-----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, N6tW5SYDv97s2KV+ZG6VCpYL8bG8IdS7g+SnmDSrT8JgA3mYwP1WjalSSj2MI3D4 Cch7P09UH9CW3ga9KmClTg== 0000950124-98-003210.txt : 19980610 0000950124-98-003210.hdr.sgml : 19980610 ACCESSION NUMBER: 0000950124-98-003210 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19980601 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980603 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS SHOESOURCE HOLDINGS INC CENTRAL INDEX KEY: 0001060232 STANDARD INDUSTRIAL CLASSIFICATION: 5661 IRS NUMBER: 431813160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-14770 FILM NUMBER: 98641364 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 8-K 1 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 June 1, 1998 Date of Report (date of earliest event reported) PAYLESS SHOESOURCE, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-11633 43-1813160 (State or other jurisdiction (Commission (IRS Employer of incorporation) file Number) Identification No.) 3231 East Sixth Street, Topeka KS 66607-2207 (Address of principal executive offices) (Zip Code) (785) 233-5171 Registrant's telephone number including area code 2 ITEM 5. OTHER EVENTS On June 1, 1998 Payless ShoeSource, Inc., a Missouri corporation ("Payless") reorganized into a holding company structure through a merger (the "Merger") with Payless Merger Corp., a Missouri corporation which was an indirect wholly-owned subsidiary of Payless and a wholly owned subsidiary of Payless ShoeSource Holdings, Inc., a Delaware corporation (now known as Payless ShoeSource, Inc.) ("Registrant"). Registrant formerly was a wholly-owned subsidiary of Payless. Each of Registrant and Payless Merger Corp. were organized in connection with the Merger. Payless was the surviving corporation in the Merger and became a wholly owned subsidiary of Registrant as a result of the Merger. The Merger was effected pursuant to the Agreement and Plan of Merger among Payless, Registrant and Payless Merger Corp. (as amended, the "Merger Agreement") that was duly approved by shareowners of Payless on May 22, 1998. Prior to the Merger, Registrant's certificate of incorporation was amended to, among other matters, change its name to Payless ShoeSource, Inc. Pursuant to the Merger Agreement, all of Payless' outstanding shares of common stock were converted, on a share for share basis, into shares of common stock of Registrant. As a result, Payless shareowners now hold stock in Registrant (instead of Payless) which is deemed to have been registered under Section 12(b) of the Securities Exchange Act of 1934. In addition, pursuant to the terms of the Merger Agreement and an Assumption Agreement between Payless and Registrant, each outstanding option to purchase shares of Payless common stock has been converted into an option to purchase, on the same terms and conditions, an identical number of shares of Registrant's common stock. Registrant's common stock will trade on the New York Stock Exchange under the trading symbol PSS, the same trading symbol under which Payless' common stock traded. The conversion of shares of Payless common stock in the Merger occurred without requiring the physical exchange of certificates. Accordingly, certificates formerly representing shares of common stock of Payless are deemed to represent shares of common stock of Registrant until any such certificates are submitted to Registrant's transfer agent for transfer. Registrant intends to cause Payless to become a second tier, indirect wholly owned subsidiary of Registrant. 2 3 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (c) Exhibits *2 Agreement and Plan of Merger dated as of April 20, 1998 by and among Payless, Registrant and Payless Merger Corp., as amended. *3.1 Restated Certificate of Incorporation of Registrant. *3.2 Amended and Restated Bylaws of Registrant. *4 Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Registrant and UMB Bank, n.a. *99.1 Assumption Agreement, dated as of May 22, 1998, between Registrant and Payless. *99.2 1996 Stock Incentive Plan of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. *99.3 Restricted Stock Plan for Non-Management Directors of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. *99.4 Deferred Compensation Plan of Registrant, as amended effective April 20, 1998, effective immediately prior to the effective time of the Merger. *99.5 Executive Incentive Compensation Plan of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. *99.6 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. 3 4 *99.7 Deferred Compensation Plan for Non-Management Directors of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. *99.8 Stock Appreciation and Phantom Stock Unit Plan for Payless ShoeSource International Employees of Registrant, as amended April 20, 1998, effective immediately prior to the effective time of the Merger. *99.9 Profit Sharing Plan of Registrant, as amended and restated generally effective June 1, 1998. *99.10 Profit Sharing Plan for Puerto Rico Associates of Registrant, as amended effective June 1, 1998 *99.11 Stock Ownership Plan of Registrant, as amended effective June 1, 1998 *99.12 Supplementary Retirement Plan of Registrant, as amended effective June 1, 1998 *99.13 Form of Directors' and Officers' Indemnity Agreement of Registrant. *99.14 Amended and Restated Multicurrency Credit Agreement dated as of May 22, 1998 (but effective as of the date of the Reorganization, as defined therein), among Payless ShoeSource, Inc., a Missouri Corporation, Payless ShoeSource Holdings, Inc., a Delaware Corporation (now known as Payless Shoesource, Inc.), PSS Investment II, Inc., several financial institutions and Bank of America National Trust and Savings Association, as Agent. * Filed herewith 4 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1994, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PAYLESS SHOESOURCE, INC. Date: June 2, 1998 By: /s/ Ullrich E. Porzig ------------------------------------ Ullrich E. Porzig Senior Vice President and Chief Financial Officer 5 EX-2 2 EX-2 1 EXHIBIT 2 AGREEMENT AND PLAN OF MERGER AMONG PAYLESS SHOESOURCE, INC., PAYLESS SHOESOURCE HOLDINGS, INC. AND PAYLESS MERGER CORP. DATED AS OF APRIL 20, 1998, AS AMENDED 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated as of April 20, 1998, as amended, among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), Payless ShoeSource Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("Parent"), and Payless Merger Corp., a Missouri corporation and a wholly-owned subsidiary of Parent ("Merger Sub"). RECITALS WHEREAS, the respective boards of directors of each of Parent, Merger Sub and the Company have approved the merger of Merger Sub with and into the Company (the "Merger"), further approved the Merger upon the terms and subject to the conditions set forth in this Agreement and approved this Agreement; WHEREAS, Parent and Merger Sub are newly formed corporations organized for the purpose of participating in the transactions contemplated by this Agreement; WHEREAS, the Boards of Directors of the Company and Merger Sub have directed the submission of this Agreement to a vote of their respective shareholders; WHEREAS, the Company desires to create a new holding company structure and permit its shareowners to own equity interests in a Delaware corporation by consummating the Merger and converting each outstanding Share (as defined herein) into one share of Parent Common Stock (as defined herein), all in accordance with the terms of this Agreement; WHEREAS, for financial accounting purposes, it is intended that the Merger shall be accounted for as a corporate reorganization under common control similar to a pooling of interests; and WHEREAS, the parties will not permit the Effective Time (as defined herein) to occur prior to May 5, 1998; NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I THE MERGER; EFFECTIVE TIME 1.1. THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.2) Merger Sub shall be merged with and into the Company and the separate corporate existence of Merger Sub shall thereupon cease. The Company shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation"), and except as provided herein, the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. The Merger shall have the effects specified in the Missouri General and Business Corporation Law, as amended (the "MGCL"). 1.2. EFFECTIVE TIME. As soon as practicable following the satisfaction of the conditions set forth in this Agreement, the Company and Merger Sub will cause Articles of Merger (the "Missouri Articles of Merger") to be executed in duplicate as provided in Section 351.430 of the MGCL and delivered to the Secretary of State of Missouri as provided in Section 351.435 of the MGCL. The Merger shall become effective at the time when the Secretary of State of Missouri issues a Certificate of Merger attaching to it the Missouri Articles of Merger (the "Effective Time"). 1 3 ARTICLE II CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION 2.1. THE ARTICLES OF INCORPORATION. The amended and restated articles of incorporation of the Company as in effect immediately prior to the Effective Time shall be the articles of incorporation of the Surviving Corporation (the "Charter"), until duly amended as provided therein or by applicable law, except that Article TENTH shall be deleted in its entirety and each following Article shall be correspondingly renumbered, Article ELEVENTH shall be amended by amending each reference therein to Article ELEVENTH to be a reference to Article TENTH and Articles SECOND, THIRD and FOURTH of the Charter shall each be amended in their entirety to provide as follows: "SECOND. The Corporation's registered agent shall be Corporation Service Company d/b/a CSC-Lawyers Incorporating Service Company at 222 East Dunklin Street, Jefferson City, Missouri 65101. THIRD. The aggregate number of shares that the Corporation shall have authority to issue is 10,000,000 shares of Common Stock, par value $.01 per share. FOURTH. The number of directors constituting the first Board of Directors is FIVE (5). The number of directors to constitute all subsequent Boards of Directors shall be fixed by, or in the manner provided in, the Corporation's bylaws. Any change in the number of directors constituting the Board of Directors shall be reported by the corporation to the Missouri Secretary of State within 30 calendar days after such change." 2.2. THE BY-LAWS. The by-laws of Merger Sub in effect at the Effective Time shall be the by-laws of the Surviving Corporation (the "By-Laws"), until thereafter amended as provided therein or by applicable law. ARTICLE III OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION 3.1. OFFICERS. The officers of the Company at the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Articles of Incorporation or By-laws. 3.2. DIRECTORS. The directors of Merger Sub at the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors have been duly elected and qualified or until their earlier death, resignation or removal in accordance with the Articles of Incorporation or By-laws or as otherwise provided by law. ARTICLE IV EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES 4.1. EFFECT ON CAPITAL STOCK. At the Effective Time, as a result of the Merger and without any action on the part of Parent, the Company, Merger Sub or the holder of any capital stock of the Company: (a) MERGER CONSIDERATION. Each share of the Common Stock, par value $.01 per share, of the Company (a "Share" or, collectively, the "Shares") issued and outstanding immediately prior to the Effective Time (other than Shares owned by any direct or indirect subsidiary of the Company not held on behalf of third parties or Shares ("Dissenting Shares") that are owned by stockholders ("Dissenting Stockholders") exercising dissenters' rights pursuant to Section 351.455 of the MGCL (collectively, "Excluded Shares")) shall be converted into one share of Common Stock, par value $.01 per share, of 2 4 Parent ("Parent Common Stock") together with one attached right ("Rights") to purchase shares of Series A Preferred Stock par value $.01 per share of Parent which shall have the rights and preferences described in the Rights Agreement dated as of April 20, 1998 between Parent and UMB Financial Corp. (b) CANCELLATION OF SHARES AND CERTAIN SHARES OF PARENT COMMON STOCK. Each share of Parent Common Stock owned by the Company immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the Company, cease to be outstanding, shall be canceled and retired without payment of any consideration therefor and shall cease to exist. (c) MERGER SUB. At the Effective Time, each share of Common Stock, par value $1.00 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation. (d) OPTIONS. At the Effective Time, each option or right to purchase (each, a "Company Option") Shares pursuant to any of the Company's incentive plans or employee benefit plans, including the Company's 1996 Stock Incentive Plan and the Company's Stock Ownership Plan (the "Option Plans") shall become an option or right to purchase shares of Parent Common Stock on the same terms as an option or right to purchase Shares under an Option Plan at an exercise price equal to the exercise price per share of such Company Option under an Option Plan. (e) RESTRICTED AND OTHER SHARE BASED AWARDS OR RIGHTS. At the Effective Time, each right or obligation to receive a Share or payment of an amount based on a Share under any of the Company's incentive plans or benefit plans, including the Company's 1996 Stock Incentive Plan, Restricted Stock Plan for Non-Management Directors, Spin-Off Stock Plan, Deferred Compensation Plan and Deferred Compensation Plan for Non-Management Directors shall become a right or obligation, as the case may be, to receive shares or payment of an amount based on shares of Parent Common Stock on the same terms as the right or obligation to receive Shares or payment of an amount based on Shares existed under any of such plans immediately prior to the Effective Time. (f) NO SURRENDER OF CERTIFICATES. Until thereafter surrendered for transfer or exchange in the ordinary course, each outstanding certificate (other than certificates representing Excluded Shares) that, immediately prior to the Effective Time, evidenced Company Common Stock shall, from the Effective Time, be deemed and treated for all corporate purposes to evidence the ownership of the same number of shares of Parent Common Stock together with attached Rights. (g) DISSENTERS' RIGHTS. No Dissenting Stockholder shall be entitled to shares of Parent Common Stock or any dividends or other distributions thereon unless and until the holder thereof shall have failed to perfect or shall have effectively withdrawn or lost such holder's right to dissent from the Merger Agreement under the MGCL, and any Dissenting Stockholder shall be entitled to receive only the payment provided by Section 351.455 of the MGCL with respect to Shares owned by such Dissenting Stockholder. If any person who otherwise would be deemed a Dissenting Stockholder shall have failed to properly perfect or shall have effectively withdrawn or lost the right to dissent with respect to any Shares, such Shares shall thereupon be treated as though such Shares had been converted into shares of Parent Common Stock pursuant to Section 4.1(a) hereof. The right to payment pursuant to Section 351.455 of the MGCL shall cease to exist if and when the Company shall abandon the Merger. ARTICLE V ACTIONS TO BE TAKEN IN CONNECTION WITH THE MERGER 5.1. ASSUMPTION OF PLANS AND AGREEMENTS. Parent and the Company hereby agree that they shall, at or prior to the Effective Time, execute, acknowledge and deliver an assumption agreement pursuant to which Parent will, from and after the Effective Time, be substituted for, assume and agree to perform, or cause the Company to perform, all obligations of the Company pursuant to any and all employee benefit plans established or maintained by the Company immediately prior to the Effective Time, all severance and 3 5 employment agreements in effect immediately prior to the Effective Time between the Company and an individual named therein and all compensation and incentive plans established or maintained by the Company immediately prior to the Effective Time, in each case as Parent and the Company may provide in such assumption agreement, including the Option Plans, Restricted Stock Plan for Non-Management Directors, Spin-Off Stock Plan, Profit Sharing Plan, Profit Sharing Plan for Puerto Rico Associates, Deferred Compensation Plan, Deferred Compensation Plan for Non-Management Directors and Stock Appreciation and Phantom Stock Unit Plan for International Employees. In connection with such assumption and without further action by shareholders of Parent or the Company, such plans shall be amended such that all references to the Company and the Shares shall become references to Parent, if provided in the assumption agreement referred to in the preceding sentence, and Parent Common Stock, respectively. ARTICLE VI CONDITIONS 6.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger is subject to the satisfaction or waiver at or prior to the Effective Time of each of the following conditions: (a) STOCKHOLDER APPROVAL. This Agreement shall have been duly approved by holders of at least two-thirds of the issued and outstanding Shares and shall have been duly approved by Parent as the sole stockholder of Merger Sub in accordance with applicable law and the certificate of incorporation and bylaws of each such corporation. (b) NYSE LISTING. The shares of Parent Common Stock issuable to the stockholders of the Company pursuant to this Agreement shall have been authorized for listing on the NYSE upon official notice of issuance. (c) CLOSING DATE. The date shall be after May 4, 1998. The parties hereto acknowledge and agree that the condition set forth in this Section 5.1(c) may not be waived. ARTICLE VII TERMINATION 7.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the approval by stockholders of the Company referred to in Section 6.1(a), by mutual written consent of the Company and Parent by action of their respective Boards of Directors. ARTICLE VIII MISCELLANEOUS AND GENERAL 8.1. MODIFICATION OR AMENDMENT. Subject to the provisions of the applicable law, at any time prior to the Effective Time, whether before or after the approval by shareholders of the Company referred to in Section 6.1(a), the parties hereto may modify or amend this Agreement, by written agreement approved by the respective parties' Boards of Directors and executed and delivered by duly authorized officers of the respective parties, except that (i) the parties may not amend Section 6.1(c) and (ii) no amendment shall alter or change the amount or kind of shares to be received by shareholders of the Company or otherwise alter or change any of the terms and conditions of this Agreement so as to adversely affect the Company's shareholders. 8.2. WAIVER OF CONDITIONS. The conditions to each of the parties' obligations to consummate the Merger are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law except for the condition set forth in Section 6.1(c). 4 6 8.3. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 8.4. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF MISSOURI WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 8.5. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 5 7 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first written above. PAYLESS SHOESOURCE, INC. By: /s/ STEVEN J. DOUGLASS ----------------------------------- Name: Steven J. Douglass Title: Chairman and Chief Executive Officer PAYLESS SHOESOURCE HOLDINGS, INC. By: /s/ STEVEN J. DOUGLASS ------------------------------------ Name: Steven J. Douglass Title: Chairman and Chief Executive Officer PAYLESS MERGER CORP. By: /s/ STEVEN J. DOUGLASS ----------------------------------- Name: Steven J. Douglass Title: Chairman and Chief Executive Officer 6 EX-3.1 3 EX-3.1 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF PAYLESS SHOESOURCE HOLDINGS, INC. Payless ShoeSource Holdings, Inc., a Delaware corporation, hereby certifies as follows: FIRST. The name of the corporation is Payless ShoeSource Holdings, Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was April 15, 1998 under the name Payless ShoeSource Holdings, Inc. SECOND. This Restated Certificate of Incorporation amends and restates the Certificate of Incorporation, and has been duly adopted in accordance with the provisions of Section 245 and 242 of the General Corporation Law of the State of Delaware. THIRD. The text of the Certificate of Incorporation is hereby amended and restated to read herein as set forth in full: FIRST. The name of the corporation is Payless ShoeSource, Inc. (the "Corporation"). SECOND. The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle. The name of its registered agent at such address is Corporation Service Company. THIRD. A. Classes and Number of Shares. The aggregate number of shares that the Corporation shall have authority to issue is two hundred sixty-five million (265,000,000), consisting of two hundred forty million (240,000,000) shares of common stock, par value $.01 per share (the "Common Stock"), and twenty-five million (25,000,000) shares of preferred stock, par value $.01 per share (the "Preferred Stock"). B. Preferred Stock. Shares of Preferred Stock may be issued in series from time to time by the Board of Directors, and the Board of Directors is expressly authorized to fix by resolution or resolutions the 2 designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of Preferred Stock, including without limitation the following: (a) the distinctive serial designation of such series which shall distinguish it from other series; (b) the number of shares included in such series, which number may be increased or decreased from time to time unless otherwise provided by the board of directors in the resolution or resolutions providing for the issue of such series; (c) the dividend rate (or method of determining such rate) payable to the holders of the shares of such series, any conditions upon which such dividends shall be paid and the date or dates upon which such dividends shall be payable; (d) whether dividends on the shares of such series shall be cumulative and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of such series shall be cumulative; (e) the amount or amounts which shall be payable out of the assets of the Corporation to the holders of the shares of such series upon voluntary or involuntary liquidation, dissolution or winding up the Corporation; (f) the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series may be redeemed, in whole or in part, at the option of the Corporation or at the option of the holder or holders thereof or upon the happening of a specified event or events; (g) the obligation, if any, of the Corporation to purchase or redeem shares of such series pursuant to a sinking fund or otherwise and the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; -2- 3 (h) whether or not the shares of such series shall be convertible or exchangeable, at any time or times at the option of the holder or holders thereof or at the option of the Corporation or upon the happening of a specified event or events, into shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation, and the price or prices or rate or rates of exchange or conversion and any adjustments applicable thereto; and (i) the voting rights, if any, of the holders of the shares of such series. FOURTH. A. Number and Classification. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, consisting of not less than 3 or more than 15 directors, the exact number of directors within such range shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. The Board of Directors shall be and is divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors, with the term of office of the directors of one class expiring each year. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, the directors elected to Class I as of April 16, 1998 shall serve for a term ending on the date of the annual meeting next following the end of the calendar year 1998, the directors elected to Class II as of April 16, 1998 shall serve for a term ending on the date of the annual meeting next following the end of the calendar year 1999, and the directors elected to Class III as of April 16, 1998 shall serve for a term ending on the date of the annual meeting next following the end of the calendar year 2000. Each director shall hold office until the annual meeting for the year in which such director's term expires and until such director's successor shall be elected and qualified, subject, however, to such director's earlier death, resignation, disqualification or removal from office (in accordance with this Restated Certificate of Incorporation). In the event of any change in the authorized number of directors, the Board of Directors shall apportion any newly created directorships among, or reduce the number of directorships in, such class or classes as -3- 4 shall, so far as possible, equalize the number of directors in each class. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Restated Certificate of Incorporation or the resolution or resolutions adopted by the Board of Directors pursuant to Article THIRD applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FOURTH unless expressly provided by such terms. B. Vacancies. Any vacancy in the Board of Directors resulting from any increase in the number of directors and any other vacancy occurring in the Board of Directors may be filled by the Board of Directors acting by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and any director so elected to fill a vacancy shall hold office until the next election of the class of directors into which such director was placed and such director's successor is elected and qualified or until such director's earlier resignation or removal. In no event shall a decrease in the number of directors shorten the term of any incumbent director. C. Removal of Directors. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, at a meeting called for that purpose, any or all of the directors of the Corporation, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the outstanding securities of the Corporation then entitled to vote generally in the election of directors, considered for purposes of this Article FOURTH as one class. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of this Restated Certificate of Incorporation, the provisions of this Article FOURTH shall apply in respect of the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the holders of the outstanding shares as a whole. FIFTH. Elections of directors at an annual or special meeting of stockholders shall be by written ballot -4- 5 unless the By-Laws of the Corporation shall otherwise provide. SIXTH. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware (the "DGCL"). SEVENTH. The By-Laws of the Corporation may be amended, altered, changed or rescinded, and new or amended By-Laws adopted, by a vote of a majority of the entire Board of Directors or by a vote of sixty-six and two-thirds percent (66 2/3%) of the outstanding securities of the Corporation then entitled to vote generally in the election of directors. EIGHTH. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the President of the Corporation. Special meetings of stockholders of the Corporation may not be called by any other person or persons. NINTH. Any action required or permitted to be taken by the holders of the outstanding securities of the Corporation then entitled to vote generally in the election of directors, must be taken at a meeting of the stockholders and may not be taken by written consent or consents regardless of whether such consent or consents are signed by all holders of such securities. TENTH. A. In addition to any affirmative vote required by the DGCL or this Restated Certificate of Incorporation or the By-Laws of the Corporation, and except as otherwise expressly provided in Section B of this Article TENTH, approval of any Business Combination (as hereinafter defined) with an Interested Stockholder (as hereinafter defined) shall require the affirmative vote of not less than a majority of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock (as hereinafter defined) entitled to vote at a meeting of stockholders called for such purpose, voting together as a single class, excluding any affirmative votes by Voting Stock beneficially owned by any Interested Stockholder or any Affiliate (as hereinafter defined) or Associate (as hereinafter defined) of such Interested Stockholder. Such affirmative vote shall -5- 6 be required notwithstanding the fact that a lesser percentage or separate class vote may be specified, by the DGCL or in any agreement with any national securities exchange or otherwise and such affirmative vote shall be in addition to any vote required by the DGCL or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article TENTH shall not be applicable to any Business Combination involving an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder, and such Business Combination shall require only such affirmative vote, if any, as is required by law, any other provision of this Restated Certificate of Incorporation of the Corporation, the By-Laws of the Corporation or otherwise, if: 1. The Business Combination shall have been approved by the Board of Directors of the Corporation prior to such Interested Stockholder's Stock Acquisition Date (as hereinafter defined), or the purchase of stock made by such Interested Stockholder on such Interested Stockholder's Stock Acquisition Date had been approved by the Board of Directors of the Corporation prior to such Interested Stockholder's Stock Acquisition Date; or 2. All of the following conditions shall have been satisfied with respect to the Business Combination: (a) The aggregate amount of the cash and the Market Value (as hereinafter defined) as of the Consummation Date (as hereinafter defined) of consideration other than cash to be received per share by holders of outstanding shares of Common Stock of the Corporation in such Business Combination is at least equal to the greater of the following: (1) The highest per share price paid by such Interested Stockholder at a time when such Interested Stockholder was the Owner (as hereinafter defined), directly or indirectly, of five percent or more of the outstanding Voting Stock of the Corporation, for any shares of Common Stock acquired by it within the three-year period immediately prior to the Announcement Date (as hereinafter defined) with respect to such Business Combination, or within the three-year period immediately prior to, or in, the transaction in which such Interested Stockholder became -6- 7 an Interested Stockholder, whichever is greater; plus, in either case, interest compounded annually from the earliest date on which such highest per share acquisition price was paid through the Consummation Date at the rate for one-year United States treasury obligations from time to time in effect; less the aggregate amount of any cash dividends paid, and the Market Value of any dividends paid other than in cash, per share of Common Stock since such earliest date, up to the amount of the interest calculated; and (2) The Market Value per share of Common Stock on the Announcement Date with respect to such Business Combination or on such Interested Stockholder's Stock Acquisition Date, whichever is greater; plus interest compounded annually from such date through the Consummation Date at the rate for one-year United States treasury obligations from time to time in effect; less the aggregate amount of any cash dividends paid, and the Market Value of any dividends paid other than in cash, per share of Common Stock since such date, up to the amount of the interest calculated; (b) The aggregate amount of the cash and the Market Value as of the Consummation Date of consideration other than cash to be received per share by holders of outstanding shares of any class or series of stock, other than Common Stock, of the Corporation is at least equal to the greatest of the following, whether or not such Interested Stockholder has previously acquired any shares of such class or series of stock: (1) The greatest per share price paid by such Interested Stockholder at a time when such Interested Stockholder was the Owner, directly or indirectly, of five percent or more of the outstanding Voting Stock of the Corporation, for any shares of such class or series of stock acquired by such Interested Stockholder within the three-year period immediately prior to the Announcement Date with respect to such Business Combination, or within the three-year period immediately prior to, or in, the transaction in which such Interested Stockholder became an Interested Stockholder, whichever is greater; plus, in either case, interest compounded annually from the earliest date on which such highest per share acquisition price was paid through the Consummation Date at the rate for one-year United States treasury obligations from time to time in effect; less the aggregate amount of any cash dividends -7- 8 paid, and the Market Value of any dividends paid other than in cash, per share of such class or series of stock since such earliest date, up to the amount of the interest calculated; (2) The highest preferential amount per share to which the holders of shares of such class or series of stock are entitled in the event of any voluntary liquidation, dissolution or winding up of the Corporation, plus the aggregate amount of any dividends declared or due as to which such holders are entitled prior to payment of dividends on some other class or series of stock, unless the aggregate amount of such dividends is included in such preferential amount; and (3) The Market Value per share of such class or series of stock on the Announcement Date with respect to such Business Combination or on such Interested Stockholder's Stock Acquisition Date, whichever is greater; plus interest compounded annually from such date through the Consummation Date at the rate for one-year United States treasury obligations from time to time in effect; less the aggregate amount of any cash dividends paid, and the Market Value of any dividends paid other than in cash, per share of such class or series of stock since such date, up to the amount of the interest calculated; (c) The consideration to be received by holders of a particular class or series of outstanding stock, including Common Stock, of the Corporation in such Business Combination is in cash or in the same form as the Interested Stockholder has used to acquire the largest number of shares of such class or series of stock previously acquired by it, and such consideration shall be distributed promptly; (d) The holders of all outstanding shares of stock of the Corporation not beneficially owned by such Interested Stockholder immediately prior to the Consummation Date are entitled to receive in such Business Combination cash or other consideration for such shares in compliance with paragraphs (a), (b) and (c) of this Section; (e) After such Interested Stockholder's Stock Acquisition Date and prior to the Consummation Date with respect to such Business Combination, such Interested Stockholder has not become the Owner of any additional shares of Voting Stock of the Corporation except (i) as part -8- 9 of the transaction which resulted in such Interested Stockholder becoming an Interested Stockholder, (ii) by virtue of proportionate stock splits, stock dividends or other distributions of stock in respect of stock not constituting a Business Combination under Paragraph (1)(d) of Section C of this Article TENTH, (iii) through a Business Combination meeting all of the conditions of this Section B, or (iv) through purchase by such Interested Stockholder at any price which, if such price had been paid in an otherwise permissible Business Combination the Announcement Date and Consummation Date of which were the date of such purchase, would have satisfied the requirements of paragraphs (a), (b), and (c) of this Section. C. For purposes of this Article TENTH: 1. The term "Business Combination" shall mean: (a) Any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation with (i) an Interested Stockholder, or (ii) any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the Interested Stockholder; (b) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions except proportionately as a stockholder of the Corporation, to or with an Interested Stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation having an aggregate Market Value equal to ten percent or more of the aggregate Market Value of all the assets, determined on a consolidated basis, of the Corporation, or having an aggregate Market Value equal to ten percent or more of the aggregate Market Value of all the outstanding stock of the Corporation; (c) The issuance or transfer by the Corporation or any direct or indirect majority-owned subsidiary of the Corporation, in one transaction or a series of transactions, of any stock of the Corporation or such subsidiary of the Corporation to an Interested Stockholder except (i) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which securities -9- 10 were outstanding prior to the time that the Interested Stockholder became such, (ii) pursuant to a merger under Section 251(g) of the DGCL, (iii) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which security is distributed, pro rata to all stockholders subsequent to the time the Interested Stockholder became such, (iv) pursuant to an exchange offer by the Corporation to purchase stock made on the same terms to all stockholders, or (v) any issuance or transfer of stock by the Corporation, provided however, that in no case under (iii)-(v) above shall there be an increase in the Interested Stockholder's proportionate share of the stock of the Corporation or of the Voting Stock of the Corporation; (d) Any reclassification of securities, including, without limitation, any stock split, stock dividend, or other distributions of stock in respect of stock, or any reverse stock split, or recapitalization of the Corporation, any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the Corporation or any such subsidiary which is owned by such Interested Stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any share of stock not caused, directly or indirectly, by the Interested Stockholder; or (e) Any receipt by an Interested Stockholder of the benefit, directly or indirectly, except proportionately as a stockholder of the Corporation, of any loans, advances, guarantees, pledges or other financial benefits provided by or through the Corporation or any direct or indirect majority-owned subsidiary of the Corporation. 2. The term "Voting Stock" shall mean all shares of capital stock of the Corporation entitled to vote generally in the election of directors. 3. The term "person" shall mean any individual, corporation, partnership, unincorporated association or other entity. -10- 11 4. The term "Interested Stockholder" shall mean any person who: (a) Is the Owner (as hereinafter defined), directly or indirectly, of fifteen percent (15%) or more of the outstanding Voting Stock of the Corporation; or (b) Is an Affiliate or Associate of the Corporation and at any time within the three-year period immediately prior to the date in question was the Owner, directly or indirectly, of fifteen percent (15%) or more of the then outstanding Voting Stock of the Corporation; and (c) The Affiliates and Associates of any person described in (a) or (b) above provided that, for the purpose of determining whether a person is an Interested Stockholder, the number of shares of Voting Stock of the Corporation deemed to be outstanding shall include shares deemed to be owned by the person but shall not include any other unissued shares of Voting Stock of the Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 5. The term "Owner" of any capital stock, including the terms "own," "owned," and "ownership," means a person who: (a) Individually or with or through any of its Affiliates or Associates, beneficially owns such stock, directly or indirectly; or (b) Individually or with or through any of its Affiliates or Associates, has (i) the right to acquire such stock, whether such right is exercisable immediately or only after the passage of time, pursuant to any agreement, arrangement or understanding, whether or not in writing, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the Owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person's Affiliates or Associates until such tendered stock is accepted for purchase or exchange; or (ii) the right to vote such stock pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that a person shall not be deemed the Owner of any stock if the agreement, arrangement or -11- 12 understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten (10) or more persons; or (c) Has any agreement, arrangement or understanding, whether or not in writing, for the purpose of acquiring, holding, voting, except voting pursuant to a revocable proxy or consent as described in paragraph (b) of this subsection, or disposing of such stock with any other person that beneficially owns or whose Affiliates or Associates beneficially own, directly or indirectly, such stock. 6. The term "Affiliate" shall mean a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified person. 7. The term "Associate," when used to indicate a relationship with any person, means any corporation, partnership, unincorporated association or other entity of which such person is an officer or partner or is, directly or indirectly, the Owner of twenty percent (20%) or more of any class of Voting Stock, any trust or other estate in which such person has at least a twenty percent (20%) beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person. 8. The term "Consummation Date," with respect to any Business Combination, means the date of consummation of such Business Combination, or, in the case of a Business Combination as to which a stockholder vote is taken, the later of the business day prior to the vote or 20 days prior to the date of consummation of such Business Combination; 9. The term "control," including the terms "controlling," "controlled by" and "under common control with," shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise. A person's ownership of twenty percent (20%) or more of the outstanding Voting Stock of any corporation, partnership, unincorporated association or other entity shall create a presumption that such person has control of such corporation. -12- 13 Notwithstanding the foregoing, a person shall not be presumed to have control if such person holds Voting Stock, in good faith and not for the purpose of circumventing this Article, as an agent, bank, broker, nominee, custodian or trustee for one or more Owners who do not individually or as a group have control of such corporation. 10. The term "stock" means: (a) Any stock or similar security, any certificate of interest, any participation in any profit sharing agreement, any voting trust certificate, or any certificate of deposit for stock; and (b) Any security convertible, with or without consideration, into stock, or any warrant, call or other option or privilege of buying stock without being bound to do so, or any other security carrying any right to acquire, subscribe to or purchase stock; 11. The term "Stock Acquisition Date," with respect to any person and the Corporation, means the date that such person first becomes an Interested Stockholder of the Corporation. 12. The term "Market Value" means: (a) In the case of stock, the highest closing sale price during the thirty-day period immediately preceding the date in question of a share of such stock on the composite tape for New York Stock Exchange listed stocks, or, if such stock is not quoted on such composite tape or if such stock is not listed on such exchange, on the principal United States securities exchange on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty-day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board of Directors of the Corporation in good faith; and (b) In the case of property other than cash or stock, the fair market value of such property on the date in -13- 14 question as determined by the Board of Directors of the Corporation in good faith. 13. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs (2)(a) and (2)(b) of Section B of this Article TENTH shall include the shares of Common Stock and/or the shares of any other class or series of capital stock retained by the holders of such shares. 14. The term "Announcement Date" when used in reference to any Business Combination, means the date of the first public announcement of the final proposal for such Business Combination. ELEVENTH. A. Indemnification of Officers, Directors and Others. The Corporation shall indemnify to the fullest extent authorized or permitted by law (as now or hereafter in effect) any person made, or threatened to be made, a party to or otherwise involved in any action or proceeding (whether civil or criminal or otherwise) by reason of the fact that he, his testator or intestate, is or was a director or officer of the Corporation or by reason of the fact that such director or officer, at the request of the Corporation, is or was serving any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in any capacity. Expenses, including attorneys' fees, incurred by any such person in defending any such action, suit or proceeding shall be paid or reimbursed by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation. A director of the Corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as currently in effect or as the same may hereafter be amended. The rights provided to any person by this Article ELEVENTH shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a director or officer as provided above. Nothing contained herein shall affect any rights to indemnification to which employees other than directors and -14- 15 officers may be entitled by law. No amendment or repeal of this Article ELEVENTH shall apply to or have any effect on any right to indemnification provided hereunder with respect to any acts or omissions occurring prior to such amendment or repeal. B. Insurance, Indemnification Agreements and Other Matters. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plans or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of the law. The Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing for indemnification to the fullest extent authorized or permitted by law and including as part thereof any or all of the foregoing, to ensure the payment of such sums as may become necessary to effect full indemnification. C. Nonexclusivity. The rights to indemnification and advancement of expenses conferred in this Article ELEVENTH shall not be deemed exclusive of any other right which any person may have or hereafter acquire under any statute, this Certificate of Incorporation of the Corporation, or the By-Laws or any agreement, vote of stockholders or directors or otherwise. TWELFTH. Notwithstanding the fact that a lesser percentage may be specified by the DGCL, this Certificate of Incorporation or the By-Laws of the Corporation, any proposal to amend or repeal or adopt any provision inconsistent with any provision of ARTICLES FOUR, SEVEN, EIGHT, NINE AND TEN of this Certificate of Incorporation shall require the affirmative vote of the holders of not less than sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of stock of the Corporation entitled to vote thereon. -15- 16 IN WITNESS WHEREOF, I have signed this Restated Certificate of Incorporation this 27 day of May, 1998. PAYLESS SHOESOURCE HOLDINGS, INC. By:/s/ Steven J. Douglass ------------------------- Chairman and Chief Executive Officer -16- EX-3.2 4 EX-3.2 1 EXHIBIT 3.2 Amended and Restated By-Laws, Payless Shoesource AMENDED AND RESTATED BY-LAWS OF PAYLESS SHOESOURCE, INC. (Amended and Restated as of May 22, 1998) ARTICLE I OFFICES Section 1. The registered office of the Corporation in the State of Delaware shall be at the office of Corporation Service Company at 1013 Centre Road in the City of Wilmington, County of New Castle, or at such other place within the State of Delaware as the Board of Directors may at any time and from time to time designate. Section 2. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders shall be held either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. The annual meeting of stockholders for the election of directors shall be held at such place within or without the State of Delaware, at such hour and on such date, commencing in 1999, not earlier than May 1 in each year as the Board of Directors may specify in the call of such meeting, at which meeting the stockholders shall elect directors by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors and to transact such other business as may properly be brought before the meeting. Section 3. Except as otherwise required by law, written notice of the annual meeting stating the place, date and 2 hour of the meeting shall be given by mail, postage prepaid, not less than ten or more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting at such address as shall appear on the books of the Corporation. Section 4. The Secretary of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if, not so specified, at the place where the meeting is to be held. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, may be called by the persons specified in the Certificate of Incorporation. The business transacted at a special meeting of stockholders shall be confined to the purpose or purposes specified in the notice therefore. Section 6. Except as otherwise required by law, written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given by mail, postage prepaid, not less than ten or more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting at such address as shall appear on the books of the Corporation. Section 7. At each meeting of stockholders, except where otherwise provided by law or the Certificate of Incorporation or these By-laws, the holders of a majority of the outstanding shares of stock entitled to vote on a matter at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, where a separate vote by class or classes is required for any matter, the holders of a majority of the outstanding -2- 3 shares of such class or classes, present in person or represented by proxy, shall constitute a quorum to take action with respect to that vote on that matter. Two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum of the holders of any class of stock entitled to vote on a matter, the holders of such class so present or represented may, by majority vote, adjourn the meeting of such class from time to time in the manner provided by Section 8 of this Article II of these By-laws until a quorum of such class shall be so present or represented. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 8. Any meeting of stockholders, annual or special, may be adjourned from time to time, to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. Other than in the election of directors, and other than as provided by law or by the Certificate of Incorporation or these By-laws, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote on the subject matter shall be the act of the stockholders. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power, regardless of -3- 4 whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Section 10. Except as otherwise provided by the Certificate of Incorporation, each stockholder of record shall at every meeting of the stockholders be entitled to one vote for each share of capital stock of the Corporation entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy, but no proxy shall be valid after three years from the date of its execution unless otherwise provided in the proxy. Subject to applicable law, the Board of Directors shall prescribe the rules and regulations for voting at all meetings of the stockholders; provided, however, the vote for the election of directors, and upon the direction of the presiding officer of the meeting, the vote on any other question before the meeting, shall be by written ballot. Section 11. To be properly brought before the annual or any special stockholders' meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before an annual meeting by a stockholder in accordance with the manner specified in these By-laws. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be (i) delivered to or mailed and (ii) received at the principal executive offices of the Corporation by the Secretary of the Corporation not less than 75 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 90 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders generally, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such -4- 5 stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (i) the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these by-laws to the contrary, no business shall be conducted at the annual or any special meeting except in accordance with the procedures set forth in this Section 11. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 11, and if he should so determine and declare, any such business not properly brought before the meeting shall not be transacted. Section 12. Except as provided in Section 3 of Article III, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation at the annual meeting may be made at the meeting by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 12. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 75 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 90 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders generally, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth -5- 6 (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and, if such information is different, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the Corporation); and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. Such notice shall be accompanied by the executed consent of each nominee to serve as a director if so elected. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine and declare, the defective nomination shall be disregarded. Section 13. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board by the Vice Chairman of the Board, if any, or in the absence of the Vice Chairman of the Board by the Chief Executive Officer, or in the absence of the Chief Executive Officer by the President, or in the absence of the President by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairman of the -6- 7 meeting may appoint any person to act as secretary of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. Section 14. Prior to any meeting of stockholders, the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the person who will be presiding over such meeting shall appoint one or more inspectors to act at such meeting and make a written report thereof and may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at the meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons to assist them in the performance of their duties. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxy or vote, nor any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination -7- 8 of the proxies, any envelopes submitted therewith, any information provided by a stockholder who submits a proxy by telegram, cablegram or other electronic transmission from which it can be determined that the proxy was authorized by the stockholder, ballots and the regular books and records of the Corporation, and they may also consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for such purpose, they shall, at the time they make their certification, specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. ARTICLE III DIRECTORS Section 1. Except as otherwise required by law or the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Section 2. The number of directors of the Corporation from time to time shall be fixed in the manner provided in the Certificate of Incorporation. Section 3. Except as otherwise required by the Certificate of Incorporation, any vacancy in the Board of Directors resulting from any increase in the number of directors and any other vacancy occurring in the Board of Directors may be filled by the Board of Directors acting by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and any director so elected to fill a vacancy shall hold office for a term that shall coincide with the term of the class to which such director shall have been elected and such director's successor is elected and qualified or until such director's earlier resignation or removal. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation, vacancies and newly created directorships of such class or -8- 9 classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by the sole remaining director so elected. In no event shall a decrease in the number of directors shorten the term of any incumbent director. Section 4. The Board of Directors may hold its meetings, both regular and special, and cause the books of the Corporation to be kept, either within or without the State of Delaware at such place or places as they may from time to time determine or as otherwise may be provided in these by-laws. Section 5. Subject to Section 8 of this Article III there shall be an annual meeting of the Board of Directors on the day of the annual meeting of stockholders in each year or as soon thereafter as convenient, such annual meeting to be at such place and time (and, if applicable, on such date) as the Chairman of the Board or the Chief Executive Officer shall designate by written notice to the directors, and regular meetings shall be held on such dates and at such times and places either as the directors shall by resolution provide or as the Chairman of the Board or the Chief Executive Officer shall designate by written notice to the directors. Except as provided, no notice of said annual meeting or such regular meetings of the Board of Directors need be given. Section 6. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer, the President, the Secretary or the Treasurer and shall be called by one of the foregoing officers on the written request of a majority of the entire Board of Directors specifying the object or objects of such special meeting. In the event that one of the foregoing officers shall fail to call a meeting within two days after receipt of such request, such meeting may be called in like manner by the directors making such request. The person or persons calling the special meeting may fix the place, either within or without the State of Delaware, as a place for holding the meeting. Notice of each special meeting, stating the date, place and time of the meeting and the purpose or purposes for which it is called, shall be deposited in the regular or overnight mail, sent by telecopy, telegram or delivered by hand to each director not later than the day preceding the date of such meeting, or on such shorter notice as the -9- 10 person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 7. At all meetings of the Board of Directors a majority of the entire Board of Directors in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law, the Certificate of Incorporation or by these by-laws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 8. Except as otherwise required by the Certificate of Incorporation or these by-laws, any action required or permitted to be taken by the Board of Directors at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or the committee as the case may be. Section 9. Any one or more members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting. Section 10. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any committee meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another -10- 11 member of the board of directors to act at the meeting in the place of any absent or disqualified member. Any such committee, to the extent allowed by law and as provided in the resolution, shall have and may exercise all of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 11. Each committee of the Board shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 12. Directors and members of committees may receive such compensation for their services, and such reimbursement of expenses, as the Board of Directors may from time to time determine. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefore. Section 13. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (a) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee and the Board of Directors or the committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it -11- 12 is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 14. As used in these by-laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. ARTICLE IV NOTICES Section 1. Whenever written notice is required by law, the Certificate of Incorporation or these By-laws, to be given to any director, committee member or stockholder, such requirement shall not be construed to mean personal notice, but such notice may be given in writing, by mail addressed to such director, committee member or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telecopy, telegram, telex or cable or by overnight mail. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Section 2. Whenever any notice is required by law, the Certificate of Incorporation or these By-laws, to be given to any director, committee member or stockholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any -12- 13 written waiver of notice unless so required by the Certificate of Incorporation or these By-laws. ARTICLE V OFFICERS Section 1. The officers of the Corporation elected by the Board of Directors shall consist of a Chairman of the Board, a Chief Executive Officer, a President and a Secretary and such other officers as the Board of Directors may deem necessary and proper, including, without limitation, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Treasurer, and one or more Assistant Secretaries or Assistant Treasurers. The Board of Directors shall elect the Chairman of the Board, the Chief Executive Officer, the President and the Secretary at its first meeting held after each annual meeting of stockholders and may elect such other officers from time to time as it deems necessary or advisable. Any two or more of such offices, excepting the offices of President and Secretary, may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument on behalf of the Corporation in more than one capacity. Section 2. The Chairman of the Board, the Chief Executive Officer, the President and such other officer or officers as the Board may from time to time by resolution designate may appoint one or more Vice Presidents, a Controller, and one or more Assistant Controllers, Assistant Secretaries and Assistant Treasurers, who shall also be officers of the Corporation. Section 3. The Board of Directors may determine or provide the method of determining the compensation of all officers. Section 4. The officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the Corporation that was filled by the Board of Directors pursuant to Article V, Section 1 also shall be filled by the Board of Directors. -13- 14 Section 5. Each officer of the Corporation shall be subject to the control of the Board of Directors and shall have such duties in the management of the Corporation as may be provided by appropriate resolution of the Board of Directors and/or provided in these By-laws. Section 6. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the Chief Executive Officer, the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 7. In the case of the absence of any officer of the Corporation, or for any other reason that the Board may deem sufficient, the Board of Directors may delegate the powers or duties of such officer to any other officer or to any other director, or to any other person for the time being. ARTICLE VI CERTIFICATES OF STOCK Section 1. The shares of stock in the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation's stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate theretofore issued until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates, and upon request every holder of uncertificated shares, shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board, if any, or the President or a Vice President, and by the Treasurer or an -14- 15 Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, representing the number of shares of stock registered in certificate form owned by such holder. Any signature on such certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. If the Corporation is authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written notice containing the information required by law to be set forth or stated on certificates or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. The provisions of this paragraph will not apply to the common stock of the Corporation so long as and to the extent that the Corporation shall have only one class of common stock outstanding. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated shares and -15- 16 the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. Section 2. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. Section 3. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, and which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors; provided, however that if the Board of Directors does not set a record date for the determination of the stockholders entitled to notice of, and to vote at, a meeting of stockholders, only the stockholders of record at the close of business on the day next preceding the day on which notice is given (or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held) shall be entitled to notice of, and to vote at, the meeting and any adjournment of the meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days prior to such action, and which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors; provided, however that if the -16- 17 Board of Directors does not set a record date in relation to such action, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. ARTICLE VII GENERAL PROVISIONS Section 1. All checks or demands for money and all notes and other obligations of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may at any time and from time to time designate. Section 2. The fiscal year of the Corporation shall end on the Saturday closest to the 31st day of January in each year or shall otherwise be as determined by the Board of Directors. Section 3. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors and shall be kept by the Secretary. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII AMENDMENTS These By-laws may be amended, altered, changed or rescinded, in whole or in part, or new by-laws may be adopted, in the manner provided in the Certificate of Incorporation. -17- EX-4 5 EX-4 1 EXHIBIT 4 =============================================================================== STOCKHOLDER PROTECTION RIGHTS AGREEMENT dated as of April 20, 1998 as amended between PAYLESS SHOESOURCE HOLDINGS, INC. and UMB BANK, N.A. as Rights Agent =============================================================================== 2 STOCKHOLDER PROTECTION RIGHTS AGREEMENT TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS 1.1 Definitions..............................................................2 ARTICLE II THE RIGHTS 2.1 Summary of Rights.......................................................11 2.2 Legend on Common Stock Certificates.....................................11 2.3 Exercise of Rights; Separation of Rights................................12 2.4 Adjustments to Exercise Price; Number of Rights.........................16 2.5 Date on Which Exercise is Effective.....................................18 2.6 Execution, Authentication, Delivery and Dating of Rights Certificates...18 2.7 Registration, Registration of Transfer and Exchange.....................19 2.8 Mutilated, Destroyed, Lost and Stolen Rights Certificates...............21 2.9 Persons Deemed Owners...................................................22 2.10 Delivery and Cancellation of Certificates...............................22 2.11 Agreement of Rights Holders.............................................23 ARTICLE III ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF CERTAIN TRANSACTIONS 3.1 Flip-in.................................................................24 3.2 Flip-over...............................................................28 ARTICLE IV THE RIGHTS AGENT 4.1 General.................................................................29 4.2 Merger or Consolidation or Change of Name of Rights Agent...............30 4.3 Duties of Rights Agent..................................................31 4.4 Change of Rights Agent..................................................36
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ARTICLE V MISCELLANEOUS 5.1 Redemption..............................................................38 5.2 Expiration..............................................................38 5.3 Issuance of New Rights Certificates.....................................39 5.4 Supplements and Amendments..............................................40 5.5 Fractional Shares.......................................................40 5.6 Rights of Action........................................................41 5.7 Holder of Rights Not Deemed a Stockholder...............................41 5.8 Notice of Proposed Actions..............................................42 5.9 Notices.................................................................42 5.10 Suspension of Exercisability............................................43 5.11 Costs of Enforcement....................................................44 5.12 Successors..............................................................44 5.13 Benefits of this Agreement..............................................44 5.14 Determination and Actions by the Board of Directors, etc................44 5.15 Descriptive Headings....................................................45 5.16 Governing Law...........................................................45 5.17 Counterparts............................................................45 5.18 Severability............................................................45 EXHIBITS Exhibit A Form of Rights Certificate (Together with Form of Election to Exercise) Exhibit B Form of Certificate of Designation and Terms of Participating Preferred Stock
