-----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, E4aSd9lQA3iMc+PEIqE4UHZDVGY/0accqs+97MX9Gn/8CkGv73es6Cefnr2r3Ujs A6xWJaWdbS+5EdLVGIh0tw== 0000076744-98-000002.txt : 19980302 0000076744-98-000002.hdr.sgml : 19980302 ACCESSION NUMBER: 0000076744-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971129 FILED AS OF DATE: 19980227 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS CASHWAYS INC CENTRAL INDEX KEY: 0000076744 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 420945849 STATE OF INCORPORATION: IA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08210 FILM NUMBER: 98551308 BUSINESS ADDRESS: STREET 1: TWO PERSHING SQ 2300 MAIN ST STREET 2: P O BOX 419466 CITY: KANSAS CITY STATE: MO ZIP: 64141 BUSINESS PHONE: 8162346000 10-K 1 FORM 10-K NOVEMBER 29, 1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) / X / Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee required] For the fiscal year ended November 29, 1997 OR / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee required] For the transition period from ____________to_____________ Commission file number 0-4437 PAYLESS CASHWAYS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 42-0945849 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Two Pershing Square 2300 Main, P.O. Box 419466 Kansas City, Missouri 64141-0466 (Address of Principal Executive Offices) (Zip Code) (816) 234-6000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12 (b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock, $.01 par value None Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES / X / NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / X / The aggregate market value of the Common Stock, par value $.01 per share, of the registrant held by nonaffiliates of the registrant as of February 6, 1998, was $52,745,083. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distributions of securities under a plan confirmed by a court. YES / X / NO / / Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. There were 19,990,509 shares of Common Stock, $.01 par value, outstanding as of February 6, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended November 29, 1997, are incorporated by reference into Part II. Portions of the Annual Proxy Statement for the Annual Meeting of Shareholders to be held April 15, 1998, are incorporated by reference into Part III. 2 PART I Item 1. BUSINESS. General Payless Cashways, Inc. ("Payless" or the "Company") is the fifth largest retailer of building materials and home improvement products in the United States as measured by sales. The Company operates 164 building materials stores in 20 states located in the Midwest, Southwest, Pacific Coast, and Rocky Mountain areas under the names of Payless Cashways Building Materials, Furrow Building Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox Lumber, and Contractor Supply. Each store is designed as a one-stop source that provides customers with a complete selection of quality products and services needed to build, improve, and maintain their home, business, farm or ranch properties. The Company's merchandise assortment in each store currently averages approximately 31,000 items in the following categories: lumber and building materials, millwork, tools, hardware, electrical and plumbing products, paint, lighting, home decor, kitchens, decorative plumbing, heating, ventilating and cooling (HVAC), and seasonal items. The Company believes that the combination of a full-line lumberyard, a broad product mix, a high level of in-store customer assistance concerning product usage and installation, an array of services including credit, delivery, estimating and design services as well as competitive prices distinguishes Payless from many competitors. The Company's primary customers include professionals and project-oriented do-it-yourselfers. Professionals ("Pros") include remodelers, residential and commercial contractors, and specialty tradespeople as well as enterprises which purchase large quantities of building materials for facility maintenance, such as property management firms, commercial and industrial accounts, and government institutions. Project-oriented do-it-yourselfers ("DIY-ers") are those who engage in more frequent and complex repair or home improvement projects and typically spend in excess of $1,000 annually on home improvement products. Payless also serves the needs of the moderate and light DIY-er. Due to its product mix (especially the advantage provided by its full-line lumberyard) and customer service approach, the Company believes that it is positioned to increase business to the professional customer and serve the project-oriented do-it-yourself customer. Petition For Relief Under Chapter 11 While the Company had sufficient liquidity to fund its current operations, the operating performance of the Company during the second quarter of fiscal 1997, which was well below the Company's expectations, led management to conclude that it was unlikely that the Company would be able to comply with the covenants contained in its principal credit agreements at the end of the 1997 fiscal year. In the course of the Company's subsequent negotiations with its senior lenders to restructure its debt and after considering all other alternatives with its financial adviser, Houlihan Lokey Howard & Zukin, including the sale of the Company and liquidation, the Company concluded that a Chapter 11 proceeding provided the best approach for a comprehensive financial restructuring of the Company. After a decade of dealing with a highly leveraged balance sheet and with limited capital expenditures, this action was intended to improve the Company's competitive position by establishing a more appropriate capital structure to operate the business in this period of unprecedented competitive pressure. On July 21, 1997, the Company filed a voluntary petition to reorganize under Chapter 11 and filed a plan of reorganization for its emergence from Chapter 11 (the "Plan" or "Plan of Reorganization") as well as a Disclosure Statement. The Company operated its business as a debtor-in-possession, subject to the jurisdiction of the Court, while pursuing its reorganization plan to restructure the Company's capitalization. The Chapter 11 filing resulted in an automatic stay of the commencement or prosecution of claims against the Company that arose before the Petition Date. The Disclosure Statement and Plan were subsequently amended on September 5, 1997, and modified on October 9, 1997. On October 10, 1997, the Court determined that the Disclosure Statement contained adequate information to permit a creditor to make an informed decision about the Plan. The Company's impaired creditors and equity security holders approved the Plan, the Court confirmed the Plan on November 19, 1997, and, after the satisfaction of a number of conditions, the Plan became effective December 2, 1997 (the "Effective Date"). Under the Plan, the Company reincorporated as a Delaware corporation and canceled outstanding shares of common and preferred stock and issued approximately 20,000,000 shares of newly reorganized Payless Cashways, Inc. common stock (the "New Common Stock"), as described below. The Plan generally provided for the following: (I) The secured bank group under the existing credit agreement (the "Amended Credit Agreement"), on or prior to the Effective Date, received (a) payment of accrued interest, fees and expenses, (b) Net Cash Proceeds (as defined in the Plan) from the sale of certain collateral securing the Amended Credit Agreement and the collection of 3 certain promissory notes pledged to the secured bank group, (c) their allocable portion of $283.1 million of new term loans and (d) 10,730,671 shares of New Common Stock (approximately 54% of the shares of the newly reorganized Company), of which 460,000 shares was distributed to the lenders providing a $150 million revolving credit facility to supply post-emergence working capital financing in consideration for their commitment to provide such facility. See Note D to the 1997 financial statements, incorporated herein by reference, for a description of the term loans and the revolving credit facility (together, the "Exit Financing Agreement"). (II) On the Effective Date, UBS Mortgage Finance, Inc. ("UBS"), the holders of notes under an existing mortgage loan received new notes pursuant to a new mortgage loan. (III) Unsecured claims against the Company by vendors and suppliers for goods delivered and services rendered prior to the Petition Date, claims in respect of the 9-1/8% senior subordinated notes, contingent unliquidated claims and claims for damage arising from the rejection by the Company pursuant to Section 365 of the Bankruptcy Code of executory contracts and unexpired leases (collectively, "General Unsecured Claims") will receive their pro rata share of 8,269,329 shares or approximately 41% of the shares of the newly reorganized Company. Holders of General Unsecured Claims began receiving their first distribution of shares in partial satisfaction and discharge of their allowed claims on or about December 15, 1997. The remaining shares of New Common Stock are held by a trustee for future distributions to holders of General Unsecured Claims, pending the final resolution of disputed claims. (IV) On the Effective Date, holders of issued and outstanding shares of existing preferred stock ("Old Preferred Stock") received their pro rata share of 600,000 shares of New Common Stock (approximately 3% of the shares of the newly reorganized Company). (V) Holders of issued and outstanding shares of existing common stock ("Old Common Stock") will receive their pro rata share of 400,000 shares of New Common Stock (approximately 2% of the shares of the newly reorganized Company) upon surrender of their Old Common Stock. In addition, any stock options relating to outstanding Old Preferred Stock and Old Common Stock were canceled on the Effective Date. Fractional shares of New Common Stock will not be issued to creditors or stockholders in connection with the Plan. In addition, no distribution of less than $5.00 will be made for fractional share interests. As a result of these provisions, many holders of Old Common Stock will receive no distribution of stock or cash under the Plan. On July 21, 1997, the Company also announced its plan to close 29 stores and to eliminate approximately 15% of the staff at the Company's headquarters and regional administrative centers. The Court subsequently approved such plan on August 6, 1997. Because the negative sales trends of fiscal 1997 continued into the first months of fiscal 1998, the new board of directors and senior management of the Company implemented changes designed to have an immediate impact on the Company's financial results. These changes included the additional elimination of approximately 25% of the staff at the Company's headquarters and regional administrative centers, including senior management. The CEO and President positions will be consolidated and the Company is conducting a national search for a candidate to fill this position. In addition, new merchandising and sales initiatives are being implemented, and the Company has focused on the customer's experience by assigning a dedicated store manager to each retail location. In the past, a Group Store Director oversaw approximately three stores. Industry Overview Building materials and home improvement products are sold through two distribution channels -- wholesale supply outlets and retail units. Retail distribution channels include neighborhood hardware stores, home centers, warehouse stores, specialty stores (such as paint and tile stores) and lumberyards. Although the industry remains highly fragmented, the retail distribution channel has consolidated somewhat in the last ten years, particularly in metropolitan areas. In general terms, customers can be characterized as either wholesale-oriented (professional) or retail-oriented (consumer). Purchases by professionals tend to be larger in volume and require specialized merchandise assortments, competitive market pricing, superior lumber quality, telephone order placement, commercial credit and job-site delivery. The consumer segments, as defined by the Company, include light DIY-ers who spend less than $200 annually on building materials and home improvement products; moderate DIY-ers who make annual purchases of $200 to $1,000; and project-oriented DIY-ers who make annual purchases in excess of $1,000. 4 Business Strategy Objectives The Company's principal objectives are to increase its market share in the Pro and project-oriented DIY segments primarily through its existing stores, to maintain its leadership role in the industry and to continue to improve its balance sheet by reducing its debt. Payless Cashways intends to remain an industry leader by targeting the Pro business as the primary source of growth and by positioning the Company as the preferred alternative to the home improvement warehouse shopping experience. About half of the Company's 1997 revenues were from sales to the Pro customer and the remainder were from sales to the DIY customer. As a national chain, the Company believes it enjoys economies of scale, buying power and professional management that the traditional outlets supplying the professional commonly do not have. These advantages, along with the broad product assortment and full service package, make the Company well-suited to supply the Pro's needs. Strategic Initiatives The Company's new Board of Directors and senior management have assembled a team to review the Company's competitive strategy. The capital expenditure plan has been greatly reduced for 1998 and is targeted to maximize returns. The Company is currently concentrating on building sales momentum, lowering operating costs, reducing unproductive inventory and satisfying customers by focusing on operational excellence. The team will continue to review other appropriate strategic initiatives, including the impact and need for further implementation of the items discussed below in this section and in the "Professional Strategy" and "DIY Strategy" sections. The following reflects strategic initiatives that were underway during fiscal 1997 prior to the recent competitive strategy review. The Company had undertaken a strategic review in 1995. Key findings from the review showed that, although many consumers prefer the warehouse format, a significant number prefer the distinctly different type of shopping experience offered by Payless Cashways (smaller scale than the warehouse format; finished, well-lighted showrooms; full-line, drive-in lumberyards). The Company's market research regarding the Pro indicated that, while the Company has established significant business with this group, substantial growth opportunity remained. As a result of the review, the Company determined to better serve DIY customers by increasing convenience, service, and product assortment with particular emphasis on basic repair and maintenance products. The priority in adding products is to add those items most likely to produce repeat visits. In addition, focus has been placed on categories with higher margin rates in order to invest the incremental gross margin in even more competitive pricing. The Company expects the professional and commercial customer to continue to be the primary source of growth. In order to increase market share with those customers, the Company has planned to attract and retain more large-volume accounts whose business is not store-based. This approach was implemented in Phoenix, AZ, in 1996 and in Cincinnati, OH; Louisville, KY; Dallas-Ft. Worth, TX; and Minneapolis-St. Paul, MN, in 1997. Manufacturing capabilities were added in certain markets to better serve the needs of high-volume professional customers. In January 1996, the Company purchased a door and trim company in Phoenix, which specializes in manufacturing a wide range of custom doors, molding and trim products used by carpenters, homebuilders and remodelers. Also, the Company's existing door plant in Dallas was expanded to serve the same builder, remodeler and carpenter needs that the acquired door company serves in Phoenix. In March 1997, the Company acquired a plant in Cincinnati that specializes in manufactured house packages and building components for the professional builder customer. These manufactured items include roof and floor trusses, open wall panel systems, and stair systems. The Company believes that these capabilities help position it to be the supplier of choice for the large-volume professional. Professional Strategy The Company believes it is particularly well suited to serve the needs of professional customers. A sales and service staff of approximately 1,200 are dedicated to serving the professional customer. Professional sales representatives have assigned customers for whom they provide service tailored to the customers' business needs. Sales representatives call on professional 5 customers at their places of business and job sites. The sales representatives have detailed information regarding account purchases and the profitability of their accounts. The Company believes that this level of customer service and type of sales management system is effective in increasing purchases and improving profitability from current professional customers as well as building customer loyalty. Each store has a separate commercial sales area for the professional customer to use. These offices speed the purchase process for the Pro, allow private discussions between customers and their sales representatives, and offer small amenities to these customers such as coffee, ice, and phone access. The Company has 82 drive-through lumberyards that significantly reduce the time required to complete a purchase and meet the Pros' requirement for fast and efficient service. The Company's merchandise assortment is particularly appealing to the Pro. Preferred brands, commercial grade items, contractor packs and extensive special order capabilities ensure that the Company meets the broad product requirements of this customer segment. The Company has negotiated purchase arrangements with key lumber suppliers that ensure a consistent source of high quality lumber. The Company offers a number of special services that are tailored to meet the needs of various professional and commercial customer segments. Delivery services include on-time job-site delivery and roof top delivery. Credit programs include a full-service commercial credit program that provides job-based billing and other more sophisticated credit features. Additionally, all stores offer automated blueprint estimating services featuring rapid turnaround. This estimating system utilizes a digitizer that ensures accuracy in the measurement process, and it is fully integrated into the store's point of sale ("POS") system. The Company also supports the Pro with joint marketing programs such as its contractor referral database. The Company has a national accounts program that targets businesses with new construction commercial job sites, often geographically dispersed, and major facilities or multiple locations which utilize large amounts of building materials and improvement products for facility maintenance. The Company continues to develop these accounts which represent multiple individual properties for which it provides repair and maintenance as well as new construction products. Property management firms are an important component of the Company's Pro portfolio. They provide non-seasonal repair and maintenance business which balances business from builders, remodelers and commercial accounts. DIY Strategy The Company's strategy with the DIY customer focuses primarily on project-oriented DIY-ers. Knowledgeable employees, high quality products with brand names, full-line drive-in lumberyards, consistent in-stock position, all the products needed to complete a project and competitive pricing are important to the project-oriented DIY customer and have been the foundation upon which the Company has built its business with these customers. Project-oriented DIY-ers are similar to the Pro customer with regard to the brands preferred and the importance of stocking high quality lumber. The Company believes that many of the steps it has taken to serve the Pro customer have also had a positive impact on sales to the project-oriented DIY customer. Several additional components supporting the DIY strategy include the following: o Assortment Additions. The Company continues to upgrade its assortment and displays in product categories that represent a significant portion of the purchases by project-oriented DIY-ers. These upgraded categories include paint, hardware, tools, plumbing, electrical, millwork, and home decor. o Knowledgeable Employees. The Company launched an initiative aimed at raising the level of knowledge of its employees. Training materials, certifications and examinations were developed in various product categories. Employees can become certified and wear a symbol of that achievement on their name badges. o Delivery Enhancements. The Company emphasizes continuous improvement of its delivery capacity. This is an element of the service bundle that is key for both project-oriented DIY-ers and professionals. Delivery tracking systems and tow-behind forklifts contributed to the enhancement of this service offering. 6 o Recognition of Customer Service. The Company has an employee recognition and reward program and incentive compensation plans for all store employees to promote outstanding customer service. Improved customer service is intended to increase the average sales ticket size and the number of repeat purchasers. Merchandising and Marketing During 1997, Payless' full-line stores sold a broad range of building material products currently averaging approximately 31,000 items, many of which are nationally advertised brand-name items. Payless categorizes its product offerings into the classes described below: Lumberyard - Dimensional lumber, plywood, sidings, roofing materials, fencing materials, windows, doors and moldings, insulation materials and drywall. Hardware - Electrical wire and wiring materials, plumbing materials, power and hand tools, paint and painting supplies, lawn and garden products, door locks, fasteners, and heating and cooling products. Showroom - Interior and exterior lighting, bathroom fixtures and vanities, kitchen cabinets, flooring, paneling, wallcoverings and ceiling tiles. During the last three fiscal years, the three product classifications accounted for the following percentages of Payless' sales: 1997 1996 1995 ---- ---- ---- Lumberyard 51 % 50 % 49 % Hardware 35 35 35 Showroom 14 15 16 ----- ------ ------ 100 % 100 % 100 % Payless addresses its primary target customers through a mix of newspaper, targeted mailings, and broadcast media advertising methods. The primary media vehicle is newspaper advertisements, both freestanding inserts and run-of-press ads. Additionally, the Company participates in or hosts a variety of customer hospitality events, contractor product shows and national trade association shows and conferences. During fiscal 1997, the Company's expenditures (net of vendor allowances) on all forms of advertising totaled approximately $28 million or 1.2% of sales. Store Locations The Company's 164 building materials stores are located in the following states: Number of Stores Arizona................... 8 Missouri.................. 8 California................ 13 Montana................... 1 Colorado.................. 18 Nebraska.................. 5 Illinois.................. 3 Nevada.................... 6 Indiana................... 11 New Mexico................ 2 Iowa...................... 10 Ohio...................... 13 Kansas.................... 11 Oklahoma.................. 6 Kentucky.................. 5 Oregon.................... 2 Louisiana................. 1 Tennessee................. 3 Minnesota................. 8 Texas..................... 