation. Any such offset shall be made pursuant to Section 206(d) of ERISA. 17.02 ALTERNATE APPLICATION. If a Member or Beneficiary under this Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any benefit under this Plan, except as specifically provided herein, or if any benefit shall, in the discretion of the Committee, cease, and in that event the Committee may hold or apply the same or any part thereof to or for the benefit of such Member or Beneficiary, his spouse, children or other dependents, or any of them, or in such other manner and in such proportion as the Committee may deem proper. 47 53 SECTION 18 AMENDMENTS 18.01 COMPANY'S RIGHTS. The Company reserves the right at any time and from time to time in its sole discretion to alter, amend, or modify, in whole or in part, any or all of the provisions of this Plan, provided, however, no such alteration, amendment or modification shall be made which shall decrease the accrued benefit of any Member. Anything in this Plan to the contrary notwithstanding, the Company in its sole discretion may make any modifications or amendments, additions or deletions in or to this Plan as to benefits or otherwise and retroactively if necessary, and regardless of the effect thereof on the rights of any particular Member or Beneficiary, which it deems appropriate and/or necessary in order to comply with or satisfy any conditions of any law or regulation relating to the qualification of this Plan and the trust or trusts created pursuant hereto and to keep this Plan and said trusts qualified under US Code Section 401(a) and the applicable PR Code section(s) and to have the trust or trusts declared exempt from taxation under US Code Section 501(a) and the applicable PR Code section(s). 18.02 PROCEDURE TO AMEND. This Plan may be amended by action of the Company's Board of Directors and evidenced by a written amendment signed by the Company's Secretary or by any other person so authorized by or pursuant to authority of the Board of Directors. 18.03 PROVISION AGAINST DIVERSION. No part of the assets of the Trust Fund shall, by reason of any modification or amendment or otherwise, be used for, or diverted to, purposes other than for the exclusive benefit of Members and their Beneficiaries under this Plan and administrative expenses of this Plan. 48 54 SECTION 19 TERMINATION 19.01 RIGHT TO TERMINATE. The Company reserves the right to terminate this Plan, in whole or in part, at any time and, if this Plan shall be terminated, the provisions of Section 19.03 shall apply and the Accounts of affected Members shall become (or remain) fully vested and nonforfeitable. 19.02 WITHDRAWAL OF AN EMPLOYER. If an Employer shall cease to be a participating Employer in this Plan, the Trust Fund and the Accounts of the Members of the withdrawing Employer and their Beneficiaries shall be revalued as if such withdrawal date were a Valuation Date. The Committee shall then direct the Trustee either to distribute the Accounts of the Members of the withdrawing Employer as of the date of such withdrawal on the same basis as if the Plan had been terminated pursuant to Section 19.03 or to deposit in a trust established by the withdrawing Employer pursuant to a plan substantially similar to this Plan assets equal in value to the assets of the Trust Fund allocable to the Accounts of the Members of the withdrawing Employer. 19.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST. If this Plan is terminated at any time including a partial termination as defined in US Code Section 411(d)(3), or if contributions are completely discontinued and the Company determines that the trust shall be terminated, in whole or in part, the Trust Fund and all Accounts shall be revalued as if the termination date were a Valuation Date and the affected Members' Accounts shall be distributed in accordance with Section 10. 19.04 ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST. If this Plan shall be terminated in whole or in part or contributions completely discontinued but the Company determines that the trust shall be continued pursuant to the terms of the Trust Agreement, the trust shall continue to be administered as though the Plan were otherwise in effect. Upon the subsequent termination of the trust, in whole or in part, the provisions of Section 19.03 shall apply. 19.05 MERGER, CONSOLIDATION OR TRANSFER. In the case of any merger or consolidation with, or transfer of Plan assets or liabilities to, any other plan each Member shall be entitled to receive a benefit immediately after the merger, consolidation or transfer (if the transferee plan then terminated) which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). 49 55 SECTION 20 CONSTRUCTION 20.01 APPLICABLE LAW. The provisions of this Plan except as otherwise governed by ERISA shall be construed, regulated, administered and enforced according to the laws of Puerto Rico and, whenever possible, to be in conformity with the applicable requirements of ERISA, of the US Code to the extent applicable and of the PR Code of 1994. 20.02 GENDER AND NUMBER. Wherever applicable, the masculine pronoun as used herein shall include the feminine pronoun and the singular pronoun shall include the plural. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by a duly authorized officer this ______ day of _____________, 2000. PAYLESS SHOESOURCE, INC. By: ___________________________ EXHIBIT 10 19 Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Assocites. WPD 50 EX-11.1 13 COMPUTATION OF NET EARNINGS PER SHARE 1 Exhibit 11.1 PAYLESS SHOESOURCE, INC. COMPUTATION OF NET EARNINGS PER SHARE FOR THE LAST THREE FISCAL YEARS
Jan. 29, Jan. 30, Jan. 31, (Thousands, except per share) 2000 1999 1998 --------- --------- --------- Basic Computation: - ----------------- Net earnings $136,479 $134,959 $128,869 Weighted average common shares outstanding 31,221 35,412 38,443 -------- -------- -------- Basic earnings per share $ 4.37 $ 3.81 $ 3.35 ======== ======== ======== Diluted Computation: - ------------------- Net earnings $136,479 $134,959 $128,869 Weighted average common shares outstanding 31,221 35,412 38,443 Net effect of dilutive stock options based on the treasury stock method 144 320 487 -------- -------- -------- Outstanding shares for diluted earnings per share 31,365 35,732 38,930 ======== ======== ======== Diluted earnings per share $ 4.35 $ 3.78 $ 3.31 ======== ======== ========
EX-12.1 14 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 PAYLESS SHOESOURCE, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE LAST THREE FISCAL YEARS
Jan. 29, Jan. 30, Jan. 31, (Thousands, except per share) 2000 1999 1998 -------- -------- -------- Earnings Available for Fixed Charges: - ------------------------------------- Pretax earnings $226,991 $224,467 $214,348 Fixed Charges (Interest expense plus interest component of rent) 81,501 72,234 85,345 -------- -------- -------- $308,492 $296,701 $299,693 ======== ======== ======== Fixed Charges: - -------------- Gross interest expense $ 8,412 $ 1,876 $ 1,246 Interest factor attributable to rent expense 73,089 70,358 84,099 -------- -------- -------- 81,501 72,234 85,345 ======== ======== ======== Ratio of Earnings to Fixed Charges $ 3.8 $ 4.1 $ 3.5 ======== ======== ========