4 STOCKHOLDER PROTECTION RIGHTS AGREEMENT STOCKHOLDER PROTECTION RIGHTS AGREEMENT (as amended from time to time, this "Agreement"), dated as of April 20, 1998, between Payless ShoeSource Holdings, Inc., a Delaware corporation (the "Company"), and UMB Bank, N.A., a national banking association organized and existing under the laws of the United States of America, as rights agent (the "Rights Agent", which term shall include any successor Rights Agent hereunder). WITNESSETH: WHEREAS, the Board of Directors of the Company has (a) authorized and declared a dividend of one right ("Right") in respect of each share of Common Stock (as hereinafter defined) held of record as of the close of business on May 21, 1998 (the "Record Time") and (b) as provided in Section 2.4, authorized the issuance of one Right in respect of each share of Common Stock issued after the Record Time and prior to the Separation Time (as hereinafter defined) and, to the extent provided in Section 5.3, each share of Common Stock issued after the Separation Time; WHEREAS, subject to the terms and conditions hereof, each Right entitles the holder thereof, after the Separation Time, to purchase securities or assets of the Company (or, in certain cases, securities of certain other entities) pursuant to the terms and subject to the conditions set forth herein; and WHEREAS, the Company desires to appoint the Rights Agent to act on behalf of the Company, and the Rights Agent is willing so to act, in connection with the 5 issuance, transfer, exchange and replacement of Rights Certificates (as hereinafter defined), the exercise of Rights and other matters referred to herein; NOW THEREFORE, in consideration of the premises and the respective agreements set forth herein, the parties hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. For purposes of this Agreement, the following terms have the meanings indicated: "Acquiring Person" shall mean any Person who is a Beneficial Owner of 15% or more of the outstanding shares of Common Stock; provided, however, that the term "Acquiring Person" shall not include any Person (i) who is the Beneficial Owner of 15% or more of the outstanding shares of Common Stock on the date of this Agreement or who shall become the Beneficial Owner of 15% or more of the outstanding shares of Common Stock solely as a result of an acquisition by the Company of shares of Common Stock, until such time hereafter or thereafter as any of such Persons shall become the Beneficial Owner (other than by means of a stock dividend or stock split) of any additional shares of Common Stock, (ii) who becomes the Beneficial Owner of 15% or more of the outstanding shares of Common Stock but who acquired Beneficial Ownership of shares of Common Stock without any plan or intention to seek or affect control of the Company, if such Person promptly enters into an irrevocable commitment to divest, and thereafter promptly divests (without exercising or retaining any power, including voting, with respect to such shares), sufficient shares of -2- 6 Common Stock (or securities convertible into, exchangeable into or exercisable for Common Stock) so that such Person ceases to be the Beneficial Owner of 15% or more of the outstanding shares of Common Stock or (iii) who Beneficially Owns shares of Common Stock consisting solely of one or more of (A) shares of Common Stock Beneficially Owned pursuant to the grant or exercise of an option granted to such Person (an "Option Holder") by the Company in connection with an agreement to merge with, or acquire, the Company entered into prior to a Flip-in Date, (B) shares of Common Stock (or securities convertible into, exchangeable into or exercisable for Common Stock), Beneficially Owned by such Option Holder or its Affiliates or Associates at the time of grant of such option, and (C) shares of Common Stock (or securities convertible into, exchangeable into or exercisable for Common Stock) acquired by Affiliates or Associates of such Option Holder after the time of such grant which, in the aggregate, amount to less than 1% of the outstanding shares of Common Stock. In addition, Payless, the Company, any wholly-owned Subsidiary of the Company and any employee stock ownership or other employee benefit plan of the Company or a wholly-owned Subsidiary of the Company shall not be an Acquiring Person. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Exchange Act, as such Rule is in effect on the date of this Agreement. "Agreement" shall have the meaning set forth in the preamble. A Person shall be deemed the "Beneficial Owner", and to have "Beneficial Ownership" of, and to "Beneficially Own", any securities as to which such Person or any of -3- 7 such Person's Affiliates or Associates is or may be deemed to be the beneficial owner of pursuant to Rule 13d-3 and 13d-5 under the Exchange Act, as such Rules are in effect on the date of this Agreement, as well as any securities as to which such Person or any of such Person's Affiliates or Associates has the right to become Beneficial Owner (whether such right is exercisable immediately or only after the passage of time or the occurrence of conditions) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner", or to have "Beneficial Ownership" of, or to "Beneficially Own", any security (i) solely because such security has been tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered security is accepted for payment or exchange or (ii) solely because such Person or any of such Person's Affiliates or Associates has or shares the power to vote or direct the voting of such security pursuant to a revocable proxy given in response to a public proxy or consent solicitation made to more than ten holders of shares of a class of stock of the Company registered under Section 12 of the Exchange Act and pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act, except if such power (or the arrangements relating thereto) is then reportable under Item 6 of Schedule 13D under the Exchange Act (or any similar provision of a comparable or successor report). For purposes of this Agreement, in determining the percentage of the outstanding shares of Common Stock with respect to -4- 8 which a Person is the Beneficial Owner, all shares as to which such Person is deemed the Beneficial Owner shall be deemed outstanding. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in Kansas City, Missouri are generally authorized or obligated by law or executive order to close. "Close of business" on any given date shall mean 5:00 p.m. New York City time on such date or, if such date is not a Business Day, 5:00 p.m. New York City time on the next succeeding Business Day. "Common Stock" shall mean the shares of Common Stock, par value $.01 per share, of the Company. "Company" shall have the meaning set forth in the preamble. "Effective Time" shall mean the effective time of the merger of Payless and Payless Merger Corp., a Missouri corporation. "Election to Exercise" shall have the meaning set forth in Section 2.3(d) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Ratio" shall have the meaning set forth in Section 3.1(c) hereof. "Exchange Time" shall mean the time at which the right to exercise the Rights shall terminate pursuant to Section 3.1(c) hereof. -5- 9 "Exercise Price" shall mean, as of any date, the price at which a holder may purchase the securities issuable upon exercise of one whole Right. Until adjustment thereof in accordance with the terms hereof, the Exercise Price shall equal $250. "Expansion Factor" shall have the meaning set forth in Section 2.4(a) hereof. "Expiration Time" shall mean the earliest of (i) the Exchange Time, (ii) the Redemption Time, (iii) the close of business on the tenth anniversary of the Record Time and (iv) immediately prior to the effective time of a consolidation, merger or share exchange of the Company (A) into another corporation or (B) with another corporation in which the Company is the surviving corporation but Common Stock is converted into cash and/or securities of another corporation, in either case pursuant to an agreement entered into by the Company prior to a Stock Acquisition Date. "Flip-in Date" shall mean any Stock Acquisition Date or such later date as the Board of Directors of the Company may from time to time fix by resolution adopted prior to the Flip-in Date that would otherwise have occurred. "Flip-over Entity," for purposes of Section 3.2, shall mean (i) in the case of a Flip-over Transaction or Event described in clause (i) of the definition thereof, the Person issuing any securities into which shares of Common Stock are being converted or exchanged and, if no such securities are being issued, the other party to such Flip-over Transaction or Event and (ii) in the case of a Flip-over Transaction or Event referred to in clause (ii) of the definition thereof, the Person receiving the greatest portion of the (A) assets or (B) operating income or cash flow being transferred in such Flip-over Transaction or Event, provided in -6- 10 all cases if such Person is a subsidiary of a corporation, the parent corporation shall be the Flip-Over Entity. "Flip-over Stock" shall mean the capital stock (or similar equity interest) with the greatest voting power in respect of the election of directors (or other persons similarly responsible for direction of the business and affairs) of the Flip-Over Entity. "Flip-over Transaction or Event" shall mean a transaction or series of transactions after a Flip-in Date in which, directly or indirectly, (i) the Company shall consolidate or merge or participate in a share exchange with any other Person if, at the time of the consolidation, merger or share exchange or at the time the Company enters into any agreement with respect to any such consolidation, merger or share exchange, the Acquiring Person Controls the Board of Directors of the Company and either (A) any term of or arrangement concerning the treatment of shares of capital stock in such consolidation, merger or share exchange relating to the Acquiring Person is not identical to the terms and arrangements relating to other holders of the Common Stock or (B) the Person with whom the transaction or series of transactions occurs is the Acquiring Person or an Affiliate or Associate of the Acquiring Person or (ii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer) assets (A) aggregating more than 50% of the assets (measured by either book value or fair market value) or (B) generating more than 50% of the operating income or cash flow, of the Company and its Subsidiaries (taken as a whole) to any Person (other than the Company or one or more of its wholly owned Subsidiaries) or to two or more such Persons which are Affiliates or Associates or -7- 11 otherwise acting in concert, if, at the time of the entry by the Company (or any such Subsidiary) into an agreement with respect to such sale or transfer of assets, the Acquiring Person Controls the Board of Directors of the Company. An Acquiring Person shall be deemed to Control the Company's Board of Directors when, following a Flip-in Date, the persons who were directors of the Company (or persons nominated and/or appointed as directors by vote of a majority of such persons) before the Stock Acquisition Date shall cease to constitute a majority of the Company's Board of Directors. "Market Price" per share of any securities on any date shall mean the average of the daily closing prices per share of such securities (determined as described below) on each of the 20 consecutive Trading Days through and including the Trading Day immediately preceding such date; provided, however, that if an event of a type analogous to any of the events described in Section 2.4 hereof shall have caused the closing prices used to determine the Market Price on any Trading Days during such period of 20 Trading Days not to be fully comparable with the closing price on such date, each such closing price so used shall be appropriately adjusted in order to make it fully comparable with the closing price on such date. The closing price per share of any securities on any date shall be the last reported sale price, regular way, or, in case no such sale takes place or is quoted on such date, the average of the closing bid and asked prices, regular way, for each share of such securities, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange, Inc. or, if the securities are not listed or admitted to trading on the New York Stock Exchange, Inc., as -8- 12 reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the securities are listed or admitted to trading or, if the securities are not listed or admitted to trading on any national securities exchange, as reported by the National Association of Securities Dealers, Inc. Auto mated Quotation System or such other system then in use, or, if on any such date the securities are not listed or admitted to trading on any national securities exchange or quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the securities selected by the Board of Directors of the Company; provided, however, that if on any such date the securities are not listed or admitted to trading on a national securities exchange or traded in the over-the-counter market, the closing price per share of such securities on such date shall mean the fair value per share of securities on such date as determined in good faith by the Board of Directors of the Company, after consultation with a nationally recognized investment banking firm, and set forth in a certificate delivered to the Rights Agent. "Option Holder" shall have the meaning set forth in the definition of Acquiring Person. "Payless" shall mean Payless ShoeSource, Inc., a Missouri corporation. "Person" shall mean any individual, firm, partnership, association, group (as such term is used in Rule 13d-5 under the Securities Exchange Act of 1934, as such Rule is in effect on the date of this Agreement), corporation or other entity. -9- 13 "Preferred Stock" shall mean the Series A Preferred Stock, par value $.01 per share, of the Company to be created by a Certificate of Designation and Terms in substantially the form set forth in Exhibit B hereto appropriately completed. "Record Time" shall have the meaning set forth in the Recitals. "Redemption Price" shall mean an amount equal to one cent, $0.01. "Redemption Time" shall mean the time at which the right to exercise the Rights shall terminate pursuant to Section 5.1 hereof. "Right" shall have the meaning set forth in the Recitals. "Rights Agent" shall have the meaning set forth in the Preamble. "Rights Certificate" shall have the meaning set forth in Section 2.3(c) hereof. "Rights Register" shall have the meaning set forth in Section 2.7(a) hereof. "Separation Time" shall mean the close of business on the earlier of (i) the tenth business day (or such earlier or later date as the Board of Directors of the Company may from time to time fix by resolution adopted prior to the Separation Time that would otherwise have occurred) after the date on which any Person commences a tender or exchange offer which, if consummated, would result in such Person's becoming an Acquiring Person and (ii) the Flip-in Date; provided, that if any tender or exchange offer referred to in clause (i) of this paragraph is cancelled, terminated or otherwise withdrawn prior to the Separation Time without the purchase of any shares of Common Stock pursuant thereto, such offer shall be deemed, for purposes of this paragraph, never to have been made. -10- 14 "Stock Acquisition Date" shall mean the close of business on the first date of public announcement by the Company (by any means) that a Person has become an Acquiring Person. "Subsidiary" of any specified Person shall mean any corporation or other entity of which a majority of the voting power of the equity securities or a majority of the equity interest is Beneficially Owned, directly or indirectly, by such Person. "Trading Day," when used with respect to any securities, shall mean a day on which the New York Stock Exchange, Inc. is open for the transaction of business or, if such securities are not listed or admitted to trading on the New York Stock Exchange, Inc., a day on which the principal national securities exchange on which such securities are listed or admitted to trading is open for the transaction of business or, if such securities are not listed or admitted to trading on any national securities exchange, a Business Day. ARTICLE II THE RIGHTS 2.1 Summary of Rights. After the Effective Time, the Company will provide the Rights Agent with a summary of the terms of the Rights. 2.2 Legend on Common Stock Certificates. Certificates for the Common Stock issued after the Record Time but prior to the Separation Time shall -11- 15 evidence one Right for each share of Common Stock represented thereby and shall have impressed on, printed on, written on or otherwise affixed to them the following legend: Until the Separation Time (as defined in the Rights Agreement referred to below), this certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement, dated as of April 20, 1998 (as such may be amended from time to time, the "Rights Agreement"), between Payless ShoeSource Holdings, Inc. (the "Company") and UMB Bank, N.A., as Rights Agent, the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights may be redeemed, may become exercisable for securities or assets of the Company or securities of another entity, may be exchanged for shares of Common Stock or other securities or assets of the Company, may expire, may become void (if they are "Beneficially Owned" by an "Acquiring Person" or an Affiliate or Associate thereof, as such terms are defined in the Rights Agreement, or by any transferee of any of the foregoing) or may be evidenced by separate certificates and may no longer be evidenced by this certificate. The Company will mail or arrange for the mailing of a copy of the Rights Agreement to the holder of this certificate without charge after the receipt of a written request therefor. Certificates representing shares of Common Stock that are issued and outstanding at the Record Time shall evidence one Right for each share of Common Stock evidenced thereby notwithstanding the absence of the foregoing legend. 2.3 Exercise of Rights; Separation of Rights. (a) Subject to Sections 3.1, 5.1 and 5.10 and subject to adjustment as herein set forth, each Right will entitle the holder thereof, after the Separation Time and prior to the Expiration Time, to purchase, for the Exercise Price, one one-hundredth of a share of Preferred Stock. (b) Until the Separation Time, (i) no Right may be exercised and (ii) each Right will be evidenced by the certificate for the associated share of Common Stock (together, in the case of certificates issued prior to the Record Time, with the letter -12- 16 mailed to the record holder thereof pursuant to Section 2.1) and will be transferable only together with, and will be transferred by a transfer (whether with or without such letter) of, such associated share. (c) Subject to the terms and conditions hereof, after the Separation Time and prior to the Expiration Time, the Rights (i) may be exercised and (ii) may be transferred independent of shares of Common Stock. Promptly following the Separation Time, the Rights Agent will mail to each holder of record of Common Stock as of the Separation Time (other than any Person whose Rights have become void pursuant to Section 3.1(b)), at such holder's address as shown by the records of the Company (the Company hereby agreeing to furnish copies of such records to the Rights Agent for this purpose), (x) a certificate (a "Rights Certificate") in substantially the form of Exhibit A hereto appropriately completed, representing the number of Rights held by such holder at the Separation Time and having such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any national securities exchange or quotation system on which the Rights may from time to time be listed or traded, or to conform to usage, and (y) a disclosure statement describing the Rights. (d) Subject to the terms and conditions hereof, Rights may be exercised on any Business Day after the Separation Time and prior to the Expiration Time -13- 17 by submitting to the Rights Agent at the principal office of the Rights Agent in New York City the Rights Certificate evidencing such Rights with an Election to Exercise (an "Election to Exercise") substantially in the form attached to the Rights Certificate duly completed, accompanied by a signature guarantee and such other documents as the Rights Agent may reasonably request, together with payment in cash, or by certified or official bank check or money order payable to the order of the Company, of a sum equal to the Exercise Price multiplied by the number of Rights being exercised and a sum sufficient to cover any transfer tax or charge which may be payable in respect of any transfer involved in the transfer or delivery of Rights Certificates or the issuance or delivery of certificates for shares or depositary receipts (or both) in a name other than that of the holder of the Rights being exercised. (e) Upon receipt of a Rights Certificate, with an Election to Exercise accompanied by payment as set forth in Section 2.3(d), and subject to the terms and conditions hereof, the Rights Agent will thereupon promptly (i)(A) requisition from any transfer agent stock certificates evidencing such number of shares or other securities to be purchased (the Company hereby irrevocably authorizing its transfer agents to comply with all such requisitions) and (B) if the Company elects pursuant to Section 5.5 not to issue certificates representing fractional shares, requisition from the depositary selected by the Company depositary receipts representing the fractional shares to be purchased or requisition from the Company the amount of cash to be paid in lieu of fractional shares in accordance with Section 5.5 and (ii) after receipt of such certificates, depositary receipts -14- 18 and/or cash, deliver the same to or upon the order of the registered holder of such Rights Certificate, registered (in the case of certificates or depositary receipts) in such name or names as may be designated by such holder. (f) In case the holder of any Rights shall exercise less than all the Rights evidenced by such holder's Rights Certificate, a new Rights Certificate evidencing the Rights remaining unexercised will be issued by the Rights Agent to such holder or to such holder's duly authorized assigns. (g) The Company covenants and agrees that it will (i) take all such action as may be necessary to ensure that all shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Exercise Price), be duly and validly authorized, executed, issued and delivered and fully paid and nonassessable; (ii) take all such action as may be necessary to comply with any applicable requirements of the Securities Act of 1933 or the Exchange Act, and the rules and regulations thereunder, and any other applicable law, rule or regulation, in connection with the issuance of any shares upon exercise of Rights; and (iii) pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the original issuance or delivery of the Rights Certificates or of any shares issued upon the exercise of Rights, provided, that the Company shall not be required to pay any transfer tax or charge which may be payable in respect of any transfer involved in the transfer or delivery of Rights Certificates or the issuance or delivery of certificates for shares in a name other than that of the holder of the Rights being transferred or exercised. -15- 19 2.4 Adjustments to Exercise Price; Number of Rights. (a) In the event the Company shall at any time after the Record Time and prior to the Separation Time (i) declare or pay a dividend on Common Stock payable in Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares of Common Stock, (x) the Exercise Price in effect after such adjustment will be equal to the Exercise Price in effect immediately prior to such adjust ment divided by the number of shares of Common Stock (the "Expansion Factor") that a holder of one share of Common Stock immediately prior to such dividend, subdivision or combination would hold thereafter as a result thereof and (y) each Right held prior to such adjustment will become that number of Rights equal to the Expansion Factor, and the adjusted number of Rights will be deemed to be distributed among the shares of Common Stock with respect to which the original Rights were associated (if they remain outstanding) and the shares issued in respect of such dividend, subdivision or combination, so that each such share of Common Stock will have exactly one Right associated with it. Each adjustment made pursuant to this paragraph shall be made as of the payment or effective date for the applicable dividend, subdivision or combination. In the event the Company shall at any time after the Record Time and prior to the Separation Time issue any shares of Common Stock otherwise than in a transaction referred to in the preceding paragraph, each such share of Common Stock so issued shall automatically have one new Right associated with it, which Right shall be evidenced by the certificate representing such share. To the extent provided in Section 5.3, Rights shall -16- 20 be issued by the Company in respect of shares of Common Stock that are issued or sold by the Company after the Separation Time. (b) In the event the Company shall at any time after the Record Time and prior to the Separation Time issue or distribute any securities or assets in respect of, in lieu of or in exchange for Common Stock (other than pursuant to a regular periodic cash dividend or a dividend paid solely in Common Stock) whether by dividend, in a reclassification or recapitalization (including any such transaction involving a merger, consolidation or share exchange), or otherwise, the Company shall make such adjustments, if any, in the Exercise Price, number of Rights and/or securities or other property purchasable upon exercise of Rights as the Board of Directors of the Company, in its sole discretion, may deem to be appropriate under the circumstances in order to adequately protect the interests of the holders of Rights generally, and the Company and the Rights Agent shall amend this Agreement as necessary to provide for such adjustments. (c) Each adjustment to the Exercise Price made pursuant to this Section 2.4 shall be calculated to the nearest cent. Whenever an adjustment to the Exercise Price is made pursuant to this Section 2.4, the Company shall (i) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment and (ii) promptly file with the Rights Agent and with each transfer agent for the Common Stock a copy of such certificate. -17- 21 (d) Rights certificates shall represent the securities purchasable under the terms of this Agreement, including any adjustment or change in the securities purchasable upon exercise of the Rights, even though such certificates may continue to express the securities purchasable at the time of issuance of the initial Rights Certificates. 2.5 Date on Which Exercise is Effective. Each person in whose name any certificate for shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares represented thereby on the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Exercise Price for such Rights (and any applicable taxes and other governmental charges payable by the exercising holder hereunder) was made; provided, however, that if the date of such surrender and payment is a date upon which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the stock transfer books of the Company are open. 2.6 Execution, Authentication, Delivery and Dating of Rights Certificates. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Rights Certificates may be manual or facsimile. -18- 22 Rights Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the countersignature and delivery of such Rights Certificates. Promptly after the Separation Time, the Company will notify the Rights Agent of such Separation Time and will deliver Rights Certificates executed by the Company to the Rights Agent for counter-signature, and, subject to Section 3.1(b), the Rights Agent shall manually countersign and deliver such Rights Certificates to the holders of the Rights pursuant to Section 2.3(c) hereof. No Rights Certificate shall be valid for any purpose unless manually countersigned by the Rights Agent. (b) Each Rights Certificate shall be dated the date of countersignature thereof. 2.7 Registration, Registration of Transfer and Exchange. (a) After the Separation Time, the Company will cause to be kept a register (the "Rights Register") in which, subject to such reasonable regulations as it may prescribe, the Company will provide for the registration and transfer of Rights. The Rights Agent is hereby appointed "Rights Registrar" for the purpose of maintaining the Rights Register for the Company and registering Rights and transfers of Rights after the Separation Time as herein provided. In the event that the Rights Agent shall cease to be the Rights Registrar, the Rights Agent will have the right to examine the Rights Register at all reasonable times after the Separation Time. -19- 23 After the Separation Time and prior to the Expiration Time, upon surrender for registration of transfer or exchange of any Rights Certificate, and subject to the provisions of Section 2.7(c) and (d), the Company will execute, and the Rights Agent will countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder's instructions, one or more new Rights Certificates evidencing the same aggregate number of Rights as did the Rights Certificate so surrendered. (b) Except as otherwise provided in Section 3.1(b), all Rights issued upon any registration of transfer or exchange of Rights Certificates shall be the valid obligations of the Company, and such Rights shall be entitled to the same benefits under this Agreement as the Rights surrendered upon such registration of transfer or exchange. (c) Every Rights Certificate surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company or the Rights Agent, as the case may be, duly executed by the holder thereof or such holder's attorney duly authorized in writing. As a condition to the issuance of any new Rights Certificate under this Section 2.7, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. (d) The Company shall not be required to register the transfer or exchange of any Rights after such Rights have become void under Section 3.1(b), been exchanged under Section 3.1(c) or been redeemed under Section 5.1. -20- 24 2.8 Mutilated, Destroyed, Lost and Stolen Rights Certificates. (a) If any mutilated Rights Certificate is surrendered to the Rights Agent prior to the Expiration Time, then, subject to Sections 3.1(b), 3.1(c) and 5.1, the Company shall execute and the Rights Agent shall countersign and deliver in exchange therefor a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so surrendered. (b) If there shall be delivered to the Company and the Rights Agent prior to the Expiration Time (i) evidence to their satisfaction of the destruction, loss or theft of any Rights Certificate and (ii) such security or indemnity as may be required by them to save each of them and any of their agents harmless, then, subject to Sections 3.1(b), 3.1(c) and 5.1 and in the absence of notice to the Company or the Rights Agent that such Rights Certificate has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Rights Agent shall countersign and deliver, in lieu of any such destroyed, lost or stolen Rights Certificate, a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so destroyed, lost or stolen. (c) As a condition to the issuance of any new Rights Certificate under this Section 2.8, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Rights Agent) connected therewith. (d) Every new Rights Certificate issued pursuant to this Section 2.8 in lieu of any destroyed, lost or stolen Rights Certificate shall evidence an original -21- 25 additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Rights Certificate shall be at any time enforceable by anyone, and, subject to Section 3.1(b) shall be entitled to all the benefits of this Agreement equally and proportionately with any and all other Rights duly issued hereunder. 2.9 Persons Deemed Owners. Prior to due presentment of a Rights Certificate (or, prior to the Separation Time, the associated Common Stock certificate) for registration of transfer, the Company, the Rights Agent and any agent of the Company or the Rights Agent may deem and treat the person in whose name such Rights Certificate (or, prior to the Separation Time, such Common Stock certificate) is registered on the Rights Register maintained by the Rights Agent as the absolute owner thereof and of the Rights evidenced thereby for all purposes whatsoever, including the payment of the Redemption Price and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. As used in this Agreement, unless the context otherwise requires, the term "holder" of any Rights shall mean the registered holder of such Rights (or, prior to the Separation Time, the associated shares of Common Stock) as recorded on the Rights Register maintained by the Rights Agent. 2.10 Delivery and Cancellation of Certificates. All Rights Certificates surrendered upon exercise or for registration of transfer or exchange shall, if surrendered to any person other than the Rights Agent, be delivered to the Rights Agent and, in any case, shall be promptly cancelled by the Rights Agent. The Company may at any time deliver to the Rights Agent for cancellation any Rights Certificates previously counter- -22- 26 signed and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Rights Certificates so delivered shall be promptly cancelled by the Rights Agent and a certificate of cancellation shall be delivered by the Rights Agent to the Company. No Rights Certificates shall be countersigned in lieu of or in exchange for any Rights Certificates cancelled as provided in this Section 2.10, except as expressly permitted by this Agreement. The Rights Agent shall destroy all cancelled Rights Certificates, in accordance with applicable law, and shall deliver a certificate of destruction to the Company, if destroyed. 2.11 Agreement of Rights Holders. Every holder of Rights by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of Rights that: (a) prior to the Separation Time, each Right will be transferable only together with, and will be transferred by a transfer of, the associated share of Common Stock; (b) after the Separation Time, the Rights Certificates will be transferable only on the Rights Register as provided herein; (c) prior to due presentment of a Rights Certificate (or, prior to the Separation Time, the associated Common Stock certificate) for registration of transfer, the Company, the Rights Agent and any agent of the Company or the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Separation Time, the associated Common Stock certificate) is registered on the Rights -23- 27 Register maintained by the Rights Agent as the absolute owner thereof and of the Rights evidenced thereby for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; (d) Rights beneficially owned by certain Persons will, under the circumstances set forth in Section 3.1(b), become void; and (e) this Agreement may be supplemented or amended from time to time pursuant to Section 2.4(b) or 5.4 hereof. ARTICLE III ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF CERTAIN TRANSACTIONS 3.1 Flip-in. (a) In the event that prior to the Expiration Time a Flip-in Date shall occur, except as provided in this Section 3.1, each Right shall constitute the right to purchase from the Company, upon exercise thereof in accordance with the terms hereof (but subject to Section 5.10), that number of shares of Common Stock having an aggregate Market Price on the Stock Acquisition Date equal to twice the Exercise Price for an amount in cash equal to the Exercise Price (such right to be appropriately adjusted in order to protect the interests of the holders of Rights generally in the event that on or after such Stock Acquisition Date an event of a type analogous to any of the events described in Section 2.4(a) or (b) shall have occurred with respect to the Common Stock). (b) Notwithstanding the foregoing, any Rights that are or were Beneficially Owned on or after the Stock Acquisition Date by an Acquiring Person or an Affiliate or Associate thereof or by any transferee, direct or indirect, of any of the forego- -24- 28 ing shall become void and any holder of such Rights (including transferees) shall thereafter have no right to exercise or transfer such Rights under any provision of this Agreement. If any Rights Certificate is presented for assignment or exercise and the Person presenting the same will not complete the certification set forth at the end of the form of assignment or notice of election to exercise and provide such additional evidence of the identity of the Beneficial Owner and its Affiliates and Associates (or former Beneficial Owners and their Affiliates and Associates) as the Company shall reasonably request, then the Company shall be entitled conclusively to deem the Beneficial Owner thereof to be an Acquiring Person or an Affiliate or Associate thereof or a transferee of any of the foregoing and accordingly will deem the Rights evidenced thereby to be void and not transferable or exercisable. (c) The Board of Directors of the Company may, at its option, at any time after a Flip-in Date and prior to the time that an Acquiring Person becomes the Beneficial Owner of more than 50% of the outstanding shares of Common Stock, elect to exchange all (but not less than all) the then outstanding Rights (which shall not include Rights that have become void pursuant to the provisions of Section 3.1(b)) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted in order to protect the interests of holders of Rights generally in the event that after the Separation Time an event of a type analogous to any of the events described in Section 2.4(a) or (b) shall have occurred with respect to the Common Stock -25- 29 (such exchange ratio, as adjusted from time to time, being hereinafter referred to as the "Exchange Ratio"). Immediately upon the action of the Board of Directors of the Company electing to exchange the Rights, without any further action and without any notice, the right to exercise the Rights will terminate and each Right (other than Rights that have become void pursuant to Section 3.1(b)) will thereafter represent only the right to receive a number of shares of Common Stock equal to the Exchange Ratio. Promptly after the action of the Board of Directors electing to exchange the Rights, the Company shall give notice thereof (specifying the steps to be taken to receive shares of Common Stock in exchange for Rights) to the Rights Agent and the holders of the Rights (other than Rights that have become void pursuant to Section 3.1(b)) outstanding immediately prior thereto by mailing such notice in accordance with Section 5.9. Each Person in whose name any certificate for shares is issued upon the exchange of Rights pursuant to this Section 3.1(c) or Section 3.1(d) shall for all purposes be deemed to have become the holder of record of the shares represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of any applicable taxes and other governmental charges payable by the holder was made; provided, however, that if the date of such surrender and payment is a date upon which the stock transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, -26- 30 and such certificate shall be dated, the next succeeding Business Day on which the stock transfer books of the Company are open. (d) Whenever the Company shall become obligated under Section 3.1(a) or (c) to issue shares of Common Stock upon exercise of or in exchange for Rights, the Company, at its option, may substitute therefor shares of Preferred Stock, at a ratio of one one-hundredth of a share of Preferred Stock for each share of Common Stock so issuable. (e) In the event that there shall not be sufficient treasury shares or authorized but unissued shares of Common Stock or Preferred Stock of the Company to permit the exercise or exchange in full of the Rights in accordance with Section 3.1(a) or (c), and the Company elects not to, or is otherwise unable to, make the exchange referred to in Section 3.1(c), the Company shall either (i) call a meeting of stockholders seeking approval to cause sufficient additional shares to be authorized (provided that if such approval is not obtained the Company will take the action specified in clause (ii) of this sentence) or (ii) take such action as shall be necessary to ensure and provide, to the extent permitted by applicable law and any agreements or instruments in effect on the Stock Acquisition Date to which it is a party, that each Right shall thereafter constitute the right to receive, (x) at the Company's option, either (A) in return for the Exercise Price, debt or equity securities or other assets (or a combination thereof) having a fair value equal to twice the Exercise Price, or (B) without payment of consideration (except as otherwise required by applicable law), debt or equity securities or other assets (or a combination -27- 31 thereof) having a fair value equal to the Exercise Price, or (y) if the Board of Directors of the Company elects to exchange the Rights in accordance with Section 3.1(c), debt or equity securities or other assets (or a combination thereof) having a fair value equal to the product of the Market Price of a share of Common Stock on the Flip-in Date times the Exchange Ratio in effect on the Flip-in Date, where in any case set forth in (x) or (y) above the fair value of such debt or equity securities or other assets shall be as determined in good faith by the Board of Directors of the Company, after consultation with a nationally recognized investment banking firm. 3.2 Flip-over. (a) Prior to the Expiration Time, the Company shall not enter into any agreement with respect to, consummate or permit to occur any Flip-over Transaction or Event unless and until it shall have entered into a supplemental agreement with the Flip-over Entity, for the benefit of the holders of the Rights, providing that, upon consummation or occurrence of the Flip-over Transaction or Event (i) each Right shall thereafter constitute the right to purchase from the Flip-over Entity, upon exercise thereof in accordance with the terms hereof, that number of shares of Flip-over Stock of the Flip-over Entity having an aggregate Market Price on the date of consummation or occurrence of such Flip-over Transaction or Event equal to twice the Exercise Price for an amount in cash equal to the Exercise Price (such right to be appropriately adjusted in order to protect the interests of the holders of Rights generally in the event that after such date of consummation or occurrence an event of a type analogous to any of the events described in Section 2.4(a) or (b) shall have occurred with respect to the Flip-over Stock) and (ii) the -28- 32 Flip-over Entity shall thereafter be liable for, and shall assume, by virtue of such Flip-over Transaction or Event and such supplemental agreement, all the obligations and duties of the Company pursuant to this Agreement. The provisions of this Section 3.2 shall apply to successive Flip-over Transactions or Events. (b) Prior to the Expiration Time, unless the Rights will be redeemed pursuant to Section 5.1 hereof in connection therewith, the Company shall not enter into any agreement with respect to, consummate or permit to occur any Flip-over Transaction or Event if at the time thereof there are any rights, warrants or securities outstanding or any other arrangements, agreements or instruments that would eliminate or otherwise diminish in any material respect the benefits intended to be afforded by this Rights Agreement to the holders of Rights upon consummation of such transaction. ARTICLE IV THE RIGHTS AGENT 4.1 General. (a) The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable costs, charges, expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, -29- 33 liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted to be done by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any certificate for securities purchasable upon exercise of Rights, Rights Certificate, certificate for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons. 4.2 Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent is a party, or any corporation succeeding to the shareholder services business of the Rights Agent or any successor Rights Agent, will be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 4.4 hereof. In -30- 34 case at the time such successor Rights Agent succeeds to the agency created by this Agreement any of the Rights Certificates have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates have not been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates will have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent is changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. 4.3 Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement and undertakes those duties and obligations which are reasonably incidental to those duties and obligations imposed by this Agreement upon the following terms and conditions and shall not be construed to have undertaken any other duties or obligations, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: -31- 35 (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company or the Rights Agent), and the opinion of such counsel will be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent deems it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by a person believed by the Rights Agent to be the Chairman of the Board, the President or any Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate will be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent will be liable hereunder only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent will not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the certificates for securities purchasable upon exercise of Rights or the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and will be deemed to have been made by the Company only. -32- 36 (e) The Rights Agent will not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due authorization, execution and delivery hereof by the Rights Agent) or in respect of the validity or execution of any certificate for securities purchasable upon exercise of Rights or Rights Certificate (except its countersignature thereof); nor will it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor will it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 3.1(b) hereof) or any adjustment required under the provisions of Section 2.4, 3.1 or 3.2 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights after receipt of the certificate contemplated by Section 2.4 describing any such adjustment); nor will it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any securities purchasable upon exercise of Rights or any Rights or as to whether any securities purchasable upon exercise of Rights will, when issued, be duly and validly authorized, executed, issued and delivered and fully paid and nonassessable. Subject to the provisions set forth in this Agreement, the Rights Agent shall not be liable for the misuse of any Rights Certificates. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such -33- 37 further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any person believed by the Rights Agent to be the Chairman of the Board, the President or any Vice President or the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Company, and to apply to such persons for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such person. The Rights Agent shall also not be liable for failing to take any action solely as a result of the delay of any of the aforementioned persons in providing any such advice or instructions. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in Common Stock, Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the Rights Certificate attached to the form of assignment or -34- 38 form of election to purchase, as the case may be, is incomplete in any manner, the Rights Agent shall be under no obligation to take further action with respect to such requested exercise or transfer without first consulting with the Company. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds to believe that repayment of such funds or adequate indemnification against such risk or liability, as applicable, is not reasonably likely to be available. (k) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent will not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (l) The Rights Agent shall not be required to pay the Company or any holders of Rights interest or earnings on any monies held by the Rights Agent pursuant to this Agreement, unless the Rights Agent shall fail on a timely basis to provide any such monies to a Person when such monies are due. (m) The Rights Agent shall not be required to take notice or be deemed to have notice of any event or condition hereunder, including, but not limited to, a Flip-In Date, Stock Acquisition Date, Separation Time, any adjustment of the Exercise Price or -35- 39 the Common Stock, the existence of an Acquiring Person, or a Beneficial Owner or any other event or condition that may require action by the Rights Agent, unless the Rights Agent shall be specifically (i) notified in writing by the Company or (ii) notified orally by an officer of the Company of such event or condition, and all written notices or other instruments required by this subsection to be delivered to the Rights Agent must, in order to be effective, be received at the principal office of the Rights Agent, and, in the absence of oral or written notice delivered in accordance with the terms of this Agreement, the Rights Agent may conclusively assume no such event or condition exists. 4.4 Change of Rights Agent. The Rights Agent may resign and be discharged from its duties under this Agreement upon 90 days' notice (or such lesser notice as is acceptable to the Company) in writing mailed to the Company and to each transfer agent of Common Stock by registered or certified mail, and to the holders of the Rights in accordance with Section 5.9. The Company may remove the Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent and to each transfer agent of the Common Stock by registered or certified mail, and to the holders of the Rights in accordance with Section 5.9. If the Rights Agent should resign or be removed or otherwise become incapable of acting, the Company will appoint a successor to the Rights Agent. If the Company fails to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of any Rights (which holder shall, with such notice, submit such holder's Rights Certificate for inspection by -36- 40 the Company), then the holder of any Rights may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (i) a corporation organized and doing business under the laws of the United States or any state of the United States, in good standing, which is authorized under such laws to exercise the powers of the Rights Agent contemplated by this Agreement and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 or (ii) a subsidiary of a corporation described in clause (i) of this sentence; provided that the corporation described in clause (i) guarantees the obligations of such subsidiary. After appointment, the successor Rights Agent will be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company will file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock, and mail a notice thereof in writing to the holders of the Rights. Failure to give any notice provided for in this Section 4.4, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. -37- 41 ARTICLE V MISCELLANEOUS 5.1 Redemption. (a) The Board of Directors of the Company may, at its option, at any time prior to the Flip-in Date, elect to redeem all (but not less than all) the then outstanding Rights at the Redemption Price and the Company, at its option, may pay the Redemption Price either in cash or shares of Common Stock or other securities of the Company deemed by the Board of Directors, in the exercise of its sole discretion, to be at least equivalent in value to the Redemption Price. (b) Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights (or, if the resolution of the Board of Directors electing to redeem the Rights states that the redemption will not be effective until the occurrence of a specified future time or event, upon the occurrence of such future time or event), without any further action and without any notice, the right to exercise the Rights will terminate and each Right will thereafter represent only the right to receive the Redemption Price in cash or securities, as determined by the Board of Directors. Promptly after the Rights are redeemed, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice in accordance with Section 5.9. 5.2 Expiration. The Rights and this Agreement shall expire at the Expiration Time and no Person shall have any rights pursuant to this Agreement or any -38- 42 Right after the Expiration Time, except, if the Rights are exchanged or redeemed, as provided in Section 3.1 or 5.1 hereof, respectively. 5.3 Issuance of New Rights Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the number or kind or class of shares of stock purchasable upon exercise of Rights made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock by the Company following the Separation Time and prior to the Expiration Time pursuant to the terms of securities convertible or redeemable into shares of Common Stock or to options, in each case issued or granted prior to, and outstanding at, the Separation Time, the Company shall issue to the holders of such shares of Common Stock, Rights Certificates representing the appropriate number of Rights in connection with the issuance or sale of such shares of Common Stock; provided, however, in each case, (i) no such Rights Certificate shall be issued, if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or to the Person to whom such Rights Certificates would be issued, (ii) no such Rights Certificates shall be issued if, and to the extent that, appropriate adjustment shall have otherwise been made in lieu of the issuance thereof, and (iii) the Company shall have no obligation to distribute -39- 43 Rights Certificates to any Acquiring Person or Affiliate or Associate of an Acquiring Person or any transferee of any of the foregoing. 5.4 Supplements and Amendments. The Company and the Rights Agent may from time to time supplement or amend this Agreement without the approval of any holders of Rights (i) prior to the Flip-in Date, in any respect and (ii) on or after the Flip-in Date, to make any changes that the Company may deem necessary or desirable and which shall not materially adversely affect the interests of the holders of Rights generally or in order to cure any ambiguity or to correct or supplement any provision contained herein which may be inconsistent with any other provisions herein or otherwise defective. The Rights Agent will duly execute and deliver any supplement or amendment hereto requested by the Company which satisfies the terms of the previous sentence. 5.5 Fractional Shares. If the Company elects not to issue certificates representing fractional shares upon exercise or redemption of Rights, the Company shall, in lieu thereof, in the sole discretion of the Board of Directors, either (a) evidence such fractional shares by depositary receipts issued pursuant to an appropriate agreement between the Company and a depositary selected by it, providing that each holder of a depositary receipt shall have all of the rights, privileges and preferences to which such holder would be entitled as a beneficial owner of such fractional share, or (b) pay to the registered holder of such Rights the appropriate fraction of the Market Price per share in cash. -40- 44 5.6 Rights of Action. Subject to the terms of this Agreement (including Sections 3.1(b) and 5.14), rights of action in respect of this Agreement, other than rights of action vested solely in the Rights Agent, are vested in the respective holders of the Rights; and any holder of any Rights, without the consent of the Rights Agent or of the holder of any other Rights, may, on such holder's own behalf and for such holder's own benefit and the benefit of other holders of Rights, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder's right to exercise such holder's Rights in the manner provided in such holder's Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. 5.7 Holder of Rights Not Deemed a Stockholder. No holder, as such, of any Rights shall be entitled to vote, receive dividends or be deemed for any purpose the holder of shares or any other securities which may at any time be issuable on the exercise of such Rights, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to -41- 45 any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 5.8 hereof), or to receive dividends or subscription rights, or otherwise, until such Rights shall have been exercised or exchanged in accordance with the provisions hereof. 5.8 Notice of Proposed Actions. In case the Company shall propose after the Separation Time and prior to the Expiration Time (i) to effect or permit a Flip-over Transaction or Event or (ii) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Right, in accordance with Section 5.9 hereof, a notice of such proposed action, which shall specify the date on which such Flip-over Transaction or Event, liquidation, dissolution, or winding up is to take place, and such notice shall be so given at least 20 Business Days prior to the date of the taking of such proposed action. 5.9 Notices. Notices or demands authorized or required by this Agreement to be given or made by the Rights Agent or by the holder of any Rights to or on the Company shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Payless ShoeSource Holdings, Inc. 3231 SE Sixth Street Topeka, Kansas 66607 Attention: Corporate Secretary Any notice or demand authorized or required by this Agreement to be given or made by the Company or by the holder of any Rights to or on the Rights Agent shall be sufficiently -42- 46 given or made if delivered or sent by registered or certified mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: UMB Bank, N.A., as Rights Agent 928 Grand Avenue Kansas City, MO 64106 Attention: Corporate Trust Department Notices or demands authorized or required by this Agreement to be given or made by the Company or the Rights Agent to or on the holder of any Rights shall be sufficiently given or made if delivered or sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as it appears upon the Rights Register maintained by the Rights Agent or, prior to the Separation Time, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. 5.10 Suspension of Exercisability. To the extent that the Company determines in good faith that some action will or need be taken pursuant to Section 3.1 or to comply with federal or state securities laws, the Company may suspend the exercisability of the Rights for a reasonable period in order to take such action or comply with such laws. In the event of any such suspension, the Company shall issue as promptly as practicable a public announcement stating that the exercisability or exchangeability of the Rights has been temporarily suspended. Notice thereof pursuant to Section 5.9 shall not be required. Failure to give a notice pursuant to the provisions of this Agreement shall not affect the validity of any action taken hereunder. -43- 47 5.11 Costs of Enforcement. The Company agrees that if the Company or any other Person the securities of which are purchasable upon exercise of Rights fails to fulfill any of its obligations pursuant to this Agreement, then the Company or such Person will reimburse the holder of any Rights for the costs and expenses (including legal fees) incurred by such holder in actions to enforce such holder's rights pursuant to any Rights or this Agreement. 5.12 Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 5.13 Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the holders of the Rights any legal or equitable right, remedy or claim under this Agreement and this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the holders of the Rights. 5.14 Determination and Actions by the Board of Directors, etc. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement. All such actions, calculations, -44- 48 interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject the Board of Directors of the Company to any liability to the holders of the Rights. 5.15 Descriptive Headings. Descriptive headings appear herein for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. 5.16 Governing Law. THIS AGREEMENT AND EACH RIGHT ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF DELAWARE AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE APPLICABLE TO CONTRACTS TO BE MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE. 5.17 Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 5.18 Severability. If any term or provision hereof or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the -45- 49 extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions hereof or the application of such term or provision to circumstances other than those as to which it is held invalid or unenforceable. -46- 50 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. PAYLESS SHOESOURCE HOLDINGS, INC. By: ------------------------- Name: Title: UMB BANK, N.A., as Rights Agent By: ------------------------- Name: Title: -47- 51 EXHIBIT A [Form of Rights Certificate] Certificate No. W- _______ Rights THE RIGHTS ARE SUBJECT TO REDEMPTION OR MANDATORY EXCHANGE, AT THE OPTION OF THE COMPANY, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. TO THE EXTENT PERMITTED BY APPLICABLE LAW, RIGHTS BENEFICIALLY OWNED BY ACQUIRING PERSONS OR AFFILIATES OR ASSOCIATES THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) OR TRANSFEREES OF ANY OF THE FOREGOING WILL BE VOID. Rights Certificate PAYLESS SHOESOURCE HOLDINGS, INC. This certifies that ____________________, or registered assigns, is the registered holder of the number of Rights set forth above, each of which entitles the registered holder thereof, subject to the terms, provisions and conditions of the Stockholder Protection Rights Agreement, dated as of April 20, 1998 (as amended from time to time, the "Rights Agreement"), between Payless ShoeSource Holdings, Inc., a Delaware corporation (the "Company"), and UMB Bank, N.A., a national banking association organized and existing under the laws of the United States of America, as Rights Agent (the "Rights Agent", which term shall include any successor Rights Agent under the Rights Agreement), to purchase from the Company at any time after the Separation Time (as such term is defined in the Rights Agreement) and prior to the close of business on April 20, 2008, one one-hundredth of a fully paid share of Series A Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company (subject to adjustment as 52 provided in the Rights Agreement) at the Exercise Price referred to below, upon presentation and surrender of this Rights Certificate with the Form of Election to Exercise duly executed at the principal office of the Rights Agent in The City of New York. The Exercise Price shall initially be $250 per Right and shall be subject to adjustment in certain events as provided in the Rights Agreement. In certain circumstances described in the Rights Agreement, the Rights evidenced hereby may entitle the registered holder thereof to purchase securities of an entity other than the Company or securities of the Company other than Preferred Stock or assets of the Company, all as provided in the Rights Agreement. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates. Copies of the Rights Agreement are on file at the principal office of the Company and are available without cost upon written request. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor evidencing an aggregate number of Rights equal to the aggregate number of Rights evidenced by the Rights Certificate or Rights Certificates surrendered. If this Rights Certificate shall be -2- 53 exercised in part, the registered holder shall be entitled to receive, upon surrender hereof, another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, each Right evidenced by this Certificate may be (a) redeemed by the Company under certain circumstances, at its option, at a redemption price of $0.01 per Right or (b) exchanged by the Company under certain circumstances, at its option, for one share of Common Stock or one one-hundredth of a share of Preferred Stock per Right (or, in certain cases, other securities or assets of the Company), subject in each case to adjustment in certain events as provided in the Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of any securities which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by this Rights Certificate shall have been exercised or exchanged as provided in the Rights Agreement. -3- 54 This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Date: ____________ ATTEST: PAYLESS SHOESOURCE HOLDINGS, INC. ___________________________ By_______________________________ Secretary Countersigned: UMB BANK, N.A, as Rights Agent By____________________________ Authorized Signature -4- 55 [Form of Reverse Side of Rights Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer this Rights Certificate.) FOR VALUE RECEIVED ________________________ hereby sells, assigns and transfers unto ______________________________________________ (Please print name ________________________________________________________________________________ and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: _______________, ____ Signature Guaranteed: ________________________________________ Signature (Signature must correspond to name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever) Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee Medallion program), pursuant to SEC Rule 17Ad-15. ______________________________________________ (To be completed if true) 56 The undersigned hereby represents, for the benefit of all holders of Rights and shares of Common Stock, that the Rights evidenced by this Rights Certificate are not, and, to the knowledge of the undersigned, have never been, Beneficially Owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ___________________________ Signature _______________________________________ NOTICE In the event the certification set forth above is not completed in connection with a purported assignment, the Company will deem the Beneficial Owner of the Rights evidenced by the enclosed Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) or a transferee of any of the foregoing and accordingly will deem the Rights evidenced by such Rights Certificate to be void and not transferable or exercisable. -2- 57 [To be attached to each Rights Certificate] FORM OF ELECTION TO EXERCISE (To be executed if holder desires to exercise the Rights Certificate.) TO: PAYLESS SHOESOURCE HOLDINGS, INC. The undersigned hereby irrevocably elects to exercise _______________________ whole Rights represented by the attached Rights Certificate to purchase the shares of Participating Preferred Stock issuable upon the exercise of such Rights and requests that certificates for such shares be issued in the name of: ________________________________________ Address: ________________________________________ ________________________________________ Social Security or Other Taxpayer Identification Number: ________________________________________ If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: ________________________________________ Address: ________________________________________ ________________________________________ Social Security or Other Taxpayer Identification Number: ________________________________________ Dated: _______________, ____ Signature Guaranteed: ________________________________________ Signature (Signature must correspond to name as written upon the face of the attached Rights Certificate in every particular, without alteration or 58 enlargement or any change whatsoever) Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee Medallion program), pursuant to SEC Rule 17Ad-15. - - ---------------------------------------------- (To be completed if true) The undersigned hereby represents, for the benefit of all holders of Rights and shares of Common Stock, that the Rights evidenced by the attached Rights Certificate are not, and, to the knowledge of the undersigned, have never been, Beneficially Owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ------------------------- Signature - - ---------------------------------------------- NOTICE In the event the certification set forth above is not completed in connection with a purported exercise, the Company will deem the Beneficial Owner of the Rights evidenced by the attached Rights Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) or a transferee of any of the foregoing and accordingly will deem the Rights evidenced by such Rights Certificate to be void and not transferable or exercisable. -2- 59 EXHIBIT B FORM OF CERTIFICATE OF DESIGNATION AND TERMS OF PARTICIPATING PREFERRED STOCK OF PAYLESS SHOESOURCE HOLDINGS, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, the undersigned, __________________ and ____________________, the ______________________, and ____________________, respectively, of Payless ShoeSource Holdings, Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: Pursuant to authority granted by Article THIRD of the Restated Certificate of Incorporation of the Corporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation has adopted the following resolutions fixing the designation and certain terms, powers, preferences and other rights of a new series of the Corporation's Preferred Stock, par value $.01 per share, and certain qualifications, limitations and restrictions thereon: RESOLVED, that there is hereby established a series of Preferred Stock, par value $.01 per share, of the Corporation, and the designation and certain terms, powers, preferences and other rights of the shares of such series, and certain qualifications, limitations and restrictions thereon, are hereby fixed as follows: (i) The distinctive serial designation of this series shall be "Series A Preferred Stock" (hereinafter called "this Series"). Each share of this Series shall be identical in all respects with the other shares of this Series except as to the dates from and after which dividends thereon shall be cumulative. 