30 Payless owns 137 of its store facilities and 128 of the 164 sites on which such stores are located. The remaining 27 stores and 36 sites are leased. Mortgages or deeds of trust on 143 store parcels secure existing indebtedness. Payless has generally located retail stores adjacent to residential areas of major metropolitan cities or adjacent to major arteries in smaller communities that are convenient to the Pro and DIY customer. Operation of multiple stores in a trade area 7 permits more effective supervision of stores and provides certain economies in distribution expenses and advertising costs. Each of Payless' 164 existing stores has an average total selling space of approximately 192,000 square feet consisting of 32,000 square feet of indoor display space and 160,000 square feet of lumberyard. In addition, each store has an average of 52,000 square feet of warehouse space. The average Payless store occupies approximately eight acres of land. The stores built since 1993 average approximately 235,000 square feet of total retail selling space consisting of 58,000 square feet of indoor display space and a 177,000 square foot lumberyard with an attached 17,000 square foot warehouse on ten acres of land. An average Payless store currently carries approximately $2.0 million of inventory, and during fiscal 1997, sales at Payless stores averaged approximately $12.6 million per store. During fiscal 1997, two stores were opened and 30 stores were closed. During fiscal 1996, 14 stores were closed. During fiscal 1995, six stores were opened and two stores were sold. Store Management and Personnel Payless coordinates the operation of its 164 building materials stores through 12 Area Managers and 164 Store Managers, each of whom reports directly or through an Area Manager to one of four Regional Vice Presidents. Supervision and control over the individual stores are facilitated by means of detailed operating reports. All of Payless' Store Managers, Area Managers, and Regional Vice Presidents have been promoted from within Payless or from within the stores Payless has acquired. To obtain candidates for store supervisory and management positions, Payless hires both persons with business experience and recent college graduates. Employees identified as candidates for store management positions are placed on formal development plans in preparation for these positions. In addition, Payless maintains an ongoing training program for existing store personnel. Area Managers and Store Managers typically have more than ten years of experience with the Company. The stores utilize a departmental management structure designed to provide a superior level of service to customers. Sales personnel are trained in product knowledge, selling skills and systems and procedures. Formal classroom training sessions are supplemented with product clinics and special assignments. Incentive compensation systems reward employees for store performance above goal. In addition to management personnel, all sales and support personnel in the retail stores participate in incentive compensation programs. In fiscal 1997, the Company paid $1.7 million in incentive compensation to its non-management store personnel. Area Managers can earn in excess of 25% of base salary in incentive compensation and Store Managers can earn in excess of 35% of base salary in incentive compensation. The Company paid approximately $9.1 million in incentive compensation to its store management personnel for fiscal 1997. The Company believes that its incentive compensation systems are key to employee performance and motivation. Information Systems The Company has invested substantial time, effort and dollars ensuring that technology and information are used to the maximum benefit throughout its entire enterprise. In-store-processors based upon current technology standards are an integral part of store management and support customer services with programs designed to enhance the shopping experience. Each of the Company facilities transmits daily transaction detail data including item-level sales from point-of-sale terminals equipped with the latest in scanning technology. This network also serves to provide automatic check authorization and on-line credit card processing. In addition to sales support and data gathering, the Company has built merchandising, inventory management, distribution and promotional systems which are utilized at the corporate office to manage the purchasing, movement and marketing of product lines. Distribution and Suppliers The Company operates a total of seven distribution centers and three manufacturing locations. The distribution centers maintain inventories and ship product to stores on a weekly basis. The Sedalia, Missouri, distribution center handles small-sized, conveyable, high value items such as hardware, plumbing and electrical supplies, and hand tools. The other six distribution centers handle commodity products and bulky manufactured products such as tubs, paneling and ceiling tile. The manufacturing locations assemble pre-hung doors and customized windows. 8 In fiscal 1997, 49% of merchandise was channeled through the distribution centers for redistribution to individual stores. This benefits the Company in the areas of product costs, in-stock positions and inventory turnover. The Sedalia distribution center now serves 135 stores. The 592,000 square foot facility utilizes computerized receiving, storage and selection technology. Excluding the Sedalia operation, the Company's regional distribution centers average 18 acres with 148,000 square feet of warehouse space, operating with manual storage and selection systems. In addition, the Company uses third-party operations for specialized needs. Payless purchases substantially all of its merchandise from approximately 3,800 suppliers, no one of which accounted for more than 5% of the Company's purchases during fiscal 1997. Credit The Company offers credit to both its DIY and Pro customers. Purchases under national credit cards and the Company's private-label credit card program as a percentage of sales represented 28.3% in fiscal 1997, 28.0% in fiscal 1996, and 27.5% in fiscal 1995. Purchases under the Company's commercial credit program as a percentage of sales represented 32.7% in fiscal 1997, 29.9% in fiscal 1996, and 26.5% in fiscal 1995. A large finance and asset management company administers the Company's private-label credit card program and commercial credit program. Accounts written off (net of recoveries) under the commercial credit program in fiscal 1997 were approximately $9.8 million or 1.3% of net commercial credit sales. The cost of the private label credit card program represents a fixed percentage fee of charge sales. The fees on the commercial credit program consist of administrative fees that are primarily tied to commercial credit sales and fees for accounts written off, which are substantially all absorbed by the Company. Competition The business of Payless is highly competitive. As a result of its focus on the professional customer, the Company competes with local independent lumberyards, independent wholesalers, supply houses and distributors who market primarily to commercial and professional users. On the consumer side, Payless encounters competition from national and regional chains, including those with a warehouse format, and from local independent wholesalers, supply houses and distributors. In recent years, the building materials retailing industry has experienced increased levels of competition as several national chains have expanded their operations. Certain of these competitors are larger in terms of capital and sales volume and have been operating longer than Payless in particular areas. Although Payless' competition varies by geographical area, Payless continues to differentiate itself from the large warehouse competitors by targeting the professional customer and the project-oriented DIY-er. Payless offers a full-line lumberyard, a broad mix of high quality products, high levels of customer service by knowledgeable employees, consistent in-stock position and competitive pricing. Employees At November 29, 1997, Payless employed approximately 12,800 persons, approximately 29% who were part-time, although the number of employees may fluctuate seasonally. Payless believes its employee relations are satisfactory. Payless' employees are primarily nonunion with less than 3% being represented by a union. A substantial portion of the administrative, purchasing, advertising and accounting functions are centralized at Payless' headquarters in Kansas City, Missouri. =========================================================== Forward-looking statements in the "Business" section of this Form 10-K are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by the forward-looking statements made above. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially are the following: sales levels; competitor activities; stability of the sales force; supplier support; consumer spending and debt levels; interest rates; housing activity, including existing home turnover and new home construction; lumber prices; product mix; growth of certain market segments; and an excess of retail space devoted to the sale of building materials. Additional information concerning these and other factors is contained in the Company's Annual Report, copies of which are available from the Company without charge or on the Company's web site, payless.cashways.com. 9 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name and age of all executive officers of Payless and their present positions and recent business experience. There is no family relationship among Payless' current directors and executive officers.
Principal Occupation and Five-Year Employment History ---------------------------- Name Age - ---------------------- --- Donald E. Roller..........60 Acting Chief Executive Officer of Payless since January 1998; Executive Vice President - First elected a director: North American Gypsum USG Corporation from January 1996 to November 1996; and 1997 President and Chief Executive Officer of United States Gypsum Company from January 1993 to November 1996. Mr. Roller is Chairman of the Finance Committee of the Payless Board of Directors. Stanley K. Boyd...........46 Senior Vice President - Store Operations of Payless since June 1997; Vice President - Sales and Marketing of A&I Bolt and Nut from September 1993 to June 1997; and President of Outdoor Kids, Inc. from June 1992 to September 1993. Mr. Boyd was previously with Payless from June 1974 to December 1990. Robert S. Islinger........42 Senior Vice President - Marketing and Merchandising of Payless since February 1998; Senior Vice President - Marketing of Payless from August 1996 to February 1998; Vice President - Marketing of Payless from August 1994 to August 1996; and Operating Vice President - Marketing of Service Merchandise Co., Inc. from December 1986 to August 1994. Richard G. Luse...........50 Senior Vice President - Finance/Chief Financial Officer of Payless since February 1998; and Vice President - Controller of Payless from February 1988 to February 1998. Louise R. Iennaccaro......53 Vice President - Human Resources of Payless since February 1998; and Director of Field Human Resources of Payless from April 1989 to February 1998. Ms. Iennaccaro joined Payless in January 1987.
Item 2. PROPERTIES. Payless owns 137 of its store facilities and 128 of the 164 sites on which such stores are located. The remaining 27 facilities and 36 sites are leased. The leases provide for various terms. Mortgages or deeds of trust on 143 store parcels secure existing indebtedness. Five of the Company's seven distribution centers are owned and, of the remaining two, one is leased for land only and the facility and land are leased for the other. Mortgages or deeds of trust on five distribution center parcels secure existing indebtedness. Two of the Company's manufacturing locations are owned and two are leased. Mortgages or deeds of trust on two manufacturing parcels secure existing indebtedness. Payless leases its corporate office in Kansas City, Missouri, under a lease expiring on December 31, 2002. The administrative offices occupy several floors (approximately 181,000 square feet) of a multi-story building. See also "Strategic Initiatives," "Store Locations" and "Distribution and Suppliers" in Item 1, above. Item 3. LEGAL PROCEEDINGS. On January 6, 1995, a group of terminated employees and others ("Former Employees") filed a lawsuit against the Company and other named defendants (the "Company"), entitled The Payless Cashways, Inc. Partners [et al.] v. Payless Cashways, Inc. [et al], in the United States District Court for the Southern District of Iowa. The Former Employees include management employees who were terminated effective January 10, 1994, in connection with a reduction in force pursuant to a restructuring, in which the Company eliminated certain management in the field organization. The complaint asserted a variety of claims including 10 federal and state securities fraud claims, alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), federal and state claims of age discrimination, alleged violations of the Employment Retirement Income Security Act of 1974, and various state law claims including, but not limited to, fraudulent misrepresentation allegations. The complaint also asserted the Former Employees' claims as class representatives and sought to expand the group of party plaintiffs as to the federal age discrimination claims. Various forms of relief, including unspecified monetary damages and an injunctive order, were requested. The Company, in response, filed a motion to dismiss as to the majority of the pending claims except the federal and state age discrimination claims, the state law fraudulent misrepresentation claim and several other state law equitable claims. The Former Employees responded, in part, by filing a second amended complaint and providing, in large part, additional supportive factual detail. The Company filed a reply brief in support of the motion to dismiss. A ruling has been entered on the Company's motion to dismiss the majority of pending claims, substantially narrowing the Former Employee's legal claims by dismissing some age discrimination counts, all federal securities counts and RICO counts except one each, and all state law counts related to an alleged partnership. The plaintiff's motion for class certification has been denied on all claims except the age discrimination claims. The court has recently granted the plaintiff's motion for class certification of certain age discrimination claims. As a result of this ruling, approximately 20 additional individuals may choose to participate in the age claims asserted in this suit. Each of the parties has conducted discovery pursuant to the court's scheduling order and discovery plan. The lawsuit was formally stayed pursuant to the automatic stay issued by the Bankruptcy Court following the voluntary Chapter 11 reorganization filing on July 21, 1997. During the Chapter 11 reorganization, plaintiffs timely filed proofs of claim, including a purported claim on behalf of the potential Age Discrimination Employment Act opt-in class, for an aggregate of $37 million. The case has been returned to the United States District Court for the Southern District of Iowa for resolution. Any recovery for the plaintiffs would be treated as a general unsecured claim entitling the plaintiffs to their pro rata share of 8,269,329 shares of New Common Stock reserved for such claims. The Company denies any and all claimed liability and is vigorously defending this litigation, but is unable to estimate a potential range of monetary exposure, if any, to the Company or to predict the likely outcome of this matter. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market and dividend information, included on page 39 of the Annual Report to Shareholders for the fiscal year ended November 29, 1997, are incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA. The Five-Year Financial Summary, included on page 35 of the Annual Report to Shareholders for the fiscal year ended November 29, 1997, is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis of the Financial Condition and Results of Operations, included on pages 7 through 13 of the Annual Report to Shareholders for the fiscal year ended November 29, 1997, is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and independent auditors' report, included on pages 14 through 34 of the Annual Report to Shareholders for the fiscal year ended November 29, 1997, are incorporated herein by reference. 11 The Quarterly Consolidated Statements of Operations, included on pages 5 and 6 of the Annual Report to Shareholders for the fiscal year ended November 29, 1997, are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders, dated February 27, 1998, to be filed pursuant to Regulation 14A. The required information as to executive officers is set forth in Part I hereof. Item 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders, dated February 27, 1998, to be filed pursuant to Regulation 14A. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information called for by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders, dated February 27, 1998, to be filed pursuant to Regulation 14A. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders, dated February 27, 1998, to be filed pursuant to Regulation 14A. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Document list. 1. and 2. The response to this portion of Item 14 is submitted as a separate section of this report 3. List of exhibits. 2.1 First Amended Plan of Reorganization, as modified October 9, 1997 (incorporated by reference to Exhibit 2.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 2.2 Agreement and Plan of Merger in connection with theReincorporation from Iowa to Delaware (incorporated by reference to Exhibit 2.2 filed as part of Payless' Current Report on Form 8-K dated December 2, 1997). 3.1 Certificate of Incorporation.(incorporated by reference to Exhibit 4.1 filed as part of Payless' Current Report on Form 8-K dated December 2, 1997). 3.2 By-laws of the Company (incorporated by reference to Exhibit 4.2 filed as part of Payless' Current Report on Form 8-K dated December 2, 1997). 12 4.0 Long-term debt instruments of the Registrant in amounts not exceeding ten percent (10%) of the total assets of the Registrant will be furnished to the Commission upon request. 4.1(a) Amended and Restated Credit Agreement dated December 2, 1997, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Coordinating and Collateral Agent. 4.1(b) Amended and Restated Security and Pledge Agreement, dated December 2, 1997, made by Payless for the benefit of Canadian Imperial Bank of Commerce, New York Agency, as Coordinating and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement. 4.1(c) Form of Second Mortgage, dated December 2, 1997, given to Canadian Imperial Bank of Commerce, New York Agency, as Coordinating and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement. 4.1(d) Form of Second Deed of Trust, dated December 2, 1997, given to Canadian Imperial Bank of Commerce, New York Agency, as Coordinating and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement. 4.1(e) Form of Amended and Restated Mortgage, dated December 2, 1997, given to Canadian Imperial Bank of Commerce, New York Agency, as Coordinating and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement. 4.1(f) Form of Amended and Restated Deed of Trust, dated December 2, 1997, given to Canadian Imperial Bank of Commerce, New York Agency, as Coordinating and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement. 4.2(a) Amended and Restated Loan Agreement dated December 2, 1997, by and among Payless and UBS Mortgage Finance, Inc. 4.2(b) Form of Deed of Trust, Mortgage and Security Agreement Modification Agreement dated December 2, 1997, between Payless and Lasalle National Bank, as trustee for UBS Mortgage Finance, Inc. 4.2(c) Consolidated, Amended and Restated Promissory Note dated December 2, 1997, by and among Payless and Lasalle National Bank, as trustee for UBS Mortgage Finance, Inc. 10.1 Indemnification Agreement (incorporated by reference to Exhibit 10.2 filed as part of Amendment No.2 to Registration Statement No. 33-49772 filed August 26, 1992). 10.2(a)* Payless Cashways, Inc. Corporate Management Incentive Compensation Program, dated as of December 1991 (incorporated by reference to Exhibit 10.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 30, 1992). 10.2(b)* First Amendment to Payless Cashways, Inc. Corporate Management Incentive Compensation Program, dated as of February 2, 1995 (incorporated by reference to Exhibit 10.3(b) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 26, 1994). 10.3(a)* Employment Agreement dated as of June 16, 1995, between Payless and David Stanley (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1995). 10.3(b)* Amendment No. 1 to Employment Agreement dated as of August 20, 1997, between Payless and David Stanley. 10.4(a)* Employment Agreement dated as of February 8, 1993, between Payless and Susan M. Stanton (incorporated by reference to Exhibit 10.26 filed as part of Registration Statement No. 33-58008 on Form S-2 on February 8, 1993). 10.4(b)* Amendment No. 1 to Employment Agreement dated as of October 17, 1996, between Payless and Susan M. Stanton (incorporated by reference to Exhibit 10.4(b) filed as part of Payless' Annual Report on Form 10-K for the year ended November 30, 1996). 13 10.4(c)* Amendment No. 2 to Employment Agreement dated as of June 30, 1997, between Payless and Susan M. Stanton (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 10.4(d)* Amendment No. 3 to Employment Agreement dated as of August 20, 1997, between Payless and Susan M. Stanton. 10.5(a)* Employment Agreement dated as of February 8, 1993, between Payless and Stephen A. Lightstone (incorporated by reference to Exhibit 10.25 filed as part of Registration Statement No. 33-58008 on Form S-2 on February 8, 1993). 10.5(b)* Amendment No. 1 to Employment Agreement dated as of October 17, 1996, between Payless and Stephen A. Lightstone (incorporated by reference to Exhibit 10.5(b) filed as part of Payless' Annual Report on Form 10-K for the year ended November 30, 1996). 10.5(c)* Amendment No. 2 to Employment Agreement dated as of June 30, 1997, between Payless and Stephen A. Lightstone (incorporated by reference to Exhibit 10.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 10.5(d)* Amendment No. 3 to Employment Agreement dated as of August 20, 1997, between Payless and Stephen A. Lightstone. 10.6(a)* Employment Agreement dated as of October 17, 1996, between Payless and G. Michael Buchen (incorporated by reference to Exhibit 10.6 filed as part of Payless' Annual Report on Form 10-K for the year ended November 30, 1996). 10.6(b)* Amendment No. 1. to Employment Agreement dated as of June 30, 1997, between Payless and G. Michael Buchen (incorporated by reference to Exhibit 10.3 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 10.6(c)* Amendment No. 2 to Employment Agreement dated as of August 20, 1997, between Payless and G. Michael Buchen. 10.7(a)* Employment Agreement dated as of May 8, 1997, between Payless and Stanley K. Boyd (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 31, 1997). 10.7(b)* Amendment No. 1 to Employment Agreement dated as of August 20, 1997, between Payless and Stanley K. Boyd. 10.8(a)* Change in Control Agreement dated as of June 26, 1997, between Payless and E. J. Holland, Jr. (incorporated by reference to Exhibit 10.5 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 10.8(b)* Amendment No. 1 to Executive Change-In-Control Agreement dated as of August 20, 1997, between Payless and E. J. Holland, Jr. 10.9(a)* Change in Control Agreement dated as of June 26, 1997, between Payless and Robert S. Islinger (incorporated by reference to Exhibit 10.6 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 10.9(b)* Amendment No. 1 to Executive Change-In-Control Agreement dated as of August 20, 1997, between Payless and Robert S. Islinger. 10.10(a)* Change in Control Agreement dated as of June 26, 1997, between Payless and Richard E. Nawrot (incorporated by reference to Exhibit 10.4 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 30, 1997). 10.10(b)* Amendment No. 1 to Executive Change-In-Control Agreement dated as of August 20, 1997, between Payless and Richard E. Nawrot. 10.11* Employment Agreement dated as of August 2, 1996, between Payless and William H. Parker (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 24, 1996). 14 10.12* Retirement Agreement dated as of November 14, 1993, between Payless and Harold Cohen (incorporated by reference to Exhibit 10.6(c) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.13(a)* Payless Cashways, Inc. Supplemental Death Benefit Plan (incorporated by reference to Exhibit 10.12 filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.13(b)* First Amendment to the Payless Cashways, Inc. Supplemental Death Benefit Plan, dated June 16, 1994 (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 28, 1994). 10.14* Payless Cashways, Inc. Supplemental Disability Plan (incorporated by reference to Exhibit 10.13 filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 13.1 Annual Report to Shareholders. 27.1 Financial data schedule. * Represents a management contract or a compensatory plan or arrangement. Copies of any or all Exhibits will be furnished upon written request and payment of Payless' reasonable expenses in furnishing the Exhibits. (b) Reports on Form 8-K. The Registrant has filed one report on Form 8-K during the quarter ended November 29, 1997. The report was dated November 19, 1997, and contained Item 3, Bankruptcy or Receivership, and Item 7, Financial Statements and Exhibits. No financial statements were filed with this report. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Payless has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAYLESS CASHWAYS, INC. (Registrant) By s/Donald E. Roller --------------------------------------------- Donald E. Roller, Principal Executive Officer Dated: February 9, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Payless and in the capacities and on the dates indicated.