EX-13.1 15 1999 ANNUAL REPORT TO SHAREOWNERS 1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- PAYLESS SHOESOURCE, INC., A DELAWARE CORPORATION (THE "COMPANY"), ACHIEVED ITS FOURTH CONSECUTIVE YEAR OF RECORD SALES, NET EARNINGS AND EARNINGS PER SHARE SINCE OPERATING AS AN INDEPENDENT PUBLIC COMPANY. THE THREE-YEAR DILUTED EARNINGS PER SHARE COMPOUND GROWTH RATE IS 17.7 PERCENT. - -------------------------------------------------------------------------------- Sales for the Company increased to $2.73 billion in fiscal 1999, from $2.62 billion in 1998, an increase of 4.4 percent. Same-store sales for 1999 increased 0.9 percent. Diluted earnings per share for 1999 increased 15.1 percent to $4.35 from $3.78 last year. Net earnings totaled $136.5 million compared with $135.0 million in 1998, an increase of 1.1 percent. Return on sales was 5.0 percent in 1999, down from 5.2 percent in 1998. Return on equity improved to 19.4 percent in 1999 from 16.1 percent in 1998. Return on net assets increased to 18.4 percent in 1999 from 17.2 percent in 1998. During 1999 the Company had a net increase of 135 Payless ShoeSource stores (269 openings and 134 closings) and 7 Parade stores (21 openings and 14 closings). Year-end 1999 store count was 4,492 Payless ShoeSource stores and 220 Parade stores. The Company's expansion plans for 2000 include a net increase of approximately 288 stores, which includes both Payless ShoeSource and Parade stores. The expansion plans for 2000 through 2004 would add 430 net Payless ShoeSource stores and 450 net Parade stores. During this five-year period, the Company plans to invest $304 million for new stores and to spend an additional $112 million to remodel existing stores. These are the major components of a projected $670 million capital improvement plan. During 1999, the Company repurchased $142 million of common stock, with $235 million remaining of the $500 million stock repurchase program announced in October 1998. In March 2000, the Company announced a self-tender for up to 7,547,170 shares of common stock, or approximately 25 percent of the 29.6 million shares outstanding at the end of fiscal 1999. The self-tender will be financed with the Company's existing cash and additional borrowings. The following discussion summarizes the significant factors affecting operating results for the fiscal years ended January 29, 2000 (1999), January 30, 1999 (1998), and January 31, 1998 (1997). 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. References to years relate to fiscal years rather than calendar years unless otherwise designated. 12 2 REVIEW OF OPERATIONS Diluted earnings per share reached $4.35 in 1999, compared with $3.78 in 1998 and $3.31 in 1997. Net earnings totaled $136.5 million in 1999 compared with $135.0 million in 1998 and $128.9 million in 1997. The 1999 and 1998 diluted earnings per share growth rates were 15.1 percent and 14.2 percent, respectively. Return on sales was 5.0 percent, 5.2 percent and 5.0 percent for 1999, 1998 and 1997, respectively. Results for the past three years were as follows:
- ------------------------------------------------------------------------------------------------------------------- (dollars in millions, 1999 1998 1997 except per share) $ % of Sales $ % of Sales $ % of Sales - ------------------------------------------------------------------------------------------------------------------- Net retail sales $2,730.1 100.0% $2,615.5 100.0% $2,566.9 100.0% Cost of sales 1,868.3 68.4 1,798.9 68.8 1,799.4 70.1 Selling, general and administrative expenses 635.7 23.3 599.2 22.9 562.1 21.9 Interest (income) expense, net (0.9) (0.0) (7.1) (0.3) (8.9) (0.3) - ------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 227.0 8.3 224.5 8.6 214.3 8.3 - ------------------------------------------------------------------------------------------------------------------- Provision for income taxes(1) 90.5 39.9 89.5 39.9 85.4 39.9 Net earnings $ 136.5 5.0% $ 135.0 5.2% $ 128.9 5.0% - ------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 4.35 $ 3.78 $ 3.31 - ------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 4.37 $ 3.81 $ 3.35 - -------------------------------------------------------------------------------------------------------------------
(1) Percent of sales columns represent effective income tax rates. - - NET RETAIL SALES Net retail sales represent the sales of stores operated during the period. Same-store sales represent sales of those stores open during both comparable periods. In 1999 net retail sales increased 4.4 percent from 1998, consisting of a 7.1 percent increase in unit volume and a 2.6 percent decrease in average selling prices. Same-store sales increased 0.9 percent in 1999. In 1998 net retail sales increased 1.9 percent from 1997, consisting of a 1.8 percent decrease in unit volume and a 3.7 percent increase in average selling prices. Same-store sales decreased 0.8 percent in 1998. In 1997 net retail 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. The net retail sales increase in 1999 over 1998 was driven principally by growth in store count due primarily to the Company's continued expansion in the Canadian market. The moderate same-store sales increase in 1999 compared with 1998 reflected general softness in the footwear market, particularly in the first half of the year; weakness in certain geographic areas, especially the Southeast; and declines in sales of certain categories, such as women's plain pumps and flats, athletic shoes and boots. Within the dress shoe business, traditional pumps and flats continue to decline with the shift towards casual. The net retail sales increase in 1998 over 1997 was driven principally by growth in store count and the Company's successful entry into the Canadian market. The same-store sales decrease in 1998 compared with 1997 reflected general softness in the footwear market, particularly in the second half of the year; weakness in certain geographic areas, especially the West Coast and Northwest; declines in sales of certain categories, such as men's and children's athletic shoes, women's dress shoes, boots and sandals, due to changes in - -------------------------------------------------------------------------------- $142 MILLION DURING 1999, THE COMPANY REPURCHASED $142 MILLION OF COMMON STOCK. SHARE REPURCHASES REPRESENTED 59 PERCENT OF THE COMPANY'S CAPITAL ALLOCATION IN 1999. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) consumer preferences and weather conditions; and pressure from close-out sales and inventory liquidation programs by competitors with excess inventories. - - COST OF SALES Cost of sales includes cost of merchandise sold, and the Company's buying and occupancy costs. Cost of sales was $1.87 billion in 1999 which was essentially flat compared with $1.80 billion in 1998. As a percent of net retail sales, cost of sales was 68.4 percent in 1999 compared with 68.8 percent in 1998. Higher gross margins in 1999 reflect continued improvements in the merchandising mix, control of freight costs and improvements in product costs. Cost of sales was $1.80 billion in 1998 which was flat compared with $1.80 billion in 1997. As a percent of net retail sales, cost of sales was 68.8 percent in 1998 compared with 70.1 percent in 1997. Higher gross margins in 1998 reflect improvements in the merchandise mix, control of freight costs and improvements in product costs. - - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $635.7 million in 1999 compared with $599.2 million in 1998,a 6.1 percent increase. As a percent of net retail sales, selling, general and administrative expenses were 23.3 percent for 1999 compared with 22.9 percent in 1998. The increase was primarily due to increases in store payroll and advertising expense. Selling, general and administrative expenses were $599.2 million in 1998 compared with $562.1 million in 1997, a 6.6 percent increase. As a percent of net retail sales, selling, general and administrative expenses were 22.9 percent for 1998 compared with 21.9 percent in 1997. The increase was primarily due to an increase in advertising expense; negative leverage due to same-store sales below last year; and investments in systems to support future growth, enhance distribution capabilities and implement the Company's Year 2000 program, as discussed under "Year 2000 Readiness Disclosure." - - Interest (Income) Expense Interest income and expense components were:
- -------------------------------------------------------- (dollars in millions) 1999 1998 1997 - -------------------------------------------------------- Interest income $(9.3) $(9.0) $(10.1) Interest expense 8.4 1.9 1.2 - -------------------------------------------------------- Interest (income) expense, net $(0.9) $(7.1) $ (8.9) - --------------------------------------------------------
The increase in 1999 interest expense was due to the issuance of $55.0 million of unsecured notes in June 1999 and the issuance of $67.0 million of unsecured notes in November 1998. Interest expense also relates to capitalized lease obligations. Interest income is from the short-term investment of available cash balances. The increase in 1998 interest expense was due to the issuance of $67.0 million of unsecured notes in November 1998. - - INCOME TAXES The effective income tax rates were 39.9 percent for 1999, 1998 and 1997. - - IMPACT OF INFLATION Inflation did not have a material impact on the Company's 1999 sales growth or earnings. - -------------------------------------------------------------------------------- 31.6% THE COMPANY ACHIEVED GROSS MARGINS OF 31.6 PERCENT COMPARED WITH 31.2 PERCENT IN 1998. HIGHER GROSS MARGINS IN 1999 REFLECT CONTINUED IMPROVEMENTS IN THE MERCHANDISING MIX, CONTROL OF FREIGHT COSTS, AND IMPROVEMENTS IN PRODUCT COSTS. 4 REVIEW OF FINANCIAL CONDITION - - CASH FLOW Cash flow from operations (net earnings plus depreciation and amortization) was $233.9 million, 8.6 percent of net sales in 1999 compared with 8.8 percent in 1998 and 8.6 percent in 1997. Internally generated funds will continue to provide the Company with significant capital resources to enhance shareowners' value. Sources and (uses) of cash flows are summarized below:
- ---------------------------------------------------------------------------------------------- (dollars in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Net earnings and depreciation / amortization $233.9 $228.8 $219.5 Working capital (increases) decreases (28.8) (5.4) 24.0 Other operating activities 8.8 (2.7) (0.7) Capital expenditures and other investing activities (87.5) (99.9) (74.8) Net purchases of common stock (139.0) (272.9) (150.0) Net long-term debt issuances (repayments) 53.3 65.6 (1.6) - ---------------------------------------------------------------------------------------------- Increase (Decrease) in cash and cash equivalents $ 40.7 $(86.5) $ 16.4 - ----------------------------------------------------------------------------------------------
- - CAPITAL EXPENDITURES In 1999 the Company's capital expenditures totaled $100.4 million, including $48.0 million for new stores, $16.6 million to remodel existing stores and $35.8 million for other necessary improvements. The Company expects that 2000 capital expenditures will be approximately $150 million. Capital expenditures for the period 2000 through 2004 are planned at $670 million. The Company intends to use internal cash flow to finance substantially all of these expenditures. - - FINANCING ACTIVITIES During 1999 the Company issued $55 million of unsecured notes. Maturities range from 2004 to 2009, with interest rates ranging from 7.34% to 7.78% and principal payments starting in 2003. The proceeds were added to the Company's general funds and are available for stock repurchases and other general corporate purposes. In conjunction with the self-tender, the Company expects to issue indebtedness of up to $400 million including the refinancing of its existing notes. - - AVAILABLE CREDIT The Company has a $200 million revolving credit agreement. While no amounts had been drawn at January 29, 2000, the balance available to the Company was reduced by $11.4 million outstanding under a letter of credit. - - FINANCIAL CONDITION RATIOS Return on equity and return on net assets are as follows:
- ------------------------------------------------- 1999 1998 1997 - ------------------------------------------------- Return on equity(1) 19.4% 16.1% 15.1% - ------------------------------------------------- Return on net assets(2) 18.4% 17.2% 17.3% - -------------------------------------------------
(1) Return on equity is computed as net earnings divided by beginning shareowners' equity and measures the Company's ability to invest shareowners' funds profitably. The 1999 increase results from the net earnings growth and 1998 share repurchases. The 1998 increase results from the net earnings growth and the 1997 share repurchases. (2) Return on net assets is computed as pretax earnings before net interest expense and the interest component of operating leases, divided by beginning of year net assets, including present value of operating leases (PVOL) and represents performance independent of capital structure. The 1999 increase results from the decrease in beginning of year net assets including PVOL. The debt-to-capitalization ratio was 15.3 percent, 9.5 percent and 1.0 percent for 1999, 1998 and 1997, respectively. The 1999 debt-to-capitalization ratio increase results from the issuance of $55 million of unsecured debt in June 1999. The 1998 debt-to-capitalization ratio increase results from the issuance of $67 million of unsecured debt in November 1998. For purposes of the debt-to-capitalization ratio, total debt is long-term debt. Capitalization is defined as total debt, 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 58.1 percent, 56.8 percent and 50.1 percent in 1999, 1998 and 1997, respectively. The fixed charge coverage was 3.8x, 4.1x and 3.5x in 1999, 1998 and 1997, respectively. Fixed charges are defined as gross interest expense and the interest component of rent expense. Fixed charge coverage measures the Company's ability to meet debt obligations from earnings. 15 5 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) - - COMMON STOCK AND MARKET PRICES The Company's common stock is listed on the New York Stock Exchange under the trading symbol PSS. The Company has not paid a dividend on its shares of common stock and has no present intention to commence dividend payments. The quarterly intraday price ranges of the common stock in 1999 and 1998 were: 1999 1998 Market Price Market Price Fiscal Quarter High Low High Low - ------------------------------------------------------------- First $59 1/4 $44 3/8 $77 $65 1/8 Second 59 13/16 48 7/16 74 3/8 56 3/8 Third 54 1/8 44 3/4 57 11/16 37 Fourth 47 3/4 40 53 41 5/8 - -------------------------------------------------------------- Year $59 13/16 $40 $77 $37 - -------------------------------------------------------------- As of January 29, 2000, there were approximately 18,514 registered holders of the Company's common stock compared to approximately 19,931 registered holders as of January 30, 1999. YEAR 2000 READINESS DISCLOSURE During 1999, management completed the process of preparing for the Year 2000 date change. This process involved identifying and remediating date recognition problems in computer systems, software and other operating equipment, working with third parties to address their Year 2000 issues and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, the Company has successfully managed the transition. Although considered