60 (ii) The number of shares in this Series shall initially be _______, which number may from time to time be increased or decreased (but not below the number then outstanding) by the Board of Directors. Shares of this Series purchased by the Corporation shall be cancelled and shall revert to authorized but unissued shares of Preferred Stock undesignated as to series. Shares of this Series may be issued in fractional shares, which fractional shares shall entitle the holder, in proportion to such holder's fractional share, to all rights of a holder of a whole share of this Series. (iii) The holders of full or fractional shares of this Series shall be entitled to receive, when and as declared by the Board of Directors, but only out of funds legally available therefor, dividends, (A) on each date that dividends or other distributions (other than dividends or distributions payable in Common Stock of the Corporation) are payable on or in respect of Common Stock comprising part of the Reference Package (as defined below), in an amount per whole share of this Series equal to the aggregate amount of dividends or other distributions (other than dividends or distributions payable in Common Stock of the Corporation) that would be payable on such date to a holder of the Reference Package and (B) on the last day of March, June, September and December in each year, in an amount per whole share of this Series equal to the excess (if any) of $____* over the aggregate dividends paid per whole share of this Series during the three month period ending on such last day. Each such dividend shall be paid to the holders of record of shares of this Series on the date, not exceeding sixty days preceding such dividend or distribution payment date, fixed for the purpose by the Board of Directors in advance of payment of each particular dividend or distribution. Dividends on each full and each fractional share of this Series shall be cumulative from the date such full or fractional share is originally issued; provided that any such full or fractional share originally issued after a dividend record date and on or prior to the dividend payment date to which such record date relates shall not be entitled to receive the dividend payable on such dividend payment date or any amount in respect of the period from such original issuance to such dividend payment date. The term "Reference Package" shall initially mean 100 shares of Common Stock, par value $.01 per share ("Common Stock"), of the Corporation. In the event the Corporation shall at any time after the close - - -------------------- * Insert an amount equal to 1/4 of 1% of the Exercise Price divided by the number of shares of Preferred Stock purchasable upon exercise of one Right (i.e., a guaranteed 1% dividend). -2- 61 of business on ________, ____* (A) declare or pay a dividend on any Common Stock payable in Common Stock, (B) subdivide any Common Stock or (C) combine any Common Stock into a smaller number of shares, then and in each such case the Reference Package after such event shall be the Common Stock that a holder of the Reference Package immediately prior to such event would hold thereafter as a result thereof. Holders of shares of this Series shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided on this Series. So long as any shares of this Series are outstanding, no dividend (other than a dividend in Common Stock or in any other stock ranking junior to this Series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other stock ranking junior to this Series as to dividends or upon liquidation, nor shall any Common Stock nor any other stock of the Corporation ranking junior to or on a parity with this Series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to this Series as to dividends and upon liquidation), unless, in each case, the full cumulative dividends (including the dividend to be due upon payment of such dividend, distribution, redemption, purchase or other acquisition) on all outstanding shares of this Series shall have been, or shall contemporaneously be, paid. (iv) In the event of any merger, consolidation, reclassification or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of this Series shall at the same time be similarly exchanged or changed in an amount per whole share equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, that a holder of the Reference Package would be entitled to receive as a result of such transaction. - - -------------------- * For a certificate of designation relating to shares to be issued pursuant to Section 2.3 of the Rights Agreement, insert the Separation Time. For a certificate of designation relating to shares to be issued pursuant to Section 3.1(d) of the Rights Agreement, insert the Flip-in Date. -3- 62 (v) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of full and fractional shares of this Series shall be entitled, before any distribution or payment is made on any date to the holders of the Common Stock or any other stock of the Corporation ranking junior to this Series upon liquidation, to be paid in full an amount per whole share of this Series equal to the greater of (A) $__________* or (B) the aggregate amount distributed or to be distributed prior to such date in connection with such liquidation, dissolution or winding up to a holder of the Reference Package (such greater amount being hereinafter referred to as the "Liquidation Preference"), together with accrued dividends to such distribution or payment date, whether or not earned or declared. If such payment shall have been made in full to all holders of shares of this Series, the holders of shares of this Series as such shall have no right or claim to any of the remaining assets of the Corporation. In the event the assets of the Corporation available for distribution to the holders of shares of this Series upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to the first paragraph of this Section (v), no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the shares of this Series upon such liquidation, dissolution or winding up unless proportionate distributive amounts shall be paid on account of the shares of this Series, ratably in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such liquidation, dissolution or winding up. Upon the liquidation, dissolution or winding up of the Corporation, the holders of shares of this Series then outstanding shall be entitled to be paid out of assets of the Corporation available for distribution to its stockholders all amounts to which such holders are entitled pursuant to the first paragraph of this Section (v) before any payment shall be made to the holders of Common Stock or any other stock of the Corporation ranking junior upon liquidation to this Series. For the purposes of this Section (v), the consolidation or merger of, or binding share exchange by, the Corporation with any other corporation - - -------------------- * Insert an amount equal to 100 times the Exercise Price in effect as of the Separation Time. -4- 63 shall not be deemed to constitute a liquidation, dissolution or winding up of the Corporation. (vi) The shares of this Series shall not be redeemable. (vii) In addition to any other vote or consent of stockholders required by law or by the Restated Certificate of Incorporation, as amended, of the Corporation, each whole share of this Series shall, on any matter, vote as a class with any other capital stock comprising part of the Reference Package and voting on such matter and shall have the number of votes thereon that a holder of the Reference Package would have. IN WITNESS WHEREOF, the undersigned have signed and attested this certificate on the ____ day of _________, _____. --------------------------------- Attest: - - ------------------------- -5- EX-99.1 6 EX-99.1 1 EXHIBIT 99.1 ASSUMPTION AGREEMENT THIS AGREEMENT is made and entered into this 22nd day of May, 1998, by and between Payless ShoeSource, Inc., a Missouri corporation ("Payless") and Payless ShoeSource Holdings, Inc., a Delaware corporation ("Holdings"). WHEREAS, Payless sponsors certain incentive, compensation, benefit and welfare plans for executives, employees and non-employee directors of Payless, and WHEREAS, Payless is party to certain employment and other agreements with employees or directors of Payless, and WHEREAS, Holdings, Payless and Payless Merger Corp. have entered into an Agreement and Plan of Merger dated April 20 , 1998 (the "Agreement") pursuant to which Payless will become a wholly owned subsidiary of Holdings and Holdings will become the issuer of shares which will be issued or delivered under certain of those plans on the terms and subject to the conditions set forth therein, and WHEREAS, the Agreement provides that Holdings shall assume the sponsorship of various Payless incentive, compensation, benefit and welfare plans and be substituted for Payless thereunder, and shall assume the obligations of Payless under certain employment and other agreements, all as of the "Effective Time" as defined in the Agreement; NOW, THEREFORE, it is hereby agreed as follows: 1. Holdings assumes and adopts the incentive, compensation, benefit and welfare plans listed on Appendix A hereto (the "Assumed Plans"), and is substituted for Payless as the sponsoring "Employer" thereunder, effective as of the Effective Time. By such assumption Holdings assumes all of the rights, and agrees to perform all obligations, of Payless under the Assumed Plans, as in effect immediately prior to the Effective Time and Holdings adopts any and all goals established by Payless under the Assumed Plans. Payless shall have no further obligation under the Assumed Plans as the sponsor thereof but shall continue as a participating or adopting Employer, as to its employees, to the extent permitted or required under each Assumed Plan. Holdings also agrees to assume all of the obligations of Payless under the employment and other agreements between Payless and an employee of Payless who is transferred to Holdings, and from and after the date of any such transfer Payless have no further obligation under such agreements. 2. As of the Effective Time, Holdings shall assume from Payless all authority and responsibility for amending, modifying or terminating each Assumed Plan then in effect and for appointing and removing all administrative committee or other committee members, trustees, 2 custodians and agents of the Assumed Plans, provided, however, that such authority and responsibility for amending, modifying, terminating and administering each Assumed Plan (including the appointment or removal of committee members and others) may be delegated by Holdings to directors, officers or employees of Holdings or Payless or other subsidiaries of Holdings that have adopted the Assumed Plans, which subsidiaries as of the date hereof are set forth in Exhibit B hereto, and provided further that following the Effective Time and until further action by Holdings the provisions of all Assumed Plans shall remain in effect and all committee members, trustees, custodians and agents shall hold office on the same basis as immediately preceding the Effective Time. 3. As of the Effective Time, each reference to shares of Payless common stock in the Assumed Plans shall be deemed to be amended to refer to shares of Holdings common stock. 4. As of the Effective Time, each option or right to purchase one or more shares of Payless common stock pursuant to an Assumed Plan shall become an option or right to purchase a corresponding number of shares of Holdings common stock on the same terms as an option or right to purchase shares of Payless common stock existed under an Assumed Plan immediately prior to the Effective Time. 5. As of the Effective Time, each right to receive or obligation to distribute one or more shares of Payless common stock or to receive or to pay an amount based on the value of a share or shares of Payless common stock under an Assumed Plan shall become a right or obligation, as the case may be, to receive or distribute shares of Holdings common stock or to receive or to pay an amount based on the value of a share or shares of Holdings common stock on the same terms as the right or obligation to receive or distribute shares of Payless common stock or to receive or to pay an amount based on the value of a share or shares of Payless common stock existed under any of the Assumed Plans immediately prior to the Effective Time. 6. Each Assumed Plan shall be deemed to be further amended as the appropriate officers of Payless and Holdings deem necessary or appropriate, in their discretion, to implement the intent of the foregoing and the terms of this Assumption Agreement. 7. Neither the assumption of the Assumed Plans by Holdings nor the consummation of the foregoing reorganization transaction by the parties shall be deemed to be a termination of an Assumed Plan, nor cause any benefit to vest under an Assumed Plan, nor accelerate the accrual or payment of any benefit thereunder. 8. Except as modified by this Assumption Agreement, Participants in the Assumed Plans as of the date hereof shall have all of the rights and benefits thereunder as existed on the day before the Effective Date and no other changes in the Assumed Plans are intended hereby. 9. This Assumption Agreement may be executed in any number of counterparts, all of which, when executed, shall be deemed to be one and the same instrument. -2- 3 IN WITNESS WHEREOF, each party hereto has caused these presents to be executed on its behalf by its duly authorized officer, as of the day and year first above written. PAYLESS SHOESOURCE, INC. By /s/ Steven J. Douglass ------------------------------------------- Steven J. Douglass, Chief Executive Officer PAYLESS SHOESOURCE HOLDINGS, INC. By /s/ Steven J. Douglass ------------------------------------------- Steven J. Douglass, Chief Executive Officer -3- 4 Appendix A ASSUMED PLANS 1996 Stock Incentive Plan Deferred Compensation Plan Restricted Stock Plan for Non-Management Directors Deferred Compensation Plan for Non-Management Directors Profit Sharing Plan and Trust Profit Sharing Plan for Puerto Rico Associates and Trust Stock Ownership Plan Spin-Off Stock Plan and Spin-Off Cash Plan Executive Incentive Compensation Plans Stock Appreciation and Phantom Stock Unit Plan for International Employees Supplementary Retirement Plan Medical Plan Dental Plan Before-Tax Medical Option Plan Group Life, Accidental Death and Dismemberment, Accident and Sickness Plan Business Travel Accident Plan Long-Term Disability Plan Company-Paid Life Insurance Plan Optional Life Insurance Plan Dependent Care Flexible Spending Account Plan Adoption Assistance Plan Post-Retirement Life and Medical Insurance Program Performance Incentive Plan Executive Medical Reimbursement Program Supplementary Long-Term Disability Program Section 125 Payment Option Plan Tuition Reimbursement Plan Master Trust Agreement for Welfare Benefit Plans -4- 5 Exhibit B Participating Employers under Assumed Plans Payless ShoeSource, Inc. Payless ShoeSource of Puerto Rico, Inc. * Payless ShoeSource Distribution, Inc.** Payless ShoeSource Worldwide, Inc.** Payless ShoeSource Merchandising, Inc.** Payless ShoeSource Saipan, Inc.** Payless ShoeSource Labor Leasing, Inc.** * Excluding Payless ShoeSource Inc. Profit Sharing Plan ** Excluding Payless ShoeSource of Puerto Rico, Inc. Profit Sharing Plan -5- EX-99.2 7 EX-99.2 1 EXHIBIT 99.2 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 Missouri corporation, provided, that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, 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 2 on the Effective Date, the "Fair Market Value" means the arithmetic average of the high and low trading prices of the Stock on the New York Stock Exchange for each of the first 30 trading days on which trading in the Stock on that exchange occurs. (g) "Incentive Stock Option" means an Option granted under the Plan which constitutes and shall be treated as an "incentive stock option" as defined in Section 422 of the Code. (h) "Non-Qualified Stock Option" means an Option granted under the Plan which shall not constitute or be treated as an Incentive Stock Option. (i) "Non-Tandem Stock Appreciation Right" means a Right described in Part III, Section 3. (j) "Option" means a right or rights to purchase shares of Stock described in Part II. (k) "Option Agreement" means the agreement between the Company and a Participant evidencing the grant of an Option and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Option. (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. 2 3 (t) "Stock Appreciation Right" or "Right" means a right described in Part III which provides for the payment of an amount in cash or Stock in accordance with such terms and conditions as are provided in the Stock Appreciation Right Agreement applicable to such Right; provided however, that in Part III, Section 2, "Right" shall refer only to a "Tandem Stock Appreciation Right" and that in Part III, Section 3, "Right" shall refer only to a "Non-Tandem Stock Appreciation Right". (u) "Stock Appreciation Right Agreement" means the agreement between the Company and a Participant evidencing the grant of a Stock Appreciation Right and containing the terms and conditions, not inconsistent with the Plan, that are applicable to such Right. (v) "Subsidiary" means a subsidiary of the Company or an unincorporated organization controlled, directly or indirectly, by the Company. With respect to Incentive Stock Options, the term "Subsidiary" shall have the meaning set forth in Section 424(f) of the Code. (w) "Tandem Stock Appreciation Right" means a Right described in Part III, Section 2. (x) "Merger" means the merger of Payless Merger Corp., a Missouri Corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). 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. 3 4 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 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 4 5 management employees of the Company and its Subsidiaries (including employees who are directors and/or officers). (b) Determination. From time to time the Committee shall, in its sole discretion, but subject to all of the provisions of the Plan, determine which of those eligible employees shall receive Option(s), Stock Appreciation Right(s), Performance Unit(s) or Restricted Stock Grant(s) under the Plan and the size, terms, conditions and/or restrictions of the Option(s), Right(s), Performance Unit(s) or Restricted Stock Grant(s). (c) Differing Terms; Effect of Grant. The Committee may approve the grant of Option(s) Right(s), or Performance Unit(s) or the making of Restricted Stock Grant(s) subject to differing terms, conditions and/or restrictions to any eligible employee in any year. The Committee's decision to approve the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant to an eligible employee in any year shall not require the Committee to approve the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant to that employee in any other year or to any other employee in any year; nor shall the Committee's decision with respect to the size, terms, conditions and/or restrictions of any Option, Right or Performance Unit to be granted to an employee or any Restricted Stock Grant to be made to an employee in any year require the Committee to approve the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant of the same size or with the same terms, conditions and/or restrictions to that employee in any other year or to any other employee in any year. The Committee shall not be precluded from approving the grant of an Option, Right or Performance Unit or the making of a Restricted Stock Grant to any eligible employee solely because such employee may previously have been granted an Option, Right or Performance Unit or may previously have received a Restricted Stock Grant. 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 5 6 Grant to a Participant under the Plan shall affect any right of the Company or its Subsidiaries to terminate the Participant's employment at any time. II. OPTIONS 1. GENERAL. Each employee chosen to receive an Option(s) may be granted an Incentive Stock Option, a Non-Qualified Stock Option or both, subject to the following terms, conditions and restrictions. Each Option granted under the Plan shall be evidenced by an Option Agreement which shall contain such terms and conditions consistent with the Plan as the Committee shall determine; provided, however, that each Option shall satisfy the following requirements and each Incentive Stock Option shall satisfy the requirement of Part II, Section 2: (a) Option Price. The option price for each share purchased under any Option shall be specified in the Option Agreement and, subject to the provisions of paragraph (b) below and Part VII, Section 3, shall not be less than Fair Market Value on the date the Option is granted; provided, however, that in no event shall the option price per share be less than the par value thereof. (b) Option Period. (i) General. The period in which an Option may be exercised shall not exceed ten years from the date the Option is granted; provided, however, that the Option may be sooner terminated in accordance with the provisions of this paragraph (b). Subject to the foregoing, the Committee may provide that any Option may be exercised, in whole or in part, at such time or times as the Committee may in its discretion determine. (ii) Termination of Employment. If the Participant ceases to be an employee of the Company or a Subsidiary for any reason other than Retirement, Disability, or death, all of such Participant's outstanding Options shall immediately terminate. (iii)Retirement or Disability. If a Participant's employment is terminated by Retirement or Disability, the term of any then outstanding Option held by the Participant shall extend for a period specified by the Committee in the agreement pertaining to such Option, and the number of shares in respect of which the Option may be exercised after the Participant's Retirement or Disability shall be determined by the agreement pertaining to such Option; provided, however, that such agreement shall provide that the Committee may cancel the Participant's Option during such period if the Participant's Retirement was without the consent of the Company, or if the Participant 6 7 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. 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 7 8 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. 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 8 9 with respect to a share(s) of Stock for which an option has been granted and is outstanding under any other plan of the Company. A Stock Appreciation Right shall be evidenced by a Stock Appreciation Right Agreement which shall contain such terms and conditions (which may include limitations as to the time when such Stock Appreciation Right becomes exercisable and when it ceases to be exercisable that are more restrictive than the limitations applicable to the Related Option(s)) not inconsistent with the Plan as the Committee shall determine; provided, however, that each Tandem Stock Appreciation Right shall satisfy the following requirements: (a) Termination of a Right. If the Related Option is exercised, in whole or in part, then the Right with respect to the shares of Stock purchased pursuant to such exercise (but not with respect to any unpurchased shares of Stock) shall terminate as of the date of the exercise. If an unexercised Right is otherwise exercisable on the date that the Related Option expires, and if the Fair Market Value of the shares of Stock with respect to which such Right was granted, determined as of the date of such expiration, exceeds the Option price of such shares, then, notwithstanding Section 2(b), the Right shall automatically be deemed to have been exercised as of the date of such expiration; otherwise, on the date that the Related Option expires, any outstanding Right related thereto shall be terminated as of the date of such expiration. (b) Exercise. Tandem Stock Appreciation Rights may be exercised (i) only at such time or times as, and to the extent that, the Related Options shall be exercisable, (ii) only upon surrender of the Related Options with respect to the shares for which the Rights are then being exercised, and (iii) subject to the terms and conditions set forth in the Stock Appreciation Right Agreement; provided that no Tandem Stock Appreciation Right may be exercised prior to the expiration of six (6) months from the date of the grant and can only be exercised during the ten-day period beginning on the third business day following the release of the Company's quarterly or annual statement of sales and earnings. 3. NON-TANDEM STOCK APPRECIATION RIGHTS. Each Non-Tandem Stock Appreciation Right may be granted with respect to a share(s) of Stock or, if the Committee so determines, in exchange for an outstanding Option or an outstanding stock option granted under any other plan of the Company. A Non-Tandem Stock Appreciation Right shall be evidenced by a Stock Appreciation Right Agreement which shall contain such terms and conditions not inconsistent with the Plan as the Committee shall determine; provided, however, that each Non-Tandem Stock Appreciation Right shall satisfy the following requirements: (a) Termination of a Right. A Non-Tandem Stock Appreciation Right shall terminate as of the earlier of (i) the date of exercise of such Right, to the extent that it is exercised; or (ii) the termination date specified in the Stock 9 10 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 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. 10 11 (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 approval shall have been effected or obtained free of any conditions not acceptable to the Company. 11 12 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 12 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 13 14 forth in Part IV, Section 2 shall lapse as to all shares of Restricted Stock granted to such Participant pursuant to such Restricted Stock Grant on the date of such event. A Participant may file a written designation of beneficiary to receive, in the event of the Participant's death, any shares for which restrictions lapse on the date of death. The Company shall prescribe procedures and requirements for beneficiary designations not inconsistent with this provision and has the right to review and approve such designations. 5. AGREEMENT BY EMPLOYEE REGARDING WITHHOLDING TAXES. Each Participant shall agree that, subject to the provisions of Part IV, Section 6, (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 14 15 transfer agent. Any attempt to dispose of such shares of Stock in contravention of such terms, conditions and restrictions shall be ineffective. The Committee may adopt rules which provide that the certificates evidencing such shares may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody, until the restrictions thereon shall have lapsed. 8. RESTRICTIONS UPON MAKING OF RESTRICTED STOCK GRANTS. The listing upon the New York Stock Exchange or the registration or qualification under any Federal or state law of any shares of Stock to be granted pursuant to Restricted Stock Grants (whether to permit the making of Restricted Stock Grants or the resale or other disposition of any such shares of Stock by or on behalf of the employees receiving such shares) may be necessary or desirable as a condition of or in connection with such Restricted Stock Grants and if, in any such event, the Board in its sole discretion so determines, delivery of the certificates for such shares of Stock shall not be made until such listing, registration or qualification shall have been completed. In such connection, the Company agrees that it will use its best effort to effect any such listing, registration or qualification; provided, however, the Company shall not be required to use its best efforts to effect such registration under the Securities Act of 1933 other than on Form S-8, as presently in effect, or such other forms as may be in effect from time to time calling for information comparable to that presently required to be furnished under Form S-8. 9. RESTRICTIONS UPON RESALE OF STOCK. If the shares of Stock that have been granted to a Participant pursuant to the terms of the Plan are not registered under the Securities Act of 1933, as amended, pursuant to an effective registration statement, such Participant, if the Committee shall deem it advisable, may be required to represent and agree in writing that (i) any shares of Stock acquired by such employee pursuant to the Plan will not be sold except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or pursuant to an exemption from registration under said Act and (ii) such Participant is acquiring such shares of Stock for the Participant's own account and not with a view to the distribution thereof. V. PERFORMANCE UNITS 1. GENERAL. The Committee may, from time to time and upon such terms and conditions as it may determine, grant Performance Units which will become payable to a Participant upon the achievement of specified performance objectives. Each grant of Performance Units shall be evidenced by a Performance Unit Agreement which shall contain such terms and conditions consistent with the Plan as the Committee shall determine; provided, however that each grant of Performance Units shall satisfy the following requirements: 15 16 (a) Each grant shall specify the number of Performance Units to which it pertains. (b) The performance period with respect to each Performance Unit shall be such period of time commencing with the date of grant as shall be determined by the Committee at the time of grant. (c) Each grant shall specify performance objectives, if any, that are to be achieved in order for payments to be made with respect to such Performance Units. (d) Each grant shall specify a minimum acceptable level of achievement in respect of the specified performance objective below which no payment will be made and shall set forth a formula for determining the amount of payment to be made if performance is at or above such minimum, but short of full achievement of the performance objectives. (e) Each grant shall specify the time and manner of payment (whether in cash, shares of Stock or a combination thereof) of Performance Units which have been earned. If the value of a Performance Unit is paid in whole or in part with Stock, the number of shares issued with respect to such Unit or portion thereof that is paid in Stock shall be based on the Fair Market Value of the Stock on the date the Performance Unit is earned. In no event shall the 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. 16 17 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 (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. 17 18 (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. 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 18 19 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 "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election 19 20 was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the shareowners of the Company approve a merger or consolidation of the Company with any other Company, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, then from and after the date of the first of the foregoing events to occur, (a) all Options and Rights held by active employees on such date shall be exercisable in full, whether or not otherwise exercisable; (b) the restrictions set forth in Part IV, Section 2 on all outstanding Restricted Stock Grants, including Performance Restricted Stock Grants, shall lapse; and (c) Performance Units shall be earned and become fully payable. 5. AMENDMENT OR TERMINATION. The Board may, by resolution, amend or terminate the Plan at any time; provided, however, that (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 20 21 Option, Right or Performance Unit previously granted, or Restricted Stock Grant grant previously made to such Participant under the Plan except as authorized herein. Notwithstanding the foregoing, the Board may, by resolution, amend the Plan in any way that it deems necessary or appropriate in order to make income with respect to the Plan deductible for Federal income tax purposes under Section 162(m) of the Code without regard to the foregoing provisos (i) and (ii), and any such amendment shall be effective as of such date as is necessary to make such income under the Plan so deductible. 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. 21 22 PAYLESS SHOESOURCE, INC. 1996 STOCK INCENTIVE PLAN EFFECTIVE MAY 4, 1996 LAST AMENDED APRIL 20, 1998 EX-99.3 8 EX-99.3 1 EXHIBIT 99.3 RESTRICTED STOCK PLAN FOR NON-MANAGEMENT DIRECTORS EFFECTIVE MAY 4, 1996 I. GENERAL 1. PURPOSE. The purpose of the Plan is to provide certain compensation to eligible directors of the Corporation and to encourage the highest level of performance of non-management directors by providing those directors with a proprietary interest in the Corporation's success and progress by granting them shares of the Corporation's common stock which are restricted in accordance with the terms and conditions set forth below. 2. DEFINITIONS. Whenever used herein, the following terms shall have the meanings set forth below: (a) "Annual Retainer" means an annual grant of restricted Stock to an eligible director, as described in Section 5 of Part I of the Plan. (b) "Board" means the Board of Directors of the Corporation. (c) "Committee" means a committee designated by the Board, which shall consist of not less than two employee members of the Board who shall be appointed by and serve at the pleasure of the Board and who shall be "disinterested. within the meaning of Rule 16b of the General Rules and Regulations under the Securities Exchange Act of 1934. No person who is a Participant may be a member of that committee. Any person who is appointed a member of that committee and who accepts such appointment shall, by virtue thereof, be ineligible thereafter to be made a Restricted Stock Grant under the Plan. (d) "Corporation" means Payless ShoeSource, Inc., a Missouri corporation, provided, that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation. (e) "Disability" means a medically determinable physical or mental impairment which renders a Participant substantially unable to function as a director of the Corporation. (f) "Initial Grant" means the initial grant of restricted Stock to an individual who first becomes an eligible director on or after the effective date of the Plan, as described in Section 5 of Part I of the Plan. 2 (g) "Participant" means a member of the Board (i) who is not at the time of grant an officer of the Corporation and (ii) to whom a Restricted Stock Grant is made under the Plan. (h) "Plan" means the Restricted Stock Plan for Non-Management Directors of Payless ShoeSource, Inc. (i) "Restricted Period" means the period from the Restricted Stock Grant until the earlier of (i) the cessation of the Participant's membership on the Board by reason of death or Disability and (ii) the later of (a) the expiration of the six month period immediately following the Restricted Stock Grant or (b) the date on which the Participant's service as a director of the Corporation terminates (other than by reason of death or Disability). (j) "Restricted Stock Grant" means a grant described in Part II of the Plan which is made by the Corporation pursuant to the Plan. (k) "Stock" means the common stock of the Corporation. (l) "Year of Service" means (i) each full annual period from the date of the first annual meeting at which the Participant was elected as a director (which may include service before or after the Participant became a Participant, as determined by the Committee) to the date of the last annual meeting through which the Participant served continually as a director, and (ii) if the Participant was first elected to become a member of the Board by the Board during the last six calendar months of the year, the period from the date of such election until the first annual meeting of shareholders next following such election. (m) "Merger" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Corporation, pursuant to an Agreement and Plan of Merger among the Corporation, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). 3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to all the applicable provisions of the Plan, the Committee is authorized 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; provided, however, that the Committee shall have no discretion with respect to granting any shares of Stock to any Participant, it being the intent that the granting of shares of Stock hereunder shall be automatic, pursuant to the formula set forth in Paragraph 5 of this Part I of the Plan. The 2 3 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 conclusive and binding on all persons. The Committee may obtain such advice or assistance as it deems appropriate from persons not serving on the Committee. 4. SHARES OF STOCK WHICH MAY BE GRANTED. There may be granted under the Plan an aggregate of not more than 300,000 shares of Stock, subject to adjustment as provided in Section 3 of Part III of the Plan. Shares of Stock granted under the Plan shall be treasury shares or previously authorized but unissued shares. If any shares of Stock shall be returned to the Corporation pursuant to the termination provisions described in Section 1 of Part II of the Plan or in the instruments evidencing the making of Restricted Stock Grants, such shares may again be granted under the Plan. 5. PARTICIPANTS. INITIAL GRANTS. The individuals who are eligible to receive Restricted Stock Grants hereunder shall be limited to all members of the Board who are not at the time of the grant officers of the Corporation. Each eligible director on the effective date of the Plan shall receive an Initial Grant of 1,000 shares of restricted Stock. Each individual who first becomes an eligible director after the effective date of the Plan shall receive an Initial Grant of 1,000 shares of restricted Stock on the date of first becoming an eligible director. ANNUAL RETAINERS. Each individual who is an eligible director on the effective date of the Plan, and who will continue to be an eligible director after such date, shall receive an Annual Retainer of $35,000, payable in Stock, the number of shares to be determined based on the average of the high and low trading prices of the Stock on the New York Stock Exchange ("NYSE") for each of the first 30 days on which trading in the stock occurs. Each individual who is an eligible director on the date of any annual meeting of shareholders held during 1997 and subsequent years, and who will continue to be an eligible director after the date of such annual meeting of shareholders, shall receive an Annual Retainer of $35,000, payable in Stock, the number of shares to be determined based on the average of the high and low trading prices of the Stock on the NYSE on the date of such annual meeting of shareholders, or if that day is not a trading day, on the last trading day thereto. Each individual who becomes a member of the Board during the period between any two annual meetings shall receive a pro rata share of the Annual Retainer based on the number of months remaining from the date the Participant joins the Board until the next annual meeting. This pro rata portion of the Annual Retainer shall be payable in Stock, the number of shares to be determined based on the average of the high and low 3 4 trading prices of the Stock on the NYSE on the date the Participant joins the Board, or if that day is not a trading day, on the last trading day thereto. Notwithstanding any provision of the Plan to the contrary, a Participant may elect, at such time and in such manner as provided in the Non-Management Directors Deferred Compensation Plan, the terms of which are hereby incorporated herein, not to receive his Initial Grant or Annual Retainer(s) in the form of restricted Stock, but rather and in lieu thereof, to defer some or all of such amounts pursuant to the provisions of said Deferred Compensation Plan, with the balance of such Initial Grant or Annual Retainer which is not deferred, if any, to be paid in the form of restricted Stock as otherwise provided in this Plan. 6. RIGHTS WITH RESPECT TO SHARES OF STOCK. A Participant shall have, after a certificate or certificates for the number of shares of Stock granted have been issued in his or her name, absolute ownership of such shares including the right to vote the same and receive dividends thereon, subject, however, 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. The Corporation will hold all certificates until all restrictions on them have lapsed. II. RESTRICTED STOCK GRANTS Each 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. 1. RESTRICTIONS. Shares of Stock granted to a Participant pursuant to a Restricted Stock Grant shall not be sold, assigned, conveyed, transferred, pledged, hypothecated, or otherwise disposed of until the end of the Restricted Period, but only to the extent of the shares which had vested on or prior to the end of the Restricted Period in accordance with Section 2 or 3 of this Part II. If the restrictions shall not have lapsed at the end of the Restricted Period as to any of the shares, then, except as provided In Section 3 of this Part II, the shares as to which the restrictions shall not have lapsed shall be returned to the Corporation forthwith, and all the rights of the Participant to such shares shall immediately terminate without any payment or consideration by the Corporation. 2. VESTING. Except as set forth in Section 3 of this Part II, all Restricted Stock, whether part of an Initial Grant or an Annual Retainer, is forfeitable during the first six months following the date of the grant. Thereafter, as to the Initial Grant, a Participant will be vested with respect to one-fifth of the shares granted for each Year of Service the Participant has then completed. A Participant will be vested with respect to one-half of the shares granted in Annual Retainers that are granted on the date of an 4 5 annual meeting to that Participant on the first November 1 following the date of the annual meeting and will be vested in the remaining one-half of such shares as of the first May 1 following the end of the calendar year in which such shares were granted. A Participant joining the Board during the period between any two annual meetings shall be vested in the shares granted in the pro rata Annual Retainer in equal portions on the first day of each month following the date that individual joined the Board up to the next annual meeting. Notwithstanding the foregoing, the Committee may accelerate the vesting of shares under such terms and conditions as may be appropriate. 3. TERMINATION OF MEMBERSHIP ON BOARD BY REASON OF DEATH OR DISABILITY. Any provision of Section 2 of this Part II to the contrary notwithstanding, if a Participant who has been a member of the Board continuously since the date as of which a Restricted Stock Grant was made to such Participant shall cease to be such a member by reason of such death or Disability, then the Participant shall become fully vested on the date of such event as to all shares of Stock granted to such Participant pursuant to such Restricted Stock Grant. 4. AGREEMENT BY PARTICIPANT REGARDING WITHHOLDING TAXES. Each Participant shall agree that, subject to the provisions of Section 5 of this Part II: (a) such Participant will timely pay to the Corporation, or make 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 Corporation 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. 5. ELECTION TO RECOGNIZE INCOME IN THE YEAR OF GRANT. A director may elect to be taxed when the Stock is granted or when the Stock becomes non-forfeitable. (a) If any Participant properly elects, within thirty days of the date of grant, to include in gross income for federal income tax purpose 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 Corporation, or make arrangements satisfactory to the Committee to pay to the Corporation in the year of such grant, any federal, state or local taxes required to be withheld with respect to such shares. When such an election is made, dividends will be taxable as dividends. If such Participant shall fail to make the required tax payments, the Corporation and its Subsidiaries shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due 5 6 to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to such shares. (b) If a director elects to be taxed when the Stock becomes non-forfeitable, dividends will be taxed as ordinary income until the Stock ceases to be forfeitable at which time dividends will be taxed as dividends. 6. RESTRICTIVE LEGEND; CERTIFICATES MAY BE HELD IN CUSTODY. Each certificate evidencing shares of Stock granted pursuant to a Restricted Stock Grant shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock Grant. Any attempt to dispose of such shares of Stock in contravention of such terms, conditions and restrictions shall be ineffective. The Corporation itself will hold such shares in custody, until the restrictions thereon shall have lapsed. 7. RESTRICTIONS UPON MAKING OF RESTRICTED STOCK GRANTS. The listing upon the NYSE or the registration or qualification under any federal or state law of any shares of Stock to be granted pursuant to Restricted Stock Grants (whether to permit the making of Restricted Stock Grants or the resale or other disposition of any such shares of Stock by or on behalf of the Participants 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 Committee 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 Corporation agrees that it will use its best efforts to effect any such listing, registration or qualification; provided, however, the Corporation shall not be required to use its best efforts to effect such registration under the Securities Act of 1933 other than on Form S-3 or Form S-8, as in effect on the effective date of the Plan, or such other forms as may be in effect from time to time calling for information comparable to that required to be furnished under Form S-3 and Form S-8 as in effect on the effective date of the Plan. The Corporation shall not be obligated to issue or deliver any shares of Restricted Stock if the issuance or delivery of such shares shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange. 8. 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 pursuant to an effective registration statement, such participants, if the Committee shall deem it advisable, may be required to represent and agree in writing (i) that any shares of Stock acquired by such Participant pursuant to the Plan will not be sold except pursuant to an effective registration statement under the Securities Act of 1933 or pursuant to an exemption from registration under said Act 6 7 and (ii) that such Participant is acquiring such shares of Stock for the Participant's own account and not with a view to the distribution thereof. III. MISCELLANEOUS 1. Effective Date. The Plan shall become effective on May 4, 1996. 2. Duration of Plan. Unless terminated pursuant to Section 5 of Part III, the Plan shall remain in effect. 3. Changes in Capital Structure. In the event that there is any change in the capital structure of the Corporation through merger, consolidation, reorganization, recapitalization or otherwise, or if there shall be any dividend on the Stock, payable in such Stock, or if there shall be a stock Split with respect to the Stock or combination of shares, then: (a) the number of shares of Stock reserved for grants under the Plan shall be proportionately adjusted by the Committee as it deems equitable, in its absolute discretion, to prevent dilution or enlargement of the rights of Participants, (b) any shares issued pursuant thereto shall be subject to the same terms, conditions and restrictions as the shares of Stock with respect to which such newly issued shares are issued and (c) any cash which is issued pursuant thereto shall be deemed free from any restrictions. The issuance of Stock for consideration and the issuance of stock rights with respect to the Stock shall not be considered a change in the Corporation's capital structure. 4. EXPENSES OF PLAN. The expenses of the Plan shall be borne by the Corporation. 5. AMENDMENT OR TERMINATION. The Corporation, by the action of any individual authorized to act generally on behalf of the Corporation, may amend or terminate the Plan at time; provided, however, that subject to the provisions of Section 3 of this Part III, the Corporation may not, without approval by the holders of a majority of the outstanding shares of stock entitled to vote thereon and actually voting thereon, increase the number of shares of Stock which may be granted under the Plan, change the class of individuals eligible to participate in the Plan or otherwise materially increase the benefits accruing to Participants under the Plan or materially modify the requirements with respect to eligibility for participation in the Plan; and provided 7 8 further that the provisions of Section 5 of Part I of the Plan and the provision of Section 2 of Part II of the Plan relating to Initial Grants and to Annual Retainers may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules and regulations promulgated thereunder. In the event that a Restricted Stock Grant has been made to a Participant, then no amendment of the Plan after the date as of which such Restricted Stock Grant was made shall, unless otherwise required by law, adversely affect any right of such Participant with respect to such Restricted Stock Grant without the written consent of such Participant. Termination of the Plan shall not affect any Restricted Stock Grants previously made or shares of Stock previously granted pursuant thereto; the terms, conditions and restrictions applicable to such shares shall remain in effect until such terms, conditions and restrictions shall have lapsed, all in accordance with their terms. 6. Nothing in this Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection as a director by the shareholders of the Corporation. 8 9 RESTRICTED STOCK PLAN FOR NON-MANAGEMENT DIRECTORS EFFECTIVE MAY 4, 1996 Last amended April 20, 1998 EX-99.4 9 EX-99.4 1 EXHIBIT 99.4 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN (as amended April 20, 1998) SECTION 1. PURPOSE. The purpose of this Plan is to provide an additional incentive to the key employees of Payless ShoeSource, Inc. to achieve superior performance. SECTION 2. DEFINITIONS. (a) Board means the Board of Directors of Payless, as hereinafter defined. (b) Committee means the Committee appointed to administer the Plan, as hereinafter defined, as provided in Section 8 hereof. (c) Common Stock means the Common Stock of Payless, as hereinafter defined. (d) Corporation means Payless, as hereinafter defined, or any subsidiary of Payless which is an employer of an Executive, as hereinafter defined, who is a Participant, as hereinafter defined, in the Plan, as hereinafter defined. (e) Executive means any individual employed by the Corporation in an executive capacity who receives regular stated compensation in respect of such employer-employee relationship other than a pension, retainer or fee under a contract. (f) Fiscal Year means the fiscal year of the Corporation as established from time to time. (g) Payless means Payless ShoeSource, Inc., a Missouri corporation, provided, that immediately after the effective time of Merger such term shall mean Payless ShoeSource, Inc.(formerly Payless ShoeSource Holdings, Inc.) , a Delaware corporation, its successors and assigns. (h) Participant means an Executive who has been designated by the Committee as eligible, and who has elected to participate in the Plan, as hereinafter defined. (i) Plan means the Deferred Compensation Plan of the Corporation, as described herein. 2 (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. (l) "Merger" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Corporation, pursuant to an Agreement and Plan of Merger among the Corporation, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). 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 2 3 Committee as a Participant for the first time may, within 60 days of such designation, make any election otherwise permitted under this paragraph (a) with respect to the Participant's compensation in respect of employment subsequent to the date on which the election is made. (b) In connection with all determinations to be made by the Committee as respects Alternative (ii) and, except for the determination of whether payment thereunder is to be made in cash or in Common Stock or in both cash and Common Stock (which determination shall be in the absolute discretion to the Committee), Alternative (iii), the Participant shall be given an opportunity at the time he makes his election of indicating his preferences, which preferences shall be taken into account by the Committee in making its determinations. Except as provided in Section 12 and Section 13 in no event shall payments under Alternative (ii) or (iii) commence prior to the earliest of the Participant's retirement, termination of employment or death (or prior to the occurrence of a severe financial hardship, as provided below). The Committee shall make its determination with respect to the payment schedule (i.e., a lump sum payment or payments in annual installments) under Alternative (ii) or (iii) prior to the commencement of the calendar year that includes the first day of the Fiscal Year for which such alternative is elected. Except in the event of a severe financial hardship, as provided below, the Committee's determination with respect to a payment schedule shall become irrevocable as of the first day of the calendar year that includes the first day of the Fiscal Year for which the determination is made. However, upon the written request of the Participant (or if applicable, the beneficiary or distributee) the payment schedule may be revised by the Committee, in its absolute discretion, in the event that the Participant (or if applicable, the beneficiary or distributee) incurs a severe financial hardship. Such severe financial hardship must have been caused by an accident, illness or other event which was beyond the control of the Participant (or, if applicable, the beneficiary or distributee); and the Committee shall revise the payment schedule that it had previously established only to the extent that the Committee considers necessary to eliminate the severe financial hardship. Notwithstanding the requirements imposed by this paragraph (b) regarding the date by which the Committee must make a determination with respect to the payment schedule under Alternative (ii) or (iii) and the date as of which such determination shall become irrevocable (except in the event of a severe financial hardship), when a Participant makes an election pursuant to the last sentence of paragraph (a) of this Section 3, the Committee shall make its determination with respect to the payment schedule at any time prior to the date as of which the Participant's election becomes effective, and its determination shall become irrevocable (except in the event of a severe financial hardship) as of such effective date. (c) In the case of a Participant who elects to have all or any part of his compensation for a particular Fiscal Year paid under Alternative (iii), Stock Units shall be allocated to such Participant by crediting the same to his Stock Unit Account, and 3 4 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 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. 4 5 (e) Interest to be paid under Alternative (ii) shall be credited annually as of April 1 of each year and shall be at a rate shall be equal to the average yield on long-term United States Government Bonds (as determined by the Board of Governors of the Federal Reserve Board and published in the Federal Reserve Bulletin) for the calendar year prior to said April 1, compounded annually, provided, however, that if the method of calculation of such average yield shall be changed, or if the determination and/or the publication thereof be discontinued, then the Committee shall substitute therefor such alternative method of determining such interest rate as it, in its discretion, shall deem appropriate. (f) [In effect with respect to elections made with respect to the 1999 Fiscal Year and deleted thereafter.] At the same time and in the same manner as a Participant may elect an alternative method of payment under Section 3(a), any such Participant who has previously elected Alternative (ii) or (iii) for a prior Fiscal Year may indicate his preference to have all or a portion of his Cash Units reallocated and credited to his Stock Unit Account, or all or a portion of his Stock Unit Account reallocated and credited to Cash Units. Any reallocation from a Participant's Cash Units (to be invested in his Stock Unit Account) shall be based on the value of the Participant's Cash Units as of the April 1 following the Participant's election, and any crediting of a Participant's Cash Units (by reason of a reallocation from his Stock Unit Account) will be credited as of April 1. Any reallocation from a Participant's Stock Unit Account (to be invested in Cash Units) and any crediting of a Participant's Stock Unit Account (by reason of a reallocation from his Cash Units) will be based on the value of Stock Units determined under paragraph (c) (i) and, if applicable, (c) (ii) and (iii) above, and such reallocation shall occur as of the April 1 following the Participant's election. The Committee's determination as to whether or not to honor a Participant's preference to reallocate Cash Units to Stock Units shall be subject to the limitation of Section 4. SECTION 4. LIMITATION OF STOCK UNITS. In no event shall the aggregate number of Stock Units allocated under this Plan in respect of compensation for any Fiscal Year exceed a number equal to 1/2 of 1% of the total number of shares of Common Stock outstanding at the close of such Fiscal Year. SECTION 5. DISTRIBUTION FROM THE STOCK UNIT ACCOUNT. (a) Distribution from a Participant's Stock Unit Account shall be made in accordance with the determinations made by the Committee, as provided in this Plan. Stock Units shall be adjusted from time to time in accordance with this Plan until all distributions to which a Participant is entitled hereunder shall have been made. 5 6 (b) If the Committee determines that distribution to a Participant is to be made in annual installments, the Committee may determine from time to time whether each particular installment shall be distributed in cash or in Common Stock or in both cash and Common Stock. (c) If the Committee determines that a distribution to a Participant is to be made in a lump sum in Common Stock, the number of shares of Common Stock to be so distributed to such Participant shall equal the number of Stock Units then in his Stock Unit Account. For the purpose of determining the number of shares of Common Stock to be distributed on a particular annual installment distribution date, the Committee shall make its calculations as if that annual installment and all subsequent annual installments were in fact to be made in shares of Common Stock, as follows: the number of shares of Common Stock which would be then so distributable, except in the case of the last distribution, shall be equal to the product, disregarding fractions, of the total number of Stock Units then credited to the Participant's Stock Unit Account, multiplied by a fraction, the numerator of which shall be one and the denominator of which shall be the number of remaining installments; and in the case of the last distribution, shall be the number of shares of Common Stock equal to the Stock Units then remaining in the Participant's Stock Unit Account. The Participant's Stock Unit Account shall be decreased by one Stock Unit for each share of Common Stock distributed to a Participant. (d) If the Committee determines that a particular distribution to a Participant is to be made in cash, a computation shall first be made of the number of shares of Common Stock which would then be distributable pursuant to paragraph (c) of this Section 5 if such distribution were to be made in shares of Common Stock. The number of shares thus determined shall then be converted into cash in respect of each such distribution by valuing such shares at the average dosing price of the Common Stock on the New York Stock Exchange during the month of February next preceding the date of such distribution, and the resulting amount of cash shall be distributed to the Participant. The Participant's Stock Unit Account shall then be decreased by one Stock Unit for each share of Common Stock which would have been distributed to the Participant had such cash distribution been made in shares of Common Stock. (e) If the Committee determines that a distribution is to be made in part in Common Stock and in part in cash, paragraphs (c) and (d) of this Section 5 shall be applied separately to the respective parts of such distribution and to the respective parts of the Stock Unit Account with respect to which the distribution is to be made. 6 7 SECTION 6. DEATH OF PARTICIPANT. In the event of the death of a Participant prior to complete distribution under Alternatives (ii) and/or (iii) hereof, all cash and/or Stock Units then remaining undistributed, or which shall thereafter become distributable to him pursuant to such Alternatives, shall be distributed to such beneficiary as the Participant shall have designated in writing to the Corporation, or, in the absence of such designation, to his personal representative. Such distribution shall be made at such date or dates either in a lump sum or in annual installments, as may be determined by the Committee prior to the beginning of the calendar year that includes the first day of the Fiscal Year for which such alternative is elected (or, where applicable, the date specified by the last sentence of Section 3(b)); provided, however, that in the event of a severe financial hardship, the Committee may subsequently revise its determination in accordance with the applicable provisions of Section 3(b). SECTION 7. PARTICIPANT'S RIGHT UNSECURED; INVESTMENTS. The right of a Participant to receive any distribution hereunder shall be an unsecured claim against the general assets of the Corporation. Nothing in this Agreement shall require the Corporation to invest any amount, the payment of which has been deferred under Alternative (ii) or (iii), in Common Stock or in any other medium. SECTION 8. ADMINISTRATION OF THE PLAN COMMITTEE. (a) The Plan shall be administered by a Committee of not less than two nor more than five persons designated by the Board (which may, but need not, be the compensation committee of the Board), all of whom shall be directors of the Corporation and shall serve at the pleasure of the Board. In no event shall any member of the Committee be a Participant. The Committee shall act by vote or written consent of a majority of its members (except in the case of a two person Committee in which case any vote or written consent must be unanimous). The Plan may be amended, modified or terminated by the Board, except that no change may be made without the approval of the Common Shareowners of Payless (i) the maximum number of shares or Stock Units deliverable or allocable in respect of any Fiscal Year under the plan or (ii) in the provisions of subparagraphs (c)(i) and (c)(ii) of Section 3 of this Plan relating to the method of determining the number of Stock Units allocable to a Participant. (b) The Committee shall prescribe such forms as it considers appropriate for the administration of the Plan. The forms shall set forth such terms and conditions not inconsistent with the terms of the Plan as the Committee may determine and shall designate: 7 8 (i) the alternative or alternatives elected by the Participant pursuant to Section 3(a); (ii) the Committee's determination of the time or times when payment of such compensation will be made to the Participant pursuant to Section 3(b)(in the absence of a severe financial hardship); (iii) the beneficiary (if any) designated by the Participant pursuant to Section 6; and (iv) the Committee's determination of the time or times when payment of such compensation will be made after the Participant's death pursuant to Section 6 (in the absence of a severe financial hardship). SECTION 9. SUCCESSORS. The provisions of the Plan with respect to each Participant shall bind the legatees, heirs, executors, administrators or other successors in interest of such Participant. SECTION 10. ALIENATION. (a) Subject to the provisions of Section 6 and paragraph (b) of this Section 10, no amount, the payment of which as been deferred under Alternative (ii) or (iii), shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to so anticipate, 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. 8 9 SECTION 12. DISCRETIONARY PAYMENT. (a) Notwithstanding any other provision in any other Section of the Plan to be contrary, the Committee may, in its sole and absolute discretion, direct an immediate payment of cash and/or distribution of Stock with respect to amounts (except those referred to in the next proviso) previously deferred under this Plan if the Committee determines that such action is in the best interests of Payless, the Participants and their beneficiaries. (b) In the event that the Committee shall so direct an immediate payment, distribution and/or release in accordance with Section 12(a), then (i) the amounts of cash and the numbers of shares of Stock to be so paid and/or distributed shall be determined by the Committee so as to reflect fairly and equitably appropriate interest and dividends since the preceding April 1 and so as to reflect fairly and equitably such other facts and circumstances as the Committee deems appropriate, including, without limitation, recent price of the Stock; (ii) amounts which were otherwise deferred or to be deferred with respect to the Fiscal Year or long-term period in which such payment or distribution occurs shall be paid when otherwise payable (such amounts which would otherwise have been payable prior to the date of such payment or distribution shall be paid as soon as practicable thereafter); (iii) in the event that cash is not paid or made available to a Participant when otherwise due or that shares of Stock are not distributed or otherwise made available to a Participant when otherwise due, then such Participant may file a claim for such payment or distribution and, if such Participant is successful, then the Corporation shall reimburse such Participant for reasonable attorneys' fees actually paid by the Participant in enforcing such Participant's rights to such payment or distribution; and (iv) in the event that cash is not paid or made available to a Participant when otherwise due, then interest will accrue with respect to such unpaid amount from the date it was otherwise due until the date it is actually paid at a rate equal to two percentage points over the prime rate as in effect from time to time, as determined in good faith the Committee based on the prime rate charged from time to time by major banks in the City of New York. 9 10 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 purposes of this Plan, a "Change in Control of the Corporation" shall be deemed to have occurred if (a) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any company owned, directly or indirectly, by the shareowners of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner. (as defined in Rule 13d-3 under Exchange Act), directly or indirectly of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Corporation's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election 10 11 or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; (c) the shareowners of the Corporation approve a merger or consolidation of the Corporation with any other Corporation, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Corporation's then outstanding securities; or (d) the shareowners of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. 11 EX-99.5 10 EX-99.5 1 EXHIBIT 99.5 PAYLESS SHOESOURCE, INC. EXECUTIVE INCENTIVE COMPENSATION PLAN This document constitutes and sets forth the terms of the Payless ShoeSource, Inc. Executive Incentive Compensation Plan for Payless Executives. SECTION 1. PURPOSES OF THE PLAN. The purposes of the Plan are (i) to provide a means to attract, retain and motivate talented personnel and (ii) to provide to participating management employees added incentive for high levels of performance and for additional effort to improve the Company's financial performance. Payments of awards under this Plan are intended to qualify for tax deductibility under the provisions of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding any other provisions of this Plan, if any decision must be made before a specified date in order for payments to qualify for such tax deductibility under the tax rules in effect from time to time, then such decision is to be made before such date. Section 2. DEFINITIONS. Whenever used herein, the following terms shall have the following meanings: a. "Annual Award" means, for a Participant for a Fiscal Year, the product of the Participant's Minimum Annual Compensation for such Fiscal Year multiplied by the aggregate of: i. the Participant's Annual EPS Factor for such Fiscal Year, plus ii. the Participant's Annual RONA Factor for such Fiscal Year. b. "Annual EPS Factor" means, for a Participant for a Fiscal Year (i) five percent, if actual EPS Growth for such Fiscal Year equals or exceeds the Participant's Threshold Annual EPS Growth Objective for such Fiscal Year, plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual EPS Growth for such Fiscal Year less the Participant's Threshold Annual EPS Growth Objective for such Fiscal Year and the denominator of which is the Participant's Maximum Annual EPS Growth Objective for such Fiscal Year less the Participant's Threshold Annual EPS Growth Objective for such Fiscal Year; provided, however, 2 i. that the Annual EPS Factor shall be subject to adjustment as provided in Section 6(b); ii. that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 4(b); and iii. that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 4(c). c. "Annual RONA Factor" means, for a Participant for a Fiscal Year (i) five percent if actual RONA for such Fiscal Year equals or exceeds the Participant's Threshold Annual RONA Objective for such Fiscal Year, plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such Fiscal Year less the Participant's Threshold Annual RONA Objective for such Fiscal Year and the denominator of which is the Participant's Maximum Annual RONA Objective for such Fiscal Year less the Participant's Threshold Annual RONA Objective for such Fiscal Year; provided, however, i. that the Annual RONA Factor shall be subject to adjustment as provided in Section 6(b); ii. that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 4(b); and iii. that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 4(c). d. "Average Annual Compensation" means, for a Long-Term Performance Period, the Participant's average annual salary rate during such period, determined on a monthly basis, or such lesser amount as the Participant and the Company shall agree to, in writing. e. "Board" means the Board of Directors of the Company. f. "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 "outside" directors within the meaning of Section 162(m) of the Code. 2 3 g. "Company" means Payless ShoeSource, Inc., a Missouri corporation, provided, that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation. h. "Disability" means the inability of a Participant to perform the normal duties of the Participant's regular occupation. i. "EPS Growth" means (i) for a Fiscal Year, the annual growth rate in EPS measured from the immediately preceding Fiscal Year; and (ii) for a Long- Term Performance Period, the compound annual growth rate in EPS measured from the Fiscal Year immediately preceding the Long-Term Performance Period to the last Fiscal Year in the Long-Term Performance Period. For purposes of this definition, "EPS" for a Fiscal Year means the Company's EPS for such Fiscal Year as reported in the Company's annual report to its shareholders for the year of determination (or, in the event that such item is not included in such annual report, such comparable figure as may be determined by the Committee) adjusted by the Company's independent certified public accountants to exclude such non-recurring or extraordinary items as the Committee shall determine are not representative of the on-going operations of the Company. j. "Fiscal Year" means the fiscal year of the Company. k. "Long-Term Award" means, for a Participant for a Long-Term Performance Period, the product of the Participant's Average Annual Compensation for such period multiplied by the aggregate of: i. the Participant's Long-Term EPS Factor for such period, plus ii. the Participant's Long-Term RONA Factor for such period as such product is adjusted in accordance with Section 5(b) of the Plan. l. "Long-Term EPS Factor" means, for a Participant for a Long- Term Performance Period, (i) five percent if actual EPS Growth for such period equals or exceeds the Participant's Threshold Long-Term EPS Growth Objective for such period, plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one) the numerator of which is the actual EPS Growth for such period less the Participant's Threshold Long-Term EPS Growth Objective 3 4 for such period and the denominator of which is the Participant's Maximum Long-Term EPS Growth Objective for such period less the Participant's Threshold Long-Term EPS Growth Objective for such period; provided, however, i. that the Long-Term EPS Factor shall be subject to adjustment as provided in Section 6(b); and ii. that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 5(c). m. "Long-Term Performance Period" means three consecutive Fiscal Years; provided, however, that the first Long-Term Performance Period under the Plan shall be Fiscal Year 1996 and the second Long-Term Performance Period under the Plan shall be Fiscal Years 1996 and 1997. n. "Long-Term RONA Factor" means, for a Participant for a Long- Term Performance Period (i) five percent if actual RONA for such period equals or exceeds the Participant's Threshold Long-Term RONA Objective for such period plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such period less the Participant's Threshold Long-Term RONA Objective for such period and the denominator of which is the Participant's Maximum Long-Term RONA Objective for such period less the Participant's Threshold Long-Term RONA Objective for such period; provided, however, i. that the Long-Term RONA Factor shall be subject to adjustment as provided in Section 6(b); and ii. that the percentages referred to in this definition may be adjusted by the Committee as provided in Section 5(c). o. "Market Value" means the average closing price of the Stock on the New York Stock Exchange, Inc. during the month of February of the year specified; provided, however, that "Market Value" for Fiscal Year 1996 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 p. "Minimum Annual Compensation" means, for a Fiscal Year, the Participant's rate of minimum annual salary on the first day of the fiscal month of November in the Fiscal Year. 4 5 q. "Participant" means an individual who has been designated to participate in the Plan in accordance with Section 3 of the Plan. r. "Plan" mean the Payless ShoeSource, Inc. Executive Incentive Compensation Plan for Payless Executives. s. "Relative Performance Rank" means, for a Fiscal Year or for a Long-Term Performance Period, the relative rank of the Company (as among the Company and a group of competitors designated by the Committee) based on the EPS Growth and RONA, respectively, of all such corporations for such corporations' comparable fiscal periods, as determined by the Committee. Relative Performance Rank shall be determined based on data provided by the Company's independent certified public accountants from publicly available information about all such corporations, and adjusted by such independent certified public accountants for comparability (adjustments for LIFO, major non-recurring transactions, etc.) subject to the direction and approval of the Committee. The Committee may change the number of competitors or corporations included in the group when, as a result of extraordinary or unforeseen events, it is no longer appropriate for a particular corporation to be included in the competitor group (such as when one of the group ceases operations, merges with another corporation, files for bankruptcy protection or significantly changes the nature of its business). t. "Retirement" means, as to a Participant, retirement as that word is defined in the Company's Profit Sharing Plan. u. "RONA" means (i) for a Fiscal Year, the Company's return on beginning net assets for such Fiscal Year as reported in the Company's annual report to its shareowners for the year of determination (or, in the event that such item is not included in such annual report, such comparable figure as may be determined by the Committee) adjusted by the Company's independent certified public accountants to exclude such non-recurring or extraordinary items as the Committee shall determine are not representative of the ongoing operations of the Company; and (ii) for a Long-Term Performance Period, the sum of the RONA for each Fiscal Year in the Long-Term Performance Period divided by three. v. "Stock" means the common stock of the Company. w. "Subsidiary" means a subsidiary corporation of the Company within the meaning of Section 425(f) of Code. 5 6 x. The terms "Maximum Annual EPS Growth Objective," "Maximum Long-Term EPS Growth Objective," "Target Annual EPS Growth Objective," "Target Long-Term EPS Growth Objective," "Threshold Annual EPS Growth Objective," "Threshold Long-Term EPS Growth Objective," "Maximum Annual RONA Objective," "Maximum Long-Term RONA Objective," "Target Annual RONA Objective," "Target Long-Term RONA Objective," "Threshold Annual RONA Objective" and "Threshold Long-Term RONA Objective" shall mean the respective objectives determined by the Committee for each Participant pursuant to Section 7 of the Plan. y. "Merger" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc. Section 3. ELIGIBILITY. Management employees of the Company and its Subsidiaries shall be eligible to participate in the Plan. The Committee may, in its sole discretion, designate any such individual as a Participant for a particular Fiscal Year and/or for a particular Long-Term Performance Period before the end of such Fiscal Year and Long-Term Performance Period, respectively. Designation of an individual as a Participant for any period shall not require designation of such individual as a Participant in any other period, and designation of one individual as a Participant shall not require designation of any other individual as a Participant in such period or in any other period. Section 4. ANNUAL AWARD. a. Subject to the other provisions of the Plan, a Participant for a Fiscal Year who is designated as such for an entire Fiscal Year shall be entitled to an Annual Award for such Fiscal Year. Subject to the other provisions of the Plan, a Participant for a Fiscal Year who is designated as such for less than an entire Fiscal Year shall be entitled to a reduced Annual Award for such Fiscal Year equal to the Annual Award for such Fiscal Year multiplied by a fraction, the numerator of which shall be the number of complete fiscal months between (i) the first day of the fiscal month in which occurs the date as of which the Participant was so designated and (ii) the end of such Fiscal Year and the denominator of which shall be twelve. b. The Committee may change the percentages referred to in the definitions of "Annual EPS Factor" and "Annual RONA Factor" for any Fiscal Year, provided that the maximum Annual Award which may be paid under such different 6 7 percentage may not be greater than 45% of the Participant's Minimum Annual Compensation for such Fiscal Year. c. The percentages referred to in the definitions of "Annual EPS Factor" and "Annual RONA Factor" may be adjusted by the Committee, in its sole discretion, to provide that such percentages i. with respect to the chairman of the Board and chief executive officer of the Company may be up to two times the percentages stated in such definitions (subject to a maximum of 37.5% for each factor), and ii. with respect to the president of the Company may be up to one and two-thirds times the percentages stated in such definitions (subject to a maximum of 31.25% for each factor). d. Notwithstanding any other provision of the Plan, the maximum dollar amount of any Annual Award for any Participant for any Fiscal Year shall not exceed $1,500,000. SECTION 5. LONG-TERM AWARD. a. Subject to the other provisions of the Plan, a Participant for a Long-Term Performance Period who is designated as such for an entire Long-Term Performance Period shall be entitled to a Long-Term Award for such period. Subject to the other provisions of the Plan, a Participant for a Long-Term Performance Period who is designated as such for less than an entire Long-Term Performance Period shall be entitled to a reduced Long-Term Award for such period equal to the Long-Term Award for such period multiplied by a fraction, the numerator of which shall be the number of complete fiscal months between (i) the first day of the fiscal month in which occurs the date as of which the Participant was so designated and (ii) the end of such Long-Term Performance Period and the denominator of which shall be thirty-six. b. The Long-Term Award otherwise payable pursuant to Section 5(a) of the Plan for a Long-Term Performance Period shall be adjusted by multiplying such Long-Term Award by a percentage equal to a fraction, the numerator of which shall be the Market Value of the Stock in February of the calendar year in which such Long-Term Performance Period ends and the denominator of which shall be the Market Value of the Stock in February of the calendar year in which such Long-Term Performance Period begins; provided, however, that such percentage shall in no event be greater than one hundred fifty percent nor less than seventy-five percent. 7 8 c. The percentages referred to in the definitions of "Long-Term EPS Factor" and "Long-Term RONA Factor" may be adjusted by the Committee, in its sole discretion, to provide that such percentages i. with respect to the chairman of the Board and chief executive officer of the Company may be up to two times the percentages stated in such definitions (subject to a maximum of 37.5% for each factor), and ii. with respect to the president of the Company may be up to one and two-thirds times the percentages stated in such definitions (subject to a maximum of 31.25% for each factor). d. Notwithstanding any other provision of the Plan, the maximum dollar amount of any Long-Term Award for any Participant for any Long-Term Performance Period shall not exceed $1,500,000. Section 6. ADJUSTMENTS. a. Discretionary Adjustment of Awards. In the event that the Committee determines, in its absolute discretion, that an Annual Award or a Long- Term Award payable to a Participant in accordance with the other terms of the Plan should be adjusted, upwards or downwards, based on all the facts and circumstances known to the Committee at the time, then, the Committee may, in its sole and absolute discretion, increase or decrease any such Annual Award or Long-Term Award to such amount as it determines; provided, however, that the Committee may not adjust upwards any Annual Award or Long-Term Award of any Participant who is a "covered employee" (as defined in Section 162 (m) of the Code and the regulations thereunder) with respect to the particular performance period for which the Annual Award or Long- Term Award is being granted. b. Adjustment for Relative Rank. A Participant's Annual EPS Factor, Annual RONA Factor, Long-Term EPS Factor and Long-Term RONA Factor shall be adjusted in the following manner based upon the number of competitors in the group of competitors used to determine the Company's Relative Performance Rank and the Company's Relative Performance Rank therein:
Number of competitor Companies (not including the Company) 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 Factor will be no less than 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- "Target" if the Company's rank is 6th 5th 5th 5th 4th 4th 4th 4th 4th 3rd 3rd 3rd 3rd 2nd 2nd 2nd 2nd
8 9 Factor will be no less than "Threshold" if the Company's 7th- 7th- 6th- 6th- 6th- 6th- 5th- 5th- 5th- 4th- 4th- 4th- 4th- 3rd- 3rd- 3rd- 3rd- rank is: 11th 10th 10th 9th 9th 8th 8th 8th 7th 6th 6th 6th 6th 4th 4th 4th 4th Factor will be no higher than "Threshold" if the Company's 16th- 16th- 15th- 14th- 13th- 13th- 12th- 11th- 10th- 10th- 9th- 8th- 7th- 7th- 6th- 5th- rank is: 21st 20th 19th 18th 17th 16th 15th 14th 13th 12th- 11th- 10th 9th- 8th- 7th- 6th- 5th-
Section 7. ANNUAL AND LONG-TERM TARGETS. Threshold, target and maximum annual and long-term objectives with respect to EPS Growth and with respect to RONA shall be determined by the Committee as soon as practicable prior to the commencement of each Fiscal Year and each Long-Term Performance Period for each Participant or within the period permitted by applicable law. The Committee shall cause the respective objectives for each Participant to be provided to such Participant as soon thereafter as practicable. Such objectives shall remain in effect for the entire Fiscal Year or Long-Term Performance Period, as appropriate. Section 8. PAYMENT OF AWARDS. a. Annual Awards for a Fiscal Year shall be payable in cash within three months after the close of such Fiscal Year or as soon thereafter as practicable. b. Long-Term Awards for a Long-Term Performance Period shall be payable in cash within three months after the close of such Long-Term Performance Period or as soon thereafter as practicable. c. A Participant may elect to defer all or a portion of an award by making such election under the Deferred Compensation Plan with respect to such award. Such election must be made not later than December 31 of the calendar year preceding the commencement of the Fiscal Year or Long-Term Performance Period, as appropriate. d. The Company shall have the right to deduct any sums that federal, state or local tax laws require to be withheld with respect to any payment of awards. e. Before any award is paid to a Participant who is a "covered employee" (as defined in Section 162(m) of the Code and the regulations thereunder), the Committee shall certify in writing that the material terms of the Plan have been satisfied. Section 9. TERMINATION OF EMPLOYMENT. 9 10 a. Death or Disability. In the event of either the death or Disability of the Participant while employed (a "Section 9(a) Event"), the Participant shall be entitled to the following: i. An Annual Award with respect to the Fiscal Year in which the Section 9(a) Event occurs equal to the Annual Award otherwise payable (if any) for that Fiscal Year, prorated to the end of the fiscal month in which such Section 9(a) Event occurs; and ii. A Long-Term Award with respect to each Long-Term Performance Period which includes the Fiscal Year of the Section 9(a) Event; provided, however, that for purposes of this Section 9(a)(ii) the Long-Term Award for any Long-Term Performance Period (1) shall be determined at the end of the Fiscal Year in which the Section 9(a) Event occurs, (2) shall be determined (and averages used in that determination shall be calculated) based only on the Fiscal Year and any preceding Fiscal Years otherwise included in the Long-Term Performance Period and (3) shall be prorated to the end of the fiscal month in which the Section 9(a) Event occurs. b. Retirement. i. In the event of the Retirement of the Participant with the written consent of the Company, such event shall be deemed to be a Section 9(a) Event, and the Participant shall be entitled to an Annual Award and to a Long- Term Award as provided in Section 9(a). ii. In the event of the Retirement of the Participant without the consent of the Company (a "Section 9(b)(ii) Event"), the Participant shall be entitled to the following: (1) An Annual Award with respect to the Fiscal Year in which the Section 9(b)(ii) Event occurs equal to the Annual Award otherwise payable (if any) for the Fiscal Year, prorated to the end of the fiscal month in which the Section 9(b)(ii) Event occurs; and (2) No Long-Term Award following the Section 9(b)(ii) Event. The Participant shall forfeit any right or entitlement to any award with respect to any Long-Term Performance Period which has not been completed on the date of the Section 9(b)(ii) Event. Any Long- Term Award for a period which ended prior to the Section 9(b)(ii) Event shall remain unaffected. 10 11 c. Termination of Employment. i. In the event of the termination of employment of the Participant not covered by Sections 9(a) or 9(b) above which occurs at the end of the term of the Participant's then-current written employment agreement (if any) with the Company or Subsidiary, or in the event of such a termination of a Participant who has no current written employment agreement with the Company or Subsidiary, such event shall be deemed to be a Section 9(b)(ii) Event, and the Participant shall be entitled to an Annual Award (but not to a Long-Term Award) as provided in Section 9(b)(ii). ii. In the event of the termination of employment of the Participant not covered by Sections 9(a) or 9(b) above before the end of the term of the Participant's then-current written employment agreement (if any) with the Company or Subsidiary, with the written consent of the Company (a "Section 9(c)(ii) Event"), the Participant shall be entitled to the following: (1) An Annual Award with respect to the Fiscal Year in which the Section 9(c)(ii) Event occurs equal to the actual award otherwise payable for the Fiscal Year (if any); provided, however, that in the event that the term of the Participant's then-current employment agreement is due to expire during that Fiscal Year, then the Annual Award shall be prorated to the end of the fiscal month in which such term is due to expire; and (2) A Long-Term Award with respect to each Long- Term Performance Period which includes the Fiscal Year of the 9(c)(ii) Event equal to the Long-Term Award otherwise payable with respect to each Long-Term Performance Period; provided, however, that in the event that the term of the Participant's then-current employment agreement (if any) with the Company is otherwise due to expire during any such period, then the Long-Term Award with respect to such period shall be prorated to the end of the calendar month in which such term is due to expire. iii. In the event of the termination of employment of the Participant not otherwise covered by this Section 9 before the end of the term of the then-current written employment agreement (if any) with the Company or Subsidiary, without the written consent of the Company, the Participant shall not be entitled to any Annual Award or to any Long-Term Award with respect to any Fiscal Year or Long-Term Performance Period which has not been completed as of the date of such termination of employment. The Participant shall forfeit any right or interest in any award for any such Fiscal Year or 11 12 Long-Term Performance Period. Annual Awards and Long-Term Awards with respect to Fiscal Years and Long-Term Performance Periods which ended prior to the date of such termination of employment shall remain unaffected. d. For purposes of this Section 9, the term "written consent of the Company" shall refer to an express written consent of the Company, duly executed by the Company, which, by its own terms, expressly refers to this Section 9 of the Plan. Section 10. CHANGES IN RESPONSIBILITIES. In the event that (i) the duties of a Participant change and the Participant becomes eligible to participate in another bonus plan of the Company, or (ii) the duties of an employee who is a participant in another bonus plan of the Company change and the employee is newly designated by the Committee as a Participant in this Plan, then the maximum amount that such Participant would be entitled to receive under the Plan shall be a. the Annual Award determined in accordance with the provisions of the Plan with respect to the entire Fiscal Year in which such event occurred; and b. a Long-Term Award with respect to each Long-Term Performance Period which has commenced at the time of the event, determined in accordance with the provisions of the Plan, subject, in all events, to the Committee's right to adjust such awards in accordance with and subject to the restrictions set forth in Section 6(a), in its absolute discretion, which may be exercised in such a way that the Committee deems fair and equitable based on the performance of Participant while participating in the other bonus plan of the Company. Section 11. RIGHTS OF PARTICIPANTS AND BENEFICIARIES. a. Nothing contained in the Plan shall confer upon any Participant any right to continue in the employ of the Company or constitute any contract or agreement of employment or interfere in any way with the right of the Company to terminate or change the conditions of employment. b. The Company shall pay all amounts payable hereunder only to the Participant or his or her personal representatives. In the event of the death of a Participant, payments of all amounts otherwise due to the Participant under the Plan shall be made to the Participant's beneficiary at the time of death under the Company Paid Life Plan of Payless ShoeSource, Inc. or to such other beneficiary as the Participant shall have designated, in writing, for purposes of this Plan on a form provided by the Company. 12 13 c. Subject to the provisions of Section 11(d), rights to payments under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to do so shall be void; nor shall any such amounts be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participant or his or her beneficiaries. d. Nothing in this Section 11 shall prohibit the personal representatives of a Participant from designating that any amount that would otherwise be distributed to the Participant's estate should be distributed in accordance with the terms of the Participant's last will and testament or pursuant to the laws of descent and distribution. Section 12. UNFUNDED CHARACTER OF THE PLAN. The right of a Participant to receive any Annual Award or Long-Term Award hereunder shall be an unsecured claim against the general assets of the Company. Nothing in the Plan shall require the Company to invest any amounts in Stock or in any other medium. Section 13. CHANGES IN CAPITAL STRUCTURE. In the event that there is any change in the Stock through merger, consolidation, reorganization, recapitalization, spin-off 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, then the fraction provided for in Section 5(b) of the Plan shall be adjusted by the Committee as it deems desirable, in its absolute discretion, to prevent dilution or enlargement of the rights of Participants. The issuance of Stock for consideration and the issuance of Stock rights shall not be considered a change in the Company's capital structure. Section 14. AMENDMENT OR TERMINATION. The Committee may, by resolution, amend or terminate the Plan at any time. Any amendment necessary to bring the Plan into compliance with Section 162(m) of the Code and any regulations thereunder shall not require shareowner approval and the effectiveness of such amendment shall be as of the effective date of the provision in Section 162(m) of the Code or regulations thereunder giving rise to the amendment. However, (i) shareowner approval shall be sought for any changes to the Plan which would require shareowner approval under Section 162(m) of the Code and (ii) except as provided in the preceding sentence, the Committee may not, without the consent of the Participant, amend or terminate the Plan in such a manner as to affect adversely any Annual Award or Long- Term Award which would have been payable, based on the terms of the Plan immediately prior to any such amendment or termination, for any Fiscal Year or Long- Term Performance Period which has already commenced as of the effective date of the amendment or termination. 13 EX-99.6 11 EX-99.6 1 EXHIBIT 99.6 PAYLESS SHOESOURCE, INC. EXECUTIVE INCENTIVE COMPENSATION PLAN FOR BUSINESS UNIT MANAGEMENT Effective July 17, 1997 Last amended April 20, 1998 2 PAYLESS SHOESOURCE, INC. EXECUTIVE INCENTIVE COMPENSATION PLAN FOR BUSINESS UNIT MANAGEMENT This document constitutes and sets forth the terms of the Payless ShoeSource, Inc. Executive Incentive Compensation Plan for Business Unit Management. Section 1. PURPOSES OF THE PLAN. The purposes of the Plan are (i) to provide a means to attract, retain and motivate talented personnel and (ii) to provide to participating management employees added incentive for high levels of performance and for additional effort to improve the financial performance of the Company and of their business units. Section 2. DEFINITIONS. Whenever used herein, the following terms shall have the following meanings: a. "Annual Award" means, for a Participant for a Fiscal Year, the product of the Participant's Minimum Annual Compensation for such Fiscal Year multiplied by the aggregate of: i. the Participant's Annual Earnings Factor for such Fiscal Year, plus ii. the Participant's Annual RONA Factor for such Fiscal Year. b. "Annual Earnings Factor" means, for a Participant for a Fiscal Year (i) five percent, if actual Earnings Growth for such Fiscal Year equals or exceeds the Participant's Threshold Annual Earnings Growth Objective for such Fiscal Year, plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual Earnings Growth for such Fiscal Year less the Participant's Threshold Annual Earnings Growth Objective for such Fiscal Year and the denominator of which is the Participant's Maximum Annual Earnings Growth Objective for such Fiscal Year less the Participant's Threshold Annual Earnings Growth Objective for such Fiscal Year; provided, however, that the percentages referred to in this Section 2(b) may be adjusted by the Committee as provided in Section 4(b). 2 3 c. "Annual RONA Factor" means, for a Participant for a Fiscal Year (i) five percent if actual RONA for such Fiscal Year equals or exceeds the Participant's Threshold Annual RONA Objective for such Fiscal Year, plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such Fiscal Year less the Participant's Threshold Annual RONA Objective for such Fiscal Year and the denominator of which is the Participant's Maximum Annual RONA Objective for such Fiscal Year less the Participant's Threshold Annual RONA Objective for such Fiscal Year; provided, however, that the percentages referred to in this Section 2(c) may be adjusted by the Committee as provided in Section 4(b). d. "Average Annual Compensation" means, for a Long-Term Performance Period, the Participant's average annual salary rate during such period, determined on a monthly basis, or such lesser amount as the Participant and the Company shall agree to, in writing. e. "Board" means the Board of Directors of the Company. f. "Committee" means the Compensation and Nominating Committee of the Board; provided, however, the Compensation and Nominating Committee of the Board may delegate its powers under Sections 2(i), 2(p), 2(t), 2(w), 3, 6, 7 and 10 (but not under Section 14) to a management committee ("Management Committee") comprised of the Chief Executive Officer, the President and such other management personnel as the Chief Executive Officer and the President may designate from time to time, none of whom shall be eligible to participate in the Plan, in which case the term "Committee" with respect to such Sections shall be deemed to refer to the Management Committee. g. "Company" means Payless ShoeSource, Inc., a Missouri corporation, provided, that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation. h. "Disability" means the inability of a Participant to perform the normal duties of the Participant's regular occupation. i. "Earnings Growth" means, for a division or Subsidiary, (i) for a Fiscal Year, the annual growth rate in Earnings for such division or Subsidiary for such Fiscal Year, measured from the immediately preceding Fiscal Year; and (ii) for a Long-Term Performance Period, the compound annual growth rate in Earnings for such division or Subsidiary for such Fiscal Year, measured from the Fiscal Year immediately preceding the Long-Term Performance Period to the last Fiscal Year in the Long-Term Performance Period. For purposes of this Section 2(i), Earnings of a 3 4 division or Subsidiary for a Fiscal Year means the earnings of such division or Subsidiary for such Fiscal Year as reported in the Company's internal report(s) (or, in the event that such item is not included in such internal report(s) or that such internal report(s) is (are) changed to delete or modify such item, then such comparable figure as may be determined by the Committee) adjusted by the Company's independent certified public accountants to exclude such non-recurring or extraordinary items as the Committee shall determine are not representative of the on-going operations of the division or Subsidiary. j. "Fiscal Year" means the fiscal year of the Company. k. "Long-Term Award" means, for a Participant for a Long-Term Performance Period, the product of the Participant's Average Annual Compensation for such period multiplied by the aggregate of: i. the Participant's Long-Term Earnings Factor for such period, plus ii. the Participant's Long-Term RONA Factor for such period as such product is adjusted in accordance with Section 5(b) of the Plan. l. "Long-Term Earnings Factor" means, for a Participant for a Long-Term Performance Period, (i) five percent if actual Earnings Growth for such period equals or exceeds the Participant's Threshold Long-Term Earnings Growth Objective for such period, plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one) the numerator of which is the actual Earnings Growth for such period less the Participant's Threshold Long-Term Earnings Growth Objective for such period and the denominator of which is the Participant's Maximum Long-Term Earnings Growth Objective for such period less the Participant's Threshold Long-Term Earnings Growth Objective for such period. m. "Long-Term Performance Period" means three consecutive Fiscal Years; provided, however, that the first Long-Term Performance Period under the Plan shall be Fiscal Year 1998 and the second Long-Term Performance Period under the Plan shall be Fiscal Years 1998 and 1999. n. "Long-Term RONA Factor" means, for a Participant for a Long-Term Performance Period (i) five percent if actual RONA for such period equals or exceeds the Participant's Threshold Long-Term RONA Objective for such period plus (ii) ten percent multiplied by a fraction (not less than zero and not greater than one), the numerator of which is the actual RONA for such period less the Participant's Threshold Long-Term RONA Objective for such period and the denominator of which 4 5 is the Participant's Maximum Long-Term RONA Objective for such period less the Participant's Threshold Long-Term RONA Objective for such period. o. "Market Value" means the average closing price of the Stock on the New York Stock Exchange, Inc. during the month of February of the year specified. p. "Minimum Annual Compensation" means, for a Fiscal Year, (i) the Participant's minimum annual salary rate as of November 1 of such Fiscal Year or (ii) if a Participant is designated as such as of a date after November 1 in such Fiscal Year, the Participant's minimum annual salary rate as of such date; provided that if the Committee determines that such compensation rate does not adequately reflect such Participant's minimum annual salary rate for such Fiscal Year or if the Fiscal Year does not contain a November 1 (as in a short year), then the term shall mean the salary rate determined by the Committee in its absolute discretion; provided further, that upon the written agreement of the Participant and the Company, the term shall mean such lesser amount as is agreed to by the parties. q. "Participant" means an individual who has been designated to participate in the Plan in accordance with Section 3 of the Plan. r. "Plan" mean the Payless ShoeSource, Inc. Executive Incentive Compensation Plan for Business Unit Management. s. "Retirement" means, as to a Participant, retirement as that word is defined in the Company's Profit Sharing Plan (or comparable plan of a Subsidiary applicable to a Participant). t. "RONA" means, for a division or Subsidiary, (i) for a Fiscal Year, the return on beginning net assets of such division or Subsidiary for such Fiscal Year as reported in the Company's internal report(s) (or, in the event that such item is not included in such report(s) or that such report(s) is (are) changed to delete or modify such item, then such comparable figure as may be determined by the Committee) adjusted by the Company's independent certified public accountants to exclude such non-recurring or extraordinary items as the Committee shall determine are not representative of the ongoing operations of the division or Subsidiary; and (ii) for a Long-Term Performance Period, the sum of the return on beginning net assets of such division or Subsidiary for each Fiscal Year in the Long-Term Performance Period divided by three. 5 6 u. "Stock" means the common stock of the Company. v. "Subsidiary" means a subsidiary corporation of the Company within the meaning of Section 425(f) of the Internal Revenue Code. w. The terms "Maximum Annual Earnings Growth Objective," "Maximum Long-Term Earnings Growth Objective," "Target Annual Earnings Growth Objective," "Target Long-Term Earnings Growth Objective," "Threshold Annual Earnings Growth Objective," "Threshold Long-Term Earnings Growth Objective," "Maximum Annual RONA Objective," "Maximum Long-Term RONA Objective," "Target Annual RONA Objective," "Target Long-Term RONA Objective," "Threshold Annual RONA Objective" and "Threshold Long-Term RONA Objective" shall mean the respective objectives determined by the Committee for each Participant pursuant to Section 7 of the Plan. x. "Merger" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). Section 3. ELIGIBILITY. Management employees of the Company and its Subsidiaries who manage separate business units of the Company shall be eligible to participate in the Plan. The Committee may, in its sole discretion, designate any such individual as a Participant for a particular Fiscal Year and/or for a particular Long- Term Performance Period before the end of such Fiscal Year and Long-Term Performance Period, respectively. Designation of an individual as a Participant for any period shall not require designation of such individual as a Participant in any other period, and designation of one individual as a Participant shall not require designation of any other individual as a Participant in such period or in any other period. Section 4. ANNUAL AWARD. a. Subject to the other provisions of the Plan, a Participant for a Fiscal Year who is designated as such for an entire Fiscal Year shall be entitled to an Annual Award for such Fiscal Year. Subject to the other provisions of the Plan, a Participant for a Fiscal Year who is designated as such for less than an entire Fiscal Year shall be entitled to a reduced Annual Award for such Fiscal Year equal to the Annual Award for such Fiscal Year multiplied by a fraction, the numerator of which shall be the number of complete fiscal months between (i) the first day of the fiscal 6 7 month in which occurs the date as of which the Participant was so designated and (ii) the end of such Fiscal Year and the denominator of which shall be twelve. b. The Committee may change the percentages referred to in the definitions of "Annual Earnings Factor" and "Annual RONA Factor" for any Fiscal Year, provided that the maximum Annual Award which may be paid under such different percentage may not be greater than 45% of the Participant's Minimum Annual Compensation for such Fiscal Year. Section 5. LONG-TERM AWARD. a. Subject to the other provisions of the Plan, a Participant for a Long-Term Performance Period who is designated as such for an entire Long-Term Performance Period shall be entitled to a Long-Term Award for such period. Subject to the other provisions of the Plan, a Participant for a Long-Term Performance Period who is designated as such for less than an entire Long-Term Performance Period shall be entitled to a reduced Long-Term Award for such period equal to the Long-Term Award for such period multiplied by a fraction, the numerator of which shall be the number of complete fiscal months between (i) the first day of the fiscal month in which occurs the date as of which the Participant was so designated and (ii) the end of such Long-Term Performance Period and the denominator of which shall be thirty-six (or, if less, the number of months of duration of such Long Term Performance Period). b. The Long-Term Award otherwise payable pursuant to Section 5(a) of the Plan for a Long-Term Performance Period shall be adjusted by multiplying such Long-Term Award by a percentage equal to a fraction, the numerator of which shall be the Market Value of the Stock in February of the calendar year in which such Long-Term Performance Period ends and the denominator of which shall be the Market Value of the Stock in February of the calendar year in which such Long-Term Performance Period begins; provided, however, that such percentage shall in no event be greater than one hundred fifty percent nor less than seventy-five percent. Section 6. DISCRETIONARY ADJUSTMENT OF AWARDS. In the event that the Committee determines, in its absolute discretion, that an Annual Award or a Long-Term Award payable to a Participant in accordance with the other terms of the Plan should be adjusted, upwards or downwards, based on all the facts and circumstances known to the Committee at the time, then, at any time prior to the closing of the Company's books for a Fiscal Year, the Committee may, in its sole and absolute discretion, increase or decrease any such Annual Award (for such Fiscal Year) or Long-Term Award (for the Long-Term Performance Period ending with such Fiscal Year) to such amount as it determines. 7 8 Section 7. ANNUAL AND LONG-TERM TARGETS. Threshold, target and maximum annual and long-term objectives with respect to Earnings Growth and with respect to RONA shall be determined by the Committee as soon as practicable after the commencement of each Fiscal Year and each Long-Term Performance Period for each Participant. The Committee shall cause the respective objectives for each Participant to be provided to such Participant as soon thereafter as practicable. Such objectives shall remain in effect for the entire Fiscal Year or Long-Term Performance Period, as appropriate, unless the Committee determines, in its absolute discretion, that such objectives should be modified. Section 8. PAYMENT OF AWARDS. a. Annual Awards for a Fiscal Year shall be payable in cash within three months after the close of such Fiscal Year or as soon thereafter as practicable. b. Long-Term Awards for a Long-Term Performance Period shall be payable in cash within three months after the close of such Long-Term Performance Period or as soon thereafter as practicable. c. A Participant may elect to defer all or a portion of an award under the Deferred Compensation Plan. d. The Company shall have the right to deduct any sums that federal, state or local tax laws require to be withheld with respect to any payment of awards. Section 9. TERMINATION OF EMPLOYMENT. a. Death or Disability. In the event of either the death or Disability of the Participant while employed (a "Section 9(a) Event"), the Participant shall be entitled to the following: i. An Annual Award with respect to the Fiscal Year in which the Section 9(a) Event occurs equal to the Annual Award otherwise payable (if any) for that Fiscal Year, prorated to the end of the fiscal month in which such Section 9(a) Event occurs; and ii. A Long-Term Award with respect to each Long-Term Performance Period which includes the Fiscal Year of the Section 9(a) Event; provided, however, that for purposes of this Section 9(a)(ii), the Long-Term Award for any Long-Term Performance Period (1) shall be determined at the end of the Fiscal Year in which the Section 9(a) Event occurs, (2) shall be determined (and averages used in that determination shall be calculated) based 8 9 only on the Fiscal Year and any preceding Fiscal Years otherwise included in the Long-Term Performance Period and (3) shall be prorated to the end of the fiscal month in which the Section 9(a) Event occurs. b. RETIREMENT. i. In the event of the Retirement of the Participant with the written consent of the Company, such event shall be deemed to be a Section 9(a) Event, and the Participant shall be entitled to an Annual Award and to a Long- Term Award as provided in Section 9(a). ii. In the event of the Retirement of the Participant without the consent of the Company (a "Section 9(b)(ii) Event"), the Participant shall be entitled to the following: (1) An Annual Award with respect to the Fiscal Year in which the Section 9(b)(ii) Event occurs equal to the Annual Award otherwise payable (if any) for the Fiscal Year, prorated to the end of the fiscal month in which the Section 9(b)(ii) Event occurs; and (2) No Long-Term Award following the Section 9(b)(ii) Event. The Participant shall forfeit any right or entitlement to any award with respect to any Long-Term Performance Period which has not been completed on the date of the Section 9(b)(ii) Event. Any Long- Term Award for a period which ended prior to the Section 9(b)(ii) Event shall remain unaffected. c. Termination of Employment. i. In the event of the termination of employment of the Participant not covered by Sections 9(a) or 9(b) above which occurs at the end of the term of the Participant's then-current written employment agreement (if any) with the Company or Subsidiary, or in the event of such a termination of a Participant who has no current written employment agreement with the Company or Subsidiary, such event shall be deemed to be a Section 9(b)(ii) Event, and the Participant shall be entitled to an Annual Award (but not to a Long-Term Award) as provided in Section 9(b)(ii). ii. In the event of the termination of employment of the Participant not covered by Sections 9(a) or 9(b) above before the end of the term of the Participant's then-current written employment agreement (if any) with the Company or Subsidiary, with the written consent of the Company (a "Section 9(c)(ii) Event"), the Participant shall be entitled to the following: 9 10 (1) An Annual Award with respect to the Fiscal Year in which the Section 9(c)(ii) Event occurs equal to the actual award otherwise payable for the Fiscal Year (if any); provided, however, that in the event that the term of the Participant's then-current employment agreement is due to expire during that Fiscal Year, then the Annual Award shall be prorated to the end of the fiscal month in which such term is due to expire; and (2) A Long-Term Award with respect to each Long-Term Performance Period which includes the Fiscal Year of the 9(c)(ii) Event equal to the Long-Term Award otherwise payable with respect to each Long-Term Performance Period; provided, however, that in the event that the term of the Participant's then-current employment agreement (if any) with the Company is otherwise due to expire during any such period, then the Long-Term Award with respect to such period shall be prorated to the end of the calendar month in which such term is due to expire. iii. In the event of the termination of employment of the Participant not otherwise covered by this Section 9 before the end of the term of the then-current written employment agreement (if any) with the Company or Subsidiary, without the written consent of the Company, the Participant shall not be entitled to any Annual Award or to any Long-Term Award with respect to any Fiscal Year or Long-Term Performance Period which has not been completed as of the date of such termination of employment. The Participant shall forfeit any right or interest in any award for any such Fiscal Year or Long- Term Performance Period. Annual Awards and Long-Term Awards with respect to Fiscal Years and Long-Term Performance Periods which ended prior to the date of such termination of employment shall remain unaffected. d. For purposes of this Section 9, the term "written consent of the Company" shall refer to an express written consent of the Company, duly executed by the Company, which, by its own terms, expressly refers to this Section 9 of the Plan. Section 10. TRANSFERS AND CHANGES IN RESPONSIBILITIES. a. In the event that (i) a Participant's responsibilities are changed or that a Participant is transferred from the Participant's then-current operating division of the Company or Subsidiary to another operating division of the Company or Subsidiary or to the corporate operation of the Company, and (ii) the Participant remains employed by the Company or by a Subsidiary following such change or transfer (a "Section 10 Event") and the Participant and the Company either agree that the Section 10 11 10 Event is of such a character that the Participant's participation in the Plan should cease as of the date of such Section 10 Event or fail to agree on whether such Section 10 Event is of such a character, then any Annual Award or Long-Term Award to which the Participant would otherwise be entitled under the terms of the Plan shall be prorated to the date of such event. b. In the event that a Section 10 Event occurs and the Participant and the Company agree that such change or transfer is of such a character that the Participant's participation should not cease as of the date of such change or transfer, then i. any Annual Award to which the Participant would be entitled under the terms of the Plan (1) with respect to the portion of the Fiscal Year before such event, shall be the pro rata portion of the Annual Award, if any, otherwise payable to such Participant based on the Participant's objectives and on the performance of the division, Subsidiary or operation for which the Participant was employed before such event, and (2) with respect to the portion of the Fiscal Year after such event, shall be the pro rata portion of the Annual Award, if any, otherwise payable to such Participant based on the Participant's objectives and on the performance of the division, Subsidiary or operation for which the Participant was employed after such event; and ii. any Long-Term Award to which the Participant would be entitled under the terms of the Plan (1) with respect to the Long-Term Performance Period which ends with the Fiscal Year in which such event occurs, shall be based solely on the Participant's objectives and on the performance of the division, Subsidiary or operation for which the Participant was employed before such event, (2) with respect to the Long-Term Performance Period which ends with the Fiscal Year next following the Fiscal Year in which such event occurs, shall be prorated, with pro rata portions being based on the Participant's respective objectives and on the respective performances of the division, Subsidiary or operation for which the Participant was employed before and after such event, and 11 12 (3) with respect to the Long-Term Performance Period which begins with the Fiscal Year in which such event occurs, shall be based solely on the Participant's objectives and on the performance of the division, Subsidiary or operation for which the Participant was employed after such event. In the event that more than one such Section 10 Event shall occur in any one Fiscal Year or Long-Term Performance Period for any Participant, the Committee shall adjust any Annual Award or Long-Term Award in such manner as the Committee shall determine, in its absolute discretion, to reflect the purposes and intent of the Plan. Moreover, the Committee has the right to adjust all awards pursuant to Section 6, in its absolute discretion, which may be exercised in such a manner as the Committee deems fair and equitable, based on the performance of the Participant while participating in any other bonus or compensation plan of the Company. 12 13 Section 11. RIGHTS OF PARTICIPANTS AND BENEFICIARIES. a. Nothing contained in the Plan shall confer upon any Participant any right to continue in the employ of the Company or constitute any contract or agreement of employment or interfere in any way with the right of the Company to terminate or change the conditions of employment. b. So long as the Participant is alive, the Company shall pay all amounts payable hereunder only to the Participant or his or her personal representatives. In the event of the death of a Participant, payments of all amounts otherwise due to the Participant under the Plan shall be made to the Participant's beneficiary at the time of death under the Company Paid Life Insurance Plan of Payless ShoeSource, Inc. or to such other beneficiary as the Participant shall have designated, in writing, for purposes of this Plan on a form provided by the Company or, in the absence of a designation of beneficiary, to the Participant's estate. c. Subject to the provisions of Section 11(d), rights to payments under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to do so shall be void; nor shall any such amounts be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participant or his or her beneficiaries. d. Nothing in this Section 11 shall prohibit the personal representatives of a Participant from designating that any amount that would otherwise be distributed to the Participant's estate should be distributed in accordance with the terms of the Participant's last will and testament or pursuant to the laws of descent and distribution. Section 12. UNFUNDED CHARACTER OF THE PLAN. The right of a Participant to receive any Annual Award or Long-Term Award hereunder shall be an unsecured claim against the general assets of the Company. Nothing in the Plan shall require the Company to invest any amounts in Stock or in any other medium. Section 13. CHANGES IN CAPITAL STRUCTURE. In the event that there is any change in the Stock through merger, consolidation, reorganization, recapitalization, spin-off 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, then the fraction provided for in Section 5(b) of the Plan shall be adjusted by the Committee as it deems desirable, in its absolute discretion, to prevent dilution or enlargement of the rights of 13 14 Participants. The issuance of Stock for consideration and the issuance of Stock rights shall not be considered a change in the Company's capital structure. Section 14. AMENDMENT OR TERMINATION. The Committee may, by resolution, amend or terminate the Plan at any time provided, however, the Committee may not, without the consent of the Participant, amend or terminate the Plan in such a manner as to affect adversely any Annual Award or Long-Term Award which would have been payable, based on the terms of the Plan immediately prior to any such amendment or termination, for any Fiscal Year or Long-Term Performance Period which has already commenced as of the effective date of the amendment or termination. 14 EX-99.7 12 EX-99.7 1 EXHIBIT 99.7 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 Missouri corporation, provided, that immediately after the effective time of Merger such term shall mean Payless ShoeSource, Inc.(formerly Payless ShoeSource Holdings, Inc.) , a Delaware corporation, its successors and assigns. (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. 2 (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. (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. (m) "Merger" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with Payless, pursuant to an Agreement and Plan of Merger among Payless, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). 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 2 3 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 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 3 4 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 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. 4 5 (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. 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 5 6 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. 6 7 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). 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 7 8 (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. 8 9 SECTION 10. ALIENATION. (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 9 10 been payable prior to the date of such payment or distribution shall be paid as soon as practicable thereafter); (iii) in the event that cash is not paid or made available to a Participant when otherwise due or that shares of Stock are not distributed or otherwise made available to a Participant when otherwise due, then such Participant may file a claim for such payment or distribution and, if such Participant is successful, then 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 purposes of this Plan, a "Change in Control of Payless" shall be deemed to have occurred if (a) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than Payless, 10 11 any trustee or other fiduciary holding securities under an employee benefit plan of Payless, or any company owned, directly or indirectly, by the shareowners of Payless in substantially the same proportions as their ownership of stock of Payless), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of Payless representing 50% or more of the combined voting power of Payless' then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with Payless to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by Payless' shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; (c) the shareowners of Payless approve a merger or consolidation of Payless with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of Payless outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of Payless or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Payless (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of Payless' then outstanding securities; or (d) the shareowners of Payless approve a plan of complete liquidation of Payless or an agreement for the sale or disposition by Payless of all or substantially all of Payless' assets. 11 12 PAYLESS SHOESOURCE, INC. DEFERRED COMPENSATION PLAN FOR NON-MANAGEMENT DIRECTORS Effective July 17, 1997 Last amended April 20, 1998 EX-99.8 13 EX-99.8 1 Exhibit 99.8 THE STOCK APPRECIATION AND PHANTOM STOCK UNIT PLAN OF PAYLESS SHOESOURCE, INC. AND ITS SUBSIDIARIES FOR PAYLESS SHOESOURCE INTERNATIONAL EMPLOYEES (as amended April 20, 1998) 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 Missouri corporation, provided, that immediately after the effective time of the Merger such term shall mean the Board of Directors of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, 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 Missouri corporation, provided, that immediately after the effective time of the Merger 2 such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, 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. (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 2 3 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 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. (r) "Merger" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). 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. 3 4 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. 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. 4 5 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. (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, 5 6 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. 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 6 7 (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. (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. 7 8 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 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. 8 9 7. CHANGE OF CONTROL. If while unexercised Awards remain outstanding under the Plan: (a) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) the shareowners of the Company approve a merger or consolidation of the Company with any other Company, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale of disposition by the Company of all or substantially all of the Company's assets, then from and after the date of the first of the foregoing events to occur, all outstanding Stock Appreciation Unit Awards held by active employees on such date shall be exercisable in full, whether or not otherwise exercisable, and all outstanding Phantom 9 10 Stock Unit Awards held by active employees on such date shall vest in full, and shall be deemed fully payable. 10 EX-99.9 14 EX-99.9 1 Exhibit 99.9 PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN INTRODUCTION Prior to April 1, 1996, Associates of Payless ShoeSource, Inc. ("Payless") were covered by The May Department Stores Company Profit Sharing Plan ("May Plan"). Effective April 1, 1996, Payless withdrew from and ceased to be a participating Employer in the May Plan, and established the Payless ShoeSource, Inc. Profit Sharing Plan. This Plan provides for (1) a Company Contribution in an amount to be determined by the Company's Board of Directors and allocated to eligible Plan Members and (2) if elected by the Member, a salary reduction amount Member contribution determined on either a before-tax or after-tax basis. Generally effective August 1, 1997, Payless amended and restated the Plan, primarily to establish a Company Matching Contribution based on Members' contributions, to institute automatic enrollment in before-tax contributions by Members, and to comply with certain changes in the law. Now, the Company and Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, are merging, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.) (the "Merger"), to be effective as of the date of the Merger (hereinafter the "Effective Time"). SECTION 1 DEFINITIONS 1.01 ACCOUNTS means the Company Accounts and Member Accounts established under Section 6. 1.02 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). 1.03 ALLOCATION PAY AMOUNT means with respect to each eligible Member, (a) one (1) times the amount of Pay as defined in Section 1.31 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 1.02 or of Section 3.03 to the contrary, in no event shall the percentage of 2 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, for the 1996 Plan Year, only Pay received after the Plan's Effective Date shall be considered and the SSWB shall be prorated accordingly. Further, 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. 1.04 ASSOCIATE means any person employed by an Employer 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 1.20) 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. Employees in departments operated by others under lease or license shall be deemed Associates for the purposes of this Plan but only in those cases approved by the Committee in its discretion where the lessees or licensees shall have requested participation hereunder and shall have agreed in writing to assume their respective equitable proportions of the contributions payable to the Trustee as provided under this Plan. 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). 1.05 AUTHORIZED LEAVE OF ABSENCE means any leave of absence authorized by the Employer under rules established by the Employer. 2 3 1.06 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. 1.07 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. 1.08 BOARD means the Board of Directors of the Company. 1.09 CODE means the Internal Revenue Code of 1986, as amended from time to time. 1.10 COMMITTEE means the Retirement Committee comprised of three or more members as determined and appointed from time to time by the Board. On and after the date the Company is no longer a subsidiary of The May Department Stores Company, the Committee shall be comprised of the Compensation and Nominating Committee of the Board or such individuals as the Board shall otherwise designate. 1.11 COMPANY means Payless ShoeSource, Inc., a Missouri corporation, provided that immediately after the Effective Time of the Merger, such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, 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 or an Employer, 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 or an Employer, based on Net Profits, pursuant to Section 3.01. 3 4 1.15 EFFECTIVE DATE originally meant April 1, 1996. However, the effective date of this amendment and restatement of the Plan shall be the Effective Time of the Merger. 1.16 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 including but not limited to Payless ShoeSource, Inc., a Missouri corporation and sponsor of the Plan immediately prior to the Merger. 1.17 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.18 FIDUCIARY means the Trustee, each of the members of the Committee described in Section 13, and any investment manager designated pursuant to Section 14. 1.19 FISCAL YEAR means the Company's Fiscal Year. 1.20 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), or as a trade or business under common control in accordance with Code Section 414(c). 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. 1.21 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 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; 4 5 (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. 1.22 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 and the Member After-Tax Accounts. 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 MILITARY SERVICE means 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 Code Section 414(v). 1.30 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 5 6 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. 1.31 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 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 $150,000 shall be disregarded, although such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). In determining the Pay of an Associate, the rules of Code Section 414(q)(6) shall apply, except that in applying such rules the term "family" shall include only the spouse of the Associate and any lineal descendants of the Associate who have not attained age 19 before the last day of the Plan Year. Notwithstanding the foregoing, effective January 1, 1997, the "family aggregation" rules of Code Section 414(a)(6) are repealed and of no further effect. 1.32 PLAN means this Payless ShoeSource Inc. Profit Sharing Plan. 1.33 PLAN YEAR means a calendar year ending each December 31. 1.34 PRIOR PLAN means either The May Department Stores Company Profit Sharing Plan, the Volume Shoe Corporation Profit Sharing Plan and such other qualified plan as may be so designated by the Committee. 1.35 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. 1.36 RETIREMENT means a Member's termination of employment on or after age 55 with at least five (5) Years of Service, as of which date the Member's benefit shall be nonforfeitable. 6 7 1.37 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. 1.38 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. 1.39 TRANSFERRED ACCOUNTS means Member and Company Accounts transferred from the May Plan. 1.40 TRUST AGREEMENT means the agreement or agreements provided for in Section 14, as amended from time to time. 1.41 TRUST FUND means all the assets of the Investment Funds, the assets of The May Department Stores Company Profit Sharing Plan merged into this Plan and any other assets which are held in one or more trusts by the Trustee or Trustees for the purposes of this Plan. 1.42 TRUSTEE means the corporation(s), person or persons which may at any time be acting as Trustee or Trustees under the Trust Agreement. 1.43 UNIT means one of the units representing an interest in an Investment Fund as provided in Section 6.03. 1.44 UNIT VALUE means the value of each Unit in an Investment Fund as of the Valuation Date as determined pursuant to Section 6.04. 1.45 VALUATION DATE means the last day of each calendar month or such other date or dates as may be established by the Committee from time to time. 1.46 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. 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 Treasury Regulations, a "leased employee" within the meaning of 7 8 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 1.04. 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 1.47 shall be determined by the Company or by the Committee on a case-by-case basis. 1.47 VESTING SERVICE for purposes of determining a Member's vested interest under Section 6.09 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 for the Employer. (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. (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 date upon which an Associate terminates employment with the Employer (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. 8 9 (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. (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. SECTION 2 MEMBERSHIP 2.01 CONDITIONS OF ELIGIBILITY. (a) Each Associate who on the day before the original Effective Date of this Plan is a Member of or is eligible to be a Member of the May Plan or who would be eligible to become a Member of the May Plan on April 1, 1996 if the Company had continued to be a participating Employer under the May Plan shall 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) From the original Effective Date to July 31, 1997, each other Associate shall be eligible to become a Member of this Plan as follows: (i) When an Associate has completed one Year of Service and attained age 21, he shall be eligible to make Member Contributions pursuant to Section 4 hereof, commencing on the later of (a) July 1, 1996, or (b) the first day of the month coincident with or following the date he has met these eligibility requirements. 9 10 (ii) When an Associate has completed two Years of Service and attained age 21, he shall be eligible to share in Company Profit Sharing Contributions pursuant to Section 3 of this Plan, effective as of the first day of the month coincident with or following the date he satisfies the requirements of this subparagraph (ii). (c) Commencing August 1, 1997, each 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. (d) Effective January 1, 1998, each Associate who was eligible as of December 31, 1997, or who becomes eligible to become a Member thereafter, 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 received on or after the later of January 1, 1998, or 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%). (e) 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 satisfying the Plan's condition of eligibility under Section 2.01(b)(i), 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 period during which the Associate does not complete more than 500 Hours of Service with the Employer, and/or May while part of the Group. (f) Effective January 1, 1997, Associates employed by the Company's Puerto Rican Subsidiaries and subject to the related "Appendix" hereto shall 10 11 cease to be eligible for membership hereunder, but may participate, to the extent they are eligible, in any plan or plans maintained from time to time by the Company or by such Subsidiaries for the benefit of such Associates in Puerto Rico. 2.02 NO DUAL MEMBERSHIPS. Notwithstanding anything in this Plan to the contrary, when and as an Employer is obligated, pursuant to an agreement with any group or association which represents an Associate, to contribute to any plan involving pensions or other qualified deferred compensation, such Associate shall not be eligible for membership in this Plan. If 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. 2.03 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. 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. For the Plan Year ended December 31, 1996, the Company Profit Sharing Contribution shall be in an amount which is the sum of (a) 2 1/2% of Net Profits for the period May 5, 1996 through February 1, 1997 plus (b) an amount, in cash, necessary to provide each eligible Member who was a member of the May Plan on March 31, 1996 and who was employed by the Employer on December 31, 1996, with a contribution allocation equal in value to the Company Matching Allocation he would have received under the May Plan applying the "effective matching rate" determined under the terms of the May Plan for the 1996 Plan Year to the Member's Contributions made for January, February and March of 1996. For the Plan Year ended December 31, 1997, the Company Profit Sharing Contribution was made for the seven month period ended July 31, 1997, such that the total combined amount contributed to the Plan and to the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates (the "Puerto Rico Plan") for such period was equal to 2 1/2% of Net Profits for the period February 2, 1997 through August 30, 1997. For the period August 1, 1997 through December 31, 1997, the Employer 11 12 replaced the Company Profit Sharing Contribution with a Company Matching Contribution such that the total combined amount contributed to the Plan and to the Puerto Rico Plan for such period was equal to 2 1/2% of Net Profits for the period August 31, 1997 through January 31, 1998. 3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION. Effective August 1, 1997, and for Plan Years commencing thereafter, 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 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), 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. For the Plan Year ended December 31, 1997, the total Company Matching Contribution to this Plan and to the Puerto Rico Plan was a combined amount equal to 2 1/2% of Net Profits for the period August 31, 1997 through January 31, 1998. 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 6.09. Company Matching Contributions shall be allocated, based on a Member's Contributions up to 5% of Pay, to the Member's Company Matching Contribution Account, subject to the vesting provisions of Section 6.09 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. 12 13 Notwithstanding the foregoing paragraph, for the Plan Year ended December 31, 1996, the allocation made to the Company Profit Sharing Contribution Account of each eligible Member who was a Member of the May Plan on March 31, 1996 and who was employed by the Employer on December 31, 1996, shall be the sum of (a) the amount determined applying the allocation formula set forth in the preceding paragraph for Members who made Member Contributions under the May Plan during January, February and March of 1996, and, (b) an amount equal in value to the Company Matching Allocation such Member would have received under the May Plan applying the "effective matching rate" determined under the terms of the May Plan for the 1996 Plan Year to the Member's Contributions made for January, February and March of 1996. For the Plan Year ended December 31, 1997, the allocation made to the Company Profit Sharing Contribution Account of each eligible Member who was employed by the Employer on December 31, 1997 shall be the amount determined applying the allocation formula set forth in the preceding paragraph for Members eligible during January, February, March, April, May, June and July of 1997, based on the Allocation Pay of all such Members during said period. The amounts of such contributions shall be subject to applicable limitations, if any, imposed by the Code. In no event shall an allocation be made under Sections 3.03 or 3.04 in excess of an amount permitted by Code Section 401(a)(4) and the Regulations pursuant thereto. 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 the Member in the investment election filed pursuant to Section 5.02 effective for the most recent December 31. 3.06 RETURN OF COMPANY CONTRIBUTIONS. (a) If a Company Contribution is made to the Trust because of a good faith mistake of fact, then, within one year of the date of payment of such Company or Employer contribution to the Trust, the Company or Employer shall have the right (i) to recover an amount equal to the excess of (A) the amount of such Company or Employer contribution over (B) the amount that would have been contributed had a mistake of fact not occurred, or (ii) to allow all or a portion of such amount to remain in the Plan, to be forfeited and applied to or allocated with other forfeitures at the end of such Plan Year. (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 13 14 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 or Employer. 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, 4.04 and 4.05, 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, or beginning July 1, 1996, a flat dollar amount of not less than $2.00 and not more than $10.00 per Pay period, 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 or dollar amount which he elects to have contributed pursuant to Section 4.01(b)(i), the percentage or dollar amount 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, or beginning July 1, 1996, a flat dollar amount of not less than $2.00 and not more than $10.00 per Pay period, 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) Commencing January 1, 1998, pursuant to Section 2.01(d), 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. 14 15 (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 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(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) 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 my 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 paid 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. As of the first day of any calendar month after the date of such suspension(s) and with at least 15 days' prior notice, or as of such other date and with 15 16 such notice 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 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 $9,500 (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 $9,500 limit (as adjusted) 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). 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 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 is not more than two percentage points, and the Actual Deferral Percentage for the group of eligible Highly Compensated Employees is not more than the Actual Deferral Percentage of all other eligible Associates multiplied by 2.0. (iii) Effective January 1, 1997, 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. 16 17 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 be determined in accordance with Code Section 414(q) and with such rules and regulations as shall be promulgated by the Internal Revenue Service thereunder and shall mean an Associate who, at any time during such Plan Year or the preceding Plan Year (i) was a 5% owner (as defined in Code Section 416(i)(1)) with respect to an Employer, (ii) earned more than $66,000 of "compensation," (as defined in Code Section 414(q)(7)) and was among the "top-paid group" (as defined in Code Section 414(q)(4)), (iii) earned more than $100,000 of "compensation," or (iv) was one of the fifty highest-paid officers who earned more than $60,000 of "compensation" (or, if greater, 50% of the defined benefit plan dollar limit in effect under Code Section 415(b)(1)(A) with respect to such year). For purposes of Sections 4.02, 4.04 and 4.05, the $66,000 and $100,000 amounts are to be indexed at the same time and in the same manner as is the dollar limit applicable to defined benefit plans under Code Section 415. Notwithstanding any other provision of this Plan, the Committee may prescribe that a "Highly Compensated Employee" shall be determined under the calendar year election method described in Treasury Regulation 1.414(q) 1T, Q&A 14(b). Such election, if made, shall apply to all other plans maintained by an Employer that are qualified under Code Section 401(a). Notwithstanding any provision of this Section 4 to the contrary, effective January 1, 1997, the term "Highly Compensated Employee" shall be limited to an Associate who (i) is a 5% owner of an Employer (as determined above) in the current or preceding Plan Year or (ii) had "compensation" in the preceding Plan Year greater than $80,000 (as indexed in the manner described above) and was among the "top paid group." (b) Notwithstanding the provisions of the foregoing paragraph, (i) In the case of the Plan Year for which the relevant determination is being made, an Associate not described in subparagraph (ii), (iii) or (iv) of the foregoing paragraph for the preceding calendar year (without regard to this subparagraph (b)) shall not be treated as being described in subparagraph (ii), (iii) or (iv) above unless such Associate is a member of the group consisting of the 100 Associates paid the greatest "compensation" during the Plan Year for which such determination is being made; and (ii) A former Associate shall be treated as a Highly Compensated Employee if (A) such Associate was a Highly Compensated 17 18 Employee when such Associate separated from service, or (B) such Associate was a Highly Compensated Employee at any time after attaining age 55. (iii) 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 (A) The aggregate of the Before-Tax Contributions (and such other contributions which, in accordance with applicable rules and regulations promulgated by the Internal Revenue Service, may be aggregated with such Before-Tax Contributions for purposes of demonstrating compliance with the requirements of Code Section 401(k)(3)) which are actually payable to the Trust on behalf of each such Associate, to (B) Such Associate's compensation (as determined under Code Section 414(s)) 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. (c) 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 Internal Revenue Service) 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. Effective January 1, 1997, any excess Before-Tax Contributions to be returned to Highly Compensated Employees 18 19 shall be calculated (i.e., reduced) and distributed by first reducing the Before-Tax Contributions of the Highly Compensated Employees with the largest dollar amount(s) of Before-Tax Contributions (rather than with the highest Percentage(s)). In lieu of such distribution of excess Before-Tax Contributions, the Committee may, to the extent permitted by applicable rules and regulations (and (a) except with respect to situations in which Section 4.01 (h) applies, and (b) prior to March 15 of the calendar year following the Plan Year in which such contributions are made), 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. (d) 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 Internal Revenue Service, may 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. (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 April 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. 