Signature Title Date ======================================= ==================================== ==================== s/Donald E. Roller ------------------------- Donald E. Roller Acting Chief Executive Officer and February 9, 1998 Director (Principal Executive Officer) s/Peter G. Danis ------------------------- Peter G. Danis Non-Executive Chairman of the February 9, 1998 Board s/David M. Chamberlain ------------------------- David M. Chamberlain Director February 9, 1998 s/H. D. Cleberg ------------------------- H. D. Cleberg Director February 9, 1998 s/David G. Gundling ------------------------- David G. Gundling Director February 9, 1998 ------------------------- Max D. Hopper Director s/Peter M. Wood ------------------------- Peter M. Wood Director February 9, 1998 s/Richard G. Luse ------------------------- Richard G. Luse Senior Vice President-Finance February 9, 1998 and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
16 ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES EXHIBITS (Exhibits included in Form 10-K filed with the Securities and Exchange Commission are not reproduced here. See Item 14(a)3.) YEAR ENDED NOVEMBER 29, 1997 PAYLESS CASHWAYS, INC. KANSAS CITY, MISSOURI 17 PAYLESS CASHWAYS, INC. FORM 10-K--ITEM 14(a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Payless Cashways, Inc. included in Payless' Annual Report to the Shareholders for the year ended November 29, 1997, are incorporated by reference in Item 8: Statements of Operations--fiscal years ended November 29, 1997, November 30, 1996, and November 25, 1995. Balance Sheets--November 29, 1997, and November 30, 1996. Statements of Cash Flows--fiscal years ended November 29, 1997, November 30, 1996, and November 25, 1995. Statements of Shareholders' Equity--fiscal years ended November 29, 1997, November 30, 1996, and November 25, 1995. Notes to Financial Statements. The following financial statement schedule of Payless Cashways, Inc. is included in Item 14(d): VIII - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 18 [KPMG Peat Marwick LLP Letterhead] INDEPENDENT AUDITORS' REPORT The Board of Directors Payless Cashways, Inc.: Under date of January 19, 1998, we reported on the balance sheets of Payless Cashways, Inc. as of November 29, 1997 and November 30, 1996, and the related statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended November 29, 1997, as contained in the 1997 annual report to shareholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the fiscal year 1997. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note A to the financial statements, the November 29, 1997 balance sheet reflects the application of fresh-start reporting as of that date and, therefore, is not comparable in all respects to the balance sheets of the Company prior to November 29, 1997. As discussed in Note H to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal 1996. s/KPMG Peat Marwick LLP Kansas City, Missouri January 19, 1998 19 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS PAYLESS CASHWAYS, INC. (In thousands)
==================================================================================================================================== COL. A COL. B COL. C COL. D COL. E ==================================================================================================================================== Balance at Charged to Balance at beginning cost and end of Description of period expenses Deductions period ==================================================================================================================================== YEAR ENDED NOVEMBER 29, 1997: Reserve for Inventory Shrink and Obsolescence................. $ 13,604 $ 21,960 $ 20,533 $ 15,031 YEAR ENDED NOVEMBER 30, 1996: Reserve for Inventory Shrink and Obsolescence................. $ 20,354 $ 31,840 $ 38,590 $ 13,604 YEAR ENDED NOVEMBER 25, 1995: Reserve for Inventory Shrink and Obsolescence................. $ 16,661 $ 33,108 $ 29,415 $ 20,354
EX-4 2 4.1A AMENDED & RESTATED CREDIT AGREEMENT 1 AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 2, 1997 HEADING AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 2, 1997, among PAYLESS CASHWAYS, INC., a Delaware corporation, as successor by merger to the Debtor referred to below (the "Borrower"), each of the financial institutions from time to time party hereto as lenders (together with their successors and assigns, the "Lenders"), the Underwriters (as hereinafter defined), CANADIAN IMPERIAL BANK OF COMMERCE (acting through one or more of its agencies, branches, or affiliates, "CIBC"), as the issuer of standby letters of credit, U.S. BANK NATIONAL ASSOCIATION, in its capacity as the issuer of documentary letters of credit and CIBC, as coordinating and collateral agent (in such capacity, the "Agent") for the Lenders, the Fronting Banks (as hereinafter defined), the Underwriters and the other Secured Parties (as hereinafter defined). INTRODUCTORY STATEMENT On July 21, 1997, Payless Cashways, Inc., an Iowa corporation, as debtor and debtor-in-possession (the "Debtor"), filed a voluntary petition with the Bankruptcy Court initiating the Case (as hereinafter defined) and has continued in the possession of its assets and in the management of its business pursuant to Sections 1107 and 1108 of the Bankruptcy Code (as hereinafter defined). On September 5, 1997, the Debtor filed its First Amended Plan of Reorganization with the Bankruptcy Court (as hereinafter defined), which First Amended Plan of Reorganization was modified on October 9, 1997 and further modified in the Confirmation Order (as hereinafter defined) entered by the Bankruptcy Court on November 19, 1997 and on the record at the hearing with respect to the Confirmation Order. The Plan of Reorganization (as hereinafter defined) contemplates, inter alia, that the Debtor will merge into the Borrower on or before the Effective Date (as hereinafter defined) and that the Borrower will obtain post-Effective Date financing in the maximum amount of $150,000,000 as more fully described below. Immediately prior to the Effective Date, the Debtor was obligated to (i) certain of the Lenders (the "Pre-Petition Revolving Lenders") with respect to pre-petition revolving credit loans in the aggregate principal amount of $109,386,210.16 (the "Pre-Petition Revolving Loans") extended by the Pre-Petition Revolving Lenders and with respect to undrawn pre-petition letters of credit in the aggregate principal amount of $22,326,553.20 (the "Pre-Petition Letters of Credit") issued for the account of the Debtor pursuant to the Pre-Petition Credit Agreement (as hereinafter defined), (ii) certain of the Lenders (the "Pre-Petition Term Lenders" and, together with the Pre-Petition Revolving Lenders, the "Pre-Petition Lenders") with respect to pre-petition "Tranche A" term loans 2 in the aggregate principal amount of $155,509,892.94 (the "Pre-Petition Tranche A Term Loans") and pre-petition "Tranche B" term loans in the aggregate principal amount of $95,432,533.18 (the "Pre-Petition Tranche B Term Loans" and, together with the Pre-Petition Tranche A Term Loans, the "Pre-Petition Term Loans"; the Pre-Petition Term Loans, together with the Pre-Petition Revolving Loans, the "Pre-Petition Loans") extended by the Pre-Petition Term Lenders pursuant to the Pre-Petition Credit Agreement, (iii) the Pre-Petition Lenders in respect of interest, fees and all other obligations of the Debtor under the Pre-Petition Credit Agreement and the other documentation relating thereto and (iv) certain of the Lenders (the "DIP Lenders") with respect to post-petition revolving credit loans in the aggregate principal amount of $34,000,000.00 (the "DIP Revolving Credit Loans"), post-petition standby letters of credit in the aggregate principal amount of $2,625,000.00 (the "DIP Standby Letters of Credit") extended to or issued for the account of the Debtor and post-petition documentary letters of credit in the aggregate principal amount of $6,593,546.78 issued for the account of the Debtor (the "DIP Documentary Letters of Credit" and together with the DIP Standby Letters of Credit, the "DIP Letters of Credit") pursuant to the DIP Credit Agreement (as hereinafter defined). The DIP Lenders were granted superpriority administrative claims and superpriority Liens (as hereinafter defined) on all of the Debtor's assets with respect to the Debtor's obligations in respect of the DIP Obligations, subject only to valid and perfected prior Liens existing on the Filing Date (as hereinafter defined) other than the Liens of the Pre-Petition Lenders. On the Filing Date, the Pre-Petition Loans and Pre-Petition Letters of Credit were secured by substantially all of the Debtor's assets (other than the UBS Collateral (as hereinafter defined)), including, without limitation, all inventory, vehicles and other personal property, together with certain real property, buildings and improvements and fixtures, owned or leased by the Debtor, notes and capital stock owned by the Debtor and proceeds thereof (collectively, the "Pre-Petition Collateral"), subject only to certain valid and perfected prior Liens existing as of the Filing Date. In addition, as part of the adequate protection ordered by the Bankruptcy Court, the Pre-Petition Lenders were granted Liens on the UBS Collateral and on all other collateral granted to the DIP Lenders, subject only to the superpriority administrative claims and Liens granted to the DIP Lenders and to other valid and perfected prior Liens existing on the Filing Date. The Borrower has a commitment from the New Revolving Lenders (as hereinafter defined), subject to the terms and conditions hereof, for revolving credit and letter of credit facilities in an aggregate principal amount not to exceed $150,000,000 (subject to the limitation set forth in Sections 2.1(d) and (e) and to mandatory and optional reductions in accordance with Sections 2.9 and 2.12). The proceeds of the New Revolving Loans will be used to provide working capital for the Borrower, and for other general corporate purposes of the Borrower, including for Capital Expenditures (as hereinafter defined). The New Revolving Lenders have consented to make the financing contemplated hereby available on the terms and conditions contained herein. The DIP Revolving Credit Loans and the DIP Letters of Credit, together with a portion of the Pre-Petition Revolving Loans and the Pre-Petition 3 Term Loans, are being restructured as provided hereby, the Pre-Petition Credit Agreement and the DIP Credit Agreement are being amended and restated in their entirety as herein set forth and the Pre-Petition Letters of Credit are being treated as provided in Section 9.14(c) hereof. To provide security for the repayment of the Loans, the reimbursement of any draft drawn under a Letter of Credit and the payment of the other obligations of the Borrower hereunder and under the other Loan Documents, the Agent will receive, for its benefit and for the benefit of the Lenders, the Fronting Banks and the Underwriters, the following interests in the following collateral (as more fully described in the Security Documents, collectively, the "Collateral"): (a) a first perfected Lien on all Pre-Petition Collateral; (b) a first perfected Lien on all property which was unencumbered on the Filing Date or was acquired by the Debtor during the Case and a first perfected Lien on substantially all property to be acquired by the Borrower after the Effective Date; and (c) a perfected Lien on all UBS Collateral and on the collateral securing the Synthetic Lease Obligations (subject to the prior liens of UBS and the Synthetic Lease Banks with respect thereto). Accordingly, in consideration of the mutual agreements herein set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. Section 1.1. Defined Terms As used in this Agreement, the following terms shall have the meanings specified below: "ABR Loan" shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Section 2.4(a) and Section 2.8. "Adjusted LIBOR Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the quotient of (a) the LIBOR Rate in effect for such Interest Period divided by (b) a percentage (expressed as a decimal) equal to 100% minus Statutory Reserves. For purposes hereof, the term "LIBOR Rate" shall mean the rate (rounded upwards, if necessary, to the next 1/100 of 1%) at which dollar deposits approximately equal in principal amount to such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of the Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. 4 "Affiliate" shall mean, 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. For purposes of this definition, a Person (a "Controlled Person") shall be deemed to be "controlled by" another Person (a "Controlling Person") if the Controlling Person possesses, directly or indirectly, power to direct or cause the direction of the management and policies of the Controlled Person whether by contract or otherwise. "After-Acquired Property" shall have the meaning set forth in Section 5.11. "Agent" shall have the meaning set forth in the Heading. "Agreement" shall mean this Amended and Restated Credit Agreement, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the higher of (a) the rate of interest most recently announced by CIBC at its Domestic Lending Office as its base rate; and (b) the Federal Funds Rate in effect on such day plus 1/2 of 1%. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in CIBC's base rate or the Federal Funds Rate shall be effective on the effective date of such change in CIBC's base rate or the Federal Funds Rate, respectively. "Annual Budget" shall have the meaning set forth in Section 5.1(f). "Application" shall mean an application, in such form as the relevant Fronting Bank may specify from time to time (a current form of the Standby Letter of Credit Application is attached hereto as Exhibit J-1 or, in the case of the Unsupported Trade Standby Letter of Credit, Exhibit J-2), requesting such Fronting Bank to open a Letter of Credit, as such application may be amended, modified or supplemented from time to time. "Approved Purposes" shall mean, in the case of Documentary Letters of Credit, Inventory purchases or such other purposes as are reasonably acceptable to the Agent and the relevant Fronting Bank, it being understood that issuance of a Documentary Letter of Credit in favor of a single beneficiary acting as agent for other trade creditors is not an Approved Purpose. "Assignment and Acceptance" shall mean an assignment and acceptance by a Lender and an Eligible Assignee, accepted by the Agent and agreed to by the Borrower to the extent required by Section 9.3(b), substantially in the form of Exhibit P. 5 "Available Property" shall mean all real property, buildings, improvements and fixtures owned or leased by the Borrower or any Subsidiary which are not subject to a Lien as of the Effective Date, after recordation of the Mortgages delivered on such date. To the extent that any real property, buildings, improvements and fixtures owned or leased by the Borrower or any Subsidiary, which do not constitute Available Property as of the Effective Date, become, after the Effective Date, unencumbered by the Lien of the Colorado Mortgages or such other Lien as the case may be, such real property, buildings, improvements and fixtures shall, on the date such Lien is released, become Available Property unless such property becomes encumbered by a Lien securing Permitted Refinancing Debt concurrently with the release of such Lien or within 60 days of such release; provided, that on or prior to the date such Lien is released, the Borrower shall have given written notice to the Agent of its intention to refinance the Debt secured by such Lien with Permitted Refinancing Debt. Any real property, buildings, fixtures or improvements which are leased by the Borrower after the Effective Date shall be considered Available Property if the subject lease does not prohibit the granting to the Agent of a Mortgage. "Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978, as heretofore and hereafter amended, and codified as 11 U.S.C. Section 101 et seq. "Bankruptcy Court" shall mean the United States Bankruptcy Court for the Western District of Missouri or any other court having jurisdiction over the Case from time to time. "Beneficial Ownership" by a Person when used with respect to any Voting Shares shall mean beneficial ownership by such Person of such Voting Shares as defined in Rule 13d-3 of the Exchange Act. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrower" shall have the meaning set forth in the Heading. "Borrowing" shall mean the incurrence or refinancing of Loans of a single Type made from all the New Revolving Lenders or the New Term Lenders, as the case may be, on a single date and having, in the case of Eurodollar Loans, a single Interest Period (with any ABR Loan made pursuant to Section 2.15 being considered a part of the related Borrowing of Eurodollar Loans). "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banks in New York City are required or permitted to close (and, for a Letter of Credit, other than a day on which the relevant Fronting Bank issuing such Letter of Credit is required or permitted to close); provided, however, that when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. 6 "Business Plan" shall mean the revised financial projections of the Borrower, dated on or about June 27, 1997. "Capital Expenditures" shall have the meaning set forth in Section 6.4. "Capco Subleases" shall mean those twelve certain Sublease Agreements, each dated as of September 1, 1982, as amended, supplemented or otherwise modified prior to and in effect on the Filing Date, between the Borrower and Capco Realty Corp., a Delaware corporation ("Capco"), pursuant to which the Borrower subleases from Capco twelve stores located at the respective sites identified on Schedule A to such Sublease Agreements, which Capco in turn leases from Paycap pursuant to twelve Master Lease Agreements between Paycap and Capco, each dated as of September 1, 1982. "Capitalized Lease" shall mean, as applied to any Person, any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Case" shall mean the Chapter 11 Case of the Debtor commenced on July 21, 1997 in the Bankruptcy Court. "Cash Management Agreements" shall mean the documentation evidencing the cash management arrangements between the Cash Management Banks and the Borrower, as in effect on and immediately prior to the Effective Date. "Cash Management Banks" shall mean Bank of America National Trust and Savings Association, NationsBank of Texas, N.A., Nationsbank N.A. and First Bank, and their respective Affiliates, if applicable, each in its capacity as the holder of Cash Management Obligations for so long as it shall continue to hold such Obligations and any other Lender which provides additional or replacement cash management services to the Borrower on terms and conditions satisfactory to the Agent in its judgment reasonably exercised. "Cash Management Obligations" shall mean the obligations of the Borrower to reimburse each of the Cash Management Banks in respect of overdrafts, uncollected funds, returned items and reasonable related expenses arising pursuant to cash management arrangements as in effect on the Effective Date, with such changes in such arrangements subsequent to the Effective Date as may be acceptable to the relevant Cash Management Bank in its judgment reasonably exercised. "Change of Control" shall mean the occurrence of either of the following events: (x) any Person or any Persons acting together which would constitute a Group, together with any Affiliates thereof, after the Effective Date, shall acquire or hold Voting Shares of the Borrower such that such Person or Group, together with such Affiliates, have Beneficial Ownership of Voting Shares of the Borrower entitling such Person or Group, together with such Affiliates, to exercise at least 40% of the total voting power of all Voting Shares of the Borrower; or (y) any Person or any Group, 7 together with any Affiliates thereof, shall succeed in having a sufficient number of its or their nominees elected to the Board of Directors of the Borrower (other than nominees elected to the Board of Directors of the Borrower pursuant to the Plan of Reorganization) such that such nominees so elected (whether new or continuing as directors) shall constitute a majority of the Board of Directors of the Borrower. "CIBC" shall have the meaning set forth in the Heading. "CIBC Oppenheimer" shall mean CIBC Oppenheimer Corp., formerly known as Wood Gundy Securities Corp. "Closing Certificate" shall have the meaning set forth in Section 4.1(a)(iv). "Code" shall mean the Internal Revenue Code of 1986, as amended. "Collateral" shall have the meaning set forth in the Introductory Statement. "Colorado Mortgages" shall mean, collectively, that certain Mortgage, dated as of August 8, 1979, between Brookhart's, Inc. and Southwestern Life Insurance Company (as assumed by the Debtor on July 28, 1982) and that certain Mortgage, dated as of August 31, 1982, between the Debtor and Brookhart's, Inc., each as amended, supplemented or otherwise modified from time to time prior to, and in effect on, the Filing Date. "Commitment" shall mean, with respect to each New Revolving Lender, its commitment to make New Revolving Loans and purchase Participating Interests in Letters of Credit in the aggregate amount set forth opposite its name on Schedule 1.1(a) hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to Sections 2.9 and 2.12. "Commitment Fee" shall have the meaning set forth in Section 2.19. "Commitment Letter" shall mean that certain Commitment Letter, dated July 17, 1997, among the Agent, the Underwriters and the Debtor. "Commitment Percentage" shall mean at any time, with respect to each New Revolving Lender, the percentage obtained by dividing its Commitment at such time by the Total Commitments at such time. "Confirmation Order" shall have the meaning set forth in Section 4.1(c). "Consolidated Subsidiary" shall mean, at any date, any Subsidiary or other entity, the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements in accordance with GAAP as of such date. 8 "Credit Card Banks" shall mean General Electric Capital Corporation and Monogram Credit Card Bank of Georgia. "Debt" of any Person shall mean, at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under Capitalized Leases, (v) all Debt of others secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) a Lien on any asset owned, used or operated by such Person, whether or not such Debt is assumed by such Person, (vi) all Debt of others Guaranteed by such Person, directly or indirectly, or by an instrument having the effect of assuring another's payment or performance of any Debt, (vii) indebtedness and other obligations arising under acceptance facilities and the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder or payment requests honored with respect thereto, (viii) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (other than fully paid interest rate cap arrangements), (ix) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, and (x) any withdrawal or other liability incurred under ERISA by such Person (or, if such Person is the Borrower, the Borrower and its ERISA Affiliates) to a Multiemployer Plan. "Debt for Borrowed Money" of any Person shall mean Debt of such Person of the type described in clauses (i) and (ii) of the definition of "Debt" in this Section and Debt of such type of another Person which is Guaranteed by such Person. "Debt to EBITDA Ratio" shall mean, at any time, the ratio of (i) the aggregate amount of then outstanding Debt of the Borrower and its Subsidiaries described in clauses (i) through (vi) of the definition of "Debt" in this Section to (ii) EBITDA for the four consecutive fiscal quarters most recently ended. "Default" shall mean any condition or event which would, with the giving of notice or lapse of time or both, become an Event of Default. "Defaulting Lender" shall mean, at any time, any Lender which shall not have theretofore made available to (i) the Agent its pro rata share of a given Borrowing in accordance with Section 2.2(b), (ii) the Agent its pro rata portion of any amounts payable pursuant to Section 8.6 for which payment has been requested more than forty-five days prior thereto, (iii) CIBC its pro rata share of a given obligation to reimburse CIBC pursuant to Section 9.14(c) or (iv) any Fronting Bank or the Agent, as the case may be, its pro rata share of a given obligation to reimburse such Fronting Bank or the Agent pursuant to Section 2.2(c) or 2.5(f). 