unlikely, unanticipated problems in the Company's core business processes, including problems associated with non-compliant third parties, leap year and disruptions to the economy in general, could still occur despite efforts to date to remediate affected systems and develop contingency plans. Management will continue to monitor all business processes, including interaction with the Company's customers, vendors and other third parties, throughout 2000 to address any issues and ensure all processes continue to function properly. Through 1999, the Company expended approximately $9.9 million on its Year 2000 readiness efforts. While the foregoing cost does include internal costs, the Company did not separately track all of the internal costs incurred by it for its Year 2000 program, such as the payroll-related costs for the Company's Year 2000 Program Management Office and other internal resources who also contributed to the Year 2000 program. The Company's Year 2000 efforts included replacing some outdated, noncompliant hardware and noncompliant software as well as identifying and remediating Year 2000 problems. The Company anticipates that the costs for ongoing monitoring and support activities throughout 2000 will not be significant. FORWARD-LOOKING STATEMENTS This report contains, and from time to time the Company 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 forward-looking statements. The Company 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 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; Year 2000 matters as discussed herein; the financial condition of the suppliers and manufacturers from whom the Company 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 the Company 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. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The Company does not undertake any obligation to release publicly any revisions to such forward- looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 16 6 SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION The following table presents selected historical financial information of the Company. The information presented below reflects periods during which the Company 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 the Company had been an independent public company during the periods shown or the future performance of the Company 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.
- ------------------------------------------------------------------------------------------------------------------------------------ (dollars in millions, except per Fiscal Year(1) share; shares in thousands) 1999 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF EARNINGS DATA: Net retail sales $2,730.1 $ 2,615.5 $ 2,566.9 $ 2,333.7 $ 2,330.3 $ 2,116.4 $ 1,966.5 Cost of sales(2) 1,868.3 1,798.9 1,799.4 1,663.5 1,696.2 1,494.9 1,369.9 Selling, general and administrative expenses(2) 635.7 598.4 557.4 484.7 472.4 403.3 374.9 Special and nonrecurring items(3) - 0.8 4.7 12.6 71.8 - - Interest (income) expense, net (0.9) (7.1) (8.9) (6.2) 1.0 1.1 0.9 - ------------------------------------------------------------------------------------------------------------------------------------ Total cost of sales and expenses 2,503.1 2,391.0 2,352.6 2,154.6 2,241.4 1,899.3 1,745.7 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 227.0 224.5 214.3 179.1 88.9 217.1 220.8 Provision for income taxes 90.5 89.5 85.4 71.4 34.9 85.6 88.0 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 136.5 $ 135.0 $ 128.9 $ 107.7 $ 54.0 $ 131.5 $ 132.8 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share(4) $ 4.35 $ 3.78 $ 3.31 $ 2.67 - - - Average shares outstanding-diluted(4) 31,365 35,732 38,930 40,307 - - - BALANCE SHEET DATA: Working capital $ 369.1 $ 300.9 $ 384.8 $ 392.2 $ 232.0 $ 242.8 $ 253.5 Property and equipment, net 482.9 492.8 486.7 502.5 560.0 590.6 433.9 Total assets 1,075.5 1,036.7 1,073.0 1,091.8 1,014.3 1,019.8 840.8 Total debt 126.8 73.5 7.9 9.5 11.5 13.1 14.5 Total equity 703.8 702.8 836.4 853.0 752.9(5) 793.9(5) 661.0(5) - ------------------------------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL DATA: Capital expenditures $ 100.4 $ 108.6 $ 85.4 $ 73.4 $ 95.4 $ 255.2 $ 139.8 Present value of operating leases 849.5 851.4 832.5 817.9 885.5 952.1 779.9 Earnings before interest, income taxes, depreciation and amortization (EBITDA)(6) 326.1 315.5 300.5 272.1 185.2 295.2 288.7 Net retail sales growth 4.4% 1.9% 10.0% 1.4%(7) 10.1% 7.6% 10.0% Same-store sales growth 0.9% (0.8)% 5.6% 3.6% (3.7)% (0.2)% 1.7% Return on equity 19.4% 16.1% 15.1% 14.3% 6.8% 19.8% 23.3% Return on net assets 18.4% 17.2% 17.3% 15.5% 13.9% 20.9% 22.7% Stores open (at year-end) 4,712 4,570 4,431 4,236 4,549 4,435 3,779 - ------------------------------------------------------------------------------------------------------------------------------------
(1) All years include 52 weeks, except 1995, which includes 53 weeks. (2) Certain expenses related to occupancy costs and asset disposals have been reclassified from selling, general and administrative expense to cost of sales. (3) Special and nonrecurring items are included in selling, general and administrative expenses in the accompanying Consolidated Statement of Earnings. During the fourth quarter of 1995, the Company committed to close or relocate underperforming stores and restructure its central office. The Company also incurred executive retention costs associated with the spin-off that established the Company as an independent public company. (4) Calculations only shown since being an independent public company. (5) Prior to 1996, total equity was the equity investment by May Company. (6) 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. (7) Growth percentage based on a 52-week comparison with 1995. 17 7 CONSOLIDATED STATEMENT OF EARNINGS (dollars in millions, except per share)
- ------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------ NET RETAIL SALES $2,730.1 $2,615.5 $2,566.9 Cost of sales 1,868.3 1,798.9 1,799.4 Selling, general and administrative expenses 635.7 599.2 562.1 Interest (income) expense, net (0.9) (7.1) (8.9) - ------------------------------------------------------------------------------------------------ Total cost of sales and expenses 2,503.1 2,391.0 2,352.6 - ------------------------------------------------------------------------------------------------ Earnings before income taxes 227.0 224.5 214.3 Provision for income taxes 90.5 89.5 85.4 - ------------------------------------------------------------------------------------------------ NET EARNINGS $ 136.5 $ 135.0 $ 128.9 - ------------------------------------------------------------------------------------------------ Diluted earnings per share $ 4.35 $ 3.78 $ 3.31 - ------------------------------------------------------------------------------------------------ Basic earnings per share $ 4.37 $ 3.81 $ 3.35 - ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- 19.4% In 1999, Payless ShoeSource, Inc. achieved 19.4 percent return on shareowners' equity, an increase from the 16.1 percent return on equity achieved in 1998. 19 8 CONSOLIDATED BALANCE SHEET (dollars in millions, except per share)