19 20 (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 AFTER-TAX CONTRIBUTIONS. (a) Notwithstanding the foregoing provisions of this Section 4, the Committee shall limit the amount of After-Tax Contributions made by or on behalf of each eligible "Highly Compensated Employee" (as hereinafter defined) to the extent necessary to ensure that either of the following tests is satisfied: (i) The "Actual After-Tax Contribution Percentage" (as hereinafter defined) for the group of Highly Compensated Employees is not more than the Actual After-Tax Percentage of all other eligible Associates multiplied by 1.25; or (ii) The excess of the Actual After-Tax Contribution Percentage for the group of eligible Highly Compensated Employees over that of all other eligible Associates is not more than two percentage points, and the Actual After-Tax Contribution Percentage for the group of eligible Highly Compensated Employees is not more than the Actual After-Tax Contribution Percentage of all other Associates multiplied by 2.0. (iii) Effective January 1, 1997, the Actual After-Tax Contribution 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 After-Tax Contribution Percentage for non-Highly Compensated Employees for the immediately preceding Plan Year, as determined by the Company in the manner permitted by law. (b) For purposes of this Section 4.05(a), the term "Actual After-Tax Contribution Percentage" shall mean, for a specified group of Associates, the average of the ratios (calculated separately for each person in such group) of (i) The aggregate of the After-Tax Contributions (and such other contributions which, in accordance with applicable rules and regulations promulgated by the Internal Revenue Service, may be aggregated with such After-Tax Contributions for purposes of demonstrating compliance with the requirements of Code Section 401(m)(2)) which are actually payable to the Trust by or on behalf of each such Associate, to 20 21 (ii) Such Associate's compensation (as determined under Code Section 414(s)) for such Plan Year. (c) In the event it is determined prior to any payroll period that the amount of After-Tax Contributions to be made thereafter would cause the limitation prescribed in this Section 4.04 to be exceeded, the amount of such contributions allowed to be made by or on behalf of Highly Compensated Employees (and/or such other Members as the Committee may prescribe) shall be reduced, 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. (d) Notwithstanding the foregoing paragraph, with respect to any Plan Year in which After-Tax Contributions made by or on behalf of Highly Compensated Employees exceed the applicable limit set forth in this Section 4.04(a), the Committee shall reduce the amount of the excess After-Tax Contributions made by or on behalf of the Highly Compensated Employees (by reducing such contributions in accordance with such rules and regulations as the Internal Revenue Service shall prescribe) in the order of the Actual After-Tax Contribution Percentages of such Highly Compensated Employees and beginning with the highest, but only to the extent necessary to comply with the limitations, and shall distribute such excess After-Tax Contributions (along with earnings attributable to such excess contributions, as determined pursuant to such rules and regulations as shall be prescribed by the Internal Revenue Service) 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. Effective January 1, 1997, any excess After-Tax Contributions to be returned to Highly Compensated Employees shall be calculated (i.e., reduced) and distributed by first reducing the After-Tax Contributions of the Highly Compensated Employees with the largest dollar amount(s) of After-Tax Contributions (rather than the highest percentages). 4.05 LIMITATIONS ON COMPANY MATCHING CONTRIBUTIONS. (a) Notwithstanding the foregoing provisions of Sections 3.02 or this Section 4, the Committee shall limit the amount of Company Matching Contributions allocated on behalf of each eligible Highly Compensated Employee to the extent necessary to ensure that either of the following tests is satisfied: (i) The "Actual Matching Contribution Percentage" (as hereinafter defined) for the group of Highly Compensated Employees is not 21 22 more than the Actual Matching Contribution Percentage of all other eligible Associates multiplied by 1.25; or (ii) The excess of the Actual Matching Contribution Percentage for the group of eligible Highly Compensated Employees over that of all other eligible Associates is not more than two percentage points, and the Actual Matching Contribution Percentage for the group of eligible Highly Compensated Associates is not more than the Actual Matching Contribution Percentage of all other Associates multiplied by 2.0. (iii) Effective January 1, 1997, the Actual Matching Contribution Percentage for non-Highly Compensated Employees used in satisfying the tests set forth in (i) and/or (ii) above shall be, for any Plan Year, the Actual Matching Contribution Percentage for non-Highly Compensated Employees for the immediately preceding Plan Year, unless elected otherwise by the Company in the manner permitted by law. (b) For purposes of this Section 4.05, the term "Matching Contribution" shall mean any portion of the Company Contribution deemed to be a matching contribution under Section 3.02, allocated to the Accounts of Members for a Plan Year. (c) For purposes of this Section 4.05, the term "Actual Matching Contribution Percentage" shall mean, for a specified group of Associates, the average of the ratios (calculated separately for each person in such group) of (i) The aggregate of the Matching Contribution on behalf of each such Associate, to (ii) Such Associate's compensation (as determined under Code Section 414(s)) for such Plan Year. (d) With respect to any Plan Year in which Matching Contributions on behalf of Highly Compensated Employees exceed the applicable limit set forth in this Section 4.05(a), the Committee shall reduce the amount of the excess Matching Contribution on behalf of the Highly Compensated Employees (by reducing such amounts in accordance with such rules and regulations as the Internal Revenue Service shall prescribe) in the order of the Actual Matching Contribution Percentages of such Highly Compensated Employees and beginning with the highest, but only to the extent necessary to comply with the limitations, and shall distribute such excess Matching Contribution (along with earnings attributable to such excess allocations, as determined pursuant to such rules and regulations as shall be prescribed by the Internal Revenue Service) to the affected Highly Compensated Employees as soon as practicable after the 22 23 end of such Plan Year, and in all events prior to the end of the next following Plan Year, so long as such distribution is in accordance with the rules and regulations governing Code Section 401(m). Notwithstanding the foregoing, effective January 1, 1997, any excess Matching Contributions to be returned to Highly Compensated Employees shall be calculated (i.e., reduced) and distributed by first reducing the Company Matching Contributions of the Highly Compensated Employees with the largest dollar amount(s) of Matching Contributions (rather than the highest Matching Contribution Percentages). 4.06 AGGREGATE LIMITATIONS. (a) To the extent required under Code Section 401(m) or Regulations thereunder, Company Matching Contributions and Member After-Tax Contributions shall be aggregated on a Member by Member basis and the "Actual After-Tax Contribution Percentage" test under Section 4.04 and the "Actual Matching Contribution Percentage" test under Section 4.05 in effect shall be performed on a combined basis. (b) The Secretary of the Treasury may impose, and the Plan shall comply with, Regulations to prevent the multiple use of the limitations in Section 4.02(b)(i) and (ii) above and in Sections 4.04 and 4.05 also above with respect to contributions by or on behalf of Highly Compensated Employees provided, however, that in lieu of such limitations (which are also contained in Code Sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii)), the Plan may elect to satisfy any alternate, combined or multiple use limitations permitted under such Regulations. (c) In furtherance of the foregoing and any other provision of the Plan to the contrary notwithstanding, the provisions of this Section 4.06 shall apply with respect to a Plan Year if the conditions of both (i) and (ii) below are met: (i) the sum of (1) the "Actual Deferral Percentage" (as defined in Section 4.02(b)), (2) the "Actual After-Tax Contribution Percentage" (as defined in Section 4.04) and (3) the "Actual Matching Contribution Percentage" (as defined in Section 4.05(b)) for the group of eligible Associates who are Highly Compensated Employees exceeds the "Aggregate Limit" (as hereinafter defined), and (ii) both (1) the Actual Deferral Percentage for the group of eligible Associates who are Highly Compensated Employees exceeds 125% of the Actual Deferral Percentage of all other eligible Associate and (2) the combined Actual After-Tax Contribution Percentage and Actual Matching Contribution Percentage of such group of Highly Compensated Employees 23 24 exceeds 125% of the combined Actual After-Tax Contribution Percentage and Actual Matching Contribution Percentage of all such other Associates. The term "Aggregate Limit" means the greater of the sum of (i) and (ii) below or the sum of (iii) and (iv) below: (i) 125% of the greater of (1) the Actual Deferral Percentage of the group of eligible Associates who are not Highly Compensated Employees, or (2) the combined Actual After-Tax and Matching Contribution Percentage of the group of eligible Associates who are not Highly Compensated Employees, and (ii) two plus the lesser of (i)(1) or (i)(2) above (but in no event more than 200% of the lesser of (i)(1) or (i)(2) above). (iii) 125% of the lesser of (1) the Actual Deferral Percentage of the group of eligible Associates who are not Highly Compensated Employees, and (iv) two plus the greater of (iii)(1) or (iii)(2) above (but in no event more than 200% of the greater of (iii)(1) or (iii)(2) above). If the Actual Deferral Percentage and/or combined Actual After-Tax Contribution and Actual Matching Contribution Percentage for the group of eligible Associates who are Highly Compensated Employees, determined after any corrective distribution or recharacterization of excess amounts in accordance with the provisions of Section 4.02(b) and 4.04 have been effectuated, exceed an amount which would cause the limits set forth in the foregoing provisions of this Section 4.06 to be exceeded, first the amount of After-Tax Contributions then the amount of Company Matching Contributions and then the amount of Before-Tax Contributions shall be reduced, in the same manner and at the same time as such contributions are reduced in accordance with Sections 4.02(b) and 4.04, but only to the extent necessary to bring the Plan into compliance with the applicable limits set forth in this Section 4.06. 24 25 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 which may include a money market or stable value fund, a fixed income fund, a common stock fund, a Payless Common Stock Fund and a May Common Stock Fund. The May Common Stock Fund shall not be available for investment of new contributions after May 4, 1996, and shall be eliminated entirely as an investment option not later than December 31, 1997. If, on or before December 31, 1997, a Member has failed to direct the reinvestment of amounts in his May Common Stock Fund, he shall be deemed to have elected to have such amounts invested in the money market or stable value fund. 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. Effective immediately following the Merger, a reference to the "Payless Common Stock Fund" and to "Payless Stock" shall be deemed to be a reference to a fund invested in, and shares of common stock of, the Company rather than a reference to Payless ShoeSource, Inc., a Missouri corporation and the sponsor of the Plan immediately prior to the Merger. (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 calendar month be invested in 1% increments totaling 100% in one or more of the Investment Funds. Such election must be made with at least one day notice prior to each calendar month or prior to membership in the Plan, pursuant to procedures prescribed by the Committee, or on such other date and subject to other conditions as may be determined 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 Money Market Fund (or such other stable, fixed income investment as may be determined by the Committee) and 100% of his Company Matching Contributions in the Payless Common Stock Fund. 25 26 For the Plan Year ended December 31, 1996 and 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 such Plan Year-end. (b) A Member may change his election with respect to future Member and Company Contributions effective with the first payroll period paid in each calendar month with at least one day prior written notice to the Committee pursuant to procedures prescribed by the Committee, or on such other date and subject to other conditions as may be determined 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 last day of each calendar month with at least one day prior notice to the Committee, or as of such other 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 under Section 5.01. 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. 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. 26 27 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 THE MAY DEPARTMENT STORES COMPANY ("MAY STOCK") IN THE MAY COMMON STOCK FUND. The provisions of this Section 6.06 shall govern the shares of common stock in the May Common Stock Fund, including the shares of stock transferred to the Plan from the May Plan. (a) The May Stock shall be held by the Trustee in a separate fund of the Trust designated as the May Common Stock Fund. Subject to the further provisions of Section 6.07, the May Common Stock Fund shall be invested only in shares of May Stock. Dividends received by the Trustee in respect of the May Stock shall be first used to pay expenses of the May Common Stock Fund and then invested in the Money Market Fund. (b) A Member may elect to sell some or all of the Units in the May Common Stock Fund attributable to either his Member or Company Accounts. Such election shall be made in such manner as provided by the Committee and will be effective as of the last day of the calendar month in which the election is recorded. Notwithstanding the foregoing, the Committee may permit Members to elect to sell Units as of any monthly valuation date and under such further conditions as may be determined from time to time which shall be applicable to all Members with Units in the May Common Stock Fund. 27 28 (c) The net proceeds from the sale of a Member's interest in the May Common Stock Fund shall be invested pursuant to the Member's election in one or more of the other Investment Funds described in Section 5.02. (d) At such time as all shares of May Common Stock attributable to Units held in the May Common Stock Fund have been distributed or sold pursuant to Member election, the May Common Stock Fund shall terminate. Until such time as such Fund has been terminated, it shall be valued at the same time and in the same manner as the Investment Funds described in Section 5.02, and maintained to and valued in Member Accounts in accordance with Sections 6.03. (e) Each Member (or beneficiary of a deceased Member) who has Accounts in the May 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 May Stock attributable to Units credited to him in the May Common Stock Fund as of the latest practicable Valuation Date prior to each meeting of shareowners of May. 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. Each Member or Beneficiary who has the right under this section to direct the Trustee with respect to voting shares and who provides timely instructions to the Trustee shall, as a named fiduciary, be considered to have directed the Trustee to vote a pro rata portion of the shares attributable to Units for which the Trustee receives no timely instructions and shares which have not been credited as of the latest practicable Valuation Date. Upon receipt of such instructions, the Trustee shall vote such shares in accordance therewith. If, within such reasonable period of time prior to any such meeting of the shareowners as may be specified by the Trustee, no instructions shall have been received by the Trustee from such Member, the Trustee shall vote, in person or by proxy, such shares of stock proportionally in the same manner as the May Stock for which the Trustee received voting instructions from Members. The Trustee shall not divulge the instruction of any Member. The Trustee shall also be entitled to vote in its sole discretion, in person or by proxy, all shares of May Stock held by it upon any matters to which as a practical matter no instructions can be given by Members prior to the meeting. (f) Each Member who has Accounts in the May 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 May Stock attributable to Units credited to him in the May 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 May Stock, and the Trustee shall respond in accordance with the instructions so received. The Trustee shall utilize its best efforts to 28 29 timely distribute or cause to be distributed to each Member such information as will be distributed to shareowners of May 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 May Stock with respect to which such Member has the right of direction. The Trustee shall not divulge the instructions of any Member. Shares in May Stock Fund Accounts of Members who direct that such shares be tendered or exchanged shall be transferred to a new fund. 6.07 SHARES OF THE COMPANY RECEIVED IN RESPECT OF MAY STOCK. In the event that shares of the Company were distributed to Members' Accounts in the May Common Stock Fund, such shares were segregated and transferred to the Payless Common Stock Investment Fund. 6.08 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 each meeting of 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. Each member or Beneficiary who has the right under this Section 6.08 to direct the Trustee with respect to voting shares and who provides timely instructions to the Trustee shall, as a named fiduciary, be considered to have directed the Trustee to vote a pro rata portion of the shares attributable to Units for which the Trustee receives no timely instructions and shares which have not been credited as of the latest practicable Valuation Date. Upon receipt of such instructions, the Trustee shall vote such shares in accordance therewith. If, within such reasonable period of time prior to any such meeting of the shareowners as may be specified by the Trustee, no instruction shall have been received by the Trustee from such Member, the Trustee shall vote, in person or by proxy, such shares of stock proportionally in the same manner as the Payless Stock for which the Trustee received voting instructions from Members. The Trustee shall not divulge the instructions of any Member. The Trustee shall also be entitled to vote in its sole discretion, in person or by proxy, all shares of Payless Stock held by it upon any matters to which as a practical matter no instructions can be given by Members prior to the meeting. 29 30 (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. 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. 6.09 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: Period of Service Vested Interest ----------------- --------------- Fewer than 2 years 0% 2 years 25% 3 years 50% 4 years 75% 5 years or more 100% 30 31 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 9.01, a partially-vested Member receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in clause (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 clause (f) below. A partially- vested Member is a Member whose Vested Interest, determined under Section 6.09(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 clause (e) 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 clause (f) below; (B) second, deductible Employer contributions for the Plan Year to the extent made under a discretionary formula; and 31 32 (C) third, as otherwise permitted by law. The Plan Administrator will not take into account any allocation under this clause (b) in applying the limitation on allocations under Section 12. (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) PERIOD OF SERVICE--VESTING. For purposes of determining a Member's Vested Interest in his Company Contributions Account(s) under clause (a) above, a Member shall be credited with that number of "years of service" determined by adding together all of the Employee's Periods of Service, whether or not consecutive. Only whole years of service shall be taken into account for purposes of applying the schedule set forth in clause (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 thirty (30) days of service being deemed to constitute one month and with either twelve (12) months or 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 1.47(g) shall apply. (d) BREAK IN SERVICE--VESTING. For purposes of this Section 6.09, a "Break in Service" is a Period of Severance of at least twelve (12) consecutive months. (e) INCLUDED PERIODS OF SERVICE. (i) For purposes of determining "Periods of Service" under this clause (e), the Plan takes into account all Periods of Service an Associate completes with an Employer or member of the Group (as defined in Section 1.20), except: (A) any Period of Service before the Plan Year in which the Member attained the age of eighteen (18); and (B) for the sole purpose of determining a Member's Vested Interest of his Account(s) derived from Company contributions which accrued for his benefit prior to a Forfeiture Break in Service, the 32 33 Plan shall disregard any Period of Service after the Member first incurs a Forfeiture Break in Service. The Member incurs a Forfeiture Break in Service when he incurs five (5) consecutive Breaks in Service. (f) 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 clause (f) solely by reference to the vesting schedule of Section 6.09(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. (g) FORMER MAY PLAN MEMBERS. The provisions of this clause (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, the value of the Member's Company Account forfeited under the May Plan will be restored under this Plan (in the manner described in clause (b) above) and will be 100% vested. 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 33 34 regarded as administrative expenses and shall be borne by the appropriate Investment Fund as determined by the Trustee or Committee. 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. 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; 34 35 (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. 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. (d) 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 35 36 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. 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 at the end of the month next following the later of (i) the date of such termination of employment or (ii) the date the Plan Administrator receives notice of such termination of employment, whether such notice be written notice or actual notice, and shall be distributed as provided in Section 10. 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 for the purposes of this Plan. 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 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. 36 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 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 ever has exceeded) $3,500 (or, effective January 1, 1998, $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 $3,500 (or $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 37 38 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 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 May Common Stock Fund or the Payless Common Stock Fund shall be made in the form of full shares of May Common Stock or 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 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, effective January 1, 1997, 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. If a Member is currently receiving required distributions from the Plan under Code Section 401(a)(9) and this Section 10.05 but would not be required to receive such payments after January 1, 1997 under 38 39 this Section 10.05 as amended, such Member may elect, in the manner determined by the Committee, to postpone further distributions until the date otherwise required hereunder. Such distribution may be made by distributing the entire value of the Member's Accounts as of the last day of such calendar year. If otherwise permitted pursuant to Code Section 401 (a) (9) and Regulations thereto, the Member may elect to take such distribution in lump sum or in installments, if he is otherwise entitled to installment payments pursuant to Section 10.01 (b). 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 the first day of April following the calendar year in which the Member would have attained age 70 1/2. Notwithstanding the above, any portion of a Member's accounts which are distributable to a Beneficiary shall be distributed within five (5) years of the Member's death. 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 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 $3,500, 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. 39 40 SECTION 11 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS 11.01 ROLLOVER PERMITTED. 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 less than thirty (30) days after the notice required under Treas. Reg. Section 1.411(a)-11(c) (or its successor) is 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 an earlier distribution. 11.02 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, 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); and 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). (b) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 401(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), and which accepts the distributee's 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. 40 41 (d) DIRECT ROLLOVER. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. SECTION 12 LIMIT ON CONTRIBUTIONS TO THE PLAN This Section 12 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. 12.01 LIMIT ON CONTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary: (a) The "Annual Addition" that may be made to a Member's Accounts in any calendar year shall not exceed (i) 25% of his Earnings for the calendar year or (ii) $30,000 (as adjusted from time to time by the Secretary of the Treasury or his delegate, pursuant to Code Section 415(d), provided that no such adjustment shall be taken into account before the calendar year for which the adjustment first takes effect). (b) If a Member participates in a Defined Benefit Plan maintained by the Extended Group, the sum of the Member's Defined Contribution Plan Fraction and Defined Benefit Plan Fraction may not exceed 1.0 for any calendar year. (c) If the limitation imposed by Subsection (a) above applies to a Member in a calendar year, his Member Contributions and, if necessary, Company Contributions shall be reduced to the extent necessary to prevent the limitation with respect to such calendar year from being exceeded. If the limitation imposed by Subsection (b) above, applies, the benefits under any Defined Benefit Plan maintained by the Extended Group shall be reduced before the Annual Additions under this Plan are reduced. 12.02 SPECIAL DEFINITIONS. For the purposes of this Section 12, the following terms shall have the following meanings: (a) ANNUAL ADDITION for any calendar year is the sum of: (i) the amount of the Company Profit Sharing and Matching Contributions for the calendar year, plus 41 42 (ii) the Member's Before-Tax Contributions for the calendar year, plus (iii) the Member's After-Tax Contributions, plus (iv) the amount of an Employer's contribution on behalf of the Member or of a Member's contribution, if any, in the same Plan Year, to another individual account pension benefit plan maintained by an Employer, plus (v) the amount, if any, allocated to an individual medical account pursuant to Code Section 415(l)(1), plus (vi) the amount, if any, attributable to post-retirement medical or life insurance benefits for key employees pursuant to Code Section 419A(d)(2). (b) DEFINED BENEFIT PLAN means any plan which is qualified under Code Sections 401(a) or 403(a) and which is not a Defined Contribution Plan. (c) DEFINED BENEFIT PLAN FRACTION means a fraction, where the numerator is the Member's projected annual benefit under the Defined Benefit Plan (determined as of the close of the calendar year), and the denominator is the lesser of: (i) 1.25 multiplied by the dollar limitation in effect under Code Section 415(b)(1)(A) for that calendar year, or (ii) 1.4 multiplied by the amount that may be taken into account under Code Section 415(b)(1)(B) with respect to the Member for the calendar year. (d) DEFINED CONTRIBUTION PLAN means any plan which is qualified under Code Sections 401(a), 403(a), or 405(a) and which provides for an individual account for each Member and for benefits based solely on the amount contributed to the account, and any income, expenses, gains, losses, and forfeitures that may be allocated to the account. (e) DEFINED CONTRIBUTION PLAN FRACTION means a fraction, where the numerator is the sum of the Annual Additions to the Member's Accounts as of the close of the calendar year, and the denominator is the sum of the lesser of the following amounts for such calendar year and for each prior calendar year of service with the Extended Group: 42 43 (i) 1.25 multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A) for that calendar year (determined without regard to Code Section 415(c)(6)), or (ii) 1.4 multiplied by the amount that may be taken into account under Code Section 415(c)(1)(B) with respect to the Member for the calendar year; provided, that the Company may, in accordance with applicable Treasury Department regulations, elect to calculate the denominator of the Defined Contribution Plan Fraction in accordance with Code Section 415(e)(6). (f) EARNINGS means the Member's "415(c) compensation" (as determined under Section 415(c)(3) of the Code and under Treasury Regulation Section 1.415-2(d)(11), and including any such compensation received from the Extended Group. (g) EXTENDED GROUP means the Company and any other employer which is related to the Corporation as a member of a controlled group of corporations in accordance with Code Section 414(b), or as a trade or business under common control in accordance with Code Section 414(c), plus any other company, trade or business which would be included by such definition after the modification thereof required by Code Section 415(h). 12.03 GENERAL. (a) For purposes of applying the limitations set forth in this Section 12, all Defined Benefit Plans (whether or not terminated) of the Extended Group shall be treated as one Defined Benefit Plan, and all Defined Contribution Plans (whether or not terminated) of the Extended Group shall be treated as one Defined Contribution Plan. (b) This Section 12 is intended to satisfy the requirements imposed by Code Section 415 and shall be construed in a manner that shall effectuate this intent. This Section 12 shall not be construed in a manner that would impose limitations that are more stringent than those required by Code Section 415. 12.04 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 43 44 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 Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 12.01(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. 12.05 LIMITATION IMPOSED BY CODE SECTION (401)(A)(17). In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Pay of each Associate taken in to account under the Plan shall not exceed the annual compensation limit of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). The OBRA '93 annual Pay limit is $150,000, as adjusted by the Commissioner of Internal Revenue Service for increases in the cost of living in accordance with Code Section 40l(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Pay is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual Pay limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. Any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 annual Pay limit set forth is this provision. If Pay for any prior determination period is taken into account in determining an Associate's benefits accruing in the current year, the Pay for that prior determination period is subject to the OBRA '93 annual Pay limit in effect for that prior 44 45 determination period. For this purpose, for a determination period beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual Pay limit is $150,000. SECTION 13 ADMINISTRATION OF THE PLAN 13.01 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). 13.02 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 1.38 (Total and Permanent Disability), 4.01 (b) and (c) (Member Contributions), 6.01 (Member Accounts), 6.02 (Company Accounts), 6.05 (Annual Statements), 8.02 (Authorized Withdrawals), 12.04 (Adjustment of Excessive Annual Additions), 18.02 (Withdrawal of an Employer) and this Section 13. (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), 14 (Management of the Trust Fund), 6.06 (shares of The May Department Stores Company in the May Common Stock Fund), and 6.08 (shares of Payless ShoeSource, Inc. 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 14.03(b), (c) and (d) (Investments and Reinvestments). (d) Authority to exercise any and all of the powers of the Company hereunder following the Effective Time of the Merger may be delegated by the Company to Payless ShoeSource, Inc., a Missouri corporation and sponsor of the Plan immediately prior to the Merger, or to any officer, employee or agent thereof. 13.03 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 45 46 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 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 13.03. 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 14.03(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 13 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. 46 47 13.04 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. 13.05 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)). SECTION 14 MANAGEMENT OF THE TRUST FUND 14.01 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. 14.02 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. 14.03 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. 47 48 (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 14.03(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 14.02, then the powers of the Investment Subcommittee as provided for in Section 14.03(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 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 the Trustee or Trustees implementing the Plan shall contain provisions effectuating the provisions of this Section 14 of the Plan. SECTION 15 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS 15.01 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. 48 49 15.02 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. 15.03 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. 15.04 CORPORATE ACTION. With respect to any action permitted or required by the Plan, the Company may act through its appropriate officers. 15.05 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 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. 49 50 SECTION 16 NON-ALIENATION OF BENEFITS 16.01 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. 16.02 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. SECTION 17 AMENDMENTS 17.01 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 50 51 Code Section 401(a) and to have the trust or trusts declared exempt from taxation under Code Section 501(a). 17.02 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. 17.03 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. SECTION 18 TERMINATION 18.01 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 either in its entirety or with respect to any Employer included hereunder, the provisions of Section 18.03 shall apply and the Accounts of affected Members shall become (or remain) fully vested and nonforfeitable. 18.02 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 18.03 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. 18.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST. If this Plan is terminated at any time including a partial termination as defined in 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. 51 52 18.04 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 18.03 shall apply. 18.05 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). SECTION 19 CONSTRUCTION 19.01 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 the State of Kansas and, whenever possible, to be in conformity with the applicable requirements of ERISA and the Internal Revenue Code. 19.02 GENDER AND NUMBER. Wherever applicable, the masculine pronoun as used herein shall include the feminine pronoun and the singular pronoun shall include the plural. SECTION 20 TOP-HEAVY REQUIREMENTS 20.01 GENERALLY. For any Plan Year in which the Plan is a Top-Heavy Plan, the provisions of Sections 20.02, 20.03, 20.04 and 20.05 shall automatically take effect in accordance with Code Section 416. 20.02 VESTING. A Member who is credited with an Hour of Service while the Plan is Top-Heavy, or in any Plan Year after a Plan Year in which the Plan is Top- Heavy, and who has completed at least three Years of Service shall have a nonforfeitable right to 100 percent of his accrued benefit and no amount may become forfeitable if the Plan later ceases to be Top-Heavy. Such accrued benefit shall include benefits accrued before the Plan becomes Top-Heavy. Notwithstanding any other provision of this Plan to the contrary, once the vesting requirements of this Section 52 53 20.02 become applicable, they shall remain applicable even if the Plan later ceases to be Top-Heavy. 20.03 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 20.03(b) and (c). (b) The amount of the minimum allocation shall be the lesser of the following, percentages of Pay: (i) four percent 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 $150,000, 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 20.03, 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. 20.04 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 20.03(a) shall not apply and the required minimum annual contribution for such Member under this Plan shall be 7 1/2 percent 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. 20.05 SUPER TOP-HEAVY PLANS. If for any Plan Year in which the Plan is a Top-Heavy Plan it is also a Super Top-Heavy Plan, then for purposes of the limitations on contributions and benefits under Code Section 415, the dollar limitations in the defined benefit plan fraction and the defined contribution plan fraction shall be multiplied by 1.0 rather than 1.25. However, if the application of the provisions of this Section 20.05 would cause any individual to exceed the combined Code Section 415 53 54 limitations on contributions and benefits, then the application of the provisions of this Section 20.05 shall be suspended as to such individual until such time as he no longer exceeds the combined Code Section 415 limitations as modified by this Section 20.05. During the period of such suspension, there shall be no Employer Contributions, forfeitures or voluntary nondeductible contributions allocated to such individual under this or any other defined contribution plan of an Employer and there shall be no accruals for such individual under any defined benefit plan of an Employer. 20.06 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 20.06. (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. 20.07 DETERMINATION OF SUPER TOP HEAVINESS. A plan shall be a Super Top-Heavy Plan if it would be a Top-Heavy Plan under the provisions of Section 20.08, but substituting "90 percent" for "60 percent" in the ratio test in Section 20.08. 20.08 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 of a similar sum determined for all Employees, excluding former Key Employees. 20.09 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 20.09. 54 55 (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. (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. 55 56 20.10 OTHER DEFINITIONS. (a) Solely for purposes of this Section 20, the definitions in paragraphs (b) through (i) of this Section 20.10 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 20.02, 20.03 and 20.05 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 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 56 57 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). (g) LIMITATION YEAR means the calendar year. (h) PLAN YEAR means the calendar year. (i) YEAR OF SERVICE means a year which constitutes a "year of service" under the rules of paragraphs (4), (5) and (6) of Code Section 411(a) to the extent not inconsistent with the provisions of this Section 20. 58 PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN As Amended and Restated Generally Effective June 1, 1998 59 TABLE OF CONTENTS PAGE SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . .1 1.01 ACCOUNTS. . . . . . . . . . . . . . . . . . .1 1.02 AFTER-TAX CONTRIBUTIONS . . . . . . . . . . .1 1.03 ALLOCATION PAY AMOUNT . . . . . . . . . . . .1 1.04 ASSOCIATE . . . . . . . . . . . . . . . . . .2 1.05 AUTHORIZED LEAVE OF ABSENCE . . . . . . . . .2 1.06 BEFORE-TAX CONTRIBUTIONS. . . . . . . . . . .3 1.07 BENEFICIARY . . . . . . . . . . . . . . . . .3 1.08 BOARD . . . . . . . . . . . . . . . . . . . .3 1.09 CODE. . . . . . . . . . . . . . . . . . . . .3 1.10 COMMITTEE . . . . . . . . . . . . . . . . . .3 1.11 COMPANY . . . . . . . . . . . . . . . . . . .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. . . . . . . . . . . . . . . . . . .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 MILITARY SERVICE. . . . . . . . . . . . . . .5 1.30 NET PROFITS . . . . . . . . . . . . . . . . .5 1.31 PAY . . . . . . . . . . . . . . . . . . . . .6 1.32 PLAN. . . . . . . . . . . . . . . . . . . . .6 1.33 PLAN YEAR . . . . . . . . . . . . . . . . . .6 1.34 PRIOR PLAN. . . . . . . . . . . . . . . . . .6 1.35 QUALIFIED DOMESTIC RELATIONS ORDER. . . . . .6 1.36 RETIREMENT. . . . . . . . . . . . . . . . . .6 1.37 SOCIAL SECURITY WAGE BASE . . . . . . . . . .7 1.38 TOTAL AND PERMANENT DISABILITY OR DISABILITY.7 1.39 TRANSFERRED ACCOUNTS. . . . . . . . . . . . .7 i 60 1.40 TRUST AGREEMENT . . . . . . . . . . . . . . .7 1.41 TRUST FUND. . . . . . . . . . . . . . . . . .7 1.42 TRUSTEE . . . . . . . . . . . . . . . . . . .7 1.43 UNIT. . . . . . . . . . . . . . . . . . . . .7 1.44 UNIT VALUE. . . . . . . . . . . . . . . . . .7 1.45 VALUATION DATE. . . . . . . . . . . . . . . .7 1.46 YEAR OF SERVICE . . . . . . . . . . . . . . .7 1.47 VESTING SERVICE . . . . . . . . . . . . . . .8 SECTION 2 MEMBERSHIP . . . . . . . . . . . . . . . . . . . .9 2.01 CONDITIONS OF ELIGIBILITY.. . . . . . . . . .9 2.02 NO DUAL MEMBERSHIPS.. . . . . . . . . . . . 11 2.03 RE-EMPLOYMENT.. . . . . . . . . . . . . . . 11 SECTION 3 COMPANY CONTRIBUTIONS . . . . . . . . . . . . . 11 3.01 AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION. . . . . . . . . . . . . . . . 11 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 CONTRIBUTION. . . 13 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.. . . . . 19 4.04 LIMITATIONS ON AFTER-TAX CONTRIBUTIONS. . . 20 4.05 LIMITATIONS ON COMPANY MATCHING CONTRIBUTIONS.. . . . . . . . . . . . . . . 21 4.06 AGGREGATE LIMITATIONS.. . . . . . . . . . . 23 SECTION 5 INVESTMENT PROVISIONS . . . . . . . . . . . . . 25 5.01 INVESTMENT FUNDS. . . . . . . . . . . . . . 25 5.02 INVESTMENT DIRECTION. . . . . . . . . . . . 25 SECTION 6 ACCOUNTS . . . . . . . . . . . . . . . . . . . . 26 6.01 MEMBER ACCOUNTS.. . . . . . . . . . . . . . 26 6.02 COMPANY ACCOUNTS. . . . . . . . . . . . . . 26 6.03 MAINTENANCE OF ACCOUNTS.. . . . . . . . . . 27 6.04 VALUATION OF ACCOUNTS.. . . . . . . . . . . 27 6.05 MEMBER STATEMENTS.. . . . . . . . . . . . . 27 6.06 SHARES OF THE MAY DEPARTMENT STORES COMPANY ("MAY STOCK") IN THE MAY COMMON STOCK FUND. . . . . . . . . . . . . . . . . . . . 27 6.07 SHARES OF THE COMPANY RECEIVED IN RESPECT OF MAY STOCK . . . . . . . . . . . . . . . 29 ii 61 6.08 SHARES OF PAYLESS SHOESOURCE, INC. ("PAYLESS STOCK") IN THE PAYLESS COMMON STOCK FUND. . . . . . . . . . . . . . . . . 29 6.09 VESTING IN MEMBER AND COMPANY ACCOUNTS. . . 30 SECTION 7 EXPENSES . . . . . . . . . . . . . . . . . . . . 33 7.01 ADMINISTRATIVE EXPENSES.. . . . . . . . . . 33 SECTION 8 WITHDRAWALS DURING EMPLOYMENT . . . . . . . . . 34 8.01 WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED. . . . . . . . . . . . . . . . . 34 8.02 AUTHORIZED WITHDRAWALS. . . . . . . . . . . 34 SECTION 9 BENEFITS UPON RETIREMENT, DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT . . . . . . . . . . 36 9.01 BENEFITS. . . . . . . . . . . . . . . . . . 36 9.02 BENEFICIARY.. . . . . . . . . . . . . . . . 36 SECTION 10 PAYMENT OF BENEFITS . . . . . . . . . . . . . . 37 10.01 TIME OF PAYMENT. . . . . . . . . . . . . . 37 10.02 FORM OF PAYMENT . . . . . . . . . . . . . 38 10.03 INDIRECT PAYMENT OF BENEFITS . . . . . . . 38 10.04 INABILITY TO FIND MEMBER . . . . . . . . . 38 10.05 COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBER . . . . . . . . . . . . . . . . 38 10.06 COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY . . . . . . . . . . . . . . 39 10.07 COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE . . . . . . . . . . . . 39 SECTION 11 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS . . . . 40 11.01 ROLLOVER PERMITTED . . . . . . . . . . . . 40 11.02 DEFINITIONS . . . . . . . . . . . . . . . 40 SECTION 12 LIMIT ON CONTRIBUTIONS TO THE PLAN . . . . . . . 41 12.01 LIMIT ON CONTRIBUTIONS . . . . . . . . . . 41 12.02 SPECIAL DEFINITIONS . . . . . . . . . . . 41 12.03 GENERAL . . . . . . . . . . . . . . . . . 43 12.04 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS . . . . . . . . . . . . . . . . 43 12.05 LIMITATION IMPOSED BY CODE SECTION (401)(A)(17) . . . . . . . . . . . . . . . 44 SECTION 13 ADMINISTRATION OF THE PLAN. . . . . . . . . . . 45 13.01 PLAN ADMINISTRATOR . . . . . . . . . . . . 45 13.02 DELEGATION OF AUTHORITY. . . . . . . . . . 45 13.03 COMMITTEE AND SUBCOMMITTEES. . . . . . . . 45 13.04 ACCOUNTS AND REPORTS . . . . . . . . . . . 47 13.05 NON-DISCRIMINATION . . . . . . . . . . . . 47 iii 62 SECTION 14 MANAGEMENT OF THE TRUST FUND . . . . . . . . . . 47 14.01 USE OF THE TRUST FUND. . . . . . . . . 47 14.02 TRUSTEES.. . . . . . . . . . . . . . . 47 14.03 INVESTMENTS AND REINVESTMENTS. . . . . 47 SECTION 15 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS . . . . . . . . . . . . . . . . . . 48 15.01 DISCLAIMER OF EMPLOYER LIABILITY.. . . 48 15.02 EMPLOYER-ASSOCIATE RELATIONSHIP. . . . 49 15.03 BINDING EFFECT . . . . . . . . . . . . 49 15.04 CORPORATE ACTION.. . . . . . . . . . . 49 15.05 CLAIM AND APPEAL PROCEDURE.. . . . . . 49 SECTION 16 NON-ALIENATION OF BENEFITS . . . . . . . . . . . 50 16.01 PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY . . . . . . . . . . . . . . . 50 16.02 ALTERNATE APPLICATION. . . . . . . . . 50 SECTION 17 AMENDMENTS . . . . . . . . . . . . . . . . . . . 50 17.01 COMPANY'S RIGHTS.. . . . . . . . . . . 50 17.02 PROCEDURE TO AMEND.. . . . . . . . . . 51 17.03 PROVISION AGAINST DIVERSION. . . . . . 51 SECTION 18 TERMINATION . . . . . . . . . . . . . . . . . . 51 18.01 RIGHT TO TERMINATE.. . . . . . . . . . 51 18.02 WITHDRAWAL OF AN EMPLOYER. . . . . . . 51 18.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST . . . . . . . . . . . . . . . 51 18.04 ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST . . . . . . . . . . . . . . . 52 18.05 MERGER, CONSOLIDATION OR TRANSFER. . . 52 SECTION 19 CONSTRUCTION . . . . . . . . . . . . . . . . . . 52 19.01 APPLICABLE LAW.. . . . . . . . . . . . 52 19.02 GENDER AND NUMBER. . . . . . . . . . . 52 SECTION 20 TOP-HEAVY REQUIREMENTS . . . . . . . . . . . . . 52 20.01 GENERALLY. . . . . . . . . . . . . . . 52 20.02 VESTING. . . . . . . . . . . . . . . . 52 20.03 MINIMUM ALLOCATIONS. . . . . . . . . . 53 20.04 PARTICIPANTS UNDER DEFINED BENEFIT PLANS. . . . . . . . . . . . . . . . . 53 20.05 SUPER TOP-HEAVY PLANS. . . . . . . . . 53 20.06 DETERMINATION OF TOP HEAVINESS.. . . . 54 20.07 DETERMINATION OF SUPER TOP HEAVINESS.. 54 20.08 CALCULATION OF TOP-HEAVY RATIOS. . . . 54 20.09 CUMULATIVE ACCOUNTS AND CUMULATIVE ACCRUED BENEFITS . . . . . . . . . . . 54 20.10 OTHER DEFINITIONS. . . . . . . . . . . 56 iv EX-99.10 15 EX-99.10 1 EXHIBIT 99.10 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"). The Payless Plan provided for (1) a Company Contribution in an amount to be determined by the Company's Board of Directors and allocated to eligible Plan Members and (2) if elected by the Member, Member contributions determined on either a before-tax or after-tax basis. Effective January 1, 1997, Payless spun off the portion of the Payless Plan covering Associates employed by Payless PR and established a new Plan, adopted by Payless PR as an adopting Employer under Section 1.16. The terms and provisions of the new Plan established by Payless to accept the spin-off were substantially identical to the terms and provisions of the Payless Plan, as amended and restated. Such amendment and restatement, both as to the Payless Plan and in connection with this Plan, applied only to 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 were 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. Now, the Company and Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, are merging, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.) (hereinfater referred to as the "Merger"), to be effective as of the date of the Merger (hereinafter the "Effective Time"). This amendment and restatement of the Plan, as of the Effective Time, makes such changes as are necessary to reflect the Merger. The terms and provisions of this amended and restated Plan are as follows: 2 SECTION 1 DEFINITIONS 1.01 ACCOUNTS means the Company Accounts and Member Accounts established under Section 6. 1.02 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). 1.03 ALLOCATION PAY AMOUNT means with respect to each eligible Member, (a) one (1) times the amount of Pay as defined in Section 1.31 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 1.02 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, for the 1996 Plan Year, only Pay received after the Plan's Effective Date shall be considered and the SSWB shall be prorated accordingly. Further, 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. 1.04 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 U.S. citizen employed, at the request of the Company or the Employer, by a member of the Group (defined in 2 3 Section 1.20) 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. Employees in departments operated by others under lease or license shall be deemed Associates for the purposes of this Plan but only in those cases approved by the Committee in its discretion where the lessees or licensees shall have requested participation hereunder and shall have agreed in writing to assume their respective equitable proportions of the contributions payable to the Trustee as provided under this Plan. 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). 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. 1.05 AUTHORIZED LEAVE OF ABSENCE means any leave of absence authorized by the Employer under rules established by the Employer. 1.06 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. 1.07 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. 1.08 BOARD means the Board of Directors of the Company. 1.09 CODE means the U.S. Internal Revenue Code of 1986, as amended from time to time, but only to the extent incorporated into the applicable provisions of the Puerto Rico Internal Revenue Code of 1994 (the "Act"). Any references herein to Code Sections which have not been incorporated into the Act and which conflict with the Act shall be void and of no effect hereunder. Any references herein to specific Code Sections or regulations thereunder shall be construed as and deemed to be references to the corresponding sections of the Act or regulations thereunder, as applicable. 1.10 COMMITTEE means the Retirement 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 Retirement Committee of the Payless ShoeSource, Inc. Profit Sharing Plan from time to time. 3 4 1.11 COMPANY OR PAYLESS means Payless ShoeSource, Inc., a Missouri corporation, provided that immediately after the Effective Time of the Merger, such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, 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 or by an Employer, 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 or by an Employer, based on Net Profits, pursuant to Section 3.01. 1.15 EFFECTIVE DATE originally meant January 1, 1997. However, the effective date of this amendment and restatement of the Plan shall be the Effective Time of the Merger. 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 Trustee, each of the members of the Committee described in Section 13, and any investment manager designated pursuant to Section 14. 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 Code Section 414(b), or as a trade or business under common control in accordance with Code Section 414(c). For the purposes of the Plan, for determining whether or not a person is an employee of the Group and the 4 5 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. 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 or 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. 1.22 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 and the Member After-Tax Accounts. 1.26 MEMBER AFTER-TAX ACCOUNTS means the Member Accounts with respect to a Member's After-Tax Contributions. 5 6 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 MILITARY SERVICE means 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 Code Section 414(v). 1.30 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. 1.31 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 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 $150,000 shall be disregarded, although such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). 1.32 PLAN means this Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates, as amended from time to time. 6 7 1.33 PLAN YEAR means a calendar year ending each December 31. 1.34 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. 1.35 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. 1.36 RETIREMENT means a Member's termination of employment on or after age 55 with at least five (5) Years of Service, as of which date the Member's benefit shall be nonforfeitable. 1.37 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. 1.38 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. 1.39 TRANSFERRED ACCOUNTS means Member and Company Accounts transferred from a Prior Plan. 1.40 TRUST AGREEMENT means the agreement or agreements provided for in Section 14, as amended from time to time. 1.41 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. 1.42 TRUSTEE means the corporation(s), person or persons which may at any time be acting as Trustee or Trustees under the Trust Agreement. 1.43 UNIT means one of the units representing an interest in an Investment Fund as provided in Section 6.03. 7 8 1.44 UNIT VALUE means the value of each Unit in an Investment Fund as of the Valuation Date as determined pursuant to Section 6.04. 1.45 VALUATION DATE means the last day of each calendar month or such other date or dates as may be established by the Committee from time to time. 1.46 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. 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 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 1.04. 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 1.47 shall be determined by the Company or by the Committee on a case-by-case basis. 1.47 VESTING SERVICE for purposes of determining a Member's vested interest under Section 6.09 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 for the Employer. (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. (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 date upon which an Associate terminates employment with the Employer (either voluntarily or involuntarily), retires or dies; or 8 9 (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. (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 10 SECTION 2 MEMBERSHIP 2.01 CONDITIONS OF ELIGIBILITY. (a) Each Associate who on the day before the Effective Date of this Plan is a Member of or is eligible to be a Member of the Payless Plan or who would be eligible to become a Member of the Payless Plan on January 1, 1997 if the Employer had continued to be a participating Employer under the Payless Plan shall 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) From the Effective Date to July 31, 1997, each other Associate shall be eligible to become a Member of this Plan as follows: (i) When an Associate has completed one Year of Service and attained age 21, he shall be eligible to make Member Contributions pursuant to Section 4 hereof, commencing on the first day of the month coincident with or following the date he has met these eligibility requirements. (ii) When an Associate has completed two Years of Service and attained age 21, he shall be eligible to share in Company Profit Sharing Contributions pursuant to Section 3 of this Plan, effective as of the first day of the month coincident with or following the date he satisfies the requirements of this subparagraph (ii). (c) Commencing August 1, 1997, each 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. (d) Effective January 1, 1998, each Associate who was eligible as of December 31, 1997, or who becomes eligible to become a Member thereafter, shall be 10 11 deemed to have elected to make a three percent (3%) Before-Tax Contribution pursuant to Section 4.01(b), commencing with the first paycheck received on or after the later of January 1, 1998, or 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%). (e) 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 satisfying the Plan's condition of eligibility under Section 2.01(b)(i), 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 period during which the Associate does not complete more than 500 Hours of Service with the Employer, and/or May while part of the Group. 2.02 NO DUAL MEMBERSHIPS. Notwithstanding anything in this Plan to the contrary, when and as an Employer is obligated, pursuant to an agreement with any group or association which represents an Associate, to contribute to any plan involving pensions or other qualified deferred compensation, such Associate shall not be eligible for membership in this Plan. If 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. 2.03 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. 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 11 12 Company shall be reimbursed to the Company by the Employer for which such amounts were advanced. For the Plan Year ended December 31, 1997, the Company Profit Sharing Contribution was made for the seven month period ended July 31, 1997, such that the total combined amount contributed to this Plan and to the Payless Plan for such period was equal to 2 1/2% of Net Profits for the period February 2, 1997 through August 30, 1997. For the period August 1, 1997 through December 31, 1997, the Employer replaced the Company Profit Sharing Contribution with a Company Matching Contribution such that the total combined amount contributed to this Plan and to the Payless Plan for such period was equal to 2 1/2% of Net Profits for the period August 31, 1997 through January 31, 1998. 3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION. Effective August 1, 1997, and for Plan Years commencing thereafter, 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 Plan equal to 2 1/2% of Net Profits, until determined otherwise by the Board of Directors, in the form of a Company Matching Contribution. Such contribution may be made directly 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), 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. For the Plan Year ended December 31, 1997, the total Company Matching Contribution to this Plan and to the Payless Plan was a combined amount equal to 2 1/2% of Net Profits for the period August 31, 1997 through January 31, 1998. 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 6.09. Company Matching Contributions shall be allocated, based on annual Member Contributions up to 5% of Pay, to the Member's Company Matching Contribution Account, subject to the vesting provisions of Section 6.09 and to the withdrawal penalty provisions of Section 8.02(a). No Company Matching 12 13 Contribution shall be made with respect to a Member Before-Tax Contribution in excess of the Code Section 402(g) 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 Plan and this Plan. Notwithstanding the foregoing paragraph, for the Plan Year ended December 31, 1997, the allocation made to the Company Profit Sharing Contribution Account of each eligible Member who was employed by the Employer on December 31, 1997 shall be the amount determined applying the allocation formula set forth in the preceding paragraph for Members eligible during January, February, March, April, May, June and July of 1997, based on the Allocation Pay of all such Members during said period. The amounts of such contributions shall be subject to applicable limitations, if any, imposed by the Code and the Act. In no event shall an allocation be made under Sections 3.03 or 3.04 in excess of an amount permitted by Code Section 401(a)(4) and the Regulations pursuant thereto. 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 the Member in the investment election filed pursuant to Section 5.02 effective for the most recent December 31. 3.06 RETURN OF COMPANY CONTRIBUTIONS. (a) If a Company or Employer Contribution is made to the Trust because of a good faith mistake of fact, then, within one year of the date of payment of such Company contribution to the Trust, the Company and/or the Employer shall have the right (i) to recover an amount equal to the excess of (A) the amount of such Company contribution over (B) the amount that would have been contributed had a mistake of fact not occurred, or (ii) to allow all or a portion of such amount to remain in the Plan, to be forfeited and applied to or allocated with other forfeitures at the end of such Plan Year. (b) Each contribution made to the Trust shall be made on the condition that it is currently deductible by the Employer under Code Section 404 for the taxable year with respect to which the contribution is made. If a contribution 13 14 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. SECTION 4 MEMBER CONTRIBUTIONS 4.01 PROCEDURE FOR MAKING CONTRIBUTIONS. (a) AFTER-TAX CONTRIBUTIONS. Subject to any limitations set forth in the Act 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, or a flat dollar amount of not less than $2.00 and not more than $10.00 per Pay period, subject to any further limitations imposed by the Company in its discretion; provided, however, that any Before-Tax Contributions made on behalf of the Member shall reduce by the percentage or dollar amount which he elects to have contributed pursuant to Section 4.01(b)(i), the percentage or dollar amount 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, or a flat dollar amount of not less than $2.00 and not more than $10.00 per Pay period, 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) Commencing January 1, 1998, pursuant to Section 2.01(d), 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. 14 15 (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 Puerto Rico Internal Revenue Code of 1994 ("Act"), or if the Actual Deferral Percentage standards set forth in the Act 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(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 my 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 paid 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. As of the first day of any calendar month after the date of such suspension(s) and with at least 15 days' prior notice, or as of such other date and with such notice 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 15 16 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 $7,500 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 "Deferral Limit"). 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). 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 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 is not more than two percentage points, and the Actual Deferral Percentage for the group of eligible Highly Compensated Employees is not more than the Actual Deferral Percentage of all other eligible Associates multiplied by 2.0. (iii) Effective January 1, 1997 to the extent permitted by the Act, 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. 16 17 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. 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 Act, may be aggregated with such Before-Tax Contributions for purposes of demonstrating compliance with the requirements of the Act) 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 Internal Revenue Service) to the affected Highly Compensated Employees as soon as practicable after the end of such Plan Year, and in all events 17 18 prior to the end of the next following Plan Year. Effective January 1, 1997, any excess Before-Tax Contributions to be returned to Highly Compensated Employees shall be calculated (i.e., reduced) and distributed by first reducing the Before-Tax Contributions of the Highly Compensated Employees with the largest dollar amount(s) of Before-Tax Contributions (rather than with the highest Percentage(s)) to the extent required or permitted under the Act. 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 Act), 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 Internal Revenue Service, may be distributed no later than April 15 (or such later date as may be 18 19 permitted under the Act) 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 Act Section 1165(e) exceeds the limit imposed on the Member in accordance with the applicable provisions of the Act 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 Act 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 Act 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 20 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 which may include a money market or stable value fund, a fixed income fund, a common stock fund, a Payless Common Stock Fund and a May Common Stock Fund. The May Common Stock Fund shall not be available for investment of new contributions and shall be eliminated entirely as an investment option not later than December 31, 1997. If, on or before December 31, 1997, a Member has failed to direct the reinvestment of amounts in his May Common Stock Fund, he shall be deemed to have elected to have such amounts invested in the money market or stable value fund. 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. Effective immediately following the Merger, any reference to the "Payless Common Stock Fund" or to "Payless Stock" shall be deemed to be a reference to a fund invested in, and to shares of common stock of, the Company, rather than a reference to a fund invested in, or shares of, Payless ShoeSource, Inc., a Missouri corporation and the Sponsor of the Plan immediately prior to the Merger. (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 calendar month be invested in 1% increments totaling 100% in one or more of the Investment Funds. Such election must be made with at least one day notice prior to each calendar month or prior to membership in the Plan, pursuant to procedures prescribed by the Committee, or on such other date and subject to other conditions as may be determined 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 20 21 Contributions and his Company Profit Sharing Contributions invested in the Money Market Fund (or such other stable, fixed income investment as may be determined by the Committee) and 100% of his Company Matching Contributions in the Payless Common Stock Fund. For the Plan Year ended December 31, 1996 and 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 such Plan Year-end. (b) A Member may change his election with respect to future Member and Company Contributions effective with the first payroll period paid in each calendar month with at least one day prior written notice to the Committee pursuant to procedures prescribed by the Committee, or on such other date and subject to other conditions as may be determined 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 last day of each calendar month with at least one day prior notice to the Committee, or as of such other 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 under Section 5.01. 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. 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. 21 22 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 THE MAY DEPARTMENT STORES COMPANY ("MAY STOCK") IN THE MAY COMMON STOCK FUND. The provisions of this Section 6.06 shall govern the shares of common stock in the May Common Stock Fund, including the shares of stock transferred to the Plan from the May Plan. (a) The May Stock shall be held by the Trustee in a separate fund of the Trust designated as the May Common Stock Fund. Subject to the further provisions of Section 6.07, the May Common Stock Fund shall be invested only in shares of May Stock. Dividends received by the Trustee in respect of the May Stock shall be first used to pay expenses of the May Common Stock Fund and then invested in the Money Market Fund. (b) A Member may elect to sell some or all of the Units in the May Common Stock Fund attributable to either his Member or Company Accounts. Such election shall be made in such manner as provided by the Committee and will be effective as of the last day of the calendar month in which the election is recorded. Notwithstanding the foregoing, the Committee may permit Members to elect to sell Units as of any monthly valuation date and under such further conditions as may be determined from time to time which shall be applicable to all Members with Units in the May Common Stock Fund. 22 23 (c) The net proceeds from the sale of a Member's interest in the May Common Stock Fund shall be invested pursuant to the Member's election in one or more of the other Investment Funds described in Section 5.02. (d) At such time as all shares of May Common Stock attributable to Units held in the May Common Stock Fund have been distributed or sold pursuant to Member election, the May Common Stock Fund shall terminate. Until such time as such Fund has been terminated, it shall be valued at the same time and in the same manner as the Investment Funds described in Section 5.02, and maintained to and valued in Member Accounts in accordance with Sections 6.03. (e) Each Member (or beneficiary of a deceased Member) who has Accounts in the May 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 May Stock attributable to Units credited to him in the May Common Stock Fund as of the latest practicable Valuation Date prior to each meeting of shareowners of May. 