9 "Designated Collateral" shall mean (i) any Inventory at any time located at the 29 stores closed pursuant to the Business Plan on or after the Effective Date, (ii) the real estate interests at 9 of such closed stores (and the 7 other properties currently held for sale) and any related fixtures, equipment and vehicles (except items having an aggregate book value of not more than $600,000 which are transferred by the Borrower to other stores for use in its business), (iii) any tax refunds, including, without limitation, those resulting from the Small Business Job Retention Act of 1996 and filed for by the Debtor on October 9, 1996 and those resulting from carrybacks of net operating losses for fiscal year 1997 and (iv) any other assets which the Borrower determines are no longer useful in its business, including, without limitation, the real estate interests with respect to any additional stores which the Borrower determines to close, together with the Inventory located in such stores and any related fixtures, equipment and vehicles. "DIP Agent" shall mean CIBC, as coordinating and collateral agent under the DIP Credit Agreement. "DIP Credit Agreement" shall mean that certain Revolving Credit Agreement, dated as of July 21, 1997, among the Borrower, the DIP Lenders, the Underwriters, the Fronting Banks and CIBC, as coordinating and collateral agent for the DIP Lenders, the Fronting Banks and the Underwriters, as amended, modified and supplemented from time to time. "DIP Documentary Letters of Credit" shall have the meaning set forth in the Introductory Statement. "DIP Financing Order" shall mean the orders of the Bankruptcy Court authorizing the Debtor to enter into the DIP Credit Agreement, including orders filed on July 21, 1997 and August 20, 1997. "DIP Fronting Banks" shall mean CIBC and First Bank in their capacities as "Fronting Banks", under the DIP Credit Agreement. "DIP Lenders" shall have the meaning set forth in the Introductory Statement. "DIP Letters of Credit" shall have the meaning set forth in the Introductory Statement. "DIP Obligations" shall mean (a) the due and punctual payment of principal of and interest on DIP Revolving Credit Loans and the reimbursement of all amounts drawn under the DIP Letters of Credit, and (b) the due and punctual payment of all other present and future, fixed or contingent, monetary and performance obligations of the Borrower to the DIP Lenders, the DIP Fronting Banks, the Underwriters and the DIP Agent under the DIP Credit Agreement. "DIP Revolving Credit Loans" shall have the meaning set forth in the Introductory Statement. "DIP Standby Letters of Credit" shall have the meaning set forth in the Introductory Statement. 10 "Disclosure Statement" shall mean the Borrower's First Amended Disclosure Statement, filed by the Debtor in the Case on September 5, 1997, as modified on October 9, 1997. "Documentary Letter of Credit" shall mean a documentary letter of credit in form and substance customarily issued by the relevant Fronting Bank from time to time. "Documentary Letter of Credit Fronting Bank" shall mean any Fronting Bank which has issued or has committed to issue Documentary Letters of Credit hereunder. "Documentary Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate undrawn stated amount of all Documentary Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Documentary Letters of Credit and not then reimbursed. "Documentary Reserve" shall have the meaning set forth in Section 2.5(a). "Dollars" and "$" shall mean lawful money of the United States of America. "Domestic Lending Office" shall mean initially, as to each Lender, its office designated on the signature pages to this Agreement, and thereafter, upon notice to the Borrower and the Agent, such other office of such Lender, if any, which shall be making or maintaining ABR Loans. "Dual Path Capital Expenditures" shall mean capital expenditures made or accrued in connection with the Business Plan (or in connection with any other strategic initiatives undertaken by the Borrower with the approval of the board of directors of the Borrower) and identified as such in Section 6.4 (as such amounts may be reduced from time to time). "EBITDA" shall mean, for any period, the consolidated net income (or net loss) of the Borrower and its Consolidated Subsidiaries for such period before deduction of "Chapter 11 expenses" (or "administrative costs" reflecting Chapter 11 expenses) (excluding extraordinary, unusual or non-recurring gains and losses or (without duplication) special charges), plus without duplication in accordance with GAAP the sum of (i) interest and tax expense of the Borrower and its Consolidated Subsidiaries for such period to the extent deducted in determining such consolidated net income plus (ii) depreciation and amortization expense of the Borrower and its Consolidated Subsidiaries for such period to the extent deducted in determining such consolidated net income, all as shown on the consolidated statement of income for the Borrower and its Consolidated Subsidiaries for such period. "Effective Date" shall mean the first Business Day after which the Confirmation Order shall have become a Final Order and on which each of the conditions set forth in Section 4.1 shall have been satisfied or waived in accordance with the terms hereof, which Effective Date shall be as soon as practicable, but in no event later than December 31, 1997, unless such date shall have been extended in writing by the Agent, the Required Pre-Petition Lenders and all of the DIP Lenders. 11 "Eligible Assignee" shall mean (i) a commercial bank having total assets in excess of $1,500,000,000 and (ii) a finance company, insurance company or other financial institution or fund, in each case acceptable to the Agent, which in the ordinary course of business extends credit of the type evidenced by the Notes and has total assets in excess of $250,000,000 and whose becoming an assignee would not constitute a prohibited transaction under Section 4975 of ERISA. "Environmental Law" shall have the meaning set forth in Section 6.15(d). "Environmental Lien" shall mean a Lien in favor of any Governmental Authority for (i) any liability under any Environmental Law, or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a Hazardous Substance into the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) which is a member of a group of which the Borrower or any Subsidiary is a member and which is under common control within the meaning of Section 414(b) or (c) of the Code and the regulations promulgated and rulings issued thereunder. "ERISA Event" shall mean (a) a "reportable event" as such term is described in Section 4043 of ERISA (other than a "reportable event" not subject to the provision for 30-day notice to the PBGC under 29 C.F.R. 2615), or (b) the withdrawal of the Borrower, any Subsidiary or any ERISA Affiliate of either of them from a Multiple Employer Plan or a Single Employer Plan during a Plan year in which it was a "substantial employer", as such term is defined in Section 4001(a)(2) of ERISA, which would result in any liability to the Borrower, any Subsidiary or any ERISA Affiliate of either of them, or the incurrence of liability by the Borrower, any Subsidiary or any ERISA Affiliate of either of them under Section 4064 of ERISA upon the termination of a Multiple Employer Plan or a Single Employer Plan, or (c) an event described in Section 4068(f) of ERISA, or (d) the distribution of a notice of intent to terminate a Plan pursuant to Section 4041(a)(2) of ERISA or the treatment of a Plan amendment as a termination under Section 4041 of ERISA where, in either case, such termination would result in any liability to the Borrower, a Subsidiary or any ERISA Affiliate of either of them, or (e) the failure by the Borrower, a Subsidiary or any ERISA Affiliate of either of them to make a payment to a Plan pursuant to Section 302(f)(1) of ERISA or (f) the adoption of any amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA, or (g) the institution of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, or (h) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Eurocurrency Liabilities" shall have the meaning assigned thereto in Regulation D issued by the Board, as in effect from time to time. 12 "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined by reference to the Adjusted LIBOR Rate in accordance with the provisions of Section 2.4(b) and Section 2.8. "Eurodollar Lending Office" shall mean, initially as to each Lender, its office, designated on the signature pages to this Agreement or such other office, branch or Affiliate of such Lender as it may hereafter designate as its Eurodollar Lending Office by notice to the Borrower and the Agent. "Event of Default" shall have the meaning set forth in Section 7.1. "Excess Cash Flow" shall mean, for any fiscal year, the sum for such fiscal year (without duplication) of (i) EBITDA of the Borrower and its Consolidated Subsidiaries for such fiscal year, plus (ii) non-cash charges deducted in arriving at such EBITDA for such fiscal year, plus (iii) the aggregate Net Cash Proceeds of the sale, lease, transfer or other disposition of assets by the Borrower or by its Consolidated Subsidiaries during such fiscal year (other than sales of Inventory in the ordinary course of business) to the extent not applied to the mandatory prepayment or payment of the Loans and to the extent not resulting in any mandatory permanent Commitment reduction plus (iv) an amount equal to the increase (or less an amount equal to the decrease) in consolidated current liabilities of the Borrower and its Consolidated Subsidiaries during such fiscal year (other than Debt described in clauses (i) through (iv) of the definition of "Debt" contained in this Section), less (v) an amount equal to the increase (or plus an amount equal to the decrease) in consolidated non-cash current assets of the Borrower and its Consolidated Subsidiaries for such fiscal year, less (vi) the aggregate amount of taxes paid in cash by the Borrower or by its Consolidated Subsidiaries during such fiscal year, less (vii) the aggregate amount of Capital Expenditures of the Borrower and of its Consolidated Subsidiaries made during such fiscal year or permitted to be carried forward into the next fiscal year pursuant to Section 6.4 (less any amounts carried forward from prior years to the extent not expended in the current year), less (viii) an amount equal to the sum of all regularly scheduled payments and any mandatory or permitted optional prepayments of principal on all Debt of the type described in clauses (i) through (iv) of the definition of "Debt" contained in this Section of the Borrower and of its Consolidated Subsidiaries (other than prepayments on the New Revolving Loans to the extent not accompanied by commensurate permanent Commitment reductions hereunder) actually made during such fiscal year to the extent permitted hereunder, less (ix) interest paid by the Borrower or by its Consolidated Subsidiaries during such fiscal year, less (x) any gains (or plus any losses) arising from the sale, lease, transfer or other disposition of assets by the Borrower or by its Consolidated Subsidiaries during such fiscal year to the extent included in EBITDA for such fiscal year. Excess Cash Flow shall be calculated by reference to the audited financial statements referred to in Section 5.1(a), and such calculation shall be set forth in the Excess Cash Flow Certificate. "Excess Cash Flow Certificate" shall have the meaning set forth in Section 2.12(d). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 13 "Existing Agreements" shall mean the Pre-Petition Credit Agreement, the DIP Credit Agreement, each of the other agreements listed on Schedule 1.1(b) hereto, the notes delivered pursuant thereto, and all of the agreements and the DIP Financing Order granting Liens on Property and other assets of the Borrower to the Lenders, including without limitation, the security agreements, mortgages, deeds of trust and leasehold mortgages listed on Schedule 1.1(b) hereto, as each may have been amended, amended and restated, modified or supplemented from time to time. "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fees" shall mean, collectively, the Commitment Fees and the Letter of Credit Fees, together with the other fees referred to in Section 2.18. "Fee Letter" shall mean the fee letter, dated July 17, 1997, among the Debtor, the Agent, the Underwriters and the New Revolving Lenders with respect to certain fees, as the same may be amended, modified or supplemented from time to time by a written instrument executed by the relevant parties thereto. "FIFO Value" shall mean, as to any Inventory, the value (determined as the lower of cost or fair market value) of such Inventory calculated on a first in, first out basis. "Filing Date" shall mean July 21, 1997. "Final Order" shall mean an order or judgment of the Bankruptcy Court as entered on the docket as to which the time to appeal or petition for certiorari has expired and as to which no appeal or petition for certiorari has been timely filed, or as to which any appeal or petition for certiorari that has been filed has been resolved by the highest court to which such order or judgment was timely appealed or from which certiorari was sought. "Financial Officer" shall mean the Chief Financial Officer, Vice President Finance or the Treasurer of the Borrower. "First Bank" shall mean U.S. Bank National Association, successor by merger to First Bank National Association. "Fronting Banks" shall mean (i) with respect to Standby Letters of Credit, CIBC and (ii) with respect to Documentary Letters of Credit, First Bank; or, in each case, such other Lender or Lenders or financial institutions or institutions (which other financial institution or institutions shall have been 14 chosen by the Borrower with the approval of the Agent and the Majority Revolving Lenders) as may agree to act as such. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those used in preparing the financial statements referred to in Section 3.4. "GE Credit Program Documents" shall mean (a) the Monogram Credit Card Bank of Georgia Program Agreement, dated as of July 20, 1997, between the Borrower and Monogram Credit Card Bank of Georgia, as such agreement has been or may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time to the extent permitted by this Agreement, together with any agreements entered into by the Borrower and Monogram Credit Card Bank of Georgia, or any affiliate, in replacement of such agreement to the extent permitted by this Agreement (including, without limitation, Section 5.9); and (b) the Commercial Credit Account Purchase and Service Program Agreement, dated as of July 20, 1997, between the Borrower and General Electric Capital Corporation, as such agreement may hereafter be further amended, amended and restated, supplemented or otherwise modified from time to time to the extent permitted by this Agreement, together with any agreement entered into by the Borrower and General Electric Capital Corporation, or any affiliate, in replacement of such agreement to the extent permitted by this Agreement. "Governmental Authority" shall mean any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or any court, in each case whether of the United States or foreign. "Group" shall mean a "group" for purposes of Section 13(d) of the Exchange Act. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" shall have the meaning set forth in Section 6.15(d). "Hedging Agreement" shall mean that certain ISDA Master Agreement, dated as of May 22, 1995, between CIBC and the Debtor, together with all Schedules executed in connection therewith, as assumed by the Debtor pursuant to the DIP Credit Agreement and by the Borrower upon the merger of the Debtor with and into the Borrower as in effect on the Effective Date, as amended, amended and restated, supplemented or otherwise modified from time to time. 15 "Hedging Bank" shall mean CIBC in its capacity as Party A under the Hedging Agreement and any other Lender or other counterparty reasonably acceptable to the Agent and the Majority Revolving Lenders which enters into interest rate protection or hedging arrangements with the Borrower which are permitted by this Agreement. "Hedging Obligations" shall mean the obligations of the Borrower to the Hedging Bank under the Hedging Agreement. "Indemnified Party" shall have the meaning set forth in Section 9.6. "Insufficiency" shall mean, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA. "Interest Payment Date" shall mean (i) as to any Eurodollar Loan, the last calendar day of each month during each Interest Period with respect to such Eurodollar Loan and the last day of each such Interest Period, and (ii) as to all ABR Loans, the last calendar day of each month and the date on which any ABR Loans are refinanced with Eurodollar Loans pursuant to Section 2.11. "Interest Period" shall mean, as to any Borrowing of Eurodollar Loans, the period commencing on the date of such Borrowing (including as a result of a refinancing of ABR Loans) or on the last day of the preceding Interest Period applicable to such Borrowing and ending on the numerically corresponding day (or if there is no corresponding day, the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect in the related notice delivered pursuant to Sections 2.2(b) or 2.11; provided, however, that (i) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) no Interest Period shall end later than the Maturity Date for the Loans to which such Interest Period relates. "Inventory" shall mean all goods and merchandise now owned or hereafter acquired by the Borrower or any of its Subsidiaries (wherever located, whether in the possession of the Borrower or any of its Subsidiaries or of a bailee or other person for sale, storage, transit, processing, use or otherwise and whether consisting of whole goods, components, supplies, materials, returned or repossessed goods or goods consigned by the Borrower or any of its Subsidiaries to a third party) which are held for sale or lease or to be furnished (or have been furnished) under any contract of service or which are raw materials, work-in-process, finished goods or materials used or consumed in the business of the Borrower or any of its Subsidiaries or processed by or on behalf of the Borrower or any of its Subsidiaries, but expressly excluding inventory consigned to the Borrower or its Subsidiaries by third parties. "Inventory Compliance Certificate" shall have the meaning set forth in Section 5.1(t). "Investments" shall have the meaning set forth in Section 6.10. 16 "Lender Obligations" shall mean the Revolving Obligations and the Term Obligations. "Lenders" shall have the meaning set forth in the Heading. "Lending Office" shall mean, as to each Lender, its Domestic Lending Office or its Eurodollar Lending Office, as the context may require. "Letter of Credit" shall mean any irrevocable letter of credit issued or outstanding under the DIP Credit Agreement and deemed issued pursuant to Section 2.5, which letter of credit shall be (i) a Standby Letter of Credit or a Documentary Letter of Credit and (ii) denominated in Dollars except as otherwise permitted pursuant to Section 2.5(a). "Letter of Credit Accounts" shall mean (i) with respect to Standby Letters of Credit, the account established by the Borrower under the sole and exclusive control of the Agent maintained at the office of the Agent at 425 Lexington Avenue, New York, New York 10017 designated as the "Payless Cashways, Inc. Standby Letter of Credit Account" and (ii) with respect to Documentary Letters of Credit, the account established by the Borrower under the sole and exclusive control of U.S. Bank National Association, maintained at the office of First Bank at 601 2nd Avenue South, Minneapolis, Minnesota 55402, designated the "Payless Cashways, Inc. Documentary Letter of Credit Account," each of which shall be used solely for the purposes set forth in Sections 2.5(a), 2.12(h), 7.1 and 7.2. "Letter of Credit Fees" shall mean the fees payable in respect of Letters of Credit pursuant to Section 2.20. "Letter of Credit Outstandings" shall mean, at any time, the aggregate amount of all Documentary Letter of Credit Outstandings and all Standby Letter of Credit Outstandings. "Lien" shall mean, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind whatsoever in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" shall have the meaning set forth in Section 2.1(d). "Loan Documents" shall mean this Agreement, the Notes, the Letters of Credit, the Security Documents, the Hedging Agreement, the Cash Management Agreements, and any other instrument or agreement executed and delivered in connection herewith, including (without limitation) documentation between the respective Fronting Banks and the Borrower with respect to Letters of Credit. "Lumberjack" shall mean Lumberjack Stores, Inc. 17 "Majority Lenders" shall mean the Majority Term Lenders plus the Majority Revolving Lenders; provided, that for purposes of this definition, the relevant Commitments, Loans or Participating Interests of a Lender shall be disregarded if and for so long as such Lender shall be a Defaulting Lender. "Majority Revolving Lenders" shall mean New Revolving Lenders holding New Revolving Loans or Participating Interests representing at least 51% of the sum of the aggregate principal amount of such Loans and Participating Interests outstanding (or, if no New Revolving Loans or Letters of Credit are outstanding, New Revolving Lenders having Commitments representing at least 51% of the Total Commitments); provided, that for purposes of this definition, the relevant Commitments, Loans or Participating Interests of a Lender shall be disregarded if and for so long as such Lender shall be a Defaulting Lender. "Majority Term Lenders" shall mean, at any time, New Term Lenders holding New Term Loans representing at least 51% of the aggregate principal amount of such Loans outstanding; provided, that for purposes of this definition, the Loans of a New Term Lender shall be disregarded if and for so long as such Lender shall be a Defaulting Lender. "Material Adverse Effect" shall mean (i) with respect to the Borrower and its Subsidiaries, any materially adverse change in the business, operations, condition (financial or otherwise), properties, assets or prospects of the Borrower and its Subsidiaries taken as a whole, or (ii) any fact or circumstance which, singly or in the aggregate, could reasonably be expected to result in (a) a materially adverse change described in clause (i) or (b) the inability of the Borrower or any of its Subsidiaries to perform in any material respect its obligations hereunder or under the other Loan Documents. "Maturity Date" shall mean (i) with respect to the New Revolving Loans, May 31, 2002 or such earlier date on which the Commitments shall terminate or such Loans shall become due in accordance with Section 7 and (ii) with respect to the New Term Loans, November 30, 2002, or such earlier date on which such Loans shall become due in accordance with Section 7. "Maximum Rate" shall have the meaning set forth in Section 2.8(b). "Minority Investment" shall mean any Investment consisting of the acquisition of non-majority ownership interests in any Person. "Moody's" shall mean Moody's Investors Service, Inc. or if such company shall cease to issue ratings, another nationally recognized statistical rating company selected in good faith by mutual agreement of the Agent and the Borrower. "Mortgages" shall have the meaning set forth in Section 4.1(l). "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Borrower, any Subsidiary or any ERISA Affiliate is making or accruing an 18 obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" shall mean an employee benefit plan, other than a Multiemployer Plan, subject to Title IV of ERISA to which the Borrower, any Subsidiary or any ERISA Affiliate of the Borrower or any Subsidiary, and more than one employer other than the Borrower, any Subsidiary or an ERISA Affiliate of the Borrower or any Subsidiary, is making or accruing an obligation to make contributions or, in the event that any such plan has terminated, to which the Borrower, any Subsidiary or any ERISA Affiliate of the Borrower or any Subsidiary made or accrued an obligation to make contributions during any of the five plan years preceding the date of termination of such plan. "Net Cash Proceeds" shall mean, with respect to any sale, lease, transfer or other disposition of property or other assets: (a) the cash proceeds received by the Borrower or any Subsidiary (including, without limitation, all cash proceeds received by way of (i) deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received and (ii) receivables and other assets retained by the Borrower as part of the sales consideration), minus (b) reasonable and customary brokerage commissions and other reasonable and customary fees and expenses (including reasonable and customary fees and expenses of counsel and investment bankers and reasonable and customary inventory liquidation costs actually paid by the Borrower or such Subsidiary) related to such financing, sale, lease or other disposition or issuance, minus (c) payments made to retire Debt (other than the Loans) secured by such assets being sold or otherwise disposed of where payment of such Debt is required in connection with such sale or disposition. "New Common Stock" shall have the meaning set forth in Section 4.1(u). "New Revolving Lender" and "New Revolving Lenders" shall have the meanings set forth in Section 2.1(d). "New Revolving Loans" shall have the meaning set forth in Section 2.1(d). "New Revolving Notes" shall mean the promissory notes of the Borrower, substantially in the form of Exhibit A-2 hereto, each payable to the order of a New Revolving Lender, evidencing New Revolving Loans. "New Term Lender" and "New Term Lenders" shall have the meanings set forth in Section 2.1(a). "New Term Loans" shall have the meaning set forth in Section 2.1(a). "New Term Notes" shall mean the promissory notes of the Borrower, substantially in the form of Exhibit A-1 hereto, each payable to the order of a New Term Lender, evidencing New Term Loans. "Notes" shall mean the New Revolving Notes and the New Term Notes. 