- ------------------------------------------------------------------------------ January 29, January 30, 2000 1999 - ------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 164.2 $ 123.5 Merchandise inventories 349.7 342.1 Current deferred income taxes 12.1 14.2 Other current assets 40.9 34.8 - ------------------------------------------------------------------------------ Total current assets 566.9 514.6 Property and equipment: Land 7.5 6.3 Buildings and leasehold improvements 713.9 652.5 Furniture, fixtures and equipment 309.1 293.6 Property under capital leases 7.3 7.6 - ------------------------------------------------------------------------------ Total property and equipment 1,037.8 960.0 Accumulated depreciation and amortization (554.9) (467.2) - ------------------------------------------------------------------------------ Property and equipment, net 482.9 492.8 Deferred income taxes 21.3 25.8 Other assets 4.4 3.5 - ------------------------------------------------------------------------------ Total assets $1,075.5 $1,036.7 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Current maturities of long-term debt $ 0.7 $ 1.5 Accounts payable 81.2 95.4 Accrued expenses 115.9 116.8 - ------------------------------------------------------------------------------ Total current liabilities 197.8 213.7 Long-term debt 126.1 72.0 Other liabilities 47.8 48.2 Shareowners' Equity: Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued Common stock, $.01 par value; 240,000,000 shares authorized; 36,924,127 and 36,924,127 issued; 29,601,939 and 32,453,406 shares outstanding in 1999 and 1998, respectively 0.3 0.3 Additional paid-in capital 40.1 35.0 Unearned restricted stock (0.8) (3.3) Retained earnings 663.2 670.8 Accumulated other comprehensive income 1.0 - - ------------------------------------------------------------------------------ Total shareowners' equity 703.8 702.8 - ------------------------------------------------------------------------------ Total liabilities and shareowners' equity $1,075.5 $1,036.7 - ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 19 9 CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY (dollars in millions, shares in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Outstanding Additional Unearned Other Total Common Stock Paid-in Restricted Retained Comprehensive Shareowners' Comprehensive Shares Dollars Capital Stock Earnings Income Equity Income - ------------------------------------------------------------------------------------------------------------------------------------ Balance at February 1, 1997 39,920 $0.4 $12.0 $(3.1) $843.7 - $853.0 ==================================================================================================================================== Net earnings - - - - 128.9 - 128.9 $128.9 Issuances of common stock 197 - 9.0 (9.0) - - - Purchases of common stock (2,785) - - - (150.0) - (150.0) Amortization of unearned restricted stock - - - 4.5 - - 4.5 Comprehensive income 128.9 ==================================================================================================================================== Balance at January 31, 1998 37,332 0.4 21.0 (7.6) 822.6 - 836.4 ==================================================================================================================================== Net earnings - - - - 135.0 - 135.0 135.0 Issuances of common stock 227 - 14.0 - - - 14.0 Purchases of common stock (5,106) (0.1) - - (286.8) - (286.8) Amortization of unearned restricted stock - - - 4.3 - - 4.3 Comprehensive income 135.0 ==================================================================================================================================== Balance at January 30, 1999 32,453 0.3 35.0 (3.3) 670.8 - 702.8 ==================================================================================================================================== Net earnings - - - - 136.5 - 136.5 136.5 Translation adjustments - - - - - 1.0 1.0 1.0 Issuances of common stock 85 - 5.1 - - - 5.1 Purchases of common stock (2,936) - - - (144.1) - (144.1) Amortization of unearned restricted stock - - - 2.5 - - 2.5 Comprehensive income $137.5 ==================================================================================================================================== Balance at January 29, 2000 29,602 $0.3 $40.1 $(0.8) $663.2 $1.0 $703.8 ====================================================================================================================================
Outstanding common stock excludes shares held in treasury. Treasury share activity for the last three years is summarized below:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Balance, Beginning of Year 4,471 3,668 1,080 Issuances of common stock: Exercise of stock options (102) (214) (38) Deferred compensation plan (1) (1) - Restricted stock grants, net of forfeitures 18 (12) (159) - -------------------------------------------------------------------------------- Total issuances of common stock (85) (227) (197) Purchases of common stock 2,936 5,106 2,785 Retirement of common stock - (4,076) - - -------------------------------------------------------------------------------- Balance End of Year 7,322 4,471 3,668 ================================================================================
See Notes to Consolidated Financial Statements. 20 10 CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in millions)
- ------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Operating activities: Net earnings $ 136.5 $ 135.0 $ 128.9 Adjustments for noncash items included in net earnings: Depreciation and amortization 97.4 93.8 90.6 Amortization of unearned restricted stock 2.5 4.3 4.5 Deferred income taxes 6.6 (3.2) (8.9) Changes in working capital: Merchandise inventories (7.6) (17.5) 30.2 Other current assets (6.1) (4.6) (1.6) Accounts payable (14.2) 11.7 (19.1) Accrued expenses (0.9) 5.0 14.5 Other assets and liabilities, net (0.3) (3.8) 3.7 - ------------------------------------------------------------------------------------------------- Total operating activities 213.9 220.7 242.8 - ------------------------------------------------------------------------------------------------- Investing activities: Capital expenditures (100.4) (108.6) (85.4) Dispositions of property and equipment 12.9 8.7 10.6 - ------------------------------------------------------------------------------------------------- Total investing activities (87.5) (99.9) (74.8) - ------------------------------------------------------------------------------------------------- Financing activities: Issuance of long-term debt 55.0 67.0 -- Repayments of long-term debt (1.7) (1.4) (1.6) Purchases of common stock: Stock repurchase program (142.4) (272.9) (150.0) Compensation plans (1.7) (14.0) -- Issuances of common stock 5.1 14.0 -- - ------------------------------------------------------------------------------------------------- Total financing activities (85.7) (207.3) (151.6) - ------------------------------------------------------------------------------------------------- Increase (Decrease) in cash and cash equivalents 40.7 (86.5) 16.4 Cash and cash equivalents, beginning of year 123.5 210.0 193.6 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 164.2 $ 123.5 $ 210.0 ================================================================================================= Cash paid during the year: Interest $ 8.4 $ 1.9 $ 2.0 Income taxes 77.5 79.6 85.8 - -------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 21 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - Description of Business and Basis of Presentation Payless ShoeSource, Inc., a Delaware corporation, together with its subsidiaries, (the "Company"), is the largest family footwear retailer in North America. As of January 29, 2000, the Company operated 4,492 Payless ShoeSource family shoe stores in all 50 states, the District of Columbia, Puerto Rico, Guam, Saipan, the U.S. Virgin Islands and Canada. The Company also operates Parade, a 220-store division offering fashionable