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. Each Member or Beneficiary who has the right under this section to direct the Trustee with respect to voting shares and who provides timely instructions to the Trustee shall, as a named fiduciary, be considered to have directed the Trustee to vote a pro rata portion of the shares attributable to Units for which the Trustee receives no timely instructions and shares which have not been credited as of the latest practicable Valuation Date. Upon receipt of such instructions, the Trustee shall vote such shares in accordance therewith. If, within such reasonable period of time prior to any such meeting of the shareowners as may be specified by the Trustee, no instructions shall have been received by the Trustee from such Member, the Trustee shall vote, in person or by proxy, such shares of stock proportionally in the same manner as the May Stock for which the Trustee received voting instructions from Members. The Trustee shall not divulge the instruction of any Member. The Trustee shall also be entitled to vote in its sole discretion, in person or by proxy, all shares of May Stock held by it upon any matters to which as a practical matter no instructions can be given by Members prior to the meeting. (f) Each Member who has Accounts in the May 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 May Stock attributable to Units credited to him in the May 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 May Stock, and the Trustee shall respond in accordance with the instructions so received. The Trustee shall utilize its best efforts to 23 24 timely distribute or cause to be distributed to each Member such information as will be distributed to shareowners of May 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 May Stock with respect to which such Member has the right of direction. The Trustee shall not divulge the instructions of any Member. Shares in May Stock Fund Accounts of Members who direct that such shares be tendered or exchanged shall be transferred to a new fund. 6.07 SHARES OF PAYLESS STOCK RECEIVED IN RESPECT OF MAY STOCK. In the event that shares of Payless Stock were distributed to Members' Accounts in the May Common Stock Fund, such shares were segregated and transferred to the Payless Common Stock Investment Fund. 6.08 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 each meeting of 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. Each member or Beneficiary who has the right under this Section 6.08 to direct the Trustee with respect to voting shares and who provides timely instructions to the Trustee shall, as a named fiduciary, be considered to have directed the Trustee to vote a pro rata portion of the shares attributable to Units for which the Trustee receives no timely instructions and shares which have not been credited as of the latest practicable Valuation Date. Upon receipt of such instructions, the Trustee shall vote such shares in accordance therewith. If, within such reasonable period of time prior to any such meeting of the shareowners as may be specified by the Trustee, no instruction shall have been received by the Trustee from such Member, the Trustee shall vote, in person or by proxy, such shares of stock proportionally in the same manner as the Payless Stock for which the Trustee received voting instructions from Members. The Trustee shall not divulge the instructions of any Member. The Trustee shall also be entitled to vote in its sole discretion, in person or by proxy, all shares of Payless Stock held by it upon any matters to which as a practical matter no instructions can be given by Members prior to the meeting. 24 25 (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. 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. 6.09 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: Period of Service Vested Interest ----------------- --------------- Fewer than 2 years 0% 2 years 25% 3 years 50% 4 years 75% 5 years or more 100% 25 26 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 9.01, a partially-vested Member receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in clause (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 clause (f) below. A partially- vested Member is a Member whose Vested Interest, determined under Section 6.09(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 clause (e) 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 clause (f) below; (B) second, deductible Employer contributions for the Plan Year to the extent made under a discretionary formula; and 26 27 (C) third, as otherwise permitted by law. The Plan Administrator will not take into account any allocation under this clause (b) in applying the limitation on allocations under Section 12. (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) PERIOD OF SERVICE--VESTING. For purposes of determining a Member's Vested Interest in his Company Contributions Account(s) under clause (a) above, a Member shall be credited with that number of "years of service" determined by adding together all of the Employee's Periods of Service, whether or not consecutive. Only whole years of service shall be taken into account for purposes of applying the schedule set forth in clause (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 thirty (30) days of service being deemed to constitute one month and with either twelve (12) months or 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 1.47(g) shall apply. (d) BREAK IN SERVICE--VESTING. For purposes of this Section 6.09, a "Break in Service" is a Period of Severance of at least twelve (12) consecutive months. (e) INCLUDED PERIODS OF SERVICE. (i) For purposes of determining "Periods of Service" under this clause (e), the Plan takes into account all Periods of Service an Associate completes with an Employer or with a member of the Group (defined in Section 1.20), except: (A) any Period of Service before the Plan Year in which the Member attained the age of eighteen (18); and (B) for the sole purpose of determining a Member's Vested Interest of his Account(s) derived from Company contributions which accrued for his benefit prior to a Forfeiture Break in Service, the 27 28 Plan shall disregard any Period of Service after the Member first incurs a Forfeiture Break in Service. The Member incurs a Forfeiture Break in Service when he incurs five (5) consecutive Breaks in Service. (f) 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 clause (f) solely by reference to the vesting schedule of Section 6.09(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. (g) FORMER MAY PLAN MEMBERS. The provisions of this clause (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, the value of the Member's Company Account forfeited under the May Plan will be restored under this Plan (in the manner described in clause (b) above) and will be 100% vested. 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 28 29 fees, are not regarded as administrative expenses and shall be borne by the appropriate Investment Fund as determined by the Trustee or Committee. 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. 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; 29 30 (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. 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. (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 30 31 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. 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 at the end of the month next following the later of (i) the date of such termination of employment or (ii) the date the Plan Administrator receives notice of such termination of employment, whether such notice be written notice or actual notice, and shall be distributed as provided in Section 10. 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 for the purposes of this Plan. 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 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. 31 32 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 ever has exceeded) $3,500 (or, effective January 1, 1998, $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 $3,500 (or $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 32 33 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 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 May Common Stock Fund or the Payless Common Stock Fund shall be made in the form of full shares of May Common Stock or 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 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, effective January 1, 1997, 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. If a Member is currently receiving required distributions from the Plan under Code Section 401(a)(9) and this Section 10.05 but would not be required to receive such payments after January 1, 1997 under 33 34 this Section 10.05 as amended, such Member may elect, in the manner determined by the Committee, to postpone further distributions until the date otherwise required hereunder. Such distribution may be made by distributing the entire value of the Member's Accounts as of the last day of such calendar year. If otherwise permitted pursuant to Code Section 401 (a) (9) and Regulations thereto, the Member may elect to take such distribution in lump sum or in installments, if he is otherwise entitled to installment payments pursuant to Section 10.01 (b). 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 the first day of April following the calendar year in which the Member would have attained age 70 1/2. Notwithstanding the above, any portion of a Member's accounts which are distributable to a Beneficiary shall be distributed within five (5) years of the Member's death. 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 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 $3,500, 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. 34 35 SECTION 11 PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS 11.01 ROLLOVER PERMITTED. 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 less than thirty (30) days after the notice required under Treas. Reg. Section 1.411(a)-11(c) (or its successor) is 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 an earlier distribution. 11.02 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, 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); and 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). (b) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 401(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), and which accepts the distributee's 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. 35 36 (d) DIRECT ROLLOVER. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. SECTION 12 LIMIT ON CONTRIBUTIONS TO THE PLAN This Section 12 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. 12.01 LIMIT ON CONTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary: (a) The "Annual Addition" that may be made to a Member's Accounts in any calendar year shall not exceed (i) 25% of his Earnings for the calendar year or (ii) $30,000 (as adjusted from time to time by the Secretary of the Treasury or his delegate, pursuant to Code Section 415(d), provided that no such adjustment shall be taken into account before the calendar year for which the adjustment first takes effect). (b) If a Member participates in a Defined Benefit Plan maintained by the Extended Group, the sum of the Member's Defined Contribution Plan Fraction and Defined Benefit Plan Fraction may not exceed 1.0 for any calendar year. (c) If the limitation imposed by Subsection (a) above applies to a Member in a calendar year, his Member Contributions and, if necessary, Company Contributions shall be reduced to the extent necessary to prevent the limitation with respect to such calendar year from being exceeded. If the limitation imposed by Subsection (b) above, applies, the benefits under any Defined Benefit Plan maintained by the Extended Group shall be reduced before the Annual Additions under this Plan are reduced. 12.02 SPECIAL DEFINITIONS. For the purposes of this Section 12, the following terms shall have the following meanings: (a) ANNUAL ADDITION for any calendar year is the sum of: (i) the amount of the Company Profit Sharing and Matching Contributions for the calendar year, plus 36 37 (ii) the Member's Before-Tax Contributions for the calendar year, plus (iii) the Member's After-Tax Contributions, plus (iv) the amount of an Employer's contribution on behalf of the Member or of a Member's contribution, if any, in the same Plan Year, to another individual account pension benefit plan maintained by an Employer, plus (v) the amount, if any, allocated to an individual medical account pursuant to Code Section 415(l)(1), plus (vi) the amount, if any, attributable to post-retirement medical or life insurance benefits for key employees pursuant to Code Section 419A(d)(2). (b) Defined Benefit Plan means any plan which is qualified under Code Sections 401(a) or 403(a) and which is not a Defined Contribution Plan. (c) Defined Benefit Plan Fraction means a fraction, where the numerator is the Member's projected annual benefit under the Defined Benefit Plan (determined as of the close of the calendar year), and the denominator is the lesser of: (i) 1.25 multiplied by the dollar limitation in effect under Code Section 415(b)(1)(A) for that calendar year, or (ii) 1.4 multiplied by the amount that may be taken into account under Code Section 415(b)(1)(B) with respect to the Member for the calendar year. (d) DEFINED CONTRIBUTION PLAN means any plan which is qualified under Code Sections 401(a), 403(a), or 405(a) and which provides for an individual account for each Member and for benefits based solely on the amount contributed to the account, and any income, expenses, gains, losses, and forfeitures that may be allocated to the account. (e) DEFINED CONTRIBUTION PLAN FRACTION means a fraction, where the numerator is the sum of the Annual Additions to the Member's Accounts as of the close of the calendar year, and the denominator is the sum of the lesser of the following amounts for such calendar year and for each prior calendar year of service with the Extended Group: 37 38 (i) 1.25 multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A) for that calendar year (determined without regard to Code Section 415(c)(6)), or (ii) 1.4 multiplied by the amount that may be taken into account under Code Section 415(c)(1)(B) with respect to the Member for the calendar year; provided, that the Company may, in accordance with applicable Treasury Department regulations, elect to calculate the denominator of the Defined Contribution Plan Fraction in accordance with Code Section 415(e)(6). (f) EARNINGS means the Member's "415(c) compensation" (as determined under Section 415(c)(3) of the Code and under Treasury Regulation Section 1.415-2(d)(11), and including any such compensation received from the Extended Group. (g) EXTENDED GROUP means the Company, the Employer and any other employer which is related to the Corporation as a member of a controlled group of corporations in accordance with Code Section 414(b), or as a trade or business under common control in accordance with Code Section 414(c), plus any other company, trade or business which would be included by such definition after the modification thereof required by Code Section 415(h). 12.03 GENERAL. (a) For purposes of applying the limitations set forth in this Section 12, all Defined Benefit Plans (whether or not terminated) of the Extended Group shall be treated as one Defined Benefit Plan, and all Defined Contribution Plans (whether or not terminated) of the Extended Group shall be treated as one Defined Contribution Plan. (b) This Section 12 is intended to satisfy the requirements imposed by Code Section 415 and shall be construed in a manner that shall effectuate this intent. This Section 12 shall not be construed in a manner that would impose limitations that are more stringent than those required by Code Section 415. 12.04 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 38 39 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 Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 12.01(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. 12.05 LIMITATION IMPOSED BY CODE SECTION (401)(a)(17). In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Pay of each Associate taken in to account under the Plan shall not exceed the annual compensation limit of the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). The OBRA '93 annual Pay limit is $150,000, as adjusted by the Commissioner of Internal Revenue Service for increases in the cost of living in accordance with Code Section 40l(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Pay is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual Pay limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. Any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 annual Pay limit set forth is this provision. If Pay for any prior determination period is taken into account in determining an Associate's benefits accruing in the current year, the Pay for that prior determination period is subject to the OBRA '93 annual Pay limit in effect for that prior 39 40 determination period. For this purpose, for a determination period beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual Pay limit is $150,000. SECTION 13 ADMINISTRATION OF THE PLAN 13.01 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). 13.02 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 1.38 (Total and Permanent Disability), 4.01 (b) and (c) (Member Contributions), 6.01 (Member Accounts), 6.02 (Company Accounts), 6.05 (Annual Statements), 8.02 (Authorized Withdrawals), 12.04 (Adjustment of Excessive Annual Additions), 18.02 (Withdrawal of an Employer) and this Section 13. (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), 14 (Management of the Trust Fund), 6.06 (shares of The May Department Stores Company in the May Common Stock Fund), and 6.08 (shares of Payless ShoeSource, Inc. 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 14.03(b), (c) and (d) (Investments and Reinvestments). (d) Authority to exercise any and all of the powers of the Company hereunder following the Effective Time of the Merger may be delegated by the Company to Payless ShoeSource, Inc., a Missouri corporation and the sponsor of the Plan immediately prior to the Merger, or to any officer, employee or agent thereof. 13.03 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 40 41 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 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 13.03. 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 14.03(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 13 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. 41 42 13.04 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. 13.05 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)). SECTION 14 MANAGEMENT OF THE TRUST FUND 14.01 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. 14.02 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. 14.03 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 index fund, or any other Investment Funds the Company may designate. 42 43 (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 14.03(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 14.02, then the powers of the Investment Subcommittee as provided for in Section 14.03(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 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 14 of the Plan. SECTION 15 CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS 15.01 DISCLAIMER OF EMPLOYER LIABILITY. (a) No liability shall attach to the Company or the 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. 43 44 15.02 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. 15.03 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. 15.04 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: 15.05 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 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 45 SECTION 16 NON-ALIENATION OF BENEFITS 16.01 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. 16.02 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. SECTION 17 AMENDMENTS 17.01 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 45 46 Code Section 401(a) and to have the trust or trusts declared exempt from taxation under Code Section 501(a). 17.02 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. 17.03 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. SECTION 18 TERMINATION 18.01 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 18.03 shall apply and the Accounts of affected Members shall become (or remain) fully vested and nonforfeitable. 18.02 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 18.03 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. 18.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST. If this Plan is terminated at any time including a partial termination as defined in 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. 46 47 18.04 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 18.03 shall apply. 18.05 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). SECTION 19 CONSTRUCTION 19.01 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 Internal Revenue Code to the extent applicable and of the Puerto Rico Internal Revenue Code of 1994. 19.02 GENDER AND NUMBER. Wherever applicable, the masculine pronoun as used herein shall include the feminine pronoun and the singular pronoun shall include the plural. 47 48 PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN FOR PUERTO RICO ASSOCIATES Effective June 1, 1998 49 TABLE OF CONTENTS Page SECTION 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.01 Accounts. . . . . . . . . . . . . . . . . . . . . 2 1.02 After-Tax Contributions . . . . . . . . . . . . . 2 1.03 Allocation Pay Amount . . . . . . . . . . . . . . 2 1.04 Associate . . . . . . . . . . . . . . . . . . . . 2 1.05 Authorized Leave of Absence. . . . . . . . . . . 3 1.06 Before-Tax Contributions. . . . . . . . . . . . . 3 1.07 Beneficiary . . . . . . . . . . . . . . . . . . . 3 1.08 Board . . . . . . . . . . . . . . . . . . . . . . 3 1.09 Code. . . . . . . . . . . . . . . . . . . . . . . 3 1.10 Committee . . . . . . . . . . . . . . . . . . . . 3 1.11 Company or Payless. . . . . . . . . . . . . . . . 4 1.12 Company Accounts. . . . . . . . . . . . . . . . . 4 1.13 Company Matching Contributions. . . . . . . . . . 4 1.14 Company Profit Sharing Contributions. . . . . . . 4 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 . . . . . . . . . . . . . . . . . 5 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. . . . . . . . . . . . 6 1.28 Member Contributions. . . . . . . . . . . . . . . 6 1.29 Military Service. . . . . . . . . . . . . . . . . 6 1.30 Net Profits . . . . . . . . . . . . . . . . . . . 6 1.31 Pay . . . . . . . . . . . . . . . . . . . . . . . 6 1.32 Plan. . . . . . . . . . . . . . . . . . . . . . . 6 1.33 Plan Year . . . . . . . . . . . . . . . . . . . . 7 1.34 Prior Plan. . . . . . . . . . . . . . . . . . . . 7 1.35 Qualified Domestic Relations Order. . . . . . . . 7 1.36 Retirement. . . . . . . . . . . . . . . . . . . . 7 1.37 Social Security Wage Base . . . . . . . . . . . . 7 i 50 1.38 Total and Permanent Disability or Disability. . . 7 1.39 Transferred Accounts. . . . . . . . . . . . . . . 7 1.40 Trust Agreement . . . . . . . . . . . . . . . . . 7 1.41 Trust Fund. . . . . . . . . . . . . . . . . . . . 7 1.42 Trustee . . . . . . . . . . . . . . . . . . . . . 7 1.43 Unit. . . . . . . . . . . . . . . . . . . . . . . 7 1.44 Unit Value. . . . . . . . . . . . . . . . . . . . 8 1.45 Valuation Date. . . . . . . . . . . . . . . . . . 8 1.46 Year of Service . . . . . . . . . . . . . . . . . 8 1.47 Vesting Service . . . . . . . . . . . . . . . . . 8 SECTION 2 Membership . . . . . . . . . . . . . . . . . . . . . 10 2.01 Conditions of Eligibility.. . . . . . . . . . . . 10 2.02 No Dual Memberships . . . . . . . . . . . . . . . 11 2.03 Re-Employment . . . . . . . . . . . . . . . . . . 11 SECTION 3 Company Contributions. . . . . . . . . . . . . . . . 11 3.01 Amount of Company Profit Sharing Contribution . . 11 3.02 Amount of Company Matching Contribution . . . . . 12 3.03 Allocation of Company Contributions.. . . . . . . 12 3.04 Profit Sharing Allocation Formula.. . . . . . . . 13 3.05 Investment of the Company Contribution. . . . . . 13 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 . . . . . . . . . . . . . . . . . . . . . . 21 6.01 Member Accounts . . . . . . . . . . . . . . . . . 21 6.02 Company Accounts. . . . . . . . . . . . . . . . . 21 6.03 Maintenance of Accounts.. . . . . . . . . . . . . 22 6.04 Valuation of Accounts.. . . . . . . . . . . . . . 22 6.05 Member Statements.. . . . . . . . . . . . . . . . 22 6.06 Shares of The May Department Stores Company ("May Stock") in the May Common Stock Fund. . . . . . . 22 ii 51 6.07 Shares of Payless Stock Received in Respect of May Stock . . . . . . . . . . . . . . . . . . . . . . 24 6.08 Shares of Payless ShoeSource, Inc. ("Payless Stock") in the Payless Common Stock Fund. . . . . 24 6.09 Vesting in Member and Company Accounts. . . . . . 25 SECTION 7 Expenses. . . . . . . . . . . . . . . . . . . . . . . 28 7.01 Administrative Expenses . . . . . . . . . . . . . 28 SECTION 8 Withdrawals During Employment . . . . . . . . . . . . 29 8.01 Withdrawals Prohibited Unless Specifically Authorized . . . . . . . . . . . . . . . . . . . 29 8.02 Authorized Withdrawals. . . . . . . . . . . . . . 29 SECTION 9 Benefits Upon Retirement, Death, Disability, or Termination of Employment . . . . . . . . . . . . . . 31 9.01 Benefits. . . . . . . . . . . . . . . . . . . . . 31 9.02 Beneficiary.. . . . . . . . . . . . . . . . . . . 31 SECTION 10 Payment of Benefits . . . . . . . . . . . . . . . . . 32 10.01 Time of Payment . . . . . . . . . . . . . . . . . 32 10.02 Form of Payment . . . . . . . . . . . . . . . . . 33 10.03 Indirect Payment of Benefits. . . . . . . . . . . 33 10.04 Inability to Find Member. . . . . . . . . . . . . 33 10.05 Commencement of Benefit Distribution to Member. . 33 10.06 Commencement of Benefit Distribution to Beneficiary . . . . . . . . . . . . . . . . . . . 34 10.07 Commencement of Benefit Distribution to Alternate Payee . . . . . . . . . . . . . . . . . 34 SECTION 11 Permitted Rollover of Plan Distributions. . . . . . . 35 11.01 Rollover Permitted. . . . . . . . . . . . . . . . 35 11.02 Definitions . . . . . . . . . . . . . . . . . . . 35 SECTION 12 Limit on Contributions to the Plan. . . . . . . . . . 36 12.01 Limit on Contributions. . . . . . . . . . . . . . 36 12.02 Special Definitions . . . . . . . . . . . . . . . 36 12.03 General . . . . . . . . . . . . . . . . . . . . . 38 12.04 Adjustment for Excessive Annual Additions . . . . 38 12.05 Limitation Imposed by Code Section (401)(a)(17). . . . . . . . . . . . . . . 39 SECTION 13 Administration of the Plan. . . . . . . . . . . . . . 40 13.01 Plan Administrator. . . . . . . . . . . . . . . . 40 13.02 Delegation of Authority . . . . . . . . . . . . . 40 13.03 Committee and Subcommittees . . . . . . . . . . . 40 13.04 Accounts and Reports. . . . . . . . . . . . . . . 42 13.05 Non-Discrimination. . . . . . . . . . . . . . . . 42 iii 52 SECTION 14 Management of the Trust Fund. . . . . . . . . . . . . . 42 14.01 Use of the Trust Fund . . . . . . . . . . . . . . . 42 14.02 Trustees. . . . . . . . . . . . . . . . . . . . . . 42 14.03 Investments and Reinvestments . . . . . . . . . . . 42 SECTION 15 Certain Rights and Obligations of Employers and Members . . . . . . . . . . . . . . . . . . . . . . . . 43 15.01 Disclaimer of Employer Liability. . . . . . . . . . 43 15.02 Employer-Associate Relationship . . . . . . . . . . 44 15.03 Binding Effect . . . . . . . . . . . . . . . . . . 44 15.04 Corporate Action. . . . . . . . . . . . . . . . . . 44 15.05 Claim and Appeal Procedure. . . . . . . . . . . . . 44 SECTION 16 Non-Alienation of Benefits. . . . . . . . . . . . . . . 45 16.01 Provisions With Respect to Assignment and Levy. . . 45 16.02 Alternate Application . . . . . . . . . . . . . . . 45 SECTION 17 Amendments. . . . . . . . . . . . . . . . . . . . . . . 45 17.01 Company's Rights. . . . . . . . . . . . . . . . . . 45 17.02 Procedure to Amend. . . . . . . . . . . . . . . . . 46 17.03 Provision Against Diversion . . . . . . . . . . . . 46 SECTION 18 Termination . . . . . . . . . . . . . . . . . . . . . . 46 18.01 Right to Terminate. . . . . . . . . . . . . . . . . 46 18.02 Withdrawal of an Employer . . . . . . . . . . . . . 46 18.03 Distribution in Event of Termination of Trust . . . 46 18.04 Administration in Event of Continuance of Trust . . 47 18.05 Merger, Consolidation or Transfer . . . . . . . . . 47 SECTION 19 Construction. . . . . . . . . . . . . . . . . . . . . . 47 19.01 Applicable Law. . . . . . . . . . . . . . . . . . . 47 19.02 Gender and Number . . . . . . . . . . . . . . . . . 47 iv EX-99.11 16 EX-99.11 1 EXHIBIT 99.11 PAYLESS SHOESOURCE, INC. STOCK OWNERSHIP PLAN (as amended April 20, 1998) 1. PURPOSE AND EFFECT OF PLAN The purpose of the Plan is to provide associates, including executive officers, an opportunity to purchase Common Stock of Payless ShoeSource, Inc. (the "Company") through payroll deductions at a discount on a tax deferred basis. It is believed that this will help attract, motivate and retain highly qualified and talented associates who are important to the Company's success. The Plan is also intended to offer equity ownership in the Company to associates to encourage them to enhance the value of the Company and therefore the price of the Company's Common Stock and the shareowners' return. The Plan is intended to comply with Code section 423 and to be a "tax conditioned plan" within the meaning of SEC Rule 16b-3(c). 2. SHARES RESERVED FOR THE PLAN There shall be reserved for issuance and purchase by Eligible Associates under the Plan an aggregate of 2,000,000 shares of Common Stock, subject to adjustment as provided in Section 16. Shares purchased for the Plan shall be purchased in the open market or in private transactions, or a combination thereof. 3. DEFINITIONS Where indicated by initial capital letters, the following terms shall have the following meanings: ACT: The Securities Exchange Act of 1934. BASE COMPENSATION: The regular earnings of an Eligible Associate (before withholding or other deductions), including overtime, after any salary reduction contributions pursuant to elections under a plan subject to Code sections 125 or 401(k) and excluding bonuses and any other special payments; provided, that the Committee may expand or narrow the definition of Base Compensation from time to time so long as such definition is consistent with the requirements of Section 423 of the Code. BOARD: The Board of Directors of the Company. 2 BUSINESS DAY: Each day on which shares of Common Stock are or could be traded on the New York Stock Exchange, or such other definition as the Committee may from time to time specify. CODE: The Internal Revenue Code of 1986, as amended, or any subsequently enacted federal revenue law. A reference to a particular section of the Code shall include a reference to any regulations issued under the section and to the corresponding section of any subsequently enacted federal revenue law. COMMITTEE: The committee established pursuant to Section 13 to be responsible for the general administration of the Plan. COMMON STOCK: The Company's common stock, $.01 par value. COMPANY: Payless ShoeSource, Inc., a Missouri corporation, provided, that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, and any successor by merger, consolidation or otherwise. ELIGIBLE ASSOCIATE: Each employee, including each executive officer, of the Company and its domestic Subsidiaries who meet the eligibility requirements of Section 4. EMPLOYER: A Participating Company that is the employer of a Participant. ENROLLMENT PROCEDURE: The procedure specified from time to time by the Committee to enable an Eligible Associate to participate in the Plan and to authorize payroll deductions pursuant to Section 5. FAIR MARKET VALUE: The weighted average price per share paid for all shares purchased on the date in question with respect to a determination of the Purchase Price of Common Stock purchased other than from the Company by an independent trustee or purchasing agent in arms-length transactions. For all other purposes, Fair Market Value shall mean the average of the reported lowest and highest sales prices per share for the Common Stock on the New York Stock Exchange on the date in question, or, if there are no such sales on that date, the reported lowest and highest sales prices per share for the Common Stock on the New York Stock Exchange for the last Business Day prior to the date in question for which sales of the Common Stock were reported. INVESTMENT ACCOUNT: The account established for each Participating Associate to hold Common Stock purchased under the Plan pursuant to Section 5. 2 3 INVESTMENT DATE: The date on which the shares of Common Stock are purchased for the Plan. "MERGER" means the merger of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). MONTH: A calendar month. PARENT: Any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, as of an Investment Date, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. PARTICIPATING COMPANIES: The Company and its domestic Subsidiaries. PARTICIPANT OR PARTICIPATING ASSOCIATE: Eligible Associates who elect to participate in the Plan pursuant to Section 5. PAYROLL DEDUCTION ACCOUNT: The account established for a Participating Associate to hold payroll deductions pursuant to Section 5. PLAN: The "Payless ShoeSource, Inc. Stock Ownership Plan," as set forth herein and as amended from time to time. PURCHASE PRICE: The price for each whole and fractional share of Common Stock, including those purchased by dividend reinvestment, which shall be 85% of the Fair Market Value of such whole or fractional share on the Investment Date; provided, however, the Committee may change such purchase price so long as the purchase price is not lower than the lesser of (i) 85% of the Fair Market Value of the Common Stock on the first day of the applicable purchase period, and (ii) 85% of the Fair Market Value of the Common Stock on the Investment Date. PURCHASE PERIOD: That period specified by the Committee during which payroll deductions shall be accumulated for the purchase of Common Stock under the Plan; provided, that such period shall not have a duration that exceeds the limitations provided in Section 423(b)(7) of the Code. 3 4 RULE 16B-3: Rule 16b-3 of the Securities and Exchange Commission promulgated under the Act, as now and hereafter amended. SUBSIDIARY OR SUBSIDIARIES: Any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, as of an Investment Date, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. TRUSTEE: The trustee of the Plan designated by the Committee as provided in Section 13. 4. ELIGIBLE ASSOCIATES Participation in the Plan shall be open to each associate of a Participating Company (including each executive officer of the Company) who has been continuously employed by one or more Participating Companies for at least one year; provided, that the Committee may establish such other or different employment requirements as it may deem appropriate so long as such other or different requirements are consistent with the provisions of Section 423 of the Code. For purposes of this section any break in service of less than thirty days shall not be deemed to constitute a discontinuance of employment, unless the Committee shall otherwise provide. No director of the Company or of any its Subsidiaries who is not an associate shall be eligible to participate in the Plan. 5. ELECTION TO PARTICIPATE; METHOD OF PURCHASE; INVESTMENT ACCOUNTS; DIVIDENDS 5.1 ELECTION TO PARTICIPATE. Each Eligible Associate may become a Participant effective on the first day of any Month coincident with or following the date the Participant becomes an Eligible Associate by complying with the Enrollment Procedure authorizing specified regular payroll deductions from the Participant's Base Compensation. Such regular payroll deductions shall be subject to a minimum deduction of $5.00 per weekly pay period and $10.00 per bi-weekly pay period and a maximum deduction of $25.00 per weekly pay period and $50.00 per bi-weekly pay period; provided, that the Committee may increase or decrease such minimum and maximum deductions from time to time. All regular payroll deductions shall be credited to the Payroll Deduction Account that the Company has established in the name of the Participant. 4 5 5.2 PURCHASE OF COMMON STOCK. Each Participating Associate having eligible funds in the Participant's Payroll Deduction Account on an Investment Date shall be deemed, without any further action, to have purchased the number of shares which the eligible funds in the Participant's Payroll Deduction Account could purchase at the Purchase Price on that Investment Date. All shares purchased shall be maintained by the Trustee in separate Investment Accounts for Participating Associates. Fractional shares will be allocated to accounts under the Plan unless the Committee otherwise provides; provided that share certificates shall only be issued for whole shares. If fractional shares are not allocated to accounts under the Plan, amounts that otherwise would have been applied to the purchase of fractional shares will continue to be held for the Participant and be applied towards the purchase of shares on the last day of the next Purchase Period. 5.3 TIMING AND MANNER OF PURCHASE. The Committee shall designate Purchase Periods during which funds shall be accumulated in Payroll Deduction Accounts for the purchase of Common Stock. Until otherwise specified the Purchase Periods shall consist of each Month in a year. The Investment Date shall occur during an interval immediately following the end of each Purchase Period having such duration as the Committee shall from time to time specify, provided that until the Committee otherwise specifies, such interval shall be the ten Business Days immediately following the end of the Purchase Period. However, nothing contained in this Plan shall authorize the Committee, the Company or any affiliate of the Company to exercise any direct or indirect control or influence over the times when, or the prices at which, the Trustee or its independent agent may purchase the Common Stock for the Plan, the amounts of the Common Stock to be purchased, the manner in which the Common Stock is to be purchased, or the selection of a broker or dealer (other than the Trustee) through which purchases may be executed; provided, that the Company, the Committee and affiliates of the Company, shall not be deemed to have such control or influence solely because the Committee revises not more than once in any three month period the basis for determining the amount of the Company's contributions to the Plan, the basis for determining the frequency of the Company's allocations to the Plan, or any formula in the Plan that determines the amount or timing of shares to be purchased by the Trustee. 5.4 DIVIDENDS AND OTHER DISTRIBUTIONS. All cash dividends paid with respect to the whole and fractional shares of the Common Stock and shares so purchased shall be reinvested in Common Stock on the immediately following Investment Date and added to the shares held for a Participating Associate in the Participant's Investment Account. Stock dividends and stock splits received by the Plan will be credited to Participants having Common Stock allocated to their Investment Account to the extent that they are attributable to such allocated Common Stock. Property, other than shares of Common Stock or cash, received by the Trustee as a 5 6 distribution with respect to Common Stock allocated to Participant Common Stock accounts will be distributed in kind to Participants in proportion to the number of shares of Common Stock contained in their Investment Account. 5.5 STOCK PURCHASES. The Trustee shall effect purchases of Common Stock on the open market or in private transactions. Purchases shall be made using total amounts contained in all Payroll Deduction Accounts immediately preceding the purchase. The Company will pay the difference between the Purchase Price and the price at which such shares are purchased for the Plan on or prior to the required closing date for the purchase. Expenses incurred in the purchase of shares shall also be paid by the Company. 5.6 PAYMENT OF DEDUCTIONS TO THE TRUSTEE. Participating Companies shall pay to the Trustee or to the order of the Trustee payroll deductions made during a Month prior to the time required for the closing of purchases of Common Stock for the Plan, as directed by the Committee. Interest shall not accrue on any amount paid to the Trustee or otherwise allocated to an Investment Account pending investment in Common Stock or other distribution. 6. CHANGE IN PARTICIPATION, WITHDRAWALS AND DISTRIBUTIONS 6.1 PERIOD OF PARTICIPATION. After an Eligible Associate has become a Participant in the Plan, such participation will continue thereafter, so long as the Plan continues in effect, until the employment of the Participant with all Participating Companies terminates, the Participant ceases to make contributions to the Plan and makes a complete withdrawal from the Plan, or the Participant ceases to be an Eligible Associate. 6.2 CHANGE IN PARTICIPATION. A Participant may change the amount of the Participant's payroll deductions in accordance with rules established by the Committee. 6.3 PARTIAL WITHDRAWALS. The Trustee shall deliver whole shares allocated to a Participant's Investment Account upon written request for a partial withdrawal received in accordance with rules established by the Committee so long as the Participant's Investment Account following such delivery contains at least one share or such other amount as the Committee may from time to time require. Deliveries shall be made as soon as practicable after the request is received. 6.4 COMPLETE WITHDRAWAL, TERMINATION OF EMPLOYMENT, DEATH. A Participant may effect a complete withdrawal from the Plan by giving notice in accordance with rules established by the Committee. A withdrawal from the 6 7 Plan shall also be deemed to occur at such time as the Participant ceases to be an Eligible Associate for any reason, including death, or upon the occurrence of such other event as may herein be specified as one which triggers a withdrawal. The Employer shall give prompt notice to the Trustee of such withdrawal. Upon any such withdrawal the Participant, or the Participant's beneficiary or estate in the case of death, shall be entitled to receive from the Trustee, as soon as practicable after the Trustee shall have completed its purchases of Common Stock hereunder with all funds attributable to amounts received by the Trustee with respect to the part of the Purchase Period that precedes the effective date of such withdrawal: (a) the number of whole shares of Common Stock credited to the account of such Participant, (b) cash in the amount of any fractional share credited to the Participant's Investment Account and (c) any cash balance credited to such Participant's Accounts which has not been invested by the Trustee. In the case of the death of the Participant the deliveries shall be made to the beneficiary designated by the Participating Associate in a writing filed with the Company. If no beneficiary has been designated, or if the designated beneficiary does not survive the Participating Associate, such amount and all shares shall be delivered to the Participant's estate. 6.5 PLAN RE-ENTRY; SUSPENSION DURING APPROVED LEAVE. A Participant who withdraws from the Plan and continues to otherwise be an Eligible Associate may re-enter the Plan in accordance with such rules as the Committee may establish; provided that until the Committee otherwise specifies, re-entry may be effected at any time in accordance with the Enrollment Procedure. A Participant whose contributions under the Plan shall have been temporarily discontinued shall not be considered to have withdrawn from the Plan. 7. REGISTRATION OF SHARES The shares to be delivered to a Participant will be issued in such registration as shall have been specified by the Participant in accordance with procedures established by the Committee. The Committee may, in its discretion, restrict the use of any form of registration other than registration solely in the name of the Participant and may permit such other registrations as may be permitted under Section 423 of the Code and related Code sections and rules. The shares of a Participant who is a minor may, with the consent of the Committee, and upon written instructions by such associate, be registered in the name of an adult as custodian for such minor associate. 8. REQUIRED NOTICE OF SUBSEQUENT SALE As a condition of participation in the Plan, each Participating Associate agrees to notify the Company if the Participant sells or otherwise disposes of any of the 7 8 Participant's shares of Common Stock within two years of the Investment Date on which such shares were purchased. 9. STATEMENT OF ACCOUNT As soon as practicable after the end of each calendar quarter each Participant will receive from the Trustee or the Company a statement of the Participant's account with respect to such period, subject to the right of the Committee to prescribe the form and content of such statement and to otherwise change the frequency, coverage and delivery of such statement. 10. EXERCISE OF VOTING AND OTHER RIGHTS Prior to the time when the Trustee makes delivery to the Participating Associate of the shares of Common Stock held in the Participant's Investment Account, the Trustee will exercise all voting rights pertaining to the shares of Common Stock allocated to the Investment Account of each Participant only in accordance with written directions, if any, given to the Trustee by such Participant prior to the date fixed for the exercise of such voting rights. In the absence of such direction, the Trustee shall not vote allocated shares but may vote any unallocated Common Stock in its discretion. All stock rights or offers received by the Trustee with respect to any Common Stock held by it hereunder shall be exercised by the Trustee to the extent appropriately specified in writing by Participants with respect to Common Stock allocated to the Investment Accounts of such Participants. Rights or offers relating to any unallocated Common Stock shall be exercised or otherwise disposed of by the Trustee in its discretion. 11. DESIGNATION OF BENEFICIARY A Participant may file with the Company a written designation of a beneficiary with respect to the assets in the accounts of the Participant in the event of the Participant's death, provided that no such designation shall be effective unless so filed prior to the death of the Participant. The written designation of a beneficiary filed with the Company may be changed or revoked by the sole action of the Participant unless such action is precluded by statute. If upon the death of a Participant there is doubt as to the right of any beneficiary to receive any amount, the Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Trustee to distribute such amount into any court of appropriate jurisdiction, in either of which events neither the Trustee nor the Committee nor any Employer shall be under any further liability to anyone with respect to such amount. 12. SALE OF SHARES 8 9 A Participating Associate shall have the right to direct the Trustee to sell shares in the Participant's Investment Account in lieu of a withdrawal or distribution of the shares in kind; provided that the Committee may adopt rules regulating such elections, the timing of such sales, and requirements that sales be aggregated with other sales. The Committee may also choose to completely or temporarily suspend or terminate such rights. Upon any permitted direction to sell, the Trustee will sell all shares allocated to the Investment Account that are covered by the direction together with any fractional interest that may be aggregated with other fractional interests into a whole share, and remit the proceeds of such sale, less brokerage commissions and other selling expenses to the Participant or other permitted distributee. The Trustee may, consistent with applicable securities laws, sell the shares in private transactions, in the open market, or to the Company. If so directed the Trustee shall sell the shares to the Company. Any sale of shares to the Company shall be effected at Fair Market Value on the date of purchase. 13. ADMINISTRATION OF THE PLAN 13.1 THE COMMITTEE. The Plan shall be administered by the Committee, which shall consist of not less than two members appointed by the Board. Committee members shall be directors, officers or salaried employees of the Company. The Board from time to time may appoint members previously appointed and may fill vacancies, however caused, in the Committee. 13.2 THE TRUSTEE. The Committee will designate one or more individuals, a bank, trust company or investment firm having trust powers to act as trustee under the Plan (the "Trustee"), with the right in the Committee to change such designation in its discretion. The Trustee will hold all funds received by it under the Plan and, until delivery thereof to the Participants hereunder, all shares of Common Stock acquired by the Trustee under the Plan. The Trustee may rely on all orders, requests, and instructions with respect to the Plan given in writing and signed by any person authorized by the Committee or the Company's Board of Directors, and the Trustee shall not be liable to any person for any action taken in accordance therewith. The Trustee or such other agent as the Trustee may appoint to effect purchases under the Plan shall be an "agent independent of the issuer" within the meaning of Regulation M of the Securities and Exchange Commission, as amended. 13.3 AUTHORITY OF THE COMMITTEE. Subject to the express provisions of the Plan, the Committee shall have the authority to take any and all actions (including directing the Trustee as to the acquisition of shares) necessary to implement the Plan, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable in 9 10 administering the Plan. All of such determinations shall be final and binding upon all persons. A quorum of the Committee shall consist of a majority of its members and the Committee may act by vote of a majority of its members at a meeting at which a quorum is present, or without a meeting by a written consent to the action taken signed by all members of the Committee. The Committee may request advice or assistance or employ such other persons as are necessary for proper administration of the Plan. To the extent that the Committee exercises discretionary authority with respect to the establishment and modification of rules, regulations and guidelines for the administration of the Plan, such rules and rule changes shall be made to apply uniformly to all Participants, consistent with the requirements of Section 423 of the Code. 14. LIMITATION ON PURCHASES No Participating Associate may purchase during any one calendar year under the Plan (or under any other plan of the Company, a Parent or Subsidiary qualified under Code section 423) shares of Common Stock having an aggregate Fair Market Value (determined by reference to the Fair Market Value on each Investment Date) in excess of the limitations of Code section 423(b)(8). A Participating Associate's Payroll Deduction Account may not be used to purchase Common Stock on any Investment Date to the extent that after such purchase the Participating Associate would own (or be considered as owning within the meaning of Code section 424(d)) stock possessing 5 percent or more of the total combined voting power of the Company or its Parent or Subsidiary. For this purpose, Common Stock which the Participating Associate may purchase under any outstanding rights to purchase shall be treated as owned by such Participating Associate. As of the first Investment Date on which this paragraph limits a Participating Associate's ability to purchase Common Stock, the associate shall cease to be an Eligible Associate. 15. RIGHTS NOT TRANSFERABLE Rights under the Plan are not transferable by a Participating Associate otherwise than by will or the laws of descent and distribution, and are exercisable, during the Associate's lifetime, only by the Associate. 16. CHANGE IN CAPITAL STRUCTURE In the event of a stock dividend, stock split or combination of shares, recapitalization or merger in which the Company is the surviving corporation or other change in the Company's capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of Common Stock or preferred stock of the Company), the number and kind of shares of 10 11 stock or securities of the Company to be subject to the Plan, the maximum number of shares or securities which may be delivered under the Plan, the selling price and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the Company is a party to a consolidation or a merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company's outstanding stock by a single person or entity, or a sale or transfer of substantially all of the Company's assets, the Committee may take such actions with respect to the Plan as the Committee deems appropriate. Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee's determination shall be conclusive and binding on all persons for all purposes. 17. AMENDMENT OF THE PLAN The Board of Directors may at any time, or from time to time, amend the Plan in any respect; provided, however, that the shareholders of the Company must approve any amendment that would (i) increase the number of securities that may be issued under the Plan, or (ii) modify the requirements as to eligibility for participation in the Plan. 18. TERMINATION OF THE PLAN The Plan and all rights of associates hereunder shall terminate: a. on the Investment Date that Participating Associates become entitled to purchase a number of shares greater than the number of reserved shares remaining available for purchase; or b. at any date at the discretion of the Board of Directors. In the event that the Plan terminates under circumstances described in (a) above, reserved shares remaining as of the termination date shall be issued to Participating Associates on a pro rata basis. Upon termination of the Plan, all amounts in an associate's Payroll Deduction Account that are not used to purchase Common Stock will be refunded. 19. EFFECTIVE DATE OF PLAN The Plan was approved by the Board of Directors on March 20, 1997, and shall become effective on August 1, 1997, subject to receiving shareholder approval. 11 12 20. GOVERNMENT AND OTHER REGULATIONS The Plan, and the grant and exercise of the rights to purchase shares hereunder, and the Company's obligation to sell and deliver shares upon the exercise of rights to purchase shares, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or government agency as may, in the opinion of counsel for the Company, be required. 21. INDEMNIFICATION AND LIABILITY OF COMMITTEE AND TRUSTEE The Committee and all persons employed by each Participating Company who are engaged in administering the Plan shall be entitled to rely upon all valuations, certificates and reports furnished by the Trustee or by any accountant or actuary selected by the Committee and upon all opinions given by any legal counsel selected by the Committee. The members of the Committee, the Trustee, each Participating Company, and all persons employed by each Participating Company and the Trustee who are engaged in administering the Plan (a) shall be fully protected with respect to any action taken by them in good faith and all actions so taken shall be conclusive and binding upon all persons having or claiming to have any interest under the Plan; and (b) shall not be personally liable by reason of any instrument made or executed by them or on their behalf or in the course of administering the Plan or for any mistake of judgment made by them or any other person, or for any neglect, omission or wrongdoing of any other person or for any loss to the Plan unless resulting from their own willful misconduct. No member of the Committee shall have any liability to any person for any action or omission except each for his own individual willful misconduct. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification and reimbursement as directors of the Company pursuant to its Articles of Incorporation and Bylaws. In addition to the foregoing, each member of the Committee, the Trustee, and each director and officer of each Participating Company shall be indemnified by the Company against all expenses (including costs and attorneys fees) actually and necessarily incurred or paid by such person in connection with the defense of any action, suit or proceeding in any way relating to or arising from the Plan to which the Participant may be made a party by reason of the party being or having been such member of the Committee, Trustee, director or officer or by reason of any action or omission or alleged action or omission by him in such capacity, and against any amount or amounts which may be paid by him (other 12 13 than to the Employer) in reasonable settlement of any such action, suit or proceeding, where the Company has consented to such settlement. In cases where such action, suit or proceeding shall proceed to final adjudication, such indemnification shall not extend to matters as to which it shall be adjudged that such member of the Committee, Trustee, director or officer is liable for willful misconduct in the performance of the duties of such person as such. The right of indemnification herein provided shall not be exclusive of other rights to which any member of the Committee, Trustee, director or officer may now or hereafter be entitled, shall continue as to a person who has ceased to be such member of the Committee, Trustee, director or officer and shall inure to the benefit of the heirs, executors, administrators, successor or assigns of such members of the Committee, director or officer. 22. APPLICABLE LAW The place of administration of the Plan shall conclusively be deemed to be within the State of Kansas and the validity, construction, interpretation and administration of the Plan and of any rules or regulations or determinations or decisions made thereunder, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be governed by and be determined exclusively and solely in accordance with, the laws of the State of Kansas. Without limiting the generality of the foregoing, the period within which any action arising under or in connection with the Plan, or any payment or award made or purportedly made under or in connection therewith, must be commenced shall be governed by the laws of the State of Kansas, irrespective of the place where the act or omission complained of took place and of the residence of any party to such action and irrespective of the place where the action may be brought. 13 EX-99.12 17 EX-99.12 1 Exhibit 99.12 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"). The Plan is hereby amended and restated to reflect the merger (the "Merger") of Payless Merger Corp., a Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.). This amendment makes the former Payless ShoeSource Holdings, Inc. (the Delaware corporation) in effect the sponsor of the Plan. 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 2 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. 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 2 3 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 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. 3 4 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 Missouri corporation, provided that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, 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 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. 4 5 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 Missouri corporation, provided that immediately after the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation. 1.22 Payless Profit Sharing Plan means the Payless ShoeSource, Inc. 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. 5 6 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: - his Annual Estimated Social Security Benefits, and - his Annual Retirement Benefits Offset. (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 6 7 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, 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: 7 8 (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described by clause (i), (iii) or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the shareowners of the Company approve a merger or consolidation of the Company with any other company, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities, or (iv) the shareowners of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 8 9 (e) "Termination by the Company or by an Employer of employment for cause" means termination upon: (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. 9 10 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: (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. 10 11 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 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 11 12 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. 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. 12 13 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. 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, 13 14 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 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 14 15 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. 15 16 PAYLESS SHOESOURCE, INC. SUPPLEMENTARY RETIREMENT PLAN AS AMENDED EFFECTIVE JUNE 1, 1998 17 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....................................................................4 1.9 Associate......................................................................................4 1.10 Committee......................................................................................4 1.11 Company........................................................................................4 1.12 Compensability.................................................................................4 1.13 Competing Business.............................................................................4 1.14 Effective Date.................................................................................4 1.15 Employer.......................................................................................5 1.16 Gender.........................................................................................5 1.17 May............................................................................................5 1.18 May Profit Sharing Plan........................................................................5 1.19 May Retirement Plan............................................................................5 1.20 Member.........................................................................................5 1.21 Payless........................................................................................5 1.22 Payless Profit Sharing Plan....................................................................5 1.23 Retirement Date................................................................................5 1.24 Plan Service...................................................................................5 Section 2. Membership.......................................................................................6 2.1 Eligibility for Membership.....................................................................6 2.2 Eligibility for Benefits.......................................................................6 Section 3. Benefits.........................................................................................6 3.1 Normal Retirement..............................................................................6 3.2 Early Retirement...............................................................................6 3.3 Cessation of Benefits.........................................................................10 3.4 Form of Benefit...............................................................................10 3.5 Standard Payment Period.......................................................................11 3.6 Limitation on Payments........................................................................11 3.7 Indirect Payment of Benefits..................................................................12 3.8 Termination and Rehire........................................................................12 3.9 Withholding...................................................................................12
18 Section 4. Administration of the Plan......................................................................13 4.1 The Committee.................................................................................13 4.2 Delegation of Duties..........................................................................13 4.3 Authority.....................................................................................13 Section 5. Certain Rights and Obligations..................................................................13 5.1 Rights of Members, Members' Spouses and Beneficiaries.........................................13 5.2 Employer-Associate Relationship...............................................................13 5.3 Unfunded Nature of Plan.......................................................................13 Section 6. Non-Alienation of Benefits......................................................................14 6.1 Provisions with Respect to Assignment and Levy................................................14 6.2 Alternate Application.........................................................................14 Section 7. Amendment and Termination.......................................................................14 7.1 Company's Rights..............................................................................14 7.2 Rights to Terminate...........................................................................14 Section 8. Construction....................................................................................15
EX-99.13 18 EX-99.13 1 EXHIBIT 99.13 INDEMNIFICATION AGREEMENT AGREEMENT, dated as of 20th day of April, 1998, 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 Bylaws, 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 2 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 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: (a) "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. (b) "Applicable Standard of Conduct" shall mean the standard established by Section 145(a)-(b) of the DGCL. (c) "Board of Directors" shall mean the Board of Directors of the Company. (d) "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended [the "Act"]), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 20 percent or more of the total voting power represented by the Company's then outstanding Voting Securities (such person being hereinafter referred to as an "Acquiring Person"), or (ii) during any 24-consecutive-month period, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or 2 3 nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80 percent of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets. (e) "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. (f) "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. (g) "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. 3 4 (h) "Potential Change" in Control shall be deemed to have occurred if (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; (iii) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5 percent or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by five percentage points or more over the percentage so owned by such person; or (iv) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential change in Control has occurred. (i) "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. (j) "Voting Securities" shall mean any securities of the Company which vote generally in the election of directors. 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 4 5 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 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 5 6 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. ESTABLISHMENT OF TRUST. In the event of a Potential Change in Control, the Company shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee and from time to time upon written request of Indemnitee shall fund such trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any Claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties and settlement amounts of any and all Claims relating to an Indemnifiable Event from time to time actually paid or 6 7 claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any case in which the special, independent counsel referred to above is involved. The terms of the trust shall provide that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the trustee shall advance, within two business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under the circumstances under which the Indemnitee would be required to reimburse the Company under Section 3 hereof), (iii) the trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the trustee shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such trust shall revert to the Company upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be an institutional trustee with a highly regarded, national reputation chosen by Indemnitee. Nothing in this Section 5 shall relieve the Company of any of its obligations under this Agreement. 6. 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 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. 7. 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 8 8. 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. 9. 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. 10. 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. 11. 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. 12. 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 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. 13. 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. 8 9 14. 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. 15. 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. 16. 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. 17. 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. 18. 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 unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 19. 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. 20. EFFECTIVE TIME. This Agreement shall become effective as of the effective time (the "Effective Time") of the merger between Payless ShoeSource, 9 10 Inc. and Payless Missouri Corp., each Missouri corporations. The contractual rights of Indemnitee with respect to Indemnifiable Events occurring before the Effective Time are governed by the Indemnification Agreement (the "Prior Agreement") between Indemnitee and Payless ShoeSource, Inc., a Missouri corporation, 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, under the Prior Agreement 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: ____________________________ ________________________________ [Indemnitee] 10 EX-99.14 19 EX-99.14 1 EXHIBIT 99.14 ================================================================================ $200,000,000 AMENDED AND RESTATED MULTICURRENCY CREDIT AGREEMENT DATED AS OF MAY 22, 1998 AMONG PAYLESS SHOESOURCE, INC., PAYLESS SHOESOURCE HOLDINGS, INC. PSS INVESTMENT II, INC. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, THE BANK OF NEW YORK AND THE FIRST NATIONAL BANK OF CHICAGO, AS CO-AGENTS, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO ARRANGED BY BA SECURITIES, INC. ================================================================================ 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS ..............................................................1 1.01 Certain Defined Terms ................................................1 1.02 Other Interpretive Provisions .......................................21 1.03 Accounting Principles ...............................................22 1.04 Currency Equivalents Generally ......................................22 ARTICLE II THE CREDITS ............................................................22 2.01 Amounts and Terms of Commitments ....................................22 2.02 Notes ...............................................................23 2.03 Procedure for Borrowing .............................................23 2.04 Conversion and Continuation Elections ...............................24 2.05 Utilization of Commitments in Offshore Currencies ...................25 2.06 Voluntary Termination or Reduction of Commitments ...................27 2.07 Optional Prepayments ................................................27 2.08 Currency Exchange Fluctuations ......................................27 2.09 Mandatory Prepayments of Loans ......................................28 2.10 Repayment ...........................................................28 2.11 Interest ............................................................28 2.12 Fees ................................................................29 (a) Arrangement, Agency Fees ..................................29 (b) Commitment Fees ...........................................29 2.13 Computation of Fees and Interest ....................................29 2.14 Payments by the Company .............................................30 2.15 Payments by the Banks to the Agent ..................................31 2.16 Sharing of Payments, Etc. ...........................................32 ARTICLE III THE LETTERS OF CREDIT .................................................32 3.01 The Letter of Credit Subfacility. ...................................32 3.02 Issuance, Amendment and Renewal of Letters of Credit ................33 3.03 Risk Participations, Drawings and Reimbursements ....................36 3.04 Repayment of Participations .........................................37 3.05 Role of the Issuing Bank ............................................38 3.06 Obligations Absolute ................................................38 3.07 Letter of Credit Fees ...............................................39 3.08 Uniform Customs and Practice ........................................40
-i- 3 ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY ................................40 4.01 Taxes .......................................................40 4.02 Illegality ..................................................41 4.03 Increased Costs and Reduction of Return .....................42 4.04 Funding Losses ..............................................43 4.05 Inability to Determine Rates ................................43 4.06 Reserves on Offshore Rate Loans .............................44 4.07 Certificates of Banks .......................................44 4.08 Survival ....................................................44 4.09 Replacement of Certain Banks ................................44 ARTICLE V CONDITIONS PRECEDENT ..................................................46 5.01 Conditions of Initial Credit Extensions .....................46 (a) Credit Agreement and Notes ............................46 (b) Resolutions; Incumbency ...............................46 (c) Organization Documents; Good Standing .................46 (d) Legal Opinions ........................................46 (e) Payment of Fees .......................................47 (f) Certificate ...........................................47 (g) Subsidiary Guaranty ...................................47 (h) Other Documents .......................................47 5.02 Conditions to All Credit Extensions .........................47 (a) Notice of Borrowing or Issuance .......................47 (b) Continuation of Representations and Warranties ........47 (c) No Existing Default ...................................48 (d) Certificate ...........................................48 (e) Solvency Certificate ..................................48 ARTICLE VI REPRESENTATIONS AND WARRANTIES ........................................49 6.01 Corporate Existence and Power ...............................49 6.02 Corporate Authorization; No Contravention ...................50 6.03 Governmental Authorization ..................................50 6.04 Binding Effect ..............................................50 6.05 Litigation ..................................................50 6.06 No Default ..................................................50 6.07 ERISA Compliance ............................................51 6.08 Use of Proceeds; Margin Regulations .........................51 6.09 Taxes .......................................................51 6.10 Financial Condition .........................................52
-ii- 4 6.11 Environmental Matters ......................................52 6.12 Regulated Entities .........................................52 6.13 Subsidiaries ...............................................52 6.14 Insurance ..................................................52 6.15 Swap Obligations ...........................................53 6.16 Full Disclosure ............................................53 ARTICLE VII AFFIRMATIVE COVENANTS ................................................53 7.01 Financial Statements .......................................53 7.02 Certificates; Other Information ............................54 7.03 Notices ....................................................55 7.04 Preservation of Corporate Existence, Etc ...................55 7.05 Maintenance of Property ....................................56 7.06 Insurance ..................................................56 7.07 Payment of Tax Obligations .................................56 7.08 Compliance with Laws .......................................56 7.09 Compliance with ERISA ......................................56 7.10 Inspection of Property and Books and Records ...............56 7.11 Environmental Laws .........................................57 7.12 Use of Proceeds ............................................57 7.13 Additional Guarantors ......................................57 ARTICLE VIII NEGATIVE AND FINANCIAL COVENANTS .....................................57 8.01 Limitation on Liens ........................................57 8.02 Disposition of Assets ......................................59 8.03 Consolidations and Mergers .................................60 8.04 Loans and Investments ......................................60 8.05 Limitation on Indebtedness .................................61 8.06 Transactions with Affiliates ...............................62 8.07 Contingent Obligations .....................................62 8.08 Restricted Payments ........................................63 8.09 ERISA ......................................................63 8.10 Conduct of Business ........................................63 8.11 Accounting Changes .........................................64 8.12 Financial Covenants ........................................64 (a) Fixed Charge Coverage Ratio ........................64 (b) Leverage Ratio .....................................64 (c) Consolidated Tangible Net Worth ....................64
-iii- 5 ARTICLE IX EVENTS OF DEFAULT ...........................................64 9.01 Event of Default...................................64 (a) Non-Payment.................................64 (b) Representation or Warranty .................64 (c) Specific Defaults ..........................64 (d) Other Defaults .............................64 (e) Cross-Default ..............................65 (f) Insolvency; Voluntary Proceedings 65 (g) Involuntary Proceedings ....................65 (h) ERISA ......................................65 (i) Monetary Judgments .........................66 (j) Change of Control ..........................66 (k) Subsidiary Guaranty ........................66 9.02 Remedies ..........................................66 9.03 Rights Not Exclusive ..............................67 ARTICLE X THE AGENT ...................................................67 10.01 Appointment and Authorization; "Agent" ............67 10.02 Delegation of Duties ..............................68 10.03 Liability of Agent ................................68 10.04 Reliance by Agent .................................68 10.05 Notice of Default .................................69 10.06 Credit Decision ...................................69 10.07 Indemnification of Agent ..........................69 10.08 Agent in Individual Capacity ......................70 10.09 Successor Agent ...................................70 10.10 Withholding Tax ...................................70 10.11 Co-Agents .........................................72 ARTICLE XI MISCELLANEOUS ...............................................72 11.01 Amendments and Waivers ............................72 11.02 Notices ...........................................73 11.03 No Waiver; Cumulative Remedies ....................74 11.04 Costs and Expenses ................................74 11.05 Company Indemnification ...........................74 11.06 Payments Set Aside ................................75 11.07 Successors and Assigns.............................75 11.08 Assignments, Participations, etc. .................75 11.09 Confidentiality ...................................77
-iv- 6 11.10 Set-off ................................................77 11.11 Notification of Addresses, Lending Offices, Etc. .......78 11.12 Counterparts ...........................................78 11.13 Severability ...........................................78 11.14 No Third Parties Benefited .............................78 11.15 Governing Law and Jurisdiction .........................78 11.16 Waiver of Jury Trial ...................................79 11.17 Judgment ...............................................79 11.18 Entire Agreement .......................................79 11.19 Effect of Restatement ..................................80
-v- 7 SCHEDULES Schedule 2.01 Commitments and Pro Rata Shares Schedule 6.07 ERISA Schedule 6.10 Permitted Liabilities Schedule 6.11 Environmental Matters Schedule 6.13 Subsidiaries and Minority Interests Schedule 8.01 Permitted Liens Schedule 8.04 Permitted Investments Schedule 8.05 Permitted Indebtedness Schedule 8.07 Contingent Obligations Schedule 11.02 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D-1 [omitted] Exhibit D-2 [omitted] Exhibit E Form of Assignment and Acceptance Agreement Exhibit F Form of Promissory Note Exhibit G Form of Reaffirmation of Guaranty
-vi- 8 AMENDED AND RESTATED MULTICURRENCY CREDIT AGREEMENT --------------------------------------------------- This AMENDED AND RESTATED MULTICURRENCY CREDIT AGREEMENT is entered into as of May 22, 1998, among Payless ShoeSource, Inc., a Missouri corporation (the "Company"), Payless Shoe Source Holdings, Inc. a Delaware corporation ("Holdco"), PSS Investment II, Inc., a Nevada corporation ("Nevada") the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks. R E C I T A L S: --------------- A. The Company, the Agent and certain financial institutions have entered into that certain revolving multicurrency credit facility dated as of April 22, 1996 (as heretofore amended, supplemented or otherwise modified, the "Existing Credit Agreement"), pursuant to which the Banks party thereto agreed to make certain financial accommodations to the Company on the terms and conditions set forth therein; B. The Company has requested that the Existing Credit Agreement be amended and restated in order to make certain changes to the Existing Credit Agreement; and C. The Company, the Agent and the Banks desire to amend and restate the Existing Credit Agreement on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and undertakings herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, Holdco, Nevada, the Banks and the Agent hereby amend and restate the Existing Credit Agreement as follows: ARTICLE I DEFINITIONS 1.01. Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that Holdco or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed 9 to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 10.09. "Agent-Related Persons" means, at any time, the Agent at such time, together with its Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means (a) in respect of payments in Dollars, the address for payments set forth on Schedule 11.02 or such other address as the Agent may from time to time specify in accordance with Section 11.02, and (b) in the case of payments in any Offshore Currency, such address as the Agent may from time to time specify in accordance with Section 11.02. "Agreed Alternative Currency" has the meaning specified in subsection 2.05(d). "Agreement" means this Amended and Restated Multicurrency Credit Agreement, as the same may be amended, supplemented, restated or otherwise modified from time to time. "Agreement Currency" has the meaning specified in Section 11.17. "Applicable Commitment Fee Percentage" means, subject to the last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period: Applicable Commitment Fixed Charge Coverage Ratio Fee Percentage --------------------------- ---------------------- Level I Status .075% Level II Status .10% Level III Status .125% Level IV Status .15% The Fixed Charge Coverage Ratio shall be calculated by Holdco as of the end of each of its fiscal quarters and shall be reported to the Agent pursuant to the Compliance Certificate delivered in accordance with subsection 7.02(b). The Applicable Commitment Fee Percentage shall be adjusted, if necessary, quarterly as of the tenth day after the delivery of the Compliance Certificate referred to above; provided that, if such certificate, together with the financial statements to which such certificate relates, are not delivered by the date required pursuant to Section 7.01 and subsection 7.02(b), then from and after such date until such certificate is so delivered, the Applicable Commitment Fee Percentage shall be equal to .225%. Until adjusted as described above, the Applicable Commitment Fee Percentage shall be equal to that in effect under the Existing Credit Agreement immediately prior to the Restatement Date. -2- 10 "Applicable Currency" means, as to any particular payment or Loan, Dollars or the Offshore Currency in which it is denominated or is payable. "Applicable Margin" means, subject to the second to last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period: Fixed Charge Coverage Ratio Applicable Margin --------------------------- ------------------ Level I Status .225% Level II Status .30% Level III Status .375% Level IV Status .45% The Fixed Charge Coverage Ratio shall be calculated by Holdco as of the end of each of its fiscal quarters and shall be reported to the Agent pursuant to the Compliance Certificate delivered in accordance with subsection 7.02(b). The Applicable Margin shall be adjusted, if necessary, quarterly as of the tenth day after the delivery of the Compliance Certificate referred to above; provided that, if such certificate, together with the financial statements to which such certificate relates, are not delivered by the date required pursuant to Section 7.01 and subsection 7.02(b), then from and after such date until such certificate is so delivered, the Applicable Margin shall be equal to .75%. Until adjusted as described above, the Applicable Margin shall be equal to that in effect under the Existing Credit Agreement immediately prior to the Restatement Date. The Applicable Margin for any Interest Period shall be the Applicable Margin in effect on the first day of such Interest Period and shall not change during such Interest Period. "Arranger" means BA Securities, Inc., a Delaware corporation. "Assignee" has the meaning specified in subsection 11.08(a). "Assignment and Acceptance" has the meaning specified in subsection 11.08(a). "Attorney Costs" means and includes all reasonable out-of-pocket fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Banking Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Chicago or San Francisco are authorized or required by law to close and (a) with respect to disbursements and payments in Dollars, a day on which dealings are carried on in the applicable offshore Dollar interbank market, and (b) with respect to any disbursements and payments in and calculations pertaining to any Offshore Currency Loan, a day -3- 11 on which commercial banks are open for foreign exchange business in London, England, and on which dealings in the relevant Offshore Currency are carried on in the applicable offshore foreign exchange interbank market in which disbursement of or payment in such Offshore Currency will be made or received hereunder. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Section 101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type and in the same Applicable Currency made to the Company on the same day by the Banks under Article II and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Chicago or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means a Banking Day. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Lease" has the meaning specified in the definition of "Capital Lease Obligations." -4- 12 "Capital Lease Obligations" means the principal component of all monetary obligations of Holdco or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease ("Capital Lease"). "Cash Collateralize" means to pledge and deposit with or deliver to the Agent, for the benefit of the Agent, the Issuing Bank and the Banks, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance reasonably satisfactory to the Agent and the Issuing Bank (which documents are hereby consented to by the Banks). Derivatives of such term shall have corresponding meanings. "Certificate Bank" has the meaning specified in subsection 4.09(a). "Change in Control" means (a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 25% or more of the outstanding shares of voting stock of Holdco, or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted Holdco's board of directors (together with any new directors whose election by the Holdco's board of directors or whose nomination for election by the Holdco's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reasons other than death or disability to constitute a majority of the directors then in office, or (c) Holdco shall cease to own directly or indirectly 100% of the issued and outstanding capital stock of each of Nevada and the Company. "Closing Date" means April 22, 1996. "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder, in each case, as amended from time to time. "Commitment", as to each Bank, has the meaning specified in Section 2.01. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Computation Date" has the meaning specified in subsection 2.05(a). "Consolidated Interest Expense" means, for any period, the sum of total interest expense (including that attributable to Capital Leases in accordance with GAAP) of Holdco and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Holdco and its Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, all as determined on a consolidated basis for Holdco and its consolidated Subsidiaries in accordance with GAAP. -5- 13 "Consolidated Net Income" means, for any period for any Person, the aggregate of the net income of such Person for such period, determined in accordance with GAAP on a consolidated basis, provided that (i) the net income of any other Person which is not a Subsidiary of such Person shall be included in the Consolidated Net Income of such Person only to the extent of the amount of cash dividends or distributions paid to such Person or to a consolidated Subsidiary of such Person and (ii) the net income of any other Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded from the Consolidated Net Income of such Person . There shall be excluded in computing Consolidated Net Income for any Person the excess (or the deficit), if any, of (i) any gain which must be treated as an extraordinary item under GAAP or any gain realized upon the sale or other disposition of any real property or equipment that is not sold in the ordinary course of business or of any capital stock owned by such Person or a Subsidiary of such Person over (ii) any loss which must be treated as an extraordinary item under GAAP or any loss realized upon the sale or other disposition of any real property or equipment that is not sold in the ordinary course of business or of any capital stock owned by such Person or a Subsidiary of such Person. Without limiting the foregoing, all costs and expenses of the Company relating to management retention incentive payments which are treated as extraordinary items shall be excluded in computing Consolidated Net Income of Holdco. "Consolidated Rental Expense" means, for any period, the sum of the aggregate payments of Holdco and its Subsidiaries on a consolidated basis under agreements to rent or lease any real or personal property (exclusive of Capital Lease Obligations), all as determined on a consolidated basis for Holdco and its consolidated Subsidiaries in accordance with GAAP. Consolidated Tangible Net Worth" of a Person means, without duplication, (a) total stockholders' equity of such Person less (b) the net book value of all assets of such Person and its consolidated Subsidiaries which would be treated as intangibles under GAAP, including, without limitation, goodwill and trademarks, but excluding, however, lease rights associated with acquisitions of below-market leases. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services -6- 14 of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof; provided that if any Guaranty Obligation (a) is limited to an amount less than the obligations guaranteed or supported the amount of the corresponding Contingent Obligation shall be equal to the lesser of the amount determined pursuant to the initial clause of this sentence and the amount to which such guaranty is so limited or (b) is limited to recourse against a particular asset or assets of such Person the amount of the corresponding Contingent Obligation shall be equal to the lesser of the amount determined pursuant to the initial clause of this sentence and the fair market value of such asset or assets at the date for determination of the amount of the Contingent Obligation. In the case of other Contingent Obligations other than in respect of Swap Contracts, such Contingent Obligations shall be equal to the maximum reasonably anticipated liability in respect thereof and, in the case of Contingent Obligations in respect of Swap Contracts, such Contingent Obligations shall be equal to the Swap Termination Value. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.04, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Credit Extension" means and includes (a) the making of any Loans hereunder and (b) the Issuance of any Letters of Credit hereunder. "Default" means any event or circumstance which, with the giving of notice pursuant to this Agreement, the expiration of any cure period specified herein, or both, would (if not cured or otherwise remedied during such cure period) constitute an Event of Default. "Disposition" has the meaning specified in Section 8.02. "Dollar Equivalent" means, at any time, (a) as to any amount denominated in Dollars, the amount thereof at such time, (b) as to any amount denominated in an Offshore Currency, the equivalent amount in Dollars as determined by the Agent at such time on the basis of the Spot Rate for the purchase of Dollars with such Offshore Currency on the most recent Computation Date provided for in subsection 2.05(a) and (c) as to any amount denominated in an Offshore L/C -7- 15 Currency, the equivalent amount in Dollars as determined by the Issuing Bank at such time on the basis of the Spot Rate for the purchase of Dollars with such Offshore L/C Currency. "Dollars", "dollars" and "$" each mean lawful money of the United States. "EBITR" means, for any period, for Holdco and its Subsidiaries on a consolidated basis, determined in accordance with GAAP, the sum of (a) Consolidated Net Income for such period plus (b) all amounts treated as expenses for taxes to the extent included in the determination of such Consolidated Net Income plus (c) Consolidated Interest Expense to the extent included in the determination of such Consolidated Net Income plus (d) Consolidated Rental Expense to the extent included in the determination of such Consolidated Net Income. "Effective Amount" means (a) with respect to any Loans on any date, the aggregate outstanding principal Dollar Equivalent amount thereof after giving effect to any Borrowings and prepayments or repayments of Loans occurring on such date; and (b) with respect to any outstanding L/C Obligations on any date, the Dollar Equivalent amount of such L/C Obligations on such date after giving effect to any Issuances of Letters of Credit occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letters of Credit or any reductions in the maximum amount available for drawing under Letters of Credit taking effect on such date. "Eligible Assignee" means (a) a commercial bank or financial institution organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $200,000,000; (b) a commercial bank or financial institution organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $200,000,000, provided that such bank or financial institution is acting through a branch or agency located in the United States; and (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder. -8- 16 "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization the liability with respect to which has not been satisfied; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 9.01. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder, in each case, as amended from time to time. "Existing Credit Agreement" has the meaning specified in the recitals hereto. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.12(a). -9- 17 "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Fixed Charge Coverage Ratio" means, for any period, the ratio of (a) EBITR to (b) the sum of Consolidated Interest Expense plus Consolidated Rental Expense, in each case, for such period; provided, however, that with respect to fiscal quarters ended prior to the Restatement Date, all relevant computations otherwise required to be made for Holdco and its Subsidiaries on a consolidated basis shall be made for the Company and its Subsidiaries on a consolidated basis. "FX Trading Office" means the Foreign Exchange Trading Center of the Agent, or such other of the Agent's offices as the Agent may designate from time to time. "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 4.01. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of (a) in the case of computations pursuant to Section 8.12, the Closing Date and (b) in all other cases, the applicable date. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantors" means, collectively, each of the Material Subsidiaries of the Company signatory to the Subsidiary Guaranty and such other Material Subsidiaries from time to time party to such Subsidiary Guaranty pursuant to Section 7.13. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." "Holdco" means Payless ShoeSource Holdings, Inc., a Delaware corporation the name of which is expected to be changed to Payless ShoeSource, Inc. "Honor Date" has the meaning specified in subsection 3.03(b). -10- 18 "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all principal obligations with respect to Capital Leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. In the event any of the foregoing Indebtedness is limited to recourse against a particular asset or assets of such Person, the amount of the corresponding Indebtedness shall be equal to the lesser of the amount of such Indebtedness and the fair market value of such asset or assets at the date for determination of the amount of such Indebtedness. In addition, the amount of any Indebtedness which is also a Contingent Obligation shall be determined as provided in the definition of "Contingent Obligation." "Indemnified Liabilities" has the meaning specified in Section 11.05. "Indemnified Person" has the meaning specified in Section 11.05. "Independent Auditor" has the meaning specified in subsection 7.01(a). "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter; provided, however, that if any Interest Period for an Offshore Rate Loan exceeds three months the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. -11- 19 "Interest Period" means, with respect to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which a Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (b) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (c) no Interest Period shall extend beyond the scheduled Revolving Termination Date. "Investments" has the meaning specified in Section 8.04. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Issuance Date" has the meaning specified in subsection 3.01(a). "Issue" means, with respect to any Letter of Credit, to issue or to extend the expiry of, or to renew or increase the amount of, such Letter of Credit; and the terms "Issued," "Issuing" and "Issuance" have corresponding meanings. "Issuing Bank" means, with respect to any Letter of Credit, BofA or any Bank which at the request of the Company agrees, in such Bank's sole discretion, to become an Issuing Bank for purposes of Issuing Letters of Credit pursuant to Article III. "Judgment Currency" has the meaning specified in Section 11.17. "L/C Advance" means each Bank's participation in any L/C Borrowing in accordance with its Pro Rata Share. "L/C Amendment Application" means an application form for amendment of outstanding standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. -12- 20 "L/C Application" means an application form for issuances of standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made nor converted into a Borrowing of Loans under subsection 3.03(b). "L/C Commitment" means the commitment of the Issuing Bank to Issue, and the commitment of the Banks severally to participate in, Letters of Credit from time to time Issued or outstanding under Article III; provided that the L/C Commitment is a part of the combined Commitments, rather than a separate, independent commitment. "L/C Obligations" means, at any time, the sum of (a) the aggregate undrawn amount of all Letters of Credit then outstanding, plus (b) the amount of all unreimbursed drawings under all Letters of Credit, including all outstanding L/C Borrowings. "L/C-Related Documents" means the Letters of Credit, the L/C Applications, the L/C Amendment Applications and any other document relating to any Letter of Credit, including any of the Issuing Bank's standard form documents for letter of credit issuances. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 11.02, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Letters of Credit" means any letters of credit (whether standby letters of credit or commercial documentary letters of credit) Issued by the Issuing Bank pursuant to Article III. "Level I Status" exists at any date if at such date the Fixed Charge Coverage Ratio is greater than 2.25:1.0. "Level II Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 2.25:1.0 but greater than 2.0:1.0. "Level III Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 2.0:1.0 but greater than 1.75:1.0. "Level IV Status" exists at any date if at such date the Fixed Charge Coverage Ratio is less than or equal to 1.75:1.0. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other), conditional sale -13- 21 or other title retention agreement, the interest of a lessor under a Capital Lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) but, in any such case, not including the interest of a lessor under an operating lease. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Fee Letter, the Subsidiary Guaranty, the Parent Guaranty, the L/C-Related Documents and all other documents delivered to the Agent or any Bank by any Loan Party or the Guarantors in connection herewith. "Loan Party" means each and any of Holdco, Nevada and the Company. "Margin Stock" means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties or financial condition of Holdco or Holdco and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform its obligations under any Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Loan Parties, or any Guarantor of any of the Loan Documents. "Material Subsidiary" means, at any time, (a) Payless ShoeSource Merchandising, Inc., a Kansas corporation, Payless ShoeSource Distribution, Inc., a Kansas corporation, and Payless ShoeSource Worldwide, Inc., a Kansas corporation, and (b) any other domestic Subsidiary of Holdco (other than the Company and Nevada) the total assets of which constitute 5% or more of the total consolidated assets of Holdco and its Subsidiaries, in each case, determined in accordance with GAAP. "Minimum Tranche" means, in respect of Loans comprising part of the same Borrowing, or to be converted or continued under Section 2.04, (a) in the case of Base Rate Loans, $3,000,000 or any multiple of $1,000,000 in excess thereof, and (b) in the case of Offshore Rate Loans, the Dollar Equivalent amount of $3,000,000 or any multiple of 1,000,000 units of the Applicable Currency in excess thereof. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. -14- 22 "Nevada" means PSS Investment II, Inc., a Nevada corporation which, after giving effect to the Reorganization, will be a Wholly-Owned Subsidiary of Holdco and will own all of the issued and outstanding shares of capital stock of the Company. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to Section 2.02, in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by any Loan Party or any Guarantor to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment pursuant to subsection 11.08(a), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Currency" means, at any time, Italian lire, Canadian dollars, British pound sterling and French francs, and any Agreed Alternative Currency. "Offshore Currency Loan" means any Offshore Rate Loan denominated in an Offshore Currency. "Offshore L/C Currency" means, at any time, any Offshore Currency and, with respect to any Letter of Credit, any other currency agreed to by the Issuing Bank thereof. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day for any Interest Period (a) with respect to Offshore Rate Loans denominated in Dollars, the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") and (b) with respect to all other Offshore Rate Loans, zero; and -15- 23 "LIBOR" means the rate of interest per annum determined by the Agent to be the arithmetic mean of the rates of interest per annum notified to the Agent by each Reference Bank as the rate of interest at which deposits in the Applicable Currency in the approximate amount of the amount of the Loan to be made or continued as, or converted into, an Offshore Rate Loan by such Reference Bank and having a maturity comparable to such Interest Period would be offered to major banks in the London interbank market at their request at approximately 11:00 a.m. (London time) two Banking Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate, and may be an Offshore Currency Loan or a Loan denominated in Dollars. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "originating Bank" has the meaning specified in subsection 11.08(d). "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Overnight Rate" means, for any day, the rate of interest per annum at which overnight deposits in the Applicable Currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by BofA's London Branch to major banks in the London or other applicable offshore interbank market. "Parent Guarantors" means Holdco and Nevada. "Parent Guaranty" means a guaranty of the Obligations of the Company by the Parent Guarantors dated as of the date hereof in form and substance reasonably satisfactory to the Agent. "Participant" has the meaning specified in subsection 11.08(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. -16- 24 "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA (other than a Multiemployer Plan) which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Liens" has the meaning specified in Section 8.01. "Permitted Swap Obligations" means all obligations (contingent or otherwise) of Holdco or any Subsidiary existing or arising under Swap Contracts, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions (other than a Multiemployer Plan) and includes any Pension Plan. "Present Value" means, with respect to each lease of Holdco 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 Holdco or its Subsidiaries have become contractually obligated) of such lease on or after the date of determination discounted to an equivalent value as of the date of determination. For purposes of computing the Present Value: (a) the discount rate utilized to calculate the Present Value of any Existing Lease (as defined below) shall be the rate actually utilized by the Company prior to the Closing Date 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 Holdco 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- -17- 25 date average of the Friday rates of the Merrill Lynch Bond Index for corporate issues of "medium" quality with terms of 10 years or more ("Index") as published in The Wall Street Journal (or similar publication). In the event that the Index ceases to be published, the Index shall be replaced by a similar index reflecting rates applicable to corporate issues with similar terms and credit quality as the Index as jointly selected by the Company and the Agent. The discount rate applied to any extension of any Existing Lease or Additional Lease shall be: (A) if the dollar amount of base rent payable during such extension is prescribed in the original operating lease, the discount rate originally applicable to such Existing Lease or Additional Lease, as applicable; and (B) in all other cases, the discount rate determined as if such extension period constituted an Additional Lease. "Present Value of Operating Leases" means, at any time, the sum of the Present Value of each operating lease of Holdco and its Subsidiaries. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Reference Banks" means BofA, The First National Bank of Chicago and The Bank of New York. "Reorganization" means the series of mergers and related transactions described in the Form S-4 Registration Statement of Holdco filed with the Securities and Exchange Commission on April 21, 1998. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Required Banks" means (a) at any time prior to the Revolving Termination Date, Banks then holding at least 51% of the then aggregate unpaid principal amount of the Loans, or, if no Loans are outstanding, Banks then having at least 51% of the aggregate amount of the Commitments and (b) at all other times, Banks then holding at least 51% of the then aggregate unpaid principal amount of the Credit Extensions. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer, president or any vice president of Holdco or the Company, as the context may require, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief -18- 26 financial officer or the treasurer of Holdco, or any other officer having substantially the same authority and responsibility. "Restatement Date" has the meaning specified in Section 11.19. "Revolving Termination Date" means the earlier to occur of: (a) November 9, 2002; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "Same Day Funds" means (a) with respect to disbursements and payments in Dollars, immediately available funds, and (b) with respect to disbursements and payments in an Offshore Currency, same day or other funds as may be reasonably determined by the Agent to be customary in the place of disbursement or payment for the settlement of international banking transactions in the relevant Offshore Currency. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Spot Rate" for a currency means the rate quoted by the Agent as the spot rate for the purchase by the Agent of such currency with another currency through its FX Trading Office at approximately 11:00 a.m. (Chicago time) on the date two Banking Days prior to the date as of which the foreign exchange computation is made. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of Holdco. "Subsidiary Guaranty" means the Subsidiary Guaranty dated as of April 22, 1996, executed and delivered by the Guarantors in favor of the Agent and the Banks, as the same may be amended, supplemented, restated or otherwise modified from time to time in accordance with its terms and the terms hereof. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds, performance bonds and similar instruments. -19- 27 "Swap Contract" means any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swaption, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined by the Company based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank.) "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Total Capitalization" means, at any time, the sum at such time of (a) Holdco's total stockholders' equity plus (b) Total Debt plus (c) the consolidated non-current deferred taxes of Holdco and its Subsidiaries. "Total Debt" means, at any time, the sum of (a) the current and long-term indebtedness obligations for money borrowed, drawn and unreimbursed letters of credit, drawn and unreimbursed surety bonds, the current portion of mandatory redeemable preferred stock of Holdco, Capital Lease Obligations and, without duplication, Contingent Obligations in respect of any of the foregoing, in each case, of Holdco and its Subsidiaries on a consolidated basis, plus (b) the Present Value of Operating Leases. "Type" has the meaning specified in the definition of "Loan." "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. -20- 28 "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by Holdco (or, where the context so indicates, by another Loan Party), or by one or more of the other Wholly-Owned Subsidiaries, or both. 1.02 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (iv) References to "Holdco" or "Holdco and its Subsidiaries" when used relative to time periods prior to the Restatement Date shall, as applicable, be deemed references to "the Company" or "the Company and its Subsidiaries" solely with respect to such prior periods. (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. -21- 29 (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. (g) This Agreement is the result of negotiations among and has been reviewed by counsel to the Agent and the Loan Parties, and is the product of all parties. Accordingly, it shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in its preparation. 1.03. Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of Holdco. Currently, the fiscal year of Holdco ends on the Saturday closest to January 31 of each year. 1.04. Currency Equivalents Generally. For all purposes of this Agreement (but not for purposes of the preparation of any financial statements delivered pursuant hereto), the equivalent in any Offshore Currency or other currency of an amount in Dollars, and the equivalent in Dollars of an amount in any Offshore Currency or other currency, shall be determined at the Spot Rate. ARTICLE II THE CREDITS ----------- 2.01. Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company from time to time on any Business Day during the period from the Closing Date to, but not including, the Revolving Termination Date, in an aggregate principal Dollar Equivalent amount not to exceed at any time outstanding the amount set forth opposite the Bank's name in Schedule 2.01 under the heading "Commitment" (such amount as the same may be reduced pursuant to Section 2.06 or as a result of one or more assignments pursuant to Section 11.08, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing of Loans, the aggregate principal Dollar Equivalent amount of all outstanding Loans and L/C Obligations shall not exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay pursuant to Section 2.07 and reborrow pursuant to this Section 2.01. -22- 30 2.02. Notes. The Loans made by each Bank shall be evidenced by one or more Notes. Each such Bank shall endorse on the schedules annexed to its Note the date, amount and maturity of each Loan made by it and the amount and Applicable Currency of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note and each Bank's record shall be rebuttably presumptive evidence of the matters set forth therein absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.03. Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 12:00 noon (Chicago time) (i) four Business Days prior to the requested Borrowing Date, in the case of Offshore Currency Loans; (ii) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans denominated in Dollars; and (iii) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans, in any such case, specifying: (A) the amount of the Borrowing, which shall be in an aggregate amount not less than the Minimum Tranche; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; (D) the duration of the Interest Period applicable to any Offshore Rate Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be one month; and (E) in the case of a Borrowing comprised of Offshore Currency Loans, the Applicable Currency; provided, however, that with respect to any Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 12:00 noon (Chicago time) one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only. (b) The Dollar Equivalent amount of any Borrowing in an Offshore Currency will be determined by the Agent for such Borrowing on the Computation Date therefor in accordance with subsection 2.05(a). Upon receipt of the Notice of Borrowing, the Agent will promptly notify each Bank thereof and of the amount of such Bank's Pro Rata Share of the Borrowing. In the case of a Borrowing comprised of Offshore Currency Loans, such notice will provide the approximate -23- 31 amount of each Bank's Pro Rata Share of the Borrowing, and the Agent will, upon the determination of the Dollar Equivalent amount of the Borrowing as specified in the Notice of Borrowing, promptly notify each Bank of the exact Dollar Equivalent amount of such Bank's Pro Rata Share of the Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office on the Borrowing Date requested by the Company in Same Day Funds and in the requested currency (i) in the case of a Borrowing comprised of Loans in Dollars, by 12:00 noon (Chicago time) and (ii) in the case of a Borrowing comprised of Offshore Currency Loans, by such time as the Agent may specify. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. (d) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than nine different Interest Periods in effect. 2.04 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.04(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans denominated in Dollars, to convert any such Loans (or any part thereof in an amount not less than the Minimum Tranche) into Loans in Dollars of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than the Minimum Tranche). (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 12:00 noon (Chicago time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans denominated in Dollars; (ii) four Business Days in advance of the continuation date, if the Loans are to be continued as Offshore Currency Loans; and (iii) one Business Day in advance of the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; -24- 32 (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans in Dollars, the Company has failed to timely select a new Interest Period to be applicable to such Offshore Rate Loans or if any Default or Event of Default then exists, unless, in either case, the Company has elected to and does repay such Loans on or prior to the expiration date of such Interest Period, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. If the Company has failed to select a new Interest Period to be applicable to Offshore Currency Loans prior to the fourth Business Day in advance of the expiration date of the current Interest Period applicable thereto as provided in subsection 2.04(b), or if any Default or Event of Default shall then exist, the Company shall be deemed to have elected to continue such Offshore Currency Loans on the basis of a one month Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Required Banks otherwise consent, during the existence of a Default or Event of Default, the Company may not elect to have a Loan in Dollars converted into or continued as an Offshore Rate Loan in Dollars or an Offshore Currency Loan continued on the basis of an Interest Period exceeding one month. (f) After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than nine different Interest Periods in effect. 2.05 Utilization of Commitments in Offshore Currencies. (a) The Agent will determine the Dollar Equivalent amount with respect to any (i) Borrowing comprised of Offshore Currency Loans as of the requested Borrowing Date, (ii) outstanding Offshore Currency Loans as of the last Banking Day of each month, (iii) outstanding Offshore Currency Loans as of any redenomination date pursuant to this Section 2.05 or Section 4.05, (iv) Issuance or renewal of any Letter of Credit denominated in an Offshore L/C Currency as of the requested date of Issuance or renewal and (v) outstanding Letter of Credit denominated in an Offshore L/C Currency as of the last Banking Day of each month (each such date under clauses (i) through (v) a "Computation Date"). -25- 33 (b) In the case of a proposed Borrowing comprised of Offshore Currency Loans, the Banks shall be under no obligation to make Offshore Currency Loans in the requested Offshore Currency as part of such Borrowing if the Agent has received notice from any of the Banks by 5:00 p.m. (Chicago time) four Business Days prior to the day of such Borrowing that such Bank cannot provide Loans in the requested Offshore Currency, in which event the Agent will give notice to the Company no later than 12:00 noon (Chicago time) on the third Business Day prior to the requested date of such Borrowing that the Borrowing in the requested Offshore Currency is not then available, and notice thereof also will be given promptly by the Agent to the Banks. If the Agent shall have so notified the Company that any such Borrowing in a requested Offshore Currency is not then available, the Company may, by notice to the Agent not later than 5:00 p.m. (Chicago time) three Business Days prior to the requested date of such Borrowing, withdraw the Notice of Borrowing relating to such requested Borrowing. If the Company does so withdraw such Notice of Borrowing, the Borrowing requested therein shall not occur and the Agent will promptly so notify each Bank. If the Company does not so withdraw such Notice of Borrowing, the Agent will promptly so notify each Bank and such Notice of Borrowing shall be deemed to be a Notice of Borrowing that requests a Borrowing comprised of Base Rate Loans in an aggregate amount equal to the amount of the originally requested Borrowing as expressed in Dollars in the Notice of Borrowing; and in such notice by the Agent to each Bank the Agent will state such aggregate amount of such Borrowing in Dollars and such Bank's Pro Rata Share thereof. (c) In the case of a proposed continuation of Offshore Currency Loans for an additional Interest Period pursuant to Section 2.04, the Banks shall be under no obligation to continue such Offshore Currency Loans if the Agent has received notice from any of the Banks by 5:00 p.m. (Chicago time) four Business Days prior to the day of such continuation that such Bank cannot continue to provide Loans in the relevant Offshore Currency, in which event the Agent will give notice to the Company not later than 12:00 noon (Chicago time) on the third Business Day prior to the requested date of such continuation that the continuation of such Offshore Currency Loans in the relevant Offshore Currency is not then available, and notice thereof also will be given promptly by the Agent to the Banks. If the Agent shall have so notified the Company that any such continuation of Offshore Currency Loans is not then available, any Notice of Continuation/Conversion with respect thereto shall be deemed withdrawn and such Offshore Currency Loans shall be redenominated into Base Rate Loans in Dollars with effect from the last day of the Interest Period with respect to any such Offshore Currency Loans. The Agent will promptly notify the Company and the Banks of any such redenomination and in such notice by the Agent to each Bank the Agent will state the aggregate Dollar Equivalent amount of the redenominated Offshore Currency Loans as of the Computation Date with respect thereto and such Bank's Pro Rata Share thereof. (d) The Company shall be entitled to request that Loans hereunder also be permitted to be made in any other lawful currency (other than Dollars), in addition to the currencies specified in the definition of "Offshore Currency" herein, that in the opinion of the Required Banks is at such time freely traded in the offshore interbank foreign exchange markets and is freely transferable and freely convertible into Dollars (an "Agreed Alternative Currency"). The Company -26- 34 shall deliver to the Agent any request for designation of an Agreed Alternative Currency in accordance with Section 11.02, to be received by the Agent not later than 12:00 noon (Chicago time) at least 10 Business Days in advance of the date of any Borrowing hereunder proposed to be made in such Agreed Alternative Currency. Upon receipt of any such request the Agent will promptly notify the Banks thereof, and each Bank will use its best efforts to respond to such request within two Business Days of receipt thereof. Each Bank may grant or accept such request in its sole discretion. The Agent will promptly notify the Company of the acceptance or rejection of any such request. 2.06 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than three Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum Dollar Equivalent amount of $5,000,000 or any Dollar Equivalent multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then outstanding principal Dollar Equivalent amount of the Loans and L/C Obligations would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section 2.06, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.07 Optional Prepayments. Subject to Section 4.04, the Company may, at any time or from time to time, upon irrevocable notice to the Agent as described below, ratably prepay Loans in whole or in part, in minimum Dollar Equivalent amounts of $3,000,000 or any Dollar Equivalent multiple of $1,000,000 in excess thereof or such other amount necessary to repay any Offshore Currency Loan in full. The Company shall deliver a notice of prepayment in accordance with Section 11.02 to be received by the Agent not later than 12:00 noon (Chicago time) (a) at least four Business Days in advance of the prepayment date if the Loans to be prepaid are Offshore Currency Loans, (b) at least three Business Days in advance of the prepayment date if the Loans to be prepaid are Offshore Rate Loans in Dollars, and (iii) at least one Business Day in advance of the prepayment date if the Loans to be prepaid are Base Rate Loans. Such notice of prepayment shall specify the date and amount of such prepayment and whether such prepayment is of Base Rate Loans or Offshore Rate Loans, or any combination thereof, and the Applicable Currency. Such notice shall not thereafter be revocable by the Company and the Agent will promptly notify each Bank thereof and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 4.04. 2.08 Currency Exchange Fluctuations. Subject to Section 4.04, if on any Computation Date the Agent shall have determined that the aggregate Dollar Equivalent principal amount of all Loans and L/C Obligations then outstanding exceeds the combined Commitments of the Banks by more than $500,000, due to a change in applicable rates of exchange between Dollars and Offshore -27- 35 Currencies, then the Agent shall give notice to the Company that a prepayment is required under this Section 2.08, and the Company agrees thereupon to make prepayments of Loans within one Business Day of such notice such that, after giving effect to such prepayment the aggregate Dollar Equivalent amount of all Loans does not exceed the combined Commitments. 2.09 Mandatory Prepayments of Loans. Subject to Section 4.04, if on any date the Effective Amount of all Loans then outstanding plus the Effective Amount of all L/C Obligations exceeds the aggregate Commitments (other than as a result of currency exchange fluctuations), the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Loans in an amount equal to the lesser of such excess and the amount of the outstanding Loans and, if any excess shall still remain, shall Cash Collateralize the L/C Obligations to the extent of such remaining excess. 2.10 Repayment. The Company shall repay to the Banks on the Revolving Termination Date or on such earlier date as such Loans may become due and payable pursuant to subsection 9.02(b) the aggregate principal amount of Loans outstanding on such date. 2.11 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate plus the Applicable Margin or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.04). (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.07, 2.08 or 2.09 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Banks. (c) Notwithstanding subsections 2.11(a) and 3.03(d), while any Event of Default exists, for the period commencing after the Company's receipt of notice from the Agent at the request, or with the consent, of the Required Banks or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans and other Obligations, at a rate per annum which is determined by adding 2% per annum to the Applicable Margin then in effect for such Loans and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 2%; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default for the period commencing after the Company's receipt of notice from the Agent at the request, or with the consent, of the Required Banks or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus 2%. -28- 36 (d) Anything herein to the contrary notwithstanding, the Obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.12 Fees. (a) Arrangement, Agency Fees. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated March 13, 1996. (b) Commitment Fees. The Company shall pay to the Agent for the account of each Bank a commitment fee equal to the Applicable Commitment Fee Percentage times the average daily unused portion of such Bank's Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent. For purposes hereof, each Bank's Commitment shall be deemed utilized to the extent of its Pro Rata Share of all outstanding Loans and L/C Obligations. Such commitment fee shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing with the first calendar quarter ending after the Closing Date through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.06, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article V are not met. 2.13 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans and of fees shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All computations of interest for Offshore Rate Loans shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) For purposes of determining utilization of each Bank's Commitment in order to calculate the commitment fee due under subsection 2.12(b), the amount of any outstanding -29- 37 Offshore Currency Loan on any date shall be determined based upon the Dollar Equivalent amount as of the most recent Computation Date with respect to such Offshore Currency Loan. (c) Each determination of an interest rate or a Dollar Equivalent amount by the Agent shall be rebuttably presumptive evidence thereof in the absence of manifest error. The Agent will, at the request of the Company or any Bank, deliver to the Company or the Bank, as the case may be, a statement showing the quotations used by the Agent in determining any interest rate or Dollar Equivalent amount. (d) If any Reference Bank's Commitment terminates (other than on termination of all the Commitments), or for any reason whatsoever such Reference Bank ceases to be a Bank hereunder, such Reference Bank shall thereupon cease to be a Reference Bank, and the Offshore Rate shall be determined on the basis of the rates as notified by the remaining Reference Bank(s). In such event, the Company (with the consent of the Agent) may designate another Bank as a Reference Bank hereunder. (e) Each Reference Bank shall use its best efforts to furnish quotations of rates to the Agent as contemplated hereby. If any of the Reference Banks fails to supply such rates to the Agent upon its request, the rate of interest shall be determined on the basis of the quotations of the remaining Reference Bank(s). 2.14 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and, with respect to principal of, interest on, and any other amounts relating to, any Offshore Currency Loan, shall be made in the Offshore Currency in which such Loan is denominated or payable, and, with respect to all other amounts payable hereunder, shall be made in Dollars. Such payments shall be made in Same Day Funds, and (i) in the case of Offshore Currency payments, no later than such time on the dates specified herein as may be determined by the Agent to be necessary for such payment to be credited on such date in accordance with normal banking procedures in the place of payment, and (ii) in the case of any Dollar payments, no later than 12:00 noon (Chicago time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such principal, interest, fees or other amounts, in like funds as received. Any payment which is received by the Agent later than 12:00 noon (Chicago time), or later than the time specified by the Agent as provided in clause (i) above (in the case of Offshore Currency payments), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on -30- 38 the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in Same Day Funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate or, in the case of a payment in an Offshore Currency, the Overnight Rate, for each day from the date such amount is distributed to such Bank until the date repaid. 2.15 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in Same Day Funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in Same Day Funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate or, in the case of any Borrowing consisting of Offshore Currency Loans, the Overnight Rate, for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection 2.15(a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. -31- 39 2.16 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 11.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section 2.16 and will in each case notify the Banks following any such purchases or repayments. ARTICLE III THE LETTERS OF CREDIT --------------------- 3.01 The Letter of Credit Subfacility. (a) On the terms and conditions set forth herein (i) the Issuing Bank agrees, (A) from time to time on any Business Day during the period from the Closing Date to, but not including, the Revolving Termination Date to issue Letters of Credit denominated in Dollars or an Offshore L/C Currency for the account of the Company, and to amend or renew Letters of Credit previously issued by it, in accordance with subsections 3.02(c) and 3.02(d), and (B) to honor drafts under the Letters of Credit; and (ii) the Banks severally agree to participate in Letters of Credit Issued for the account of the Company; provided that the Issuing Bank shall not be obligated to Issue, and no Bank shall be obligated to participate in, any Letter of Credit if as of the date of Issuance of such Letter of Credit (the "Issuance Date"): (A) the Effective Amount of all L/C Obligations plus the Effective Amount of all Loans exceeds the aggregate Commitments or (B) the participation of any Bank in the Effective Amount of all L/C Obligations plus the Effective Amount of the Loans of such Bank exceeds such Bank's Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company's ability to obtain Letters of Credit shall be fully revolving, and, accordingly, the Company may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. -32- 40 (b) The Issuing Bank shall be under no obligation to Issue any Letter of Credit if: (i) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Bank from Issuing such Letter of Credit, or any Requirement of Law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the Issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Bank in good faith deems material to it and for which the Issuing Bank is not compensated hereunder. (ii) the Issuing Bank has received written notice from any Bank, the Agent or the Company, on or prior to the Business Day prior to the requested date of Issuance of such Letter of Credit, that one or more of the applicable conditions contained in Article V is not then satisfied; (iii) the expiry date of any requested Letter of Credit is (A) more than 360 days after the date of Issuance, unless the Required Banks and the Issuing Bank have approved such expiry date in writing, or (B) after five Business Days prior to the scheduled Revolving Termination Date, unless all of the Banks have approved such expiry date in writing; (iv) any requested Letter of Credit is not in a form reasonably acceptable to the Issuing Bank, or the Issuance of a Letter of Credit shall violate any applicable policies of the Issuing Bank; or (v) any standby Letter of Credit is for the purpose of supporting the issuance of any letter of credit by any other Person. 3.02 Issuance, Amendment and Renewal of Letters of Credit. (a) Each Letter of Credit shall be issued upon the irrevocable written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least two Business Days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of issuance. Each such request for issuance of a Letter of Credit shall be by facsimile or electronic transmission, confirmed immediately in an original writing, in the form of an L/C Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the proposed date of issuance of the Letter of Credit (which shall be a Business -33- 41 Day); (ii) the face amount of the Letter of Credit; (iii) the expiry date of the Letter of Credit; (iv) the name and address of the beneficiary thereof; (v) the documents to be presented by the beneficiary of the Letter of Credit in case of any drawing thereunder; (vi) the full text of any certificate to be presented by the beneficiary in case of any drawing thereunder; (vii) the currency (which shall be Dollars or an Offshore L/C Currency) in which the Letter of Credit is to be denominated; and (viii) such other matters as the Issuing Bank may reasonably require. (b) If the Agent is not the Issuing Bank, by 12:00 noon (Chicago time) on the Business Day next preceding the requested date of issuance of a Letter of Credit, the Issuing Bank will confirm with the Agent (by telephone or in writing) that the Agent has received a copy of the L/C Application or L/C Amendment Application from the Company and, if not, the Issuing Bank will provide the Agent with a copy thereof. Unless the Issuing Bank has received notice on or before the Business Day immediately preceding the date the Issuing Bank is to issue a requested Letter of Credit from the Agent (i) directing the Issuing Bank not to issue such Letter of Credit because such issuance is not then permitted under subsection 3.01(a)(ii) as a result of the limitations set forth in clauses (A) and (B) thereof or subsection 3.01(b)(ii); or (ii) that one or more conditions specified in Article V are not then satisfied; then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, issue a Letter of Credit for the account of the Company in accordance with the Issuing Bank's usual and customary business practices. (c) From time to time while a Letter of Credit is outstanding and prior to the Revolving Termination Date, the Issuing Bank will, upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least two Business Days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of amendment, amend any Letter of Credit issued by it. Each such request for amendment of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Letter of Credit to be amended; (ii) the proposed date of amendment of the Letter of Credit (which shall be a Business Day); (iii) the nature of the proposed amendment; and (iv) such other matters as the Issuing Bank may reasonably require. The Issuing Bank shall be under no obligation to amend any Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue such Letter of Credit in its amended form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed amendment to the Letter of Credit. (d) The Issuing Bank and the Banks agree that, while a Letter of Credit is outstanding and prior to the Revolving Termination Date, at the option of the Company and upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least two Business Days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of notification of renewal, the Issuing Bank shall be entitled to authorize the automatic renewal of any Letter of Credit issued by it; provided that the Issuing Bank shall not be entitled to authorize such automatic renewal if, at least one Business Day prior to the proposed date of notification of renewal, it shall have received notice -34- 42 from the Agent (i) directing the Issuing Bank not to renew such Letter of Credit because such renewal is not then permitted under subsection 3.01(a)(ii) as a result of the limitations set forth in clauses (A) and (B) thereof or subsection 3.01(b)(ii); or (ii) that one or more conditions specified in Article V are not then satisfied. Each such request for renewal of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Letter of Credit to be renewed; (ii) the proposed date of notification of renewal of the Letter of Credit (which shall be a Business Day); (iii) the revised expiry date of the Letter of Credit; and (iv) such other matters as the Issuing Bank may require. The Issuing Bank shall be under no obligation to renew, and no Bank shall be obligated to participate in, any Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue or amend, and no Bank would be obligated to participate in, such Letter of Credit in its renewed form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed renewal of the Letter of Credit. If any outstanding Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the Issuing Bank that such Letter of Credit shall not be renewed, and if at the time of renewal the Issuing Bank would be required to authorize the automatic renewal of such Letter of Credit in accordance with this subsection 3.02(d) upon the request of the Company but the Issuing Bank shall not have received any L/C Amendment Application from the Company with respect to such renewal or other written direction by the Company with respect thereto, the Issuing Bank shall nonetheless renew such Letter of Credit, and the Company and the Banks hereby authorize such renewal, and, accordingly, the Issuing Bank shall be deemed to have received an L/C Amendment Application from the Company requesting such renewal. (e) The Issuing Bank may, at its election (or as required by the Agent at the direction of the Required Banks), deliver any notices of termination or other communications to any Letter of Credit beneficiary or transferee, and take any other action as necessary or appropriate, at any time and from time to time, in order to cause the expiry date of such Letter of Credit to be a date not later than the scheduled Revolving Termination Date. (f) This Agreement shall control in the event of any conflict with any L/C-Related Document (other than any Letter of Credit). In addition, unless the Company and the Issuing Bank shall otherwise expressly agree in writing, any purported grant of a Lien (or any requirement to do so) contained in any L/C Related Document shall be ineffective and null and void. (g) The Issuing Bank will also deliver to the Agent, concurrently or promptly following its delivery of a Letter of Credit, or amendment to or renewal of a Letter of Credit, to an advising bank or a beneficiary, a true and complete copy of each such Letter of Credit or amendment to or renewal of a Letter of Credit. (h) Within five Business Days after the end of each month, the Agent will send to each Bank a statement reflecting the outstanding Letters of Credit as of the end of such month. -35- 43 3.03 Risk Participations, Drawings and Reimbursements. (a) Immediately upon the Issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) the Pro Rata Share of such Bank, times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. For purposes of Section 2.01, each Issuance of a Letter of Credit shall be deemed to utilize the Commitment of each Bank by an amount equal to the amount of such participation for so long as any related L/C Obligations shall be outstanding. (b) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Issuing Bank will promptly notify the Company and the Agent. Provided that it shall have received such notice, the Company shall reimburse the Issuing Bank prior to 12:00 noon (Chicago time) on each date that any amount is paid by the Issuing Bank under any Letter of Credit (each such date, an "Honor Date") in an amount equal to the amount so paid by the Issuing Bank; provided that, if such Letter of Credit is denominated in an Offshore L/C Currency, the Company shall pay to the Issuing Bank the Dollar Equivalent of the amount of such Offshore L/C Currency paid by the Issuing Bank under such Letter of Credit. In the event the Company fails to reimburse the Issuing Bank for the full amount of any drawing under any Letter of Credit by 12:00 noon (Chicago time) on the Honor Date, the Issuing Bank will promptly notify the Agent and the Agent will promptly notify each Bank thereof, and the Company shall be deemed to have requested that Base Rate Loans be made by the Banks to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the Commitment and subject to the conditions set forth in Section 5.02 other than any notice requirements. Any notice given by the Issuing Bank or the Agent pursuant to this subsection 3.03(b) may be oral if immediately confirmed in writing (including by facsimile); provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (c) Each Bank shall upon any notice pursuant to subsection 3.03(b) make available to the Agent for the account of the relevant Issuing Bank an amount in Dollars and in immediately available funds equal to its Pro Rata Share of the amount of the Dollar Equivalent of the drawing, whereupon the participating Banks shall (subject to subsection 3.03(d)) each be deemed to have made a Loan consisting of a Base Rate Loan to the Company in that amount. If any Bank so notified fails to make available to the Agent for the account of the Issuing Bank the amount of such Bank's Pro Rata Share of such amount by no later than 2:00 p.m. (Chicago time) on the Honor Date, then interest shall accrue on such Bank's obligation to make such payment, from the Honor Date to the date such Bank makes such payment, at a rate per annum equal to the Federal Funds Rate in effect from time to time during such period. The Agent will promptly give notice of the occurrence of the Honor Date, but failure of the Agent to give any such notice on the Honor Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligations under this Section 3.03. -36- 44 (d) With respect to any unreimbursed drawing that is not converted into Loans consisting of Base Rate Loans to the Company in whole or in part as contemplated by subsection 3.03(b), because of the Company's failure to satisfy the conditions set forth in Section 5.02 other than any notice requirements or for any other reason, the Company shall be deemed to have incurred from the Issuing Bank an L/C Borrowing in the amount of such drawing, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at a rate per annum equal to the Base Rate, and each Bank's payment to the Issuing Bank pursuant to subsection 3.03(c) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Bank in satisfaction of its participation obligation under this Section 3.03. (e) Each Bank's obligation in accordance with this Agreement to make the Loans or L/C Advances, as contemplated by this Section 3.03, as a result of a drawing under a Letter of Credit, shall be absolute and unconditional and without recourse to the Issuing Bank and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Bank, the Company or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default, an Event of Default or a Material Adverse Effect; or (iii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided, however, that each Bank's obligation to make Loans under this Section 3.03 is subject to the conditions set forth in Section 5.02. 3.04 Repayment of Participations. (a) Upon (and only upon) receipt by the Agent for the account of the Issuing Bank of immediately available funds from the Company (i) in reimbursement of any payment made by the Issuing Bank under the Letter of Credit with respect to which any Bank has paid the Agent for the account of the Issuing Bank for such Bank's participation in the Letter of Credit pursuant to Section 3.03 or (ii) in payment of interest thereon, the Agent will pay to each Bank, in the same funds as those received by the Agent for the account of the Issuing Bank, the amount of such Bank's Pro Rata Share of such funds, and the Issuing Bank shall receive the amount of the Pro Rata Share of such funds of any Bank that did not so pay the Agent for the account of the Issuing Bank. (b) If the Agent or the Issuing Bank is required at any time to return to the Company, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by the Company to the Agent for the account of the Issuing Bank pursuant to subsection 3.04(a) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent or the Issuing Bank the amount of its Pro Rata Share of any amounts so returned by the Agent or the Issuing Bank plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent or the Issuing Bank, at a rate per annum equal to the Federal Funds Rate in effect from time to time. -37- 45 3.05 Role of the Issuing Bank. (a) Each Bank and the Company agree that, in paying any drawing under a Letter of Credit, the Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft and certificates expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or the authority of the Person executing or delivering any such document. (b) No Agent-Related Person nor any of the respective correspondents, participants or assignees of the Issuing Bank shall be liable to any Bank for: (i) any action taken or omitted in connection herewith at the request or with the approval of the Banks (including the Required Banks, as applicable); (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any L/C-Related Document. (c) The Company hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Company's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Agent-Related Person, nor any of the respective correspondents, participants or assignees of the Issuing Bank, shall be liable or responsible for any of the matters described in clauses (a) through (g) of Section 3.06; provided, however, anything in such clauses to the contrary notwithstanding, that the Company may have a claim against the Issuing Bank, and the Issuing Bank may be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Company which the Company proves were caused by the Issuing Bank's willful misconduct or gross negligence or the Issuing Bank's wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing: (i) the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation; and (ii) the Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. 3.06 Obligations Absolute. The obligations of the Company under this Agreement and any L/C-Related Document to reimburse the Issuing Bank for a drawing under a Letter of Credit, and to repay any L/C Borrowing and any drawing under a Letter of Credit converted into Loans, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and each such other L/C-Related Document under all circumstances, including the following: (a) any lack of validity or enforceability of this Agreement or any L/C-Related Document; -38- 46 (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Company in respect of any Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C-Related Documents; (c) the existence of any claim, set-off, defense or other right that the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C-Related Documents or any unrelated transaction; (d) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (e) any payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of any Letter of Credit; or any payment made by the Issuing Bank under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any Insolvency Proceeding; (f) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the obligations of the Company in respect of any Letter of Credit; or (g) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Company or a guarantor. 3.07 Letter of Credit Fees. (a) The Company shall pay to the Agent for the account of each of the Banks a letter of credit fee with respect to the Letters of Credit equal to the Applicable Margin times the average daily maximum amount available to be drawn on the outstanding Letters of Credit, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon Letters of Credit outstanding for that quarter as calculated by the Agent. Such letter of credit fees shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter during which Letters of Credit are outstanding, commencing on the first such quarterly date to occur after the Closing Date, through the Revolving Termination Date (or such later date upon which the outstanding Letters of Credit shall expire), with the final payment to be made on the Revolving Termination Date (or such later expiration date). -39- 47 (b) The Company shall pay to the Issuing Bank a letter of credit fronting fee for each Letter of Credit Issued by the Issuing Bank in an amount agreed to by the Company and the Issuing Bank. Such Letter of Credit fronting fee shall be due and payable on each date of Issuance of a Letter of Credit or at such other time as may be agreed upon between the Company and the Issuing Bank. (c) The Company shall pay to the Issuing Bank from time to time on demand the normal issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the Issuing Bank relating to letters of credit as from time to time in effect. 3.08 Uniform Customs and Practice. The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in the Letters of Credit) apply to the Letters of Credit. ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY -------------------------------------- 4.01 Taxes. ----- (a) Any and all payments by the Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section 4.01), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective -40- 48 Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of (i) Taxes, (ii) Other Taxes, and (iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If the Company is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section 4.01, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. (f) Notwithstanding anything to the contrary contained in this Agreement, in no event shall the Company be either (i) obligated to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section 4.01 or (ii) prohibited from deducting or withholding for any applicable Taxes pursuant to subsection (a) of this Section 4.01, if the Bank or Agent fails to deliver forms to the Company in accordance with Section 10.10 on a timely basis, unless such failure would not have occurred but for a change in law or regulation or in the interpretation thereof by any governmental or regulatory agency or body charged with the administration or interpretation thereof, or the introduction of any law or regulation, that occurs on or after the Closing Date. 4.02 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans (including Offshore Rate Loans in any Applicable Currency), then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. -41- 49 (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 4.04, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall (without regard to whether the conditions specified in Section 5.02 have been satisfied) borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) Before giving any notice to the Agent under this Section 4.02, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 4.03 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in the interpretation of any law or regulation after the Closing Date or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) after the Closing Date, there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans or participating in Letters of Credit, or, in the case of the Issuing Bank, any increase in the cost to the Issuing Bank of agreeing to issue, issuing or maintaining any Letter of Credit or of agreeing to make or making, funding or maintaining any unpaid drawing under any Letter of Credit, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, in any such case, after the Closing Date affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall -42- 50 pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 4.04 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation except as set forth in subsection 2.05(b) or (c) ; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.07; (d) the prepayment (including pursuant to Section 2.07 or 2.08) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.04 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained or from charges relating to any Offshore Currency Loans. For purposes of calculating amounts payable by the Company to the Banks under this Section 4.04 and under subsection 4.03(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 4.05 Inability to Determine Rates. If any two of the three Reference Banks determine that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or the Required Banks determine that the Offshore Rate applicable pursuant to subsection 2.11(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Required Banks revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the -43- 51 Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. In the case of any Offshore Currency Loans, the Borrowing or continuation shall be in an aggregate amount equal to the Dollar Equivalent amount of the originally requested Borrowing or continuation in the Offshore Currency, and to that end any outstanding Offshore Currency Loans which are the subject of any continuation shall be redenominated and converted into Base Rate Loans in Dollars with effect from the last day of the Interest Period with respect to any such Offshore Currency Loans. 4.06 Reserves on Offshore Rate Loans. The Company shall pay to each Bank, in respect of any Offshore Currency Loans, additional costs arising under any applicable regulations of the central bank or other relevant Governmental Authority in the country in which the Offshore Currency of such Offshore Rate Loan circulates on the unpaid principal amount of each Offshore Rate Loan equal to the actual costs of such reserves allocated to such Loan by the Bank (as determined by the Bank in good faith, which determination shall be conclusive), payable on each date on which interest is payable on such Loan, provided the Company shall have received at least 15 days' prior written notice (with a copy to the Agent) of such additional interest from the Bank. If a Bank fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be payable 15 days from receipt of such notice. 4.07 Certificates of Banks. Any Bank or any Bank's participant claiming reimbursement or compensation under this Article IV shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. Notwithstanding anything to the contrary contained in this Agreement, no amounts shall be payable by the Company pursuant to Section 4.03, 4.04 or 4.06 with respect to any period commencing more than 180 days before the delivery of the certificate contemplated by this Section 4.07 unless such amounts are claimed as a result of the retroactive effect of any newly enacted or adopted law, rule or regulation and such certificate is delivered within 180 days after such enactment or adoption. 4.08 Survival. The agreements and obligations of the Company in this Article IV shall survive the payment of all other Obligations. 4.09 Replacement of Certain Banks. (a) Notwithstanding any other provision of this Agreement, the Company, at any time after any Bank or any Bank's participant has (i) delivered a certificate pursuant to Section 4.07 or notified the Agent that it is unable to extend or maintain any Offshore Rate Loans (including Offshore Currency Loans) or (ii) failed to fund a Loan at any time that such Bank shall have been committed to make such Loan or in the event such Bank may be replaced pursuant to the provisions of subsection 11.08(e) (in any such case, a "Certificate Bank"), shall have the right to replace the Certificate Bank in accordance with this Section 4.09. Notwithstanding the foregoing, in no event may the Company replace the Certificate Bank pursuant to this Section 4.09 if (i) the -44- 52 Agent shall have received notice from the Required Banks specifying that a Default or an Event of Default shall have occurred and be continuing and (ii) such Default or Event of Default shall not have been subsequently cured or waived. (b) The Company, in exercising its right to replace the Certificate Bank, shall (i) reduce the Commitment of such Bank to zero and (ii) (A) agree with one or more Banks to concurrently increase the respective Commitments of such Bank or Banks by an aggregate amount not in excess of the amount of the Commitment of the Certificate Bank prior to the exercise of this Section 4.09, in full substitution of the Certificate Bank, (B) add one or more additional Eligible Assignees as signatories to this Agreement for Commitments equal to the amount of the Commitment of the Certificate Bank prior to the Company's exercise of this Section 4.09, in full substitution of the Certificate Bank or (C) any combination of increases in Commitments pursuant to (A) above and additional new lenders pursuant to (B) above, so long as the aggregate sum of the increases in Commitments plus the additional Commitments of the additional lenders equals the amount of the Commitment of the Certificate Bank prior to the exercise of this Section 4.09 and no new lender has a Commitment of less than $5,000,000. Any new lender becoming a signatory to this Agreement shall, without further action, be considered a Bank for all purposes of this Agreement at the time of execution of an appropriate Assignment and Acceptance. (c) The Company shall have the right to select any additional Eligible Assignee or Eligible Assignees to become signatories to this Agreement pursuant to subsection 4.09(b) above, subject to the consent of the Agent, which consent shall not be unreasonably withheld. (d) The Company shall give the Agent and any Certificate Bank being replaced not less than five Business Days' notice of the date (which shall be a Business Day) on which such Certificate Bank shall be replaced. (e) Each Bank or additional lender which replaces a Certificate Bank pursuant to this Section 4.09 shall acquire all (or if more than one Bank or lender is replacing a Certificate Bank the aggregate shall severally acquire all) of the then outstanding Loans and L/C Obligations of the Certificate Bank. (f) At the time of replacement, the Certificate Bank shall have been paid in full the principal of, and interest accrued and unpaid to the date of replacement on, all outstanding Loans and unreimbursed L/C Obligations of the Certificate Bank, and all accrued and unpaid to the date of replacement fees owing to the Certificate Bank. (g) After a Certificate Bank is replaced pursuant to this Section 4.09, it shall have no further rights (other than rights which by the terms hereof survive the termination hereof) or obligations hereunder (and shall no longer be a "Bank" for purposes hereof); provided that a replaced Certificate Bank shall retain its rights and obligations as a Bank hereunder with respect -45- 53 to the period before it was so replaced (except to the extent that it shall have assigned or otherwise transferred such rights). ARTICLE V CONDITIONS PRECEDENT -------------------- 5.01 Conditions of Initial Credit Extensions. The obligation of each Bank to make its initial Credit Extension under the Existing Credit Agreement was subject to the condition that the Agent shall have received on or before the date of the initial Credit Extension all of the following, in form and substance reasonably satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; (b) Resolutions; Incumbency. (i) copies of the resolutions of the board of directors of the Company and each Guarantor authorizing the transactions contemplated hereby, certified by the Secretary or an Assistant Secretary of the Company and such Guarantor; and (ii) a certificate of the Secretary or Assistant Secretary of the Company and each Guarantor certifying the names and true signatures of the officers of the Company and such Guarantor authorized to execute, deliver and perform, as applicable, this Agreement and all other Loan Documents to be delivered by such Person hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of the Company and each Guarantor as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company and such Guarantor as of such date; and (ii) a good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of the states of Missouri, its state of incorporation, and Kansas and for each Guarantor from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation as of a recent date, together with bring-down certificates by facsimile, dated the Closing Date; (d) Legal Opinions. An opinion of each of (i) Latham & Watkins, counsel to the Company and the Guarantors, substantially in the form of Exhibit D-1 to the Existing Agreement, -46- 54 and (ii) Louis J. Garr, Jr., general counsel of The May Department Stores Company, substantially in the form of Exhibit D-2 to the Existing Agreement, addressed to the Agent and the Banks; (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees to the extent then due and payable on the Closing Date; (f) Certificate. A certificate signed by a Responsible Officer on behalf of the Company, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article VI are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Credit Extension; (iii) there has occurred since February 3, 1996, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; and (iv) as of February 3, 1996, the Present Value of Operating Leases was $885,500,000; (g) Subsidiary Guaranty. The Subsidiary Guaranty executed and delivered by a duly authorized officer of each of the Guarantors party thereto; and (h) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may reasonably request. 5.02 Conditions to All Credit Extensions. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) and the obligation of the Issuing Bank to issue, and of each Bank to participate in, any Letter of Credit are subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Issuance Date: (a) Notice of Borrowing or Issuance. The Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing or in the case of any Issuance of any Letter of Credit, the Agent and the Issuing Bank shall have received an L/C Application or L/C Amendment Application, as required under Section 3.02; (b) Continuation of Representations and Warranties. The representations and warranties in Article VI shall be true and correct on and as of such Borrowing Date or Issuance Date with the same effect as if made on and as of such Borrowing Date or Issuance Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and -47- 55 (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or Issuance. Each Notice of Borrowing and L/C Application or L/C Amendment Application submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date or Issuance Date, that the conditions in subsection 5.02(a), (b) and (c) are satisfied. 5.03 Effectiveness. This Agreement shall become effective upon the execution and delivery hereof by the Loan Parties and the Banks and the delivery by the Loan Parties to the Agent of the following documents and the satisfaction of the following conditions on or prior to June 30, 1998: (a) Charter Documents; Good Standing Certificates. Copies of the certificate of incorporation of each of the Parent Guarantors, together with all amendments thereto, both certified by the appropriate governmental officer in its jurisdiction of incorporation, together with a good standing certificate issued by the Secretary of State of the jurisdiction of its incorporation. (b) By-Laws and Resolutions. Copies, certified by the Secretary or Assistant Secretary of each of the Loan Parties, of its by-laws (other than those of the Company) and of its Board of Directors' resolutions authorizing the execution, delivery and performance by such Loan Party of the Loan Documents. (c) Secretary's Certificate. An incumbency certificate, executed by the Secretary or Assistant Secretary of each of the Loan Parties, which shall identify by name and title and bear the signature of the officers authorized to sign the Loan Documents. (d) Certificate. A certificate signed by a Responsible Officer on behalf of Holdco, dated as of the Restatement Date, stating that: (i) The representations and warranties in Article VI are true and correct on and as of such date as if made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and (ii) on such date both before and after giving effect to this Agreement, no Default or Event of Default exists nor, giving effect to this Agreement, would any Default or Event of Default result from the Reorganization. (e) Solvency Certificate. A certificate in form and substance satisfactory to the Agent signed by its Chief Financial Officer on behalf of Holdco and dated as of the -48- 56 Restatement Date with respect to the solvency of the Loan Parties after giving effect to the Reorganization and related intercompany transactions. (f) Legal Opinions. A written opinion of Sullivan & Cromwell, counsel to the Loan Parties addressed to the Agent and the Banks in form and substance reasonably acceptable to the Agent and its counsel. (g) Reaffirmation of Guaranty. A reaffirmation of guaranty in the form of Exhibit G hereto duly executed by each of the Subsidiary Guarantors. (h) Parent Guaranty. The Parent Guaranty duly executed by each of the Parent Guarantors. (i) Regorganization. The Reorganization shall have been consummated and evidence thereof delivered by the Loan Parties to the Agent. ARTICLE VI REPRESENTATIONS AND WARRANTIES ------------------------------ Each Loan Party represents and warrants to the Agent and each Bank that: 6.01 Corporate Existence and Power. Each Loan Party and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (d) is in compliance with all Requirements of Law; except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. -49- 57 6.02 Corporate Authorization; No Contravention. The execution, delivery and performance by each Loan Party and the Guarantors of this Agreement and each other Loan Document have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of such Person's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any material Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its property is subject; or (c) violate any Requirement of Law applicable to such Person. 6.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Loan Party or any Guarantor of the Agreement or any other Loan Document. 6.04 Binding Effect. This Agreement and each other Loan Document constitutes the legal, valid and binding obligation of each Loan Party, enforceable against each Loan Party in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.05 Litigation. There are no actions, suits, proceedings, claims or disputes pending, or, to the best knowledge of any Loan Party, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against any Loan Party and its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) may reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 6.06 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, no Loan Party nor any Subsidiary of a Loan Party was in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a -50- 58 Material Adverse Effect, or that would, if such default had occurred after such date, create an Event of Default under subsection 9.01(e). 6.07 ERISA Compliance. Except as specifically disclosed in Schedule 6.07: (a) Each Plan is in compliance with the applicable provisions of ERISA, the Code and other federal or state law except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and, to the best knowledge of any Loan Party, nothing has occurred which would cause the loss of such qualification. Each Loan Party and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of any Loan Party, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) no Loan Party nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) no Loan Party nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) no Loan Party nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 6.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 7.12. No Loan Party nor any Subsidiary of a Loan Party is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. 6.09 Taxes. Holdco and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against any Loan Party or any Subsidiary that would, if made, have a Material Adverse Effect. -51- 59 6.10 Financial Condition. (a) The audited consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended February 3, 1996 and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 6.10, show all material indebtedness and other liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) Since February 3, 1996 there has been no Material Adverse Effect. 6.11 Environmental Matters. Each Loan Party conducts in the ordinary course of business a review of the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof each of the Loan Parties has reasonably concluded that, except as specifically disclosed in Schedule 6.11, such Environmental Laws and Environmental Claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.12 Regulated Entities. No Loan Party or its Subsidiary, nor any Person controlling a Loan Party is an "Investment Company" within the meaning of the Investment Company Act of 1940. No Loan Party is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 6.13 Subsidiaries. As of the Closing Date, the Company had no Subsidiaries other than those specifically disclosed in part (a) of Schedule 6.13. The Loan Parties have no Material Subsidiaries other than those specifically disclosed in part (b) of Schedule 6.13 or as disclosed pursuant to subsection 7.03(e) (including their jurisdictions of incorporation). As of the Closing Date, the Company had no equity investments in any other corporation or entity other than those specifically disclosed in part (c) of Schedule 6.13. 6.14 Insurance. The properties of each Loan Party and its Subsidiaries are insured as required by Section 7.06. -52- 60 6.15 Swap Obligations. No Loan Party nor any of its Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. 6.16 Full Disclosure. None of the representations or warranties made by any Loan Party in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of any Loan Party or any Subsidiary of a Loan Party in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of any Loan Party to the Banks prior to the Closing Date) taken as a whole, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VII AFFIRMATIVE COVENANTS --------------------- So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid, unless the Required Banks waive compliance in writing: 7.01 Financial Statements. Holdco shall deliver to the Agent, with sufficient copies for each Bank: (a) as soon as available, but not later than 120 days after the end of each fiscal year (commencing with fiscal year ending January 1999), a copy of the audited consolidated balance sheet of Holdco and its Subsidiaries, as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Arthur Andersen LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a consistent basis. Such opinion shall not be qualified or limited, in either case, because of a restricted or limited examination by the Independent Auditor of any material portion of Holdco's or any Subsidiary's records; (b) as soon as available, but not later than 120 days after the end of each fiscal year (commencing with the first fiscal year ending after the Restatement Date), a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such fiscal year, and certified by a Responsible Officer of the Company as fairly presenting, in accordance with GAAP, the financial position and the results of operations of the Company and the Subsidiaries; -53- 61 (c) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the first fiscal quarter ending after the Restatement Date), a copy of the unaudited consolidated balance sheet of Holdco and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer of Holdco as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments and the absence of notes thereto), the financial position and the results of operations of Holdco and its Subsidiaries; and (d) with respect to the Company's fiscal quarter ended May 2, 1998, as soon as available, but not later than 60 days after the end of such fiscal quarter, the financial information with respect to the Company and its Subsidiaries required to be delivered with respect to such fiscal quarter by Section 7.01(b) of the Existing Credit Agreement. To the extent included therein, the information required to be delivered pursuant to this Section 7.01 may be delivered by delivery of the financial statements and reports required to be delivered pursuant to subsection 7.02(c). 7.02 Certificates; Other Information. Holdco shall furnish to the Agent, with sufficient copies for each Bank: (a) concurrently with the delivery of the financial statements referred to in subsection 7.01(a), a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 7.01(a), (c) and (d), a Compliance Certificate executed by a Responsible Officer; (c) promptly, but not later than five days after the date of filing with the SEC, copies of all financial statements and reports that Holdco sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10-K, 10-Q and 8-K) that Holdco or any Subsidiary may make to, or file with, the SEC; (d) promptly after the creation or acquisition of any Material Subsidiary, the name of such Material Subsidiary, a description of its business, its net worth and the value of its assets; and (e) promptly, such additional information regarding the business, financial or corporate affairs of each Loan Party or any Subsidiary as the Agent, at the request of any Bank, may from time to time request. -54- 62 7.03 Notices. Each Loan Party shall promptly notify the Agent: (a) upon any Responsible Officer becoming aware of the occurrence of any Default or Event of Default; (b) of any matter that has resulted, or may, in the judgment of such Loan Party, reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of such Loan Party or any of its Subsidiaries; (ii) any dispute, litigation, investigation, proceeding or suspension between such Loan Party or any of its Subsidiaries and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting such Loan Party or any of its Subsidiaries, including pursuant to any applicable Environmental Laws; (c) upon any Responsible Officer becoming aware of the occurrence of any ERISA Event (but in no event more than 10 days after such ERISA Event), and deliver to the Agent and each Bank a copy of any notice with respect to such ERISA Event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to such Loan Party or any ERISA Affiliate with respect to such ERISA Event; (d) of any material change in accounting policies or financial reporting practices by such Loan Party or any of its consolidated Subsidiaries; and (e) of any Subsidiary (including its jurisdiction of incorporation) which is not a Guarantor being or becoming a Material Subsidiary. Each notice under this Section 7.03 shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action such Loan Party or any affected Subsidiary proposes to take with respect thereto and at what time (although the failure to take any such action shall not constitute a Default or Event of Default under this Agreement). Each notice under subsection 7.03(a) shall describe the provisions of this Agreement or other Loan Document that have been breached or violated. 7.04 Preservation of Corporate Existence, Etc. Each Loan Party shall, and shall cause each Material Subsidiary to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation except as otherwise permitted by this Agreement; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except in connection with transactions permitted by Section 8.03 and sales -55- 63 of assets permitted by Section 8.02 and except for any of the foregoing the expiration or termination of which could not reasonably be expected to have a Material Adverse Effect; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. 7.05 Maintenance of Property. Each Loan Party shall maintain, and shall cause each of its Subsidiaries to maintain, and preserve all its material property which is used in its business in good working order and condition, ordinary wear and tear excepted except where the failure to so maintain or preserve could not reasonably be expected to have a Material Adverse Effect. 7.06 Insurance. Each Loan Party shall maintain, and shall cause each of its Subsidiaries to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons, provided that Holdco and its Subsidiaries may self-insure against such risks and in such amounts as is usually self-insured by companies engaged in similar businesses and owning similar properties in the same general areas in which such Loan Party and its Subsidiaries operate. 7.07 Payment of Tax Obligations. Each Loan Party shall, and shall cause each of its Subsidiaries to, pay and discharge as the same shall become due and payable, all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by such Loan Party or such Subsidiary. 7.08 Compliance with Laws. Each Loan Party shall comply, and shall cause each of its Subsidiaries to comply, with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business, except where the failure to so comply could not reasonably be expected to cause a Material Adverse Effect. 7.09 Compliance with ERISA. Each Loan Party shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 7.10 Inspection of Property and Books and Records. Each Loan Party shall maintain and shall cause each of its Subsidiaries to maintain proper books of record and account, in which full, -56- 64 true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of such Loan Party and such Subsidiary. Each Loan Party shall permit, and shall cause each of its Subsidiaries to permit, representatives and independent contractors of the Agent and representatives of any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and, in the presence of Holdco if Holdco shall so request, independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to Holdco. 7.11 Environmental Laws. Each Loan Party shall, and shall cause each of its Subsidiaries to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws except where the failure to do so or to so comply could not reasonably be expected to have a Material Adverse Effect. 7.12 Use of Proceeds. The Company shall use the proceeds of the Loans for general corporate purposes and not in contravention of any Requirement of Law (including Regulation G, T, U and X of the FRB) or of any Loan Document. 7.13 Additional Guarantors. In the event any Person shall hereafter become a Material Subsidiary, Holdco shall promptly cause such Material Subsidiary to become a party to the Subsidiary Guaranty. ARTICLE VIII NEGATIVE AND FINANCIAL COVENANTS -------------------------------- So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid, unless the Required Banks waive compliance in writing: 8.01 Limitation on Liens. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien existing on property of such Loan Party or any of its Subsidiaries on the Closing Date and set forth in Schedule 8.01 securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; -57- 65 (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 7.07; provided that no notice of lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent for more than 90 days or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens on the property of such Loan Party or any of its Subsidiaries securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business and treating as non-delinquent any delinquency which is being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (g) Liens consisting of judgment or judicial attachment liens with respect to judgments that do not constitute an Event of Default and in the aggregate do not exceed $10,000,000; (h) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of such Loan Party and its Subsidiaries; (i) Liens on assets of corporations which become Subsidiaries after the Closing Date; provided, however, that such Liens existed at the time the respective corporations became Subsidiaries and were not created in anticipation thereof; (j) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by such Loan Party in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by such Loan Party or any of its Subsidiaries to provide collateral to the depository institution; -58- 66 (k) Liens securing reimbursement obligations incurred in the ordinary course of business for letters of credit, which Liens encumber only goods, or documents of title covering goods, which are purchased in transactions for which such letters of credit are issued; (l) any extension, renewal or substitution of or for any of the foregoing Liens; provided that (i) the Indebtedness or other obligation or liability secured by the applicable Lien shall not exceed the Indebtedness or other obligation or liability existing immediately prior to such extension, renewal or substitution and (ii) the Lien securing such Indebtedness or other obligation or liability shall be limited to the property which, immediately prior to such extension, renewal or substitution, secured such Indebtedness or other obligation or liability; and (m) other Liens securing Indebtedness or other obligations not at any time exceeding $50,000,000 in aggregate principal amount. 8.02 Disposition of Assets. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (collectively, a "Disposition") (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) Dispositions of inventory, or used, worn-out, obsolete or surplus equipment and other assets, all in the ordinary course of business; (b) Dispositions of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; (c) Dispositions of assets (including leasehold interests and related assets) in connection with sale/leasebacks of stores developed by such Loan Party or any of its Subsidiaries in the ordinary course of business in amounts and under circumstances consistent with past practices; (d) Dispositions of assets received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (e) Dispositions of assets between and among a Loan Party and its Wholly- Owned Subsidiaries and the Disposition of assets from any other Subsidiary to a Loan Party or a Wholly-Owned Subsidiary of a Loan Party; (f) Dispositions not otherwise permitted hereunder which are made for fair market value; provided that (i) at the time of any Disposition, no Event of Default shall exist or shall result from such Disposition and (ii) the aggregate sales price of all assets so sold by Holdco and its -59- 67 Subsidiaries, together, shall not exceed in any fiscal year 5% (but for the fiscal year ending January 1997, 10%) of the total consolidated assets of Holdco and its Subsidiaries, determined in accordance with GAAP, as of the beginning of such fiscal year; and (g) Dispositions of Investments in joint ventures made pursuant to Section 8.04(i). Upon the permitted Disposition by any Guarantor of all or substantially all of its assets to any Person (and after the subsequent distribution of the consideration received therefor by such Guarantor to any Loan Party or another Guarantor), such Guarantor shall be automatically released from its obligations under the Subsidiary Guaranty. The Agent shall provide written confirmation of such release to Holdco upon Holdco's request therefor. 8.03 Consolidations and Mergers. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, merge with or consolidate into any Person, except: (a) a Loan Party or any of its Subsidiaries may merge with or consolidate into any Person, provided that (i) at the time of such merger or consolidation, no Event of Default shall exist or result from the consummation of such merger or consolidation and (ii) such Loan Party or such Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary (other than the Company) may merge with or consolidate into any Loan Party, provided that such Loan Party shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation and if any transaction shall be between a Subsidiary and a Guarantor, the Guarantor shall be the continuing or surviving corporation or the surviving Subsidiary becomes a Guarantor; and (c) any Subsidiary (other than the Company) may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to any Loan Party or another Wholly-Owned Subsidiary or as otherwise permitted by Section 8.02. Any Disposition of assets which would be permitted by Section 8.02 may also be accomplished via a merger or consolidation of a Subsidiary and such merger or consolidation shall be permitted pursuant to this Section 8.03. 8.04 Loans and Investments. No Loan Party shall purchase or acquire, nor shall it suffer or permit any of its Subsidiaries to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person (other than a Loan Party), or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, any -60- 68 Person (other than a Loan Party) including any Affiliate of a Loan Party (together, "Investments"), except for: (a) Investments held by such Loan Party or its Subsidiaries in the form of cash equivalents or short term marketable securities; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) extensions of credit by a Loan Party to another Loan Party, by such Loan Party to any of its Wholly-Owned Subsidiaries or by any of its Subsidiaries to such Loan Party or one of its Wholly-Owned Subsidiaries; (d) advances to employees for moving, relocation and travel expenses, drawing accounts and similar expenditures and loans to employees in the ordinary course of business; (e) Investments received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, suppliers and customers arising in the ordinary course of business; (f) Investments of the Company and its Subsidiaries in existence as of the Closing Date and set forth on Schedule 8.04; (g) any extension or renewal of any of the foregoing; (h) Investments incurred in order to consummate an Acquisition of any Person principally engaged in a business substantially similar to the business of the Company; provided that (i) such Acquisition is undertaken in accordance with all applicable Requirements of Law and (ii) the prior, effective written consent or approval to such Acquisition of the board of directors or equivalent governing body of the acquiree is obtained; (i) Investments by a Loan Party or its Subsidiaries in Wholly-Owned Subsidiaries of such Loan Party which are principally engaged in a business substantially similar to the business of the Company; and (j) other Investments made after the Closing Date not exceeding $50,000,000 in the aggregate. 8.05 Limitation on Indebtedness. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness except: (a) Indebtedness incurred pursuant to this Agreement; -61- 69 (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 8.07; (c) Indebtedness existing on the Closing Date and set forth in Schedule 8.05; (d) Indebtedness constituting an Investment permitted pursuant to Section 8.04; and (e) Other Indebtedness of such Loan Party and its Subsidiaries so long as after giving pro forma effect to the incurrence of such Indebtedness as if such Indebtedness had been incurred on the last date of the most recently completed fiscal quarter the ratio of (i) Total Debt to (ii) Total Capitalization would not have been greater than 60%; provided, however, that the amount of such other Indebtedness which is Indebtedness of Subsidiaries (exclusive of Indebtedness of the Company and Indebtedness owing to Holdco or its Subsidiaries) shall at no time exceed an amount equal to 5% of Holdco's Consolidated Tangible Net Worth at such time; provided further, however, that solely for purposes of computations under this subsection 8.05(e), all such other Indebtedness outstanding at the time of such incurrence shall be included in the definitions of "Total Debt" and "Total Capitalization". 8.06 Transactions with Affiliates. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, enter into any transaction with any Affiliate of the Loan Party (other than a Loan Party or any Guarantor) (a) except upon fair and reasonable terms no less favorable to such Loan Party or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of such Loan Party or such Subsidiary and (b) except for arrangements for the provision of management services in the ordinary course of business. 8.07 Contingent Obligations. No Loan Party shall, nor shall it suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the ordinary course of business; (b) Permitted Swap Obligations; (c) Contingent Obligations of the Company and its Subsidiaries existing as of the Closing Date and listed in Schedule 8.07; (d) Contingent Obligations with respect to Surety Instruments incurred in the ordinary course of business; (e) in addition to other Contingent Obligations permitted hereunder, Contingent Obligations which do not exceed $1,000,000 in the aggregate at any one time outstanding; -62- 70 (f) Guaranty Obligations of such Loan Party or of any Guarantor with respect to any Indebtedness permitted pursuant to subsection 8.05(e); (g) the Subsidiary Guaranty; and (h) the Parent Guaranty. 8.08 Restricted Payments. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding, except that: (a) any Subsidiary may pay ratable dividends and make ratable distributions to its equity holders; (b) Holdco and any of its Subsidiaries may declare and make dividend payments or other distributions payable solely in its common stock; and (c) Holdco may declare or pay cash dividends to its stockholders and purchase, redeem or otherwise acquire shares of its capital stock or warrants, rights or options to acquire any such shares for cash; provided that, immediately after giving effect to such proposed action (or, in the case of dividends declared not earlier than 45 days prior to the payment thereof, at the time of such declaration), no Default or Event of Default would exist. 8.09 ERISA. No Loan Party shall, nor shall it suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Loan Party in an aggregate amount in excess of $10,000,000; or (b) engage in a transaction that could be reasonably expected to be subject to Section 4069 or 4212(c) of ERISA. 8.10 Conduct of Business. Holdco will, and will cause each of its Subsidiaries to, carry on and conduct its business in substantially the same manner and in substantially the same, related or, in Holdco's reasonable business judgement, materially synergistic fields of enterprise as it is presently conducted. The Loan Parties shall (a) cause assets (including rights as franchisor under franchising arrangements (but not including the assets of franchisees)) generating at least 90% of the consolidated revenues of Holdco and its Subsidiaries to be owned or leased by the Company at all times and (b) cause assets (including rights as franchisor under franchising arrangements (but not including the assets of franchisees)) generating at least 90% of Consolidated Net Income of Holdco and its Subsidiaries to be owned or leased by the Company and the Material Subsidiaries existing as of the Closing Date at all times. -63- 71 8.11 Accounting Changes. No Loan Party shall, nor shall it suffer or permit any of its Subsidiaries to, make any significant change in accounting treatment or reporting practices, except as permitted by GAAP or SEC reporting requirements, or change the fiscal year of such Loan Party or of any Subsidiary. 8.12 Financial Covenants. (a) Fixed Charge Coverage Ratio. For the period of four consecutive fiscal quarters ending on the last day of each fiscal quarter, Holdco shall not permit the Fixed Charge Coverage Ratio to be less than 1.5:1.0. (b) Leverage Ratio. Holdco shall not permit the ratio of (i) Total Debt to (ii) Total Capitalization to be greater than 60% as of the last day of any fiscal quarter. (c) Consolidated Tangible Net Worth. Holdco shall not permit Consolidated Tangible Net Worth as of the last day of any fiscal quarter to be less than $650,000,000. ARTICLE IX EVENTS OF DEFAULT ----------------- 9.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within five days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by any Loan Party or any of its Subsidiaries made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by any Loan Party, any of its Subsidiaries, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. Any Loan Party fails to perform or observe any term, covenant or agreement (i) contained in Section 8.01, 8.04 or 8.07 and such failure continues unremedied for five Business Days or (ii) contained in either subsection 7.03(a) or Section 7.12 or in any other provision of Article VIII; or (d) Other Defaults. Any Loan Party fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall -64- 72 continue unremedied for a period of 20 days after the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. Any Loan Party or any of its Subsidiaries (i) fails to make any payment in respect of any Indebtedness or Contingent Obligation having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (f) Insolvency; Voluntary Proceedings. Any Loan Party or any Material Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against any Loan Party or any Material Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of any Loan Party's or any Material Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) any Loan Party or any Material Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) any Loan Party or any Material Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted in liability of any Loan Party under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $10,000,000; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at -65- 73 any time exceeds $10,000,000; or (iii) any Loan Party or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $10,000,000; or (i) Monetary Judgments. One or more final judgments, final orders, decrees or arbitration awards is entered against any Loan Party or any of its Subsidiaries involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $10,000,000 or more (determined after allowance for the application of any insurance proceeds to such judgment or order), and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 10 days after the entry thereof; or (j) Change of Control. There occurs any Change of Control; or (k) Subsidiary Guaranty. The Subsidiary Guaranty shall fail to remain in full force and effect (except, with respect to any Material Subsidiary, upon the merger or consolidation of such Material Subsidiary with and into any Loan Party or any other Material Subsidiary which is a Guarantor), or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Subsidiary Guaranty (after giving effect to any applicable grace period set forth therein), or any Guarantor shall fail to comply with any of the terms or provisions of the Subsidiary Guaranty, or any Guarantor denies that it has any further liability under the Subsidiary Guaranty, or gives notice to such effect other than as a consequence of the satisfaction of its obligations thereunder. (l) Parent Guaranty. The Parent Guaranty shall fail to remain in full force and effect, or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Parent Guaranty (after giving effect to any applicable grace period set forth therein), or any Parent Guarantor shall fail to comply with any of the terms or provisions of the Parent Guaranty, or any Parent Guarantor denies that it has any further liability under the Parent Guaranty, or gives notice to such effect other than as a consequence of the satisfaction of its obligations thereunder. 9.02 Remedies. If any Event of Default occurs and is continuing, the Agent shall, at the request of, or may, with the consent of, the Required Banks, (a) declare the commitment of each Bank to make Loans and to issue and participate in Letters of Credit to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and -66- 74 (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence and during the continuance of any Event of Default specified in subsection (f) or (g) of Section 9.01 with respect to the Company, the obligation of each Bank to make Loans and the obligation of any Issuing Bank to issue Letters of Credit shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. In addition, following the occurrence and during the continuance of an Event of Default, so long as any Letter of Credit has not been fully drawn and has not been canceled or expired by its terms, upon demand by the Agent, the Company shall, upon the request of the Required Banks, Cash Collateralize the dollar amount of the aggregate undrawn amount of all Letters of Credit. Such funds shall be promptly applied by the Agent to reimburse the Issuing Bank for drafts drawn from time to time under the Letters of Credit. Such funds, if any, remaining following the payment of all Obligations in full or the earlier termination of all Events of Default shall, unless the Agent is otherwise directed by a court of competent jurisdiction, be promptly paid over to the Company. 9.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE X THE AGENT --------- 10.01 Appointment and Authorization; "Agent". Each Bank hereby irrevocably (subject to Section 10.09) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. -67- 75 10.02 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 10.03 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 10.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 5.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. -68- 76 10.05 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Banks in accordance with Article IX; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 10.06 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of Holdco and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Holdco and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 10.07 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or -69- 77 legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section 10.07 shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 10.08 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. 10.09 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article X and Sections 11.04 and 11.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 10.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent and the Company, to deliver to the Agent and the Company: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS -70- 78 Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with the conduct of a United States trade or business by such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent and the Company of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent and the Company of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent and the Company will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent or the Company may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section 10.10 are not delivered to the Agent or the Company, then the Agent or the Company may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent or the Company did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or -71- 79 was not properly executed, or because such Bank failed to notify the Agent or the Company of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent and the Company fully for all amounts paid, directly or indirectly, by the Agent or the Company as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent or the Company under this Section 10.10, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. 10.11 Co-Agents. None of the Banks identified on the facing page or signature pages of this Agreement as a "co-agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as a "co-agent" shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE XI MISCELLANEOUS ------------- 11.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any Guarantor therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company or any Guarantor, as applicable, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 9.02); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest other than default interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; -72- 80 (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; (e) release (other than a release provided for in the last paragraph of Section 8.02) any Guarantor from the Subsidiary Guaranty; or (f) amend this Section 11.01, or Section 2.14, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 11.02 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by any Loan Party by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 11.02, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 11.02; or, if directed to any Loan Party or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and if directed to any other party, at such other address as shall be designated by such party in a written notice to Holdco and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or X to the Agent shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Loan Parties. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the -73- 81 receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 11.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. No consent to any departure by a Parent Guarantor from any provision hereof or of the Parent Guaranty shall be effective unless in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks). 11.04 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse the Agent promptly after demand for all reasonable out-of-pocket costs and expenses incurred by the Agent in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by the Agent with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank promptly after demand for all reasonable out-of-pocket costs and expenses (including reasonable Attorney Costs) incurred by them in connection with the exercise, enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 11.05 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any Loan Document, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, or related to any Offshore Currency transactions entered into in connection herewith, whether or not any Indemnified Person is a party thereto (all -74- 82 the foregoing, collectively, the "Indemnified Liabilities"); provided that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities to the extent resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section 11.05 shall survive payment of all other Obligations. 11.06 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 11.07 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 11.08 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Company (which consent shall not be unreasonably withheld) at all times other than during the existence of an Event of Default, the Agent and the Issuing Bank, if applicable, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company, the Agent or the Issuing Bank, if applicable, shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $5,000,000; provided, however, that the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $3,500. (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such -75- 83 Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with subsection 11.08(a)), the Company shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. The Agent shall not deliver any new Notes executed by the Company unless the Agent shall have received the old Notes to be replaced or customary indemnification in favor of the Agent and the Company with respect to lost or destroyed notes. Such old Notes shall be promptly returned to the Company. (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 11.01. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 4.01, 4.03 and 11.05 as though it were also a Bank hereunder. Notwithstanding the immediately preceding sentence, all amounts payable by the Company or any Subsidiary under this Agreement and each other Loan Document shall be determined as if no such participation had been sold. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. -76- 84 Notwithstanding any such pledge, such Bank shall remain liable to the Company and the Issuing Bank as if such pledge had not been made. In the event of any enforcement or proposed enforcement of such pledge the Company shall have the right to replace such Bank pursuant to the provisions of Section 4.09. 11.09 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by a Loan Party and provided to it by Holdco or any Subsidiary, or by the Agent on Holdco's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with Holdco or any Subsidiary; except to the extent such information (a) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (b) was or becomes available on a non-confidential basis from a source other than Holdco; provided that such source is not bound by a confidentiality agreement with Holdco known to the Bank; provided, however, that any Bank may disclose such information (i) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (ii) pursuant to subpoena or other court process; (iii) when required to do so in accordance with the provisions of any applicable Requirement of Law; (iv) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (v) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (vi) to such Bank's independent auditors and other professional advisors; (vii) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (viii) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which Holdco or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (ix) to its Affiliates, provided that such Affiliate uses such information only in connection with this Agreement and agrees in writing to keep such information confidential. 11.10 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. -77- 85 11.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 11.12 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 11.13 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 11.14 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Loan Parties, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 11.15 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE LOAN PARTIES, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE LOAN PARTIES, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH LOAN PARTY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. -78- 86 11.16 Waiver of Jury Trial. EACH LOAN PARTY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE LOAN PARTIES, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION 11.16 AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.17 Judgment. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the applicable Loan Party in respect of any such sum due from it to the Agent hereunder or under the other Loan Documents shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "Agreement Currency"), be discharged only to the extent that on the Business Day following receipt by the Agent of any sum adjudged to be so due in the Judgment Currency, the Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Agent in the Agreement Currency, the applicable Loan Party agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement currency so purchased is greater than the sum originally due to the Agent in such currency, the Agent agrees to return the amount of any excess to the applicable Loan Party (or to any other Person who may be entitled thereto under applicable law). 11.18 Entire Agreement. This Agreement, together with the other Loan Documents supersedes the commitment letter dated March 13, 1996 among the Company, BofA and the Arranger and embodies the entire agreement and understanding among the Loan Parties, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. -79- 87 11.19 Effect of Restatement. This Agreement shall, except as otherwise expressly set forth herein, supersede the Existing Credit Agreement from and after the effective date hereof (the "Restatement Date") with respect to the transactions hereunder and with respect to the Loans and Letters of Credit outstanding under the Existing Credit Agreement as of Restatement Date. The parties hereto acknowledge and agree, however, that (i) this Agreement and all other Loan Documents executed and delivered herewith do not constitute a novation, payment and reborrowing or termination of the Obligations under the Existing Credit Agreement and the other Loan Documents as in effect prior to the Restatement Date, (ii) such Obligations are in all respects continuing with only the terms being modified as provided in this Agreement and the other Loan Documents, and (iii) all references in the other Loan Documents to the Credit Agreement shall be deemed to refer without further amendment to this Agreement. [signature pages follow] -80- 88 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in Chicago, Illinois, by their proper and duly authorized officers as of the day and year first above written. PAYLESS SHOESOURCE HOLDINGS, INC. By: /s/ Ullrich E. Porzig --------------------------------- Name: Ullrich E. Porzig ------------------------------- Title: Chief Financial Officer ------------------------------ PSS INVESTMENT II, INC. By: /s/ Ullrich E. Porzig --------------------------------- Name: Ullrich E. Porzig ------------------------------- Title: Vice President & Treasurer ------------------------------ PAYLESS SHOESOURCE, INC. By: /s/ Steven J. Douglass --------------------------------- Name: Steven J. Douglass ------------------------------- Title: Chief Executive Officer ------------------------------ By: /s/ Ullrich E. Porzig --------------------------------- Name: Ullrich E. Porzig ------------------------------- Title: Chief Financial Officer ------------------------------ 89 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: -------------------------------- Name: J. Casey Cosgrove ------------------------------ Title: Assistant Vice President ----------------------------- By: -------------------------------- Name: ------------------------------ Title: Assistant Vice President ----------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: -------------------------------- Name: J. Casey Cosgrove ------------------------------ Title: Assistant Vice President ----------------------------- NATIONSBANK, N.A. By: -------------------------------- Name: Michael F. Murphy ------------------------------ Title: Vice President ----------------------------- THE BANK OF NEW YORK By: -------------------------------- Name: Charlotte Sohn ------------------------------ Title: Vice President ----------------------------- COMMERCE BANK, N.A. S-2 90 By: --------------------------------- Name: Jeffrey R. Gray ------------------------------ Title: Vice President ------------------------------ FIRST UNION NATIONAL BANK By: --------------------------------- Name: Randall D. Southern ------------------------------ Title: Vice President ------------------------------ THE FIRST NATIONAL BANK OF CHICAGO By: --------------------------------- Name: Deborah K. Oberling ------------------------------ Title: Vice President ------------------------------ WELLS FARGO BANK, N.A. By: --------------------------------- Name: Frida Youliuos ------------------------------ Title: Vice President ------------------------------ PNC BANK, NATIONAL ASSOCIATION By: --------------------------------- Name: James A. Wiche ------------------------------ Title: Assistant Vice President ------------------------------ S-3 91 UNION BANK OF CALIFORNIA, N.A. By: --------------------------------- Name: Robert C. Peiler ------------------------------ Title: Vice President ------------------------------ UMB BANK, n.a. By: --------------------------------- Name: Douglas F. Page ------------------------------ Title: Executive Vice President ------------------------------ ROYAL BANK OF CANADA By: --------------------------------- Name: Karen T. Hull ------------------------------ Title: Retail Group Manager ------------------------------ MARINE MIDLAND BANK By: --------------------------------- Name: Michael C. Putlip ------------------------------ Title: Officer No. 9135 ------------------------------ S-4 -----END PRIVACY-ENHANCED MESSAGE-----