19 "Notice of Borrowing" shall have the meaning set forth in Section 2.2(b). "Other Amounts" shall have the meaning set forth in Section 2.8(b). "Other Taxes" shall have the meaning set forth in Section 2.17(b). "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor agency or entity performing substantially the same functions. "Pad Site" shall have the meaning set forth in the definition of "Permitted Pad Sale." "Participating Interest" shall mean with respect to each Letter of Credit (i) in the case of a Fronting Bank, its interest, if any, in such Letter of Credit and any Application or draft or payment request relating thereto after giving effect to the granting of all Participating Interests therein pursuant hereto and (ii) in the case of each New Revolving Lender, its undivided interest in such Letter of Credit and any Application or draft or payment request relating thereto. "Paycap" shall mean Paycap Associates Limited Partnership, a Connecticut limited partnership. "Permitted Liens" shall mean (i) Liens imposed by law (other than Environmental Liens and any Lien imposed by ERISA) for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than Environmental Liens and any Lien imposed by ERISA) imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (iii) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Debt), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere materially with the ordinary conduct of the business of the Borrower and which do not materially detract from the value of the property to which they attach or materially impair the use thereof to the Borrower; (v) purchase money Liens granted by the Borrower or its Subsidiaries upon Inventory of the Borrower and its Subsidiaries securing the purchase price therefor not to exceed $1,000,000 in unpaid purchase price in the aggregate for the Borrower and its Subsidiaries at any one time and purchase money Liens upon or in any other property acquired or held in the ordinary course of business to secure the purchase price of such property or to secure Debt permitted by Section 6.2(v) solely for the purpose 20 of financing the acquisition of such property and Capitalized Leases permitted by Section 6.4 and true leases on account of which financing statements have been filed; provided, that the aggregate Debt secured by all such purchase money Liens (other than Capitalized Leases) shall not exceed in the aggregate for the Borrower and its Subsidiaries $2,000,000 outstanding at any time; (vi) judgment Liens, but only to the extent that the related judgment does not constitute an Event of Default under Section 7.1(j); and; (vii) extensions, renewals or replacements of any Lien referred to in paragraphs (i) through (v) above, including in connection with the incurrence of Permitted Refinancing Debt; provided, that the principal amount of the obligation secured thereby is not increased and that any such extension, renewal or replacement Lien is limited to the property originally encumbered thereby. "Permitted Pad Sale" shall mean any sale of that portion (any such portion, a "Pad Site") of any real property acquired by the Borrower in excess of the portion thereof needed for the operation of the facility located on or to be constructed on such real property, as reasonably determined by the Borrower; provided, that (i) the acquisition of such real property was not prohibited by any provision of this Agreement, (ii) the aggregate acreage of all Pad Sites on any such real property does not exceed 50% of the total acreage of such real property and (iii) such sale is completed within twelve months of the acquisition of such real property. "Permitted Refinancing Debt" shall mean Debt incurred by the Borrower to refinance the Real Estate Financing or Synthetic Lease Obligations (or a portion thereof) in a principal amount not less than the principal amount of the obligations (or the portion thereof) being refinanced; provided, that (i) the principal amount of such Debt is not increased and such Debt is not secured by any assets of the Borrower other than the assets securing the Debt being refinanced and, in the case of a refinancing of less than the entire principal amount of the Real Estate Financing or the Synthetic Lease Obligations, such Debt is not secured by any assets of the Borrower not specifically allocated to the portion of the Real Estate Financing or the Synthetic Lease Obligations being refinanced and, in all cases, any Liens on such assets in favor of the Agent, for its benefit and the benefit of the other Secured Parties, remain in full force and effect and (ii) such Debt is incurred on terms and conditions (including financial and other covenants and events of defaults) and with a weighted average tenor which, taken as a whole, would be no less favorable to the Borrower than the terms, conditions and tenor of the Debt being refinanced as in effect on the date hereof. "Person" shall mean any natural person, corporation, division of a corporation, limited liability company, limited liability partnership, partnership, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof. "Plan" shall mean an employee benefit plan (other than a Multiemployer Plan), including any Multiple Employer Plan, which is or, in the event that any such plan has been terminated within five years after the occurrence of a transaction described in Section 4069 of ERISA, was maintained for employees of the Borrower, any Subsidiary or any ERISA Affiliate of the Borrower or any Subsidiary and is subject to Title IV of ERISA. 21 "Plan of Reorganization" shall mean that certain First Amended Plan of Reorganization, filed by the Debtor in the Case on September 5, 1997, as modified on October 9, 1997 and as further modified in the Confirmation Order and on the record at the hearing with respect thereto, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof as in effect on the date hereof. "Pre-Petition Agent" shall mean CIBC, as administrative and collateral agent for the Pre-Petition Lenders, the letter of credit bank and the co-agents party to the Pre-Petition Credit Agreement. "Pre-Petition Collateral" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Credit Agreement" shall mean that certain Amended and Restated Credit Agreement, dated as of October 3, 1996, among Payless Cashways, Inc., the Pre-Petition Lenders, the Pre-Petition Agent, the letter of credit bank and the co-agents named therein, as amended, amended and restated, supplemented or otherwise modified prior to the Effective Date. "Pre-Petition L/C Obligations" shall have the meaning set forth in Section 9.3(a)(iii). "Pre-Petition L/C Participant" shall have the meaning set forth in Section 9.14(c). "Pre-Petition Lenders" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Letters of Credit" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Loans" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Obligations" shall mean the Pre-Petition Loans, the reimbursement obligations with respect to the Pre-Petition Letters of Credit and all other obligations of the Debtor to the Pre-Petition Agent and the Pre-Petition Lenders pursuant to the Pre-Petition Credit Agreement and all documents and agreements executed in connection therewith. "Pre-Petition Revolving Lenders" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Revolving Loans" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Term Lenders" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Term Loans" shall have the meaning set forth in the Introductory Statement. "Pre-Petition Tranche A Term Loans" shall have the meaning set forth in the Introductory Statement. 22 "Pre-Petition Tranche B Term Loans" shall have the meaning set forth in the Introductory Statement. "Property" shall have the meaning set forth in Section 6.15(a). "Ratable Proportion" shall mean, as to each Lender, at any time, the proportion that such Lender's share of the aggregate outstanding principal amount of Loans and Letter of Credit Outstandings, together with such Lender's share (if any) of the Unused Total Commitments at the time, bears to the sum of aggregate outstanding principal amount of all Loans and Letter of Credit Outstandings plus the Unused Total Commitments at the time, expressed as a percentage. Each Lender's Ratable Proportion on and as of the Effective Date is set forth on Annex A. "Real Estate Financing" shall mean the financing by UBS provided for by the UBS Loan Agreement and the other UBS Loan Documents. "Register" shall have the meaning set forth in Section 9.3(d). "Remedial Work" shall have the meaning set forth in Section 6.15(c). "Required Inventory" shall mean Inventory in the Borrower's possession and not subject to any Liens (except Liens in favor of the Agent and other Liens permitted by Section 6.1) which shall have a minimum aggregate FIFO Value, at least equal to $300 million after deduction of all amounts secured by such other Liens permitted by Section 6.1; provided, that no Inventory subject to Liens created pursuant to the GE Credit Program Documents or Liens on Inventory subject to a purchase money security interest of the type described in clause (v) of the definition of Permitted Liens shall have any value ascribed to it for purposes of calculating Required Inventory. "Required Lenders" shall mean (i) except as provided in clause (iii) hereof, so long as any Commitments remain in effect or any New Revolving Loans or Letters of Credit remain outstanding, the Majority Revolving Lenders, (ii) if no Commitments remain in effect and no New Revolving Loans or Letters of Credit are outstanding, the Majority Term Lenders and (iii) for purposes of amending the definition of Required Inventory or the form of the Inventory Compliance Certificate or amending or waiving the provisions of Sections 4.2(f), 5.1(t) or 9.10(iv), the Majority Revolving Lenders and the Majority Term Lenders; provided, that for purposes of this definition, the relevant Commitments, Loans or Participating Interests of a Lender shall be disregarded if and for so long as such Lender shall be a Defaulting Lender. "Required Pre-Petition Lenders" shall mean, at any time Pre-Petition Lenders holding Pre-Petition Obligations representing in excess of sixty-six and two-thirds percent (66-2/3%) of the aggregate principal amount of such Pre-Petition Obligations outstanding and constituting more than fifty percent (50%) in number of such Pre-Petition Lenders. 23 "Required Revolving Lenders" shall mean, at any time, New Revolving Lenders holding New Revolving Loans or Participating Interests representing in excess of 66-2/3% of the sum of the aggregate principal amount of such Loans and Participating Interests outstanding or, if no New Revolving Loans or Letters of Credit are outstanding, New Revolving Lenders having Commitments representing in excess of 66-2/3% of the Total Commitments; provided, that for purposes of this definition, the relevant Commitments, New Revolving Loans or Participating Interests of a New Revolving Lender shall be disregarded if and for so long as such New Revolving Lender shall be a Defaulting Lender. "Required Term Lenders" shall mean, at any time, New Term Lenders holding New Term Loans representing in excess of 66-2/3% of the aggregate principal amount of such Loans outstanding; provided, that for purposes of this definition, the New Term Loans of a New Term Lender shall be disregarded if and for so long as such New Term Lender shall be a Defaulting Lender. "Requirement of Law" shall mean, as to any Person, the articles or certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restricted Payments" shall mean (i) any dividend or other distribution in cash or in kind on any shares of the Borrower's capital stock, (ii) any payment in cash or in kind (including, without limitation, the setting aside of assets or the deposit of funds therefor) on account of the purchase, redemption, retirement or acquisition of (a) any shares of the Borrower's capital stock or (b) any option, warrant or other right to acquire shares of the Borrower's capital stock, (iii) any issuance of any capital stock (or any options, warrants, rights or other equity securities relating to any capital stock) except pursuant to the Plan of Reorganization or as contemplated by Section 9.2 thereof, (iv) any payment or prepayment of principal or interest on account of Debt for Borrowed Money (other than the Loans) or the Synthetic Lease Obligations or any purchase, defeasance, redemption, retirement or acquisition of any principal or interest on such Debt or Obligations (including, without limitation, the setting aside of assets or the deposit of funds therefor) or (v) any payment of management or consulting fees to an Affiliate of the Borrower. "Restructured Obligations" shall mean all of the Borrower's Term Obligations, Cash Management Obligations and Hedging Obligations. "Revolving Credit Commitment" shall mean the commitment of each Lender to make New Revolving Loans and to purchase a Participating Interest in Documentary Letters of Credit and Standby Letters of Credit issued, as set forth in Section 2.1 and Section 2.2, as the same may be reduced from time to time pursuant to Sections 2.9 and 2.12. "Revolving Obligations" shall mean (a) the due and punctual payment of principal of and interest on the New Revolving Loans and the New Revolving Notes and the reimbursement of all 24 amounts drawn under the Letters of Credit, and (b) the due and punctual payment of the Fees and all other present and future, fixed or contingent, monetary and performance obligations of the Borrower to the New Revolving Lenders, the Fronting Banks, the Underwriters and the Agent under the Loan Documents (other than the Term Obligations). "S&P" shall mean Standard & Poor's Ratings Group (a division of McGraw-Hill, Inc.) or, if such company shall cease to issue ratings, another nationally recognized statistical rating company selected in good faith by mutual agreement of the Agent and the Borrower. "Secured Obligations" shall mean the Lender Obligations, the Cash Management Obligations and the Hedging Obligations and all other obligations owing to the Secured Parties (or any of them) in their capacities as such. "Secured Parties" shall mean the Agent, the Lenders, the Underwriters, the Fronting Banks, the Pre-Petition Lenders, the DIP Lenders, the DIP Agent, the DIP Fronting Banks, CIBC, as issuer of the Pre-Petition Letters of Credit, the Hedging Bank and the Cash Management Banks. "Security and Pledge Agreement"shall have the meaning set forth in Section 4.1(k). "Security Documents" shall mean the Security and Pledge Agreement, all Subsidiary Security Agreements, all Subsidiary Guarantees, the Mortgages and all other security agreements, mortgages, pledges and assignments at any time delivered by the Borrower or any of the Subsidiaries to the Agent pursuant to the terms of this Agreement, each as amended, amended and restated, supplemented or otherwise modified from time to time. "Single Employer Plan" shall mean a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of the Borrower or an ERISA Affiliate or (ii) was also maintained and in respect of which the Borrower could have liability under Section 4069 of ERISA in the event such Plan has been or were to be terminated. "Special Required Lenders" shall mean the Required Term Lenders plus New Revolving Lenders holding New Revolving Loans or Participating Interests representing in excess of 33-1/3% of the sum of the aggregate principal amount of New Revolving Loans and Participating Interests outstanding (or, if no New Revolving Loans or Letters of Credit are outstanding, New Revolving Lenders having Commitments representing in excess of 33-1/3% of the Total Commitments); provided, that the Ratable Proportion of such Lenders, taken together, at least equals 51%; provided further, that for purposes of this definition, the relevant Commitments, Loans or Participating Interests of a Lender shall be disregarded if and for so long as such Lender shall be a Defaulting Lender. "Standby Letter of Credit" shall mean a standby letter of credit in form and substance customarily issued by the relevant Fronting Bank from time to time and in form and substance acceptable to the Agent and the relevant Fronting Bank and issued for such purposes for which the 25 Borrower has historically obtained standby letters of credit, or for such other purposes as are reasonably acceptable to the Agent and the relevant Fronting Bank. "Standby Letter of Credit Fronting Bank" shall mean the Fronting Bank which has committed to issue Standby Letters of Credit hereunder. "Standby Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate undrawn stated amount of all Standby Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Standby Letters of Credit and not then reimbursed. "Statutory Reserves" shall mean on any date the percentage (expressed as a decimal) established by the Board and any other banking authority which is the then stated maximum rate for all reserves (including, but not limited to, any emergency, supplemental or other marginal reserve requirements) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency Liabilities (or any successor category of liabilities under Regulation D issued by the Board, as in effect from time to time). Such reserve percentages shall include, without limitation, those imposed pursuant to said Regulation. The Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in such percentage. "Subsidiary" shall mean, with respect to any Person (herein referred to as the "parent"), any corporation, association or other business entity (whether now existing or hereafter organized) of which at least a majority of the securities or other ownership interests having ordinary voting power for the election of directors is, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary Guarantee" shall mean the guarantee, substantially in the form of Exhibit E hereto, to be entered into between each Subsidiary (whether now existing or hereafter formed, purchased or otherwise acquired) and the Agent for the benefit of the Secured Parties, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time. "Subsidiary Security Agreement" shall mean the security agreement, substantially in the form of Exhibit F hereto, to be made by each Subsidiary (whether now existing or hereafter formed, purchased or otherwise acquired) in favor of the Agent, for the benefit of the Secured Parties, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time. "Substantial Consummation" shall have the meaning set forth in Section 1101 of the Bankruptcy Code. "Survey" shall mean a current survey of the real property covered by any Mortgage certified to the Agent and the title insurance company insuring the Mortgage and in form and 26 substance satisfactory to the Agent and the title insurance company, or in lieu thereof, a copy of the existing survey and, if required by the title insurance company insuring such Mortgage, an affidavit in form and substance satisfactory to such title company to remove any exceptions in the Title Policy with respect to the absence of a current certified survey. "Synthetic Lease Banks" shall mean the banks and financial institutions party to the Synthetic Lease Loan Documents and their successors and assigns. "Synthetic Lease Loan Agreement" shall mean that certain Loan Agreement, dated on or about the Effective Date, among the Borrower, the Synthetic Lease Banks and BA Leasing & Capital Corporation, as agent for the Synthetic Lease Banks, as the same may be amended, amended and restated, supplemented or otherwise modified to the extent permitted by this Agreement. "Synthetic Lease Loan Documents" shall mean the Synthetic Lease Loan Agreement, the Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing Statement from the Borrower in favor of the agent for the Synthetic Lease Banks for the Borrower's property located in Bloomington, Indiana and in Overland Park, Kansas and the Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing Statement from the Borrower in favor of the agent for the Synthetic Lease Banks for the Borrower's property located in Las Vegas, Nevada and any and all documents, agreements and instruments related thereto, each as amended, amended and restated, supplemented or otherwise modified to the extent permitted by this Agreement. "Synthetic Lease Obligations" shall mean the obligations of the Borrower under the Synthetic Lease Loan Documents. "Taxes" shall have the meaning set forth in Section 2.17. "Temporary Cash Investments" shall mean any Investment in (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, in each case maturing within one year from the date of the acquisition thereof by the Borrower or a Subsidiary, or (ii) (x) commercial paper rated in the highest grade (A1+/P1 or its equivalent) by S&P or Moody's or (y) time deposits with, including certificates of deposit issued by, any office located in the United States of any bank or trust company that has capital, surplus and undivided profits aggregating at least U.S. $500,000,000, and whose long term Debt is rated A or higher by S&P and A2 or higher by Moody's, in each case maturing within 180 days from the date of acquisition thereof by the Borrower or a Subsidiary. "Term Obligations" shall mean the due and punctual payment of principal of and interest on the New Term Loans and all other present and future, fixed or contingent, monetary and performance obligations owed to the New Term Lenders and the Agent under the Loan Documents with respect to the New Term Loans. "Title Policy" shall mean a mortgage policy of title insurance (ALTA or the equivalent) insuring the first or second priority Lien of a Mortgage (as the case may be) in favor of the Agent, in form and substance and issued by title insurers satisfactory to the Agent and containing no 27 exceptions to coverage other than matters satisfactory to the Agent in its judgment reasonably exercised. "Total Commitments" shall mean, at any time, the sum of the Commitments at such time. "Trade Payables" shall mean accounts payable in respect of Inventory purchases by the Borrower or any Subsidiary. "Trademarks" shall mean (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, service names, trade styles, service marks, logos and other source or business identifiers owned by the Borrower or any Subsidiary, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise and (b) all renewals thereof. "Transferee" shall have the meaning set forth in Section 2.17. "Type" when used in respect of any Loan or Borrowing shall refer to the rate of interest by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "rate" shall mean the Adjusted LIBOR Rate and the Alternate Base Rate. "UBS" shall mean UBS Mortgage Finance, Inc. (as the successor-in-interest to The Prudential Insurance Company of America) and UBS' successors and assigns. "UBS Collateral" shall mean the real property listed on Schedule 1.1(c) annexed hereto, together with the improvements, fixtures and appurtenances relating thereto, which is collateral for the Real Estate Financing. "UBS Loan Agreement" shall mean that certain Amended and Restated Loan Agreement, dated on or about the Effective Date, between the Borrower and UBS, as the same may be amended, amended and restated, supplemented or otherwise modified to the extent permitted by this Agreement. "UBS Loan Documents" shall mean the UBS Loan Agreement, each of the mortgages and deeds of trust heretofore delivered with respect to the UBS Collateral, as modified as of the Effective Date, and any and all documents, agreements and instruments related thereto, each as amended, amended and restated, supplemented or otherwise modified to the extent permitted by this Agreement. "UCC" shall mean the Uniform Commercial Code as in effect at the relevant time in the relevant jurisdiction. "Underwriters" shall mean CIBC Oppenheimer, NationsBank, N.A., Goldman Sachs Credit Partners, L.P. and Lehman Commercial Paper Inc. 28 "Uniform Customs" shall mean the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, or any successor publication, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time. "Unsupported Trade Payables" shall mean Trade Payables (i) which are unsecured (whether by way of cash deposits, purchase money security interests or otherwise), (ii) the payment of which is not backed by any letters of credit, guarantees or other forms of credit support or enhancement and (iii) which are not claims as to which the obligee is entitled to reclamation rights pursuant to the UCC or Section 546(c) of the Bankruptcy Code. "Unsupported Trade Standby Letter of Credit" shall have the meaning set forth in Section 2.5. "Unused Total Commitment" shall mean, at any time, (i) the Total Commitments less (ii) the sum of (x) the aggregate outstanding principal amount of all New Revolving Loans and (y) the aggregate Letter of Credit Outstandings. "Vehicles" shall mean all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any state or other jurisdiction and, in any event, shall include, without limitation, the vehicles listed on Schedule 7 to the Security and Pledge Agreement and any Subsidiary Security Agreements and all tires and other appurtenances to any of the foregoing. "Voting Shares" shall mean, with respect to any Person, shares of capital stock of any class or classes (however designated) having general voting power for the election of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Withdrawal Liability" shall have the meaning specified under Part I of Subtitle E of Title IV of ERISA. "ZR&G" shall have the meaning set forth in Section 9.5. Section 1.2 Terms Generally. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Sections, Exhibits and Schedules shall be deemed references to Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all accounting or financial terms used herein shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of determining compliance with any covenant set forth in Section 6, such terms shall be construed in accordance with GAAP as in effect on the date 29 of this Agreement applied on a basis consistent with the application used in the Borrower's audited financial statements referred to in Section 3.4. SECTION 2. AMOUNT AND TERMS OF CREDIT. Section 2.1. Assumption and Restructuring of Secured Obligations (other than Letters of Credit); Amortization of New Term Loans; Commitment to Lend. (a) Subject to the terms and conditions and relying upon the representations, warranties and covenants set forth herein, each of the parties agrees that, as of the Effective Date, the Pre-Petition Credit Agreement is hereby amended and restated and a portion of the Pre-Petition Term Loans and the Pre-Petition Revolving Loans extended by the Pre-Petition Lenders pursuant to the Pre-Petition Credit Agreement are hereby assumed by the Borrower and restructured on the terms and conditions contained herein (such portion of the Pre-Petition Term Loans and Pre-Petition Revolving Credit Loans, as restructured, being hereinafter referred to as the "New Term Loans"). The principal amount of the Pre-Petition Loans restructured by each Pre-Petition Lender (such Pre-Petition Lender, after the Effective Date, being hereinafter referred to as a "New Term Lender" and, collectively, the "New Term Lenders") as New Term Loans shall be determined in accordance with the definition of "New Term Notes" contained in the Plan of Reorganization and shall be in such amount as is set forth opposite its name on Schedule 1.1(a) annexed hereto. The Borrower confirms and agrees that it is truly and justly indebted to the Pre-Petition Lenders (which are the New Term Lenders) in the aggregate amount of the Pre-Petition Loans and the Pre-Petition Letters of Credit, without defense, offset or counterclaim of any kind whatsoever. Pursuant to the Plan of Reorganization, principal amounts outstanding on the Effective Date with respect to the portion of the Pre-Petition Obligations equal to the aggregate principal amount of the New Term Loans shall be deemed to be principal amounts outstanding with respect to the New Term Loans, as of the Effective Date. (b) The outstanding principal amount of the New Term Loans shall be payable in annual installments of $3,000,000 on September 15 of each year, commencing September 15, 1998. To the extent not previously paid, all New Term Loans shall be due and payable on the Maturity Date. Each principal payment on the New Term Loans pursuant to this Section shall be accompanied by accrued interest on the principal amount paid to but excluding the date of payment. Without limiting its obligations under the first sentence of this Section or Section 2.12, the Borrower unconditionally promises to pay the unpaid principal amount of the New Term Loans on the Maturity Date. (c) Subject to the terms and conditions and relying upon the representations, warranties and covenants set forth herein, each of the parties agrees that, as of the Effective Date, the DIP Credit Agreement is hereby amended and restated and the DIP Revolving Credit Loans and the DIP Letters of Credit are hereby assumed by the Borrower and restructured as provided in Section 2.5(b). The Borrower confirms and agrees that it is truly and justly indebted to the DIP Lenders (which are the New Revolving Lenders) in the aggregate amount of the DIP Revolving Loans without defense, offset or counterclaim of any kind whatsoever. Principal amounts outstanding on the 30 Effective Date with respect to the DIP Revolving Loans shall be deemed to be principal amounts outstanding with respect to the New Revolving Loans, as of the Effective Date. (1) (d) Subject to the terms and conditions and relying upon the representations, warranties and covenants set forth herein, each DIP Lender (such DIP Lender, after the Effective Date, hereinafter referred to as a "New Revolving Lender" and collectively, the "New Revolving Lenders") agrees severally and not jointly with the other New Revolving Lenders to make revolving credit loans (each a "New Revolving Loan" and, collectively, the "New Revolving Loans" and, together with the New Term Loans, the "Loans") to the Borrower and to participate in Letters of Credit issued by the relevant Fronting Bank at any time and from time to time during the period commencing on the Effective Date and ending on the Maturity Date of the New Revolving Loans in an aggregate principal amount not to exceed the Commitment of such Lender. Without limiting its obligations under Section 2.12, the Borrower unconditionally promises to pay the unpaid principal amount of the New Revolving Loans on the Maturity Date. At no time shall the sum of the then outstanding aggregate principal amount of the New Revolving Loans plus the then aggregate Letter of Credit Outstandings exceed the Total Commitments of $150,000,000, as the same may be reduced from time to time pursuant to Sections 2.9 or 2.12, as the case may be. In addition, at no time shall the sum of the then outstanding aggregate principal amount of New Revolving Loans plus the then aggregate Standby Letter of Credit Outstandings exceed an amount equal to the Total Commitments minus the Documentary Reserve. (e) Each Borrowing of New Revolving Loans shall be made by the New Revolving Lenders pro rata in accordance with their respective Commitments; provided, that the failure of any New Revolving Lender to make any New Revolving Loan shall not in itself relieve the other New Revolving Lenders of their obligations to lend. (f) Subject to the terms and conditions and relying upon the representations, warranties and covenants set forth herein, each of the Cash Management Banks and the Borrower agree that their respective Cash Management Agreements, as in effect immediately prior to the Effective Date, shall continue in effect from and after the Effective Date in accordance with their respective terms and the Hedging Bank and the Borrower agree that the Hedging Agreement, as in effect immediately prior to the Effective Date, shall continue in effect from and after the Effective Date in accordance with its terms. Section 2.2. Making of Loans. (a) Except as contemplated by Section 2.8, Loans shall be either ABR Loans or Eurodollar Loans as the Borrower may request subject to and in accordance with this Section; provided, that all Loans made pursuant to the same Borrowing shall, unless otherwise specifically provided herein, be Loans of the same Type. Each New Revolving Lender may fulfill its Commitment (and with respect to the conversion of any New Term Loans, each New Term Lender may convert such Loans) with respect to any Eurodollar Loan or ABR Loan by causing any Lending Office of such Lender to make (or convert, as the case may be) such Loan; provided, that any such use of a Lending 31 Office shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of the applicable Note. Each Lender shall, subject to its overall policy considerations, use reasonable efforts (but shall not be obligated) to select a Lending Office which will not result in the payment of increased costs by the Borrower pursuant to Section 2.14. Subject to the other provisions of this Section and the provisions of Section 2.11, Borrowings of Loans of more than one Type may be incurred at the same time; provided, that no more than five (5) Borrowings of Eurodollar Loans may be outstanding at any time. (b) The Borrower shall give the Agent prior notice of each Borrowing hereunder of at least three Business Days for Eurodollar Loans and one Business Day for ABR Loans (except as provided in the last sentence of this Section) by delivering a notice of borrowing in substantially the form of Exhibit I hereto (a "Notice of Borrowing"), including with respect to the New Term Loans deemed made on the Effective Date. Such Notice of Borrowing shall be irrevocable and shall specify the amount of the proposed Borrowing (which shall not be less than $5,000,000 in the case of Eurodollar Loans and $1,000,000 in the case of ABR Loans) and the date thereof (which shall be a Business Day) and shall contain disbursement instructions. Such Notice of Borrowing, to be effective, must be received by the Agent not later than 12:00 noon, New York City time, on the third Business Day in the case of Eurodollar Loans and the first Business Day in the case of ABR Loans, preceding the date on which such Borrowing is to be made except as provided in the last sentence of this Section. Such Notice of Borrowing shall specify whether the Borrowing then being requested is to be a Borrowing of ABR Loans or Eurodollar Loans and, in the case of Eurodollar Loans, the length of the applicable Interest Period. If no election is made as to the Type of Loan, such Notice of Borrowing shall be deemed a request for Borrowing of ABR Loans. The Agent shall promptly notify each Lender of its proportionate share of such Borrowing, the date of such Borrowing, the Type of Borrowing or Loans being requested and the Interest Period or Interest Periods applicable thereto, as appropriate. On the borrowing date specified in such Notice of Borrowing, each Lender shall make its share of the Borrowing available at the office of the Agent at 425 Lexington Avenue, New York, New York 10017, no later than 12:00 noon, New York City time, in immediately available funds. Upon receipt of the funds made available by the Lenders to fund any Borrowing hereunder, the Agent shall disburse such funds in the manner specified in the Notice of Borrowing delivered by the Borrower and shall use reasonable efforts to make the funds so received from the Lenders available to the Borrower no later than 2:00 p.m. New York City time (other than as provided in the following sentence). With respect to ABR Loans of $10,000,000 or less, the Lenders shall make such Borrowings available to the Agent for the account of the Borrower by 4:00 p.m., New York City time, on the same Business Day that the Borrower gives notice to the Agent of such Borrowing if the Agent receives such notice from the Borrower by 12:00 noon, New York City time. (c) On the date of each New Revolving Loan, the Agent shall be authorized (but not obligated except pursuant to Section 2.5(h)) to advance, for the account of each of the New Revolving Lenders, the amount of the New Revolving Loan to be made by it in accordance with its Commitment hereunder. Should the Agent do so, each of the New Revolving Lenders agrees forthwith to reimburse the Agent in immediately available funds for the amount so advanced on its 32 behalf by the Agent, together with interest at the Federal Funds Rate if not so reimbursed on the date due from and including such date but not including the date of reimbursement. (d) Any amounts received by the Agent in connection with this Agreement or the Notes (other than amounts to which the Agent is entitled pursuant to Sections 2.18, 8.6, 9.5 and 9.6) shall be credited to the relevant Lenders, as promptly as practicable after collection by the Agent, in immediately available funds either by wire transfer or deposit in that Lender's correspondent account with the Agent, as such Lender and the Agent shall from time to time agree. Section 2.3. Notes; Repayment of Loans. The New Term Loans and the New Revolving Loans made by each Lender shall be evidenced by a New Term Note or a New Revolving Note, as the case may be, duly executed on behalf of the Borrower, dated the Effective Date or the date of the effectiveness of the applicable Assignment and Acceptance, as the case may be, substantially in the form of Exhibits A-1 or A-2 hereto, respectively, payable to the order of such Lender in an aggregate principal amount equal to the relevant New Term Lender's New Term Loans, in the case of its New Term Note, and in an aggregate principal amount equal to the relevant New Revolving Lender's Commitment, in the case of its New Revolving Note. The outstanding principal balance of the New Term Loans, as evidenced by the New Term Notes, shall be payable as provided in Sections 2.1 and 2.12 and on the Maturity Date. New Revolving Loans may be repaid and reborrowed in accordance with the provisions of this Agreement; provided, that the outstanding principal balance of all of the New Revolving Loans, as evidenced by the New Revolving Notes, shall be payable on the Maturity Date. Each Note shall bear interest from the date thereof on the outstanding principal balance thereof as set forth in Section 2.4. Each Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender's internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of interest on any such Loan and the other information provided for on such schedule; provided, that the failure of any Lender to make such a notation or any error therein shall not affect the obligation of the Borrower to repay the Loans made by such Lender and such other amounts in accordance with the terms of this Agreement and the applicable Notes. Section 2.4. Interest on Loans. (a) Subject to the provisions of Section 2.8, each ABR Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Alternate Base Rate plus 1-1/2%. (b) Subject to the provisions of Section 2.8, each Eurodollar Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal, during each Interest Period applicable thereto, to the Adjusted LIBOR Rate for such Interest Period in effect for such Borrowing plus 2-1/2%. 33 (c) Accrued interest on all Loans shall be payable in arrears on each Interest Payment Date applicable thereto, on the Maturity Date for the affected Loans, after the Maturity Date for the affected Loans on demand, upon the Borrower's optional termination of the Total Commitments and (with respect to Eurodollar Loans) upon any repayment or prepayment thereof (on the amount prepaid). Section 2.5. Letters of Credit. (a) Subject to the terms and conditions and relying upon the representations, warranties and covenants set forth herein, each of the undrawn DIP Documentary Letters of Credit is hereby deemed to be issued as and shall be a Documentary Letter of Credit as of the Effective Date in the principal amount of such Documentary Letter of Credit immediately prior to the Effective Date. Upon the terms and subject to the conditions herein set forth, the Borrower may request the Documentary Letter of Credit Fronting Bank, at any time and from time to time after the Effective Date hereof and prior to the Maturity Date for the New Revolving Loans, to issue for Approved Purposes, and subject to the terms and conditions contained herein, such Fronting Bank shall issue, for the account of the Borrower one or more Documentary Letters of Credit; provided, that no Documentary Letter of Credit shall be issued if, after giving effect to such issuance, the aggregate Documentary Letter of Credit Outstandings would exceed the lesser of $15,000,000 (or, if less, the Total Commitments as then in effect) or the Documentary Reserve and provided further, that unless the Documentary Letter of Credit Fronting Bank shall have received written notice from the Agent at least one Business Day prior to the date with respect to which the Borrower has requested issuance of a Documentary Letter of Credit that not all of the conditions to issuance of Documentary Letters of Credit have been satisfied, the Documentary Letter of Credit Fronting Bank may assume that all such conditions have been satisfied and may issue the requested Documentary Letter of Credit for the account of the Borrower. The Borrower hereby designates $10,000,000 as the initial reserve for the issuance of Documentary Letters of Credit (the "Documentary Reserve"). The Borrower may increase or decrease the amount of the Documentary Reserve in an amount equal to $1,000,000 or any integral multiple thereof upon ten (10) Business Days prior written notice to the Agent and the Documentary Letter of Credit Fronting Bank; provided, that in no event shall the Documentary Reserve exceed $15,000,000 or be less than the Documentary Letter of Credit Outstandings and provided further, that (i) if any requested increase in the Documentary Reserve would cause the then outstanding aggregate principal amount of the New Revolving Loans to be in excess of the amount permitted pursuant to the last sentence of Section 2.1(d) or (ii) any requested decrease would cause the Documentary Reserve to be less than the Documentary Letter of Credit Outstandings, then the Agent shall notify the Documentary Letter of Credit Bank of either such result and such increase or decrease (as the case may be) shall not be effective until the then outstanding aggregate principal amount of the New Revolving Loans, or of the Documentary Letter of Credit Outstandings (as the case may be) has been repaid to the extent necessary and the Documentary Letter of Credit Fronting Bank has been notified in writing by the Agent that such increase or decrease (as the case may be) is effective. Each Documentary Letter of Credit shall (i) be denominated in Dollars or in a foreign currency acceptable to the Documentary Letter of Credit Fronting Bank and (ii) expire no later than the earlier of the date that is 180 days after the date of issuance thereof and the date that is fourteen days prior to the 34 scheduled Maturity Date for the New Revolving Loans. The Borrower shall at all times maintain a minimum balance of at least $25,000 in the Letter of Credit Account of the Documentary Letter of Credit Fronting Bank, and the Borrower hereby authorizes the Documentary Letter of Credit Fronting Bank to debit such Letter of Credit Account to reimburse itself with respect to drafts drawn under Documentary Letters of Credit and unpaid fees, costs and expenses incurred by the Documentary Letter of Credit Fronting Bank in connection therewith (whereupon the Borrower shall forthwith deposit such additional funds in such Letter of Credit Account, if any, as shall be necessary to achieve such minimum balance). (b) (i) Subject to the terms and conditions and relying upon the representations, warranties and covenants set forth herein, each of the undrawn DIP Standby Letters of Credit is hereby deemed to be issued and shall be a Standby Letter of Credit as of the Effective Date in the principal amount of such Letter of Credit immediately prior to the Effective Date (and any increase in the principal amount thereof pursuant to the provisions of such Letters of Credit as in effect on the Effective Date shall also constitute Standby Letter of Credit Outstandings for purposes of this Agreement). Upon the terms and subject to the conditions herein set forth, the Borrower may request the Standby Letter of Credit Fronting Bank, at any time and from time to time after the date hereof and prior to the Maturity Date for the New Revolving Loans, to issue, and subject to the terms and conditions contained herein, such Fronting Bank shall issue, for the account of the Borrower one or more Standby Letters of Credit; provided, that no Standby Letter of Credit shall be issued if after giving effect to such issuance the aggregate Standby Letter of Credit Outstandings would exceed $25,000,000 (or, if less, the Total Commitments as then in effect) and provided further, that no Standby Letter of Credit shall be issued if the Standby Letter of Credit Fronting Bank shall have received notice from the Agent or the Majority Revolving Lenders that the conditions to such issuance have not been met; (ii) Notwithstanding the foregoing, no Standby Letters of Credit may be issued to support Trade Payables except as follows: (x) not more than $5,000,000 of Standby Letters of Credit in the aggregate at any one time outstanding may be issued to individuals or entities supplying Inventory to the Borrower or any Subsidiary to support or otherwise assure their payment obligations in respect of Trade Payables owing to such suppliers (and all such Standby Letters of Credit shall require the beneficiary thereof to certify, as a condition to drawing under such Standby Letter of Credit, that such beneficiary is drawing thereunder in respect of Trade Payables of the Borrower or any Subsidiary which are past due) and (y) a single Standby Letter of Credit in an amount not to exceed $10,000,000 may be issued to an agent or trustee for the benefit of the holders of the Borrower's Unsupported Trade Payables (the "Unsupported Trade Standby Letter of Credit"); (iii) If issued, the Unsupported Trade Standby Letter of Credit shall (x) expire no later than the first anniversary of the Effective Date (unless prior to such first anniversary (A) the Borrower commences a Chapter 11 Case under the Bankruptcy Code, in which case the expiry date of the Unsupported Trade Standby Letter of Credit shall be the earliest to occur of (1) 60 days after the conversion of such Chapter 11 Case to a Chapter 7 Case, (2) 60 days after the confirmation of a plan of reorganization in such Chapter 11 Case providing for the sale of all or substantially all of 35 the assets of the Borrower and (3) the date of the consummation of any other plan of reorganization in such Chapter 11 Case) or (B) the board of directors of the Borrower has adopted by formal resolution a plan of liquidation which provides for the sale of all or substantially all of the assets of the Borrower, in which case the Unsupported Trade Standby Letter of Credit shall expire 60 days after the date the board of directors of the Borrower adopts such a resolution; (iv) The Unsupported Trade Standby Letter of Credit shall also require that the beneficiary thereof certify, as a condition to drawing thereunder, that (x) the Borrower has commenced or is subject to a Chapter 7 Case under the Bankruptcy Code (or the Borrower has commenced or is subject to a Chapter 11 Case under the Bankruptcy Code which has been converted to a Chapter 7 Case) or a plan of reorganization in a Chapter 11 Case of the Borrower has been confirmed which provides for the sale of all or substantially all of the assets of the Borrower; or the board of directors of the Borrower has adopted by formal resolution a plan of liquidation which provides for the sale of all or substantially all of the assets of the Borrower; or all or substantially all of the assets of the Borrower (or the proceeds thereof) have been transferred to some or all of the Secured Parties pursuant to judicial or non-judicial foreclosure proceedings, a deed or deed in lieu of foreclosure or execution or levy and (y) the amount of such drawing does not exceed 25% of the Borrower's Unsupported Trade Payables on the date of such drawing; and (v) Except as set forth in clause (iii) above with respect to the Unsupported Trade Standby Letters of Credit, each Standby Letter of Credit shall (x) be denominated in Dollars and (y) expire no later than the earlier of the date which is one year after the date of issuance thereof and the scheduled Maturity Date for the New Revolving Loans (provided, that such Letter of Credit (other than the Unsupported Trade Standby Letter of Credit) may provide that it may be extended with the consent of the Standby Letter of Credit Fronting Bank for a period of no more than one year (but in no event beyond the scheduled Maturity Date for the New Revolving Loans)). (c) Each Letter of Credit shall be subject to (i) the Uniform Customs and (ii) as to matters not addressed by the Uniform Customs, the law of the State of New York (or, if a Fronting Bank so elects, the law of the jurisdiction in which the office from which it issues its Letters of Credit is located). (d) No Fronting Bank shall at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause such Fronting Bank or any New Revolving Lender to exceed any limits imposed by, any applicable Requirement of Law. (e) The Borrower shall pay to each Fronting Bank, in addition to such other fees and charges as are specifically provided for in Section 2.20 hereof, such fees and charges in connection with the issuance and processing of the Letters of Credit issued by such Fronting Bank as are customarily imposed by such Fronting Bank from time to time in connection with letter of credit transactions in the amounts, at the times and in such manner as shall be specified by such Fronting Bank in accordance with its judgment reasonably exercised. 