women's footwear at moderate prices. The Company utilizes a network of agents with factories in 10 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 84 percent of the Company's merchandise. Payless ShoeSource, Inc., a Missouri corporation, and its subsidiaries ("Payless Missouri") was a subsidiary of The May Department Stores Company ("May Company") until its spin-off in May 1996. Effective June 1, 1998, Payless Missouri and its subsidiaries were reorganized into a Delaware holding company structure. The consolidated financial statements include results for the entire fiscal year for all years presented and the accounts of the Company, all wholly owned subsidiaries and one subsidiary, of which less than 0.1 percent of its shares are minority owned. - - FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January 31. Fiscal years 1999, 1998 and 1997 ended on January 29, 2000 January 30, 1999, and January 31, 1998, respectively. Each of these fiscal years included 52 weeks. References to years in these financial statements and notes relate to fiscal years rather than calendar years. - - USE OF ESTIMATES Management makes estimates and assumptions that affect the amounts reported within the consolidated statement of earnings, shareowners' equity and cash flows, the consolidated balance sheet and notes to consolidated financial statements. Actual results could differ from these estimates. - - NET RETAIL SALES Net retail sales ("sales") represent the sales, net of returns and excluding sales tax, of all stores operated during the period. Same-store sales represent sales of those stores open during both comparable periods. - - COST OF SALES Cost of sales includes the cost of merchandise sold and the Company's buying and occupancy costs. - - PRE-OPENING EXPENSES Costs associated with the opening of new stores are expensed as incurred. - - ADVERTISING COSTS Advertising costs and sales promotion costs are expensed at the time the advertising takes place. Selling, general and administrative expenses include advertising and sales promotion costs of $87.2 million, $84.8 million and $76.0 million in 1999, 1998 and 1997, respectively. - - INCOME TAXES 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. - - STOCK-BASED COMPENSATION The Company accounts for stock-based compensation by applying APB Opinion No. 25, as allowed under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-based Compensation." - - CASH AND CASH EQUIVALENTS Cash equivalents consist of liquid investments with an original maturity of three months or less. 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 and 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 are reviewed regularly to determine whether the carrying amount of the assets is recoverable. - - INSURANCE PROGRAMS The Company 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 22 12 vehicle liability. The Company 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. - - FINANCIAL DERIVATIVES Financial derivatives are used to reduce foreign exchange and interest rate 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. As of January 29, 2000, January 30, 1999 and January 31, 1998, there were no derivative financial instruments in place. The Company intends to adopt SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities in fiscal 2001. The Company believes that SFAS No. 133 will not have a material impact on its results of operations or financial position. - - SEGMENTS In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Segments have been identified based upon management responsibility. The Company's two segments, Payless ShoeSource stores and Parade stores, have been aggregated for reporting purposes based upon the similarity of their operations and economic characteristics. - - RECLASSIFICATION Certain prior-year amounts have been reclassified to conform with the current-year presentation. QUARTERLY RESULTS (UNAUDITED) Quarterly results 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 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (dollars in millions, except per share) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Quarter First Second Third Fourth Year First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------------------------------ Net retail sales $ 689.2 $767.6 $ 669.4 $ 604.0 $ 2,730.1 $ 681.0 $ 723.1 $ 643.1 $ 568.4 $ 2,615.5 Cost of sales 468.6 514.2 455.5 430.0 1,868.3 465.4 489.4 441.0 403.2 1,798.9 Net earnings $ 35.3 $ 51.3 $ 34.6 $ 15.3 $ 136.5 $ 37.8 $ 49.3 $ 33.7 $ 14.2 $ 135.0 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share(1) $ 1.09 $ 1.61 $ 1.11 $ 0.51 $ 4.35 $ 1.00 $ 1.33 $ 0.98 $ 0.42 $ 3.78 - ------------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share(1) $ 1.09 $ 1.62 $ 1.12 $ 0.51 $ 4.37 $ 1.01 $ 1.35 $ 0.98 $ 0.43 $ 3.81 - ------------------------------------------------------------------------------------------------------------------------------------
(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. - -------------------------------------------------------------------------------- PROFIT SHARING PLAN The Company has a qualified profit sharing plan ("Payless Profit Sharing Plan") that covers associates who work 1,000 hours or more in a year and have attained age 21. On January 1, 1997, the Payless ShoeSource Profit Sharing Plan for Puerto Rico Associates ("Puerto Rico Profit Sharing Plan") was established by the Company. All associates of the Company, as of January 1, 1997, who were previously participating in the Payless Profit Sharing Plan and employed in Puerto Rico, had their account balances transferred to the Puerto Rico Profit Sharing Plan. The Company's profit sharing plans are defined contribution plans that provide for Company contributions related to the Company's annual performance and are at the discretion of the Board of Directors. The Company expects to contribute 2.5 percent of its pretax earnings to the Company's profit sharing plans. Associates may voluntarily contribute to the Company's profit sharing plans on both a before-tax and after-tax basis. Total profit sharing contributions made by the Company were $5.7 million, $5.6 million and $5.5 million in 1999, 1998 and 1997, respectively. 23 13 INCOME TAXES The provision (benefit) for income taxes consisted of the following:
- -------------------------------------------------------------------------------- (dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Federal $ 68.5 $ 75.7 $ 76.6 State and local 15.4 17.0 17.7 - -------------------------------------------------------------------------------- Taxes currently payable 83.9 92.7 94.3 - -------------------------------------------------------------------------------- Federal 5.0 (3.0) (7.3) State and local 1.6 (0.2) (1.6) - -------------------------------------------------------------------------------- Deferred taxes 6.6 (3.2) (8.9) - -------------------------------------------------------------------------------- Total provision $ 90.5 $ 89.5 $ 85.4 ================================================================================
The reconciliation between the statutory federal income tax rate and the effective income tax rate was as follows:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes (net of federal tax benefit) 4.9 4.9 4.9 - -------------------------------------------------------------------------------- Effective income tax rate 39.9% 39.9% 39.9% ================================================================================
Major components of deferred income tax assets and (liabilities) were as follows:
- -------------------------------------------------------------------------------- Jan. 29, Jan. 30, (dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- Accrued expenses and reserves $ 21.7 $ 26.5 Depreciation/amortization and basis differences 11.7 14.0 Other deferred income taxes, net -- (0.5) - -------------------------------------------------------------------------------- Net deferred income taxes 33.4 40.0 Less: Net current deferred income taxes 12.1 14.2 - -------------------------------------------------------------------------------- Noncurrent deferred income taxes $ 21.3 $ 25.8 ================================================================================
EARNINGS PER SHARE Basic earnings per share were $4.37, $3.81 and $3.35 in 1999, 1998 and 1997, respectively. The per share amounts have been computed on the basis of the weighted average number of shares outstanding. The calculation of diluted earnings per share for 1999 and 1998 excludes the impact of 312,103 and 188,583 stock options, respectively, because to include them would have been antidilutive. Diluted earnings per share have been computed as follows:
- -------------------------------------------------------------------------------- (dollars in millions, except per share; shares in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Net earnings $136.5 $135.0 $128.9 Weighted average shares outstanding - basic 31,221 35,412 38,443 Stock options 144 320 487 - -------------------------------------------------------------------------------- Weighted average shares outstanding - diluted 31,365 35,732 38,930 - -------------------------------------------------------------------------------- Diluted earnings per share $ 4.35 $ 3.78 $ 3.31 ================================================================================
ACCRUED EXPENSES Major components of accrued expenses included:
- -------------------------------------------------------------------------------- Jan. 29, Jan. 30, (dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- Profit sharing, bonus and retention $ 25.1 $ 20.9 Sales, use and other taxes 21.2 14.0 Store closings and real estate related 16.6 14.9 Construction costs 14.9 22.0 Insurance costs 2.6 6.3 ================================================================================
LINE OF CREDIT The Company has in place a $200 million unsecured revolving credit facility with a bank syndication group. While no amounts had been drawn as of January 29,2000,the balance available to the Company was reduced by $11.4 million outstanding under a letter of credit. LONG-TERM DEBT During 1999 and 1998 the Company issued $55 million and $67 million of unsecured notes, respectively, The fair value of long-term debt (excluding capital lease obligations) was approximately $106.4 million at January 29, 2000 and $66.8 million at January 30, 1999. The fair values were determined using borrowing rates for debt instruments with similar terms and maturities. Long-term debt and capital lease obligations were:
- -------------------------------------------------------------------------------- Jan. 29, Jan. 30, (dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- 6.55% unsecured notes due 2003 $ 15.0 $ 15.0 7.34% unsecured notes due 2004 20.0 - 6.88% unsecured notes due 2005 22.0 22.0 7.35% unsecured notes due 2008 30.0 30.0 7.67% unsecured notes due 2009 15.0 - 7.78% unsecured notes due 2009 20.0 - Total unsecured notes $ 122.0 $ 67.0 Capital lease obligations 4.8 6.5 - -------------------------------------------------------------------------------- Total debt 126.8 73.5 Less current maturities (0.7) (1.5) - -------------------------------------------------------------------------------- Total long-term debt $ 126.1 $ 72.0 ================================================================================
Principal payments of unsecured notes are $17.0 million in 2003,$22.0 million in 2004 and $83.0 million thereafter. LEASE OBLIGATIONS The Company leases substantially all of its stores. Rental expense for the Company's operating leases consisted of:
- -------------------------------------------------------------------------------- (dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Minimum rentals $251.7 $235.5 $227.1 Contingent rentals based on sales 3.4 3.3 3.3 - -------------------------------------------------------------------------------- Real property rentals 255.1 238.8 230.4 Equipment rentals 0.9 0.9 0.8 - -------------------------------------------------------------------------------- Total $256.0 $239.7 $231.2 ================================================================================
24 14 Certain lease agreements include escalating rents over the lease terms. Cumulative expense recognized on the straight-line basis in excess of cumulative payments is included in accrued expenses ($4.4 million) and other liabilities ($19.4 million) in the accompanying balance sheet. Future minimum lease payments at January 29, 2000, were as follows:
- -------------------------------------------------------------------------------- Capital Operating (dollars in millions) Leases Leases Total - -------------------------------------------------------------------------------- 2000 $ 1.3 $ 232.8 $ 234.1 2001 1.3 204.6 205.9 2002 1.2 170.9 172.1 2003 0.8 133.4 134.2 2004 0.7 93.6 94.3 After 2004 1.7 225.4 227.1 - -------------------------------------------------------------------------------- Minimum lease payments $ 7.0 $ 1,060.7 $ 1,067.7 ================================================================================
Less imputed interest component 2.2 - ---------------------------------------- Present value of net minimum lease payments of which $0.7 million is included in current liabilities $4.8 - ---------------------------------------- At January 29, 2000, the present value of operating leases was $849.5 million. OTHER LIABILITIES Major components of other liabilities included:
- -------------------------------------------------------------------------------- Jan. 29, Jan. 30, (dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- Rent expense $19.4 $22.1 Insurance costs 18.3 18.2 - --------------------------------------------------------------------------------
COMMON STOCK REPURCHASE PROGRAMS During 1999, the Company repurchased $142 million of common stock (2.9 million shares) with $235 million remaining of the $500 million stock repurchase program announced in October 1998. During 1998,the Company completed the $150 million stock repurchase program (2.2 million shares) announced in September 1997. During 1997, the Company completed the $150 million stock repurchase program (2.8 million shares) announced in January 1997. STOCK OPTION AND STOCK-RELATED COMPENSATION PLANS Under the Company's common stock option plans, options are granted at the average of the high and low trading price on the date of grant. Options to purchase may extend for up to 10 years, may be exercised in installments only after stated intervals of time, and are conditional upon continued employment with the Company. The options may be exercised during certain periods following retirement, disability or death. A summary of the status of the various stock option plans at the end of 1999, 1998 and 1997, and the changes within years are presented below:
- ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Range of Average Range of Average Range of Average Exercise Exercise Exercise Exercise Exercise Exercise (shares in thousands) Shares Prices Price Shares Prices Prices Shares Prices Price - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,137 $27-72 $ 45 2,164 $27-59 $ 39 499 $27-38 $ 28 Granted 93 52-53 53 233 48-72 64 1,751 45-59 46 Exercised 102 27-59 37 214 27-59 42 38 27-46 30 Forfeited or expired 202 27-72 46 52 27-72 46 48 27-46 42 - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 1,920 $27-72 $ 45 2,131 $27-72 $ 45 2,164 $27-59 $ 39 - ---------------------------------------------------------------------------------------------------------------------------------- Exercisable at end of year 860 $27-59 $ 40 925 $27-59 $ 41 986 $27-59 $ 44 Shares available for additional grants 2,719 2,873 2,830 Fair value of options granted $32 $ 40 $ 24 - ----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at January 29, 2000:
- -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- $27-38 315 6 years $28 262 6 years 45-59 1,307 7 years 46 598 7 years 48-72 298 8 years 62 0 8 years ================================================================================
25 15 $126 MILLION IN 1999, PAYLESS GENERATED $126 MILLION OF FREE CASH FLOW IN EXCESS OF INVESTMENT NEEDS. THIS CASH IS AVAILABLE TO ENHANCE SHAREOWNER VALUE THROUGH EXPANSION OF THE BUSINESS AND CONTINUED SHARE REPURCHASES. Under the 1996 Stock Incentive Plan, the Company is authorized to grant a maximum of 400,000 shares of restricted stock to management associates. No monetary consideration is paid by associates who receive restricted stock. Restricted stock can be granted with or without performance restrictions. Restrictions, including performance restrictions, lapse over periods of up to four years, as determined at the date of grant. In 1999 and 1998, the Company granted 8,488 and 19,917 shares of restricted stock, respectively, under the 1996 Stock Incentive Plan. The Company's plans are accounted for as provided by APB Opinion No. 25. For stock options, no compensation cost has been recognized because the option exercise price is fixed at the average market price on the date of grant. For restricted stock grants, compensation expense is based upon the grant date average market price; it is recorded over the lapsing period. For performance-based restricted stock, compensation expense is recorded over the performance period based on estimates of performance levels. SFAS No. 123, "Accounting for Stock-based Compensation," provides an alternative method of accounting for stock based compensation, which establishes a fair value method of accounting for employee stock options or similar equity instruments. The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its 1996 and later option grants. The fair value is recognized over the option vesting period. As the fair value represents only 1996 and later option grants, the pro forma impact shown below may not be representative of future years. Had compensation cost for these plans been determined in accordance with SFAS No. 123, the Company's net earnings and earnings per share would have been as follows:
- -------------------------------------------------------------------------------- (dollars in millions, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------- NET EARNINGS: As reported $ 136.5 $ 135.0 $ 128.9 Pro forma $ 130.3 $ 128.7 $ 110.8 DILUTED EARNINGS PER SHARE: As reported $ 4.35 $ 3.78 $ 3.31 Pro forma $ 4.15 $ 3.60 $ 2.84 BASIC EARNINGS PER SHARE: As reported $ 4.37 $ 3.81 $ 3.35 Pro forma $ 4.17 $ 3.63 $ 2.88 - --------------------------------------------------------------------------------
The following assumptions were used in the Black-Scholes calculations above:
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Risk-free interest rate 5.71% 5.70% 6.66% Expected dividend yield 0% 0% 0% Option life 10 yrs. 10 yrs. 10 yrs. Expected volatility 36% 38% 30% - --------------------------------------------------------------------------------
SHAREOWNER RIGHTS PLAN The Company has a shareowner rights plan under which one right is attached to each share of the Company's common stock. The rights become exercisable only under certain circumstances involving actual or potential acquisitions of the Company's 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 the Company's preferred stock, shares of the Company's common stock or shares of the common stock of the acquiring person. The rights will remain in existence until April 20, 2008, unless they are terminated, extended, exercised or redeemed. ACQUISITION In March 1997 the Company purchased inventory, property and trademarks, and assumed leases on 186 stores of the Parade division from J. Baker, Inc. The purchase price was approximately $28 million in cash. The acquisition of the Parade division 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. SUBSEQUENT EVENT (UNAUDITED) In March 2000, the Company announced a self-tender for up to 7,547,170 shares of common stock, or approximately 25 percent of the 29.6 million shares outstanding at the end of 1999. 26 16 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 the Company, actual results could differ from those estimates. Management has established and maintains an internal control structure 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. Internal controls include 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 the Company 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 the Company. 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 the Company. 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 Audit and Finance Committee meeting. The Audit and Finance Committee consists of three outside directors, all of whom have accounting or financial management expertise. The members of the Audit and Finance Committee are Howard R. Fricke, Michael E. Murphy and Robert L. Stark. The Audit and Finance Committee reports the results of its activities to the full Board of Directors. 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 Delaware corporation) and subsidiaries as of January 29, 2000, and January 30, 1999, and the related consolidated statements of earnings, shareowners' equity and cash flows for each of the three fiscal years in the period ended January 29, 2000. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 29, 2000, and January 30, 1999 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP St. Louis, Missouri February 18, 2000 27 EX-21.1 16 SUBSIDIARIES OF REGISTRANT 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 Finance, Inc. Nevada Payless ShoeSource, Inc. Missouri Payless ShoeSource Distribution, Inc. Kansas Payless ShoeSource Merchandising, Inc. Kansas Payless ShoeSource Worldwide, Inc. Kansas PSS Canada, Inc. Kansas Payless ShoeSource Canada, Inc. Canada
EX-23.1 17 CONSENT OF ARTHUR ANDERSEN, LLP 1 EXHIBIT 23.1 [ARTHUR ANDERSEN LOGO] 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 (SEC File Nos. 333-25877, 333-28483, 333-30371 and 333-50671). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP St. Louis, Missouri, April 21, 2000 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PAYLESS SHOESOURCE, INC. CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 52 WEEKS ENDED JANUARY 29, 2000, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 29, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-29-2000 JAN-31-1999 JAN-29-2000 164,200 0 6,900 0 349,700 566,900 1,037,800 554,900 1,075,500 197,800 126,100 0 0 300 703,500 1,075,500 2,730,100 2,730,100 1,868,300 1,868,300 0 0 (900) 227,000 90,500 136,500 0 0 0 136,500 4.37 4.35 Includes cash equivalent securities. Any "securities" are shown under "Cash". Receivables are net after deduction of allowances. Consists of Capital Lease Obligations plus Long-Term Debt. Reflects Retained Earnings and Additional Paid In Capital. Reflects net sales. Expressed in dollars.
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