36 (f) Drafts drawn under each Letter of Credit shall be reimbursed by the Borrower in Dollars (i) on the same day if the relevant Fronting Bank shall have notified the Borrower prior to 11:00 a.m. (New York City time) and (ii) in all other cases, not later than the first Business Day following the date of drawing. Drafts drawn under each Letter of Credit shall bear interest from the date of drawing until the first Business Day following the date of draw at a rate per annum equal to the Alternate Base Rate plus 1-1/2% and thereafter until reimbursed in full at a rate per annum equal to the Alternate Base Rate plus 3-1/2% (computed on the basis of the actual number of days elapsed over any year of 360 days). The Borrower shall effect such reimbursement (x) if such draw occurs prior to the Maturity Date for the New Revolving Loans (or the earlier date of termination of the Total Commitments), in cash or through a Borrowing (or deemed Borrowing) of New Revolving Loans without regard to whether or not the Borrower is able to satisfy the conditions precedent set forth in Section 4.2 unless the making of such Loans is stayed by a court of competent jurisdiction or otherwise not permitted by, or the obligation of the Borrower to repay the same is not enforceable under, applicable law (provided, that if such drawing relates to a Documentary Letter of Credit, such a Borrowing of New Revolving Loans shall only be made if the Documentary Letter of Credit Bank notifies the Agent that it has not otherwise been reimbursed by the Borrower in respect of such drawing) or (y) if such drawing occurs on or after the Maturity Date for the New Revolving Loans, in cash. Each New Revolving Lender agrees to make the Loans described in clause (x) of the preceding sentence notwithstanding a failure to satisfy the applicable lending conditions thereto or the provisions of Section 2.1 or the occurrence of the Maturity Date for the New Revolving Loans. (g) Immediately upon the issuance of any Letter of Credit by any Fronting Bank, such Fronting Bank shall be deemed to have sold to each New Revolving Lender other than such Fronting Bank and each such other New Revolving Lender shall be deemed unconditionally and irrevocably to have purchased from such Fronting Bank, without recourse or warranty, an undivided Participating Interest, to the extent of such Lender's Commitment Percentage, in such Letter of Credit, each drawing thereunder and the obligations of the Borrower under this Agreement with respect thereto. Upon any change in the Commitments pursuant to Section 9.3, it is hereby agreed that with respect to all Letter of Credit Outstandings, there shall be an automatic adjustment to the participations hereby created to reflect the new Commitment Percentages of the assigning and assignee New Revolving Lenders. Any action taken or omitted by a Fronting Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Fronting Bank any resulting liability to any other New Revolving Lender. (h) In the event that a Fronting Bank makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to such Fronting Bank pursuant to this Section, such Fronting Bank shall promptly notify the Agent (and, if the drawing resulting in such payment was made after the stated expiry date of such Letter of Credit, shall certify that such Fronting Bank obtained the consent of the Borrower to such payment), whereupon the Agent shall promptly notify each New Revolving Lender of such failure. In such case, each New Revolving Lender is authorized (and the Borrower does hereby so authorize each New Revolving Lender) to and shall promptly make an ABR Loan to the Borrower by making the proceeds thereof available to the Agent in the amount of such New Revolving Lender's Commitment Percentage of such unreimbursed amount 37 without regard to whether or not the Borrower is able to satisfy the conditions precedent set forth in Section 4.2 unless the making of such Loans is stayed by a court of competent jurisdiction or otherwise not permitted by, or the obligation of the Borrower to repay the same is not enforceable under, applicable law. If such Fronting Bank so notifies the Agent, and the Agent so notifies the New Revolving Lenders, prior to 11:00 a.m. (New York City time) on any Business Day, each New Revolving Lender shall make available to the Agent the amounts required hereby, and the Agent shall make available to the relevant Fronting Bank the total unreimbursed amount, in each case on such Business Day and in same day funds. Notwithstanding the failure of any New Revolving Lender to make available to the Agent such New Revolving Lender's Commitment Percentage of the total Loan to be made to the Borrower, the Agent shall promptly remit to the Fronting Bank the proceeds of such Loan in the amount of the unreimbursed draw, in each case in Dollars and in the same day funds. In the event that the making of any New Revolving Loan is stayed by a court of competent jurisdiction, or the Majority Revolving Lenders and the Agent reasonably determine that the making of a New Revolving Loan is not permitted by, or the obligation of the Borrower to repay the same is not enforceable under, applicable law, each New Revolving Lender shall promptly and unconditionally pay to the Agent for the account of the Fronting Bank the amount of such New Revolving Lender's Commitment Percentage of the unreimbursed payment and the Agent shall promptly and unconditionally pay to the Fronting Bank the amount of such unreimbursed payment in each case in Dollars and in the same day funds. If such Fronting Bank so notifies the Agent, and the Agent so notifies the New Revolving Lenders, prior to 11:00 a.m. (New York City time) on any Business Day, each New Revolving Lender shall make available to the Agent, and the Agent shall make available to the relevant Fronting Bank the total unreimbursed amount in each case on such Business Day and in same day funds. If and to the extent such Lender shall not have so made its Commitment Percentage of the amount of any New Revolving Loan or payment available to the Agent, or the Agent shall not have made the amount of such payment available to the relevant Fronting Bank, such New Revolving Lender agrees to pay to the Agent, and the Agent agrees to pay to such Fronting Bank, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the party entitled thereto at the Federal Funds Rate. The failure of any New Revolving Lender to make available to the Agent its Commitment Percentage of any New Revolving Loan required to be made pursuant to this Section or any payment under any Letter of Credit shall not relieve any other New Revolving Lender of its obligation hereunder to make available to the Agent its Commitment Percentage of such New Revolving Loan or payment under any Letter of Credit, nor shall it relieve the Agent of its obligation hereunder to make the amount of such payment available to the relevant Fronting Bank, in each case on the date required, as specified above, but no New Revolving Lender shall be responsible for the failure of any other New Revolving Lender to make available to the Agent such other New Revolving Lender's Commitment Percentage of any such New Revolving Loan or such payment. Whenever a Fronting Bank receives a payment of a reimbursement obligation as to which it has received any payments from the New Revolving Lenders pursuant to this Section, such Fronting Bank shall pay to each Lender which has paid its Commitment Percentage 38 thereof, in Dollars and in same day funds, an amount equal to such New Revolving Lender's Commitment Percentage thereof. (i) First Bank in its capacity as the Documentary Letter of Credit Fronting Bank, may terminate its obligation to issue Documentary Letters of Credit upon sixty days' written notice to the Agent of such termination. If CIBC resigns as Agent, First Bank shall be deemed to have terminated its obligation to issue Documentary Letters of Credit, effective as of the effective date of CIBC's resignation as Agent, unless it otherwise notifies the Borrower and the successor Agent in writing of its decision to remain as Documentary Letter of Credit Fronting Bank. Section 2.6. Procedure for Issuance of Letters of Credit. (a) The Borrower may from time to time request that a Fronting Bank issue a Letter of Credit by delivering to such Fronting Bank, at its address for notices referred to in Section 9.1, an Application therefor, completed to the satisfaction of such Fronting Bank (which completion may occur by means of any electronic system operated by such Fronting Bank), and such other certificates, documents and other papers and information as such Fronting Bank may request. Each Application for a Documentary Letter of Credit shall specify the documents, certificates and any other items required to be presented as a condition for acceptance of a draft drawn on, or other payment request made with respect to, the Documentary Letter of Credit Fronting Bank pursuant to such Documentary Letter of Credit. Upon receipt of any Application, the relevant Fronting Bank will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures, subject to the terms and conditions hereof, and shall, subject to the terms and conditions hereof, promptly issue the Letter of Credit requested thereby (but in no event shall a Fronting Bank (unless it otherwise agrees) be required to issue any Letter of Credit earlier than two Domestic Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by such Fronting Bank and the Borrower. Such Fronting Bank shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. Each Fronting Bank will periodically (but in any event on the last Business Day of each month) report to the Agent regarding Letter of Credit issuance activity, and the Agent will periodically (but in any event on the last Business Day of each month) report to the Lenders regarding Letter of Credit issuance activity. Unless the Documentary Letter of Credit Fronting Bank shall have received written notice from the Agent at least one Business Day prior to the date with respect to which the Borrower has requested issuance of a Documentary Letter of Credit that not all of the conditions to issuance of Documentary Letters of Credit have been satisfied, the Documentary Letter of Credit Fronting Bank may assume that all such conditions have been satisfied. (b) To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Agreement, the provisions of this Agreement shall control. Section 2.7. Nature of Letter of Credit Obligations Absolute. The obligations of the Borrower to reimburse the Fronting Banks and the New Revolving Lenders for drawings made under 39 any Letter of Credit shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary of any Letter of Credit or against the relevant Fronting Bank or any of the New Revolving Lenders, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) payment by the relevant Fronting Bank against any draft, demand, certificate or other document presented under any Letter of Credit which proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the relevant Fronting Bank of any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit (including, without limitation, payment by the Fronting Bank in accordance with its usual practices and procedures, subsequent to the expiry date of a Letter of Credit, as long as the Fronting Bank has obtained the consent of the Borrower thereto and has not been notified in writing by the Agent or a New Revolving Lender of the occurrence of the Maturity Date); (v) any other circumstance or happening whatsoever, which is similar to any of the foregoing; or (vi) the fact that any Event of Default shall have occurred and be continuing (it being understood that any such payment by the Borrower shall be without prejudice to, and shall not constitute a waiver of, any rights the Borrower might have or might acquire against any party as a result of the payment by the relevant Fronting Bank of any draft or the reimbursement by the Borrower thereof). Section 2.8. (Default Interest. (a) If the Borrower shall default in the payment of the principal of or interest on any Loan or in the payment of any other amount becoming due hereunder (including, without limitation, the reimbursement pursuant to Section 2.5(f) of any draft drawn under a Letter of Credit), whether at stated maturity, by acceleration or otherwise or, if any such amount shall be outstanding at the time of the occurrence of any Event of Default specified in Section 7.1(e) or (f), the Borrower shall pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to (x) in the case of Borrowings consisting of Eurodollar Loans, the Adjusted LIBOR Rate in effect for such Borrowing plus 4-1/2% and (y) in the case of ABR Loans, Letter of Credit Outstandings and all other amounts, the Alternate Base Rate plus 3-1/2%. All such interest shall be payable on demand. (b) Notwithstanding anything herein or in the Notes to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively, the "Other Amounts"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by such Lender in accordance with applicable law, the rate of interest payable under the Note(s) held by such Lender, together with all Other Amounts payable to such Lender, shall be limited to the Maximum Rate. 40 Section 2.9. Optional Termination or Reduction of Commitment. Upon at least two Business Days' prior written notice to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitments in an amount equal to or less than the Unused Total Commitment. Each such reduction of the Total Commitments, shall be in the principal amount of $5,000,000 or any integral multiple thereof. Simultaneously with each reduction or termination of the Total Commitments, the Borrower shall pay to the Agent for the account of each New Revolving Lender the Commitment Fee accrued on the amount of the respective Commitment of such New Revolving Lender so terminated or reduced through the date thereof. Any reduction of the Total Commitments pursuant to this Section shall be applied pro rata to reduce the Commitment of each New Revolving Lender. If, at any time, the Borrower elects to reduce the Total Commitments to an amount less than the Documentary Reserve, such reduction shall not take effect until the Agent shall have notified the Documentary Letter of Credit Fronting Bank thereof (whereupon the Documentary Reserve shall be reduced by the amount necessary so that it does not exceed the Total Commitments as so reduced). Section 2.10. Alternate Rate of Interest. In the event, and on each occasion, that on or prior to the first day of any Interest Period for a Eurodollar Loan, the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower absent manifest error) that reasonable means do not exist for ascertaining the applicable Adjusted LIBOR Rate, the Agent shall, as soon as practicable thereafter, give written or telegraphic notice of such determination to the Borrower and the Lenders, and any request by the Borrower for a Borrowing of Eurodollar Loans (including pursuant to a refinancing with Eurodollar Loans) pursuant to Section 2.2 or 2.11 shall be deemed a request for a Borrowing of ABR Loans. After such notice shall have been given and until the circumstances giving rise to such notice no longer exist, each request for a Borrowing of Eurodollar Loans shall be deemed to be a request for a Borrowing of ABR Loans. Section 2.11. Refinancing of Loans. The Borrower shall have the right, at any time, on three Business Days prior irrevocable notice to the Agent, substantially in the form of Exhibit K hereto (which notice, to be effective, must be completed and received by the Agent not later than 12:00 noon, New York City time, on the third Business Day preceding the date of any refinancing), (x) to refinance (without the satisfaction of the conditions set forth in Section 4 as a condition to such refinancing) any outstanding Borrowing or Borrowings of Loans of one Type (or a portion thereof) with a Borrowing of Loans of the other Type or (y) to continue an outstanding Borrowing of Eurodollar Loans for an additional Interest Period, subject to the following: (a) as a condition to the refinancing of ABR Loans with Eurodollar Loans and to the continuation of Eurodollar Loans for an additional Interest Period, no Default or Event of Default shall have occurred and be continuing at the time of such refinancing; (b) if less than a full Borrowing of Loans shall be refinanced, such refinancing shall be made pro rata among the relevant Lenders in accordance with the respective principal amounts of the Loans comprising such Borrowing held by such Lenders immediately prior to such refinancing; 41 (c) the aggregate principal amount of Loans being refinanced shall be at least $1,000,000; provided, that no partial refinancing of a Borrowing of Eurodollar Loans shall result in the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $5,000,000 in aggregate principal amount; (d) each relevant Lender shall effect each refinancing by applying the proceeds of its new Eurodollar Loan or ABR Loan, as the case may be, to its Loan being refinanced; (e) the Interest Period with respect to a Borrowing of Eurodollar Loans effected by a refinancing or in respect to the Borrowing of Eurodollar Loans being continued as Eurodollar Loans shall commence on the date of refinancing or the expiration of the current Interest Period applicable to such continuing Borrowing, as the case may be; and (f) a Borrowing of Eurodollar Loans may be refinanced only on the last day of an Interest Period applicable thereto. In the event that the Borrower shall not give notice to refinance any Borrowing of Eurodollar Loans, or to continue such Borrowing as Eurodollar Loans, or shall not be entitled to refinance or continue such Borrowing as Eurodollar Loans, in each case as provided above, such Borrowing shall automatically be refinanced with a Borrowing of ABR Loans at the expiration of the then-current Interest Period. The Agent shall, after it receives notice from the Borrower, promptly give each affected Lender notice of any refinancing, in whole or part, of any Loan made by such Lender. Section 2.12. Commitment Termination; Mandatory Prepayments; Mandatory Commitment Reduction; Cash Collateral. (a) Upon the Maturity Date, the Total Commitments shall be terminated in full and the Borrower shall pay the New Revolving Loans in full. (b) Unless otherwise provided herein, upon receipt by the Borrower of any Net Cash Proceeds from the sale, lease or other disposition of Designated Collateral (including, without limitation, any payments of principal on any Pledged Notes (as defined in the Security and Pledge Agreement)) or any of its other assets permitted under Section 6.3 (other than (x) the sale of Inventory in the ordinary course of business, (y) the sale or lease of assets subject to the Lien granted to UBS pursuant to the documentation relating to the Real Estate Financing or to the Liens granted to the Synthetic Lease Banks under the Synthetic Lease Loan Documents solely to the extent that the Net Cash Proceeds thereof are applied to repay the Real Estate Financing or the Synthetic Lease Obligations, as the case may be and (z) transfers or sales of accounts pursuant to any customer sales charge program of the type described in Section 5.9), then 100% of such Net Cash Proceeds shall be immediately paid to the Agent for the account of the Lenders, and applied as provided in Section 2.12(g); provided, that in the case of any fiscal year, the provisions of this subsection (b) shall be applicable to the Net Cash Proceeds of assets other than Designated Collateral only if and to the extent that the aggregate amount of such Net Cash Proceeds received in such fiscal year exceeds $1,000,000. 42 (c) The Borrower shall, from time to time until payment in full of the Loans and the termination of this Agreement, within 10 days following the receipt by the Borrower (or by the Agent as loss payee) of any payment of proceeds of any insurance (other than business interruption insurance) required to be maintained pursuant to this Agreement on account of each separate loss, damage or injury in excess of $1,000,000 to any tangible property of the Borrower or any of its Subsidiaries (unless no Default or Event of Default shall have occurred and be continuing and such proceeds (or any portion thereof) shall have been expended or irrevocably committed by the Borrower to repair or replace such property within 24 months of such loss, damage or injury and the Borrower shall have furnished to the Agent evidence satisfactory to the Agent of such expenditure or commitment and shall have certified to the Agent that such proceeds (or such proceeds together with other funds available to the Borrower) are sufficient to repair or replace such property, pending which the Agent shall hold such proceeds), apply or, to the extent the Agent is loss payee under any insurance policy, irrevocably direct the Agent to apply, an amount equal to 100% (or such lesser percentage which represents that portion of such proceeds not expended or committed pursuant to the immediately preceding parenthetical phrase) of such insurance proceeds as provided in Section 2.12(g); provided, that if an Event of Default shall have occurred and be continuing, all proceeds of insurance required to be maintained pursuant to this Agreement which would otherwise be payable to the Borrower shall be paid to the Agent and held or applied pursuant to Section 7.2; provided, however, that with respect to tangible property subject to any Lien permitted under this Agreement, no such prepayment or reduction shall be required to the extent that this Section would require an application of insurance proceeds that would violate or breach any of the provisions of the instruments or documents under which such Lien arises. (d) If the Borrower has Excess Cash Flow for any fiscal year, commencing with the fiscal year ending on or about November 30, 1998, then on the earlier of the date of delivery by the Borrower to the Lenders of the financial statements required to be delivered pursuant to Section 5.1(a) covering such fiscal year and 90 days after the end of such fiscal year of the Borrower, 65% of such Excess Cash Flow shall be paid to the Agent and applied in accordance with Section 2.12(g). Concurrently with the making of each such prepayment, the Borrower shall deliver to the Agent a certificate substantially in the form of Exhibit H (an "Excess Cash Flow Certificate") of the chief financial officer of the Borrower setting forth in reasonable detail the calculation of Excess Cash Flow for the fiscal year as to which such prepayment was computed. The remaining 35% of such Excess Cash Flow may be retained by the Borrower. (e) If the Borrower incurs any Permitted Refinancing Debt, the Borrower shall, not later than the second Business Day after the incurrence thereof, pay to the Agent an amount equal to the excess, if any, of the Net Cash Proceeds of such Permitted Refinancing Debt over the aggregate amount of the Debt so refinanced, which excess Net Cash Proceeds shall be applied as provided in Section 2.12(g). (f) If the Borrower shall undertake any sale of equity securities of the Borrower, not later than the second Business Day after receipt of the proceeds of such sale, 65% of the Net Cash Proceeds thereof shall be paid to the Agent for the account of the Lenders and applied as provided in 43 Section 2.12(g). Concurrently with the making of such prepayment, the Borrower shall deliver to the Agent a statement detailing the calculation of the prepayment due hereunder. The remaining 35% of such Net Cash Proceeds may be retained by the Borrower. (g) If, contemporaneously with the payment of any amounts required under Sections 2.12(b), 2.12(c), 2.12(d), 2.12(e) or 2.12(f), the Borrower shall have Required Inventory and no Default or Event of Default shall have occurred and be continuing, the Borrower shall certify to that effect in an Inventory Compliance Certificate concurrently delivered by the Borrower to the Agent substantially in the form of Exhibit M hereto, and the amounts paid under such Sections shall be applied, first, to the prepayment of the principal of the New Term Loans in the inverse order of maturity and second, to the permanent prepayment of the principal of the New Revolving Loans (together with an automatic and irrevocable reduction of the Total Commitments in an equal amount). If the Borrower shall not have Required Inventory or a Default or Event of Default shall have occurred and be continuing, then the amounts paid under Section 2.12(b), 2.12(c), 2.12(d), 2.12(e) or 2.12(f) shall be applied in accordance with Section 7.2. (h) If at any time the sum of the aggregate outstanding New Revolving Loans plus the aggregate Standby Letter of Credit Outstandings plus the Documentary Reserve exceed the Total Commitments then in effect, the Borrower shall immediately first prepay the New Revolving Loans in an aggregate amount equal to such excess and second cash collateralize the Letters of Credit by depositing into the Letter of Credit Accounts (pro rata on the basis of the Letter of Credit Outstandings of the respective Fronting Banks), an amount equal to 105% of the amount by which the Letters of Credit (including any subsequent increases in the principal amounts thereof pursuant to provisions of such Letters of Credit as then in effect) exceed the Total Commitments and, if at any time while any New Revolving Loans are outstanding, the Inventory Compliance Certificate delivered pursuant to Section 2.12(g) does not show that the Borrower has Required Inventory, the Borrower shall prepay all outstanding New Revolving Loans on the next Business Day. (i) Each prepayment of the Loans pursuant to this Section shall be accompanied by payment of accrued and unpaid interest on the amount prepaid to the date of prepayment and any amounts payable pursuant to Section 2.13. (1) Section 2.13. Optional Prepayment of Loans; Reimbursement of Lenders. (a) Subject to the prior payment in full of any New Revolving Loans at the time outstanding, the Borrower shall have the right at any time and from time to time to prepay any New Term Loans, in whole or in part, (x) with respect to Eurodollar Loans, upon at least three Business Days' prior written, telex or facsimile notice to the Agent and (y) with respect to ABR Loans on the same Business Day if written, telex or facsimile notice is received by the Agent prior to 12:00 noon, New York City time, and thereafter upon at least one Business Days prior written, telex or facsimile notice to the Agent; provided, that (i) with respect to Eurodollar Loans, each such partial prepayment shall be in integral multiples of $5,000,000, (ii) with respect to ABR Loans, each such partial 44 prepayment shall be in integral multiples of $1,000,000, (iii) no prepayment of Eurodollar Loans shall be permitted pursuant to this Section other than on the last day of an Interest Period applicable thereto unless the Borrower pays breakage costs as provided in Section 2.13(b)(i), and (iv) no partial prepayment of a Borrowing of Eurodollar Loans shall result in the aggregate principal amount of the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $5,000,000. Each notice of prepayment shall specify the prepayment date, the principal amount of the Loans to be prepaid (and, in the case of Eurodollar Loans, the Borrowing or Borrowings pursuant to which made), shall be irrevocable and shall commit the Borrower to prepay such Loan by the amount and on the date stated therein. The Agent shall, promptly after receiving notice from the Borrower hereunder, notify each New Term Lender of the principal amount of the New Term Loans held by such New Term Lender which are to be prepaid, the prepayment date and the manner of application of the prepayment. (b) The Borrower shall reimburse each Lender on demand for any loss incurred or to be incurred by it in the reemployment of the funds released (i) resulting from any prepayment (for any reason whatsoever, including, without limitation, refinancing with ABR Loans) of any Eurodollar Loan required or permitted under this Agreement, if such Loan is prepaid other than on the last day of the Interest Period for such Loan or (ii) in the event that after the Borrower delivers a Notice of Borrowing under Section 2.2(b) in respect of Eurodollar Loans, such Loans are not made on the first day of the Interest Period specified in such Notice of Borrowing for any reason other than a breach by such Lender of its obligations hereunder. Such loss shall be the amount as reasonably determined by such Lender as the excess, if any, of (A) the amount of interest which would have accrued to such Lender on the amount so paid or not borrowed at a rate of interest equal to the Adjusted LIBOR Rate for such Loan, for the period from the date of such payment or failure to borrow to the last day (x) in the case of a payment or refinancing with ABR Loans other than on the last day of the Interest Period for such Loan, of the then current Interest Period for such Loan, or (y) in the case of such failure to borrow, of the Interest Period for such Loan which would have commenced on the date of such failure to borrow, over (B) the amount of interest which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the London interbank market. Each Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss as determined by such Lender (which shall be conclusive absent manifest error). (c) In the event the Borrower fails to prepay any Loan on the date specified in any prepayment notice delivered pursuant to Section 2.13(a), the Borrower on demand by any Lender shall pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any loss incurred by such Lender as a result of such failure to prepay, including, without limitation, any loss, cost or expenses incurred by reason of the acquisition of deposits or other funds by such Lender to fulfill deposit obligations incurred in anticipation of such prepayment, but without duplication of any amounts paid under Section 2.13(b). Each Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss as determined by such Lender (which shall be conclusive absent manifest error). 45 (d) Any partial prepayment of the New Term Loans by the Borrower pursuant to this Section shall be applied to prepayment of the principal of the New Term Loans in the inverse order of maturity. Section 2.14. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan made by such Lender or any fees or other amounts payable hereunder (other than changes in respect of Taxes, Other Taxes and taxes imposed on, or measured by, the net income or overall gross receipts or franchise taxes of such Lender by the jurisdiction in which such Lender has its principal office or in which the applicable Eurodollar Lending Office for such Eurodollar Loan is located or by any political subdivision or taxing authority therein, or by any other jurisdiction or by any political subdivision or taxing authority therein other than a jurisdiction in which such Lender would not be subject to tax but for the execution and performance of this Agreement), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender (except any such reserve requirement which is reflected in the Adjusted LIBOR Rate) or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or the Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender hereunder or under the Notes (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender in accordance with paragraph (c) below such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender shall have determined that the applicability of any change in any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basel Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption or effectiveness after the date hereof of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any Lending Office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement, the Loans made by such Lender pursuant hereto, such Lender's Commitment hereunder or the issuance of, or participation in, any Letter of Credit by such Lender to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change or compliance (taking into account such 46 Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of each Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered to it within 10 days after its receipt of the same. Any Lender receiving any such payment shall promptly make a refund thereof to the Borrower if the law, regulation, guideline or change in circumstances giving rise to such payment is subsequently deemed or held to be invalid or inapplicable. (d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or any reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. Section 2.15. Change in Legality. (a) Notwithstanding anything to the contrary contained elsewhere in this Agreement, if (x) any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration thereof shall make it unlawful for a Lender to make or maintain a Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan or (y) at any time any Lender determines that the making or continuance of any of its Eurodollar Loans has become impracticable as a result of a contingency occurring after the date hereof which adversely affects the London interbank market or the position of such Lender in such market, then, by written notice to the Borrower, such Lender may (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a Eurodollar Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under clause (i) or (ii) of this paragraph (a), all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section, a notice to the Borrower by any Lender pursuant to paragraph (a) above shall be effective, if any Eurodollar Loans shall then be outstanding, on the last 47 day of the then-current Interest Period for such Eurodollar Loans (if lawful); otherwise, such notice shall be effective on the date of receipt by the Borrower. Section 2.16. Pro Rata Treatment, etc. All payments and repayments of principal and interest in respect of the Loans (except as provided in Sections 2.14 and 2.15) shall be made pro rata among the relevant Lenders in accordance with the then outstanding principal amount of the relevant Loans held by such Lenders hereunder and all payments of Commitment Fees and Letter of Credit Fees (other than those payable to a Fronting Bank) shall be made pro rata among the New Revolving Lenders in accordance with their Commitments. All payments by the Borrower hereunder and under the Notes shall be (i) net of any tax applicable to the Borrower and (ii) made in Dollars in immediately available funds at the office of the Agent by 12:00 noon, New York City time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including the date of such Loan to but excluding the date on which such Loan is paid in full or converted to a Loan of a different Type. Section 2.17. Taxes. (a) Any and all payments by the Borrower hereunder and under the Notes shall be made free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) taxes imposed on or measured by the net income or overall gross receipts of the Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity being called a "Transferee")) and franchise taxes imposed on the Agent or any Lender (or Transferee) by the United States or any jurisdiction under the laws of which the Agent or any such Lender (or Transferee) is organized or in which the applicable Lending Office of any such Lender (or Transferee) is located or any political subdivision thereof or by any other jurisdiction or by any political subdivision or taxing authority therein other than a jurisdiction in which the Agent or such Lender would not be subject to tax but for the execution and performance of this Agreement and (ii) taxes, levies, imposts, deductions, charges or withholdings ("Amounts") with respect to payments hereunder or under the Notes to a Lender (or Transferee) in accordance with laws in effect on the later of the date of this Agreement and the date such Lender (or Transferee) becomes a Lender (or Transferee, as the case may be), but not excluding, with respect to such Lender (or Transferee), any increase in such Amounts solely as a result of any change in such laws occurring after such later date or any Amounts that would not have been imposed but for actions (other than actions contemplated by this Agreement or the Notes) taken by the Borrower after such later date (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders (or any Transferee) or the Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Lender (or Transferee) or the Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. 48 (b) In addition, the Borrower agrees to pay any current or future stamp or documentary taxes or any other excise or property taxes, charges, assessments or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender (or Transferee) and the Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee) or the Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Agent, as the case may be, makes written demand therefor. If a Lender (or Transferee) or the Agent shall become aware that it is entitled to receive a refund in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section, it shall promptly notify the Borrower of the availability of such refund and shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Lender (or Transferee) or the Agent receives a refund in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section, it shall promptly notify the Borrower of such refund and shall, within 30 days after receipt of a request by the Borrower (or promptly upon receipt, if the Borrower has requested application for such refund pursuant hereto), repay such refund to the Borrower (to the extent of amounts that have been paid by the Borrower under this Section with respect to such refund plus interest that is received by the Lender (or Transferee) or the Agent as part of the refund), net of all out-of-pocket expenses of such Lender (or Transferee) or the Agent and without additional interest thereon; provided, that the Borrower, upon the request of such Lender (or Transferee) or the Agent, agrees to return such refund (plus penalties, interest or other charges) to such Lender (or Transferee) or the Agent in the event such Lender (or Transferee) or the Agent is required to repay such refund. Nothing contained in this subsection (c) shall require any Lender (or Transferee) or the Agent to make available any of its tax returns (or any other information relating to its taxes that it deems to be confidential). (d) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender (or Transferee) or the Agent, the Borrower will furnish to the Agent, at its address referred to on the signature pages hereof, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section shall survive the payment in full of the principal of and interest on all Loans made hereunder and all other amounts due hereunder and the termination of the Total Commitments. (f) Each Lender (or Transferee) that is organized under the laws of a jurisdiction outside the United States shall, if legally able to do so, prior to the immediately following due date of any payment by the Borrower hereunder, deliver to the Borrower such certificates, documents or other 49 evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including (A) Internal Revenue Service Form W-8 or W-9 and (B) Internal Revenue Service Form 1001 or Form 4224 and any other certificate or statement of exemption required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any subsequent version thereof or successors thereto, properly completed and duly executed by such Lender (or Transferee) establishing that such payment is (i) not subject to United States Federal withholding tax under the Code because such payment is effectively connected with the conduct by such Lender (or Transferee) of a trade or business in the United States or (ii) totally exempt from United States Federal withholding tax or subject to a reduced rate of such tax under a provision of an applicable tax treaty. Unless the Borrower and the Agent have received forms or other documents satisfactory to them indicating that such payments hereunder or under the Notes are not subject to United States Federal withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrower or the Agent shall withhold taxes from such payments at the applicable statutory rate. (g) The Borrower shall not be required to pay any additional amounts to any Lender (or Transferee) in respect of United States Federal withholding tax pursuant to subsection (a) above if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender (or Transferee) to comply with the provisions of subsection (f) above. (h) Any Lender (or Transferee) claiming any additional amounts payable pursuant to this Section shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its applicable Lending Office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole determination of such Lender, be otherwise materially disadvantageous to such Lender (or Transferee). Section 2.18. Certain Fees. The Borrower shall pay to the Agent, for the respective accounts of the Agent, the Underwriters and the New Revolving Lenders, the fees set forth in the Fee Letter. Section 2.19. Commitment Fee. The Borrower shall pay to the New Revolving Lenders a commitment fee (the "Commitment Fee") for the period commencing on the Effective Date and ending on the Maturity Date for the New Revolving Loans or the earlier date of the termination in full of the Commitment, computed (on the basis of the actual number of days elapsed over a year of 360 days) at the rate of one-half of one percent (1/2%) per annum on the average daily Unused Total Commitment. Such Commitment Fee, to the extent then accrued, shall be payable (x) monthly, in arrears, on the last calendar day of each month, (y) on the Maturity Date for the New Revolving Loans and (z) as provided in Section 2.9, upon any reduction or termination in whole or in part of the Total Commitments. Section 2.20. Letter of Credit Fees. The Borrower shall pay with respect to each Letter of Credit (i) to the Agent on behalf of the New Revolving Lenders a fee calculated (on the basis of the actual number of days elapsed over a year of 360 days) at the rate of (x) two and one-half percent (2-1/2%) per annum on the daily average Standby Letter of Credit Outstandings and (y) one-half of one 50 percent (1/2%) per annum on the daily average Documentary Letter of Credit Outstandings, (ii) to each Fronting Bank, such Fronting Bank's fees for Letter of Credit issuance, amendment and processing referred to in Section 2.5(e). In addition, the Borrower agrees (i) to pay the Standby Letter of Credit Fronting Bank for its account a fronting fee in respect of each Letter of Credit issued by the Standby Letter of Credit Fronting Bank, for the period from and including the date of issuance of such Letter of Credit to and including the date of termination of such Letter of Credit, computed at a rate of 0.125% per annum on the daily average Standby Letter of Credit Outstandings and (ii) if the Documentary Letter of Credit Bank so elects, to pay the Documentary Letter of Credit Fronting Bank a fronting fee in respect of Documentary Letters of Credit, computed at a rate to be determined by such Fronting Bank from time to time in its judgment reasonably exercised. Accrued fees described in clause (i) of the first sentence of this paragraph in respect of each Letter of Credit shall be due and payable monthly in arrears on the last calendar day of each month and on the Maturity Date of the New Revolving Loans, or such earlier date as the Total Commitments are terminated and, on each such payment date, the respective Fronting Banks shall advise the Agent of their daily average Letter of Credit Outstandings since the previous payment date. Accrued fees described in the second sentence or in clause (ii) of the first sentence of this Section in respect of each Letter of Credit shall be payable to the Fronting Banks at times to be determined by the relevant Fronting Bank in its judgment reasonably exercised. Section 2.21. Nature of Fees. All Fees shall be paid on the dates due in immediately available funds. Other than Fees payable to the Fronting Banks pursuant to Section 2.20, all fees shall be paid to the Agent for the respective accounts of the Agent and the New Revolving Lenders, as provided herein and in the letter described in Section 2.18. Once paid, none of the Fees shall be refundable under any circumstances. Section 2.22. Right of Set-Off. Upon the occurrence and during the continuance of any Event of Default, the Agent and each of the other Secured Parties is hereby authorized at any time and from time to time, 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 and any and all other indebtedness at any time owing by such Secured Party to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under the Loan Documents, irrespective of whether or not such Secured Party shall have made any demand under any Loan Document and although such obligations may be unmatured. Each Secured Party agrees promptly to notify the Borrower after any such set-off and application made by such Secured Party; provided, that the failure to give such notice shall not affect the validity of such set-off and application. Subject to Section 2.23, the rights of each Secured Party under this Section are in addition to other rights and remedies which such Secured Party may have upon the occurrence and during the continuance of any Event of Default. Section 2.23. Sharing of Setoffs. Each Secured Party agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower or any Subsidiary, including, but not limited to, a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim and received by such Secured Party 51 under any applicable bankruptcy, insolvency or other similar law, or otherwise, obtain payment in respect of its Secured Obligations, such payment shall be applied as follows: (a) if such Secured Party is a New Revolving Lender and there are Revolving Obligations outstanding, and the payment received is of a proportion of the aggregate amount of the Revolving Obligations held by it which is greater than that received by any other New Revolving Lender in respect of the aggregate amount of Revolving Obligations held by such other New Revolving Lender, the New Revolving Lender receiving such proportionately greater payment shall purchase such participations in the Revolving Obligations held by the other New Revolving Lenders and such other adjustments shall be made, as may be required so that all such payments with respect to the Revolving Obligations held by the New Revolving Lenders owing to them shall be shared by the New Revolving Lenders pro rata; (b) if such Secured Party is not a New Revolving Lender and there are Revolving Obligations outstanding (other than Revolving Obligations in which participations have been purchased pursuant to this Section), such Secured Party shall purchase a subordinated participation in the Revolving Obligations in the amount of such payment (provided, that such Secured Party shall not be entitled to receive any payments in respect of such participation until all Revolving Obligations in which participations have not been purchased pursuant to this Section shall have been paid in full) and shall pay over the amount received to the Agent for distribution to the New Revolving Lenders pro rata until all amounts owing in respect of the Revolving Obligations shall have been paid or purchased in full (and payments received in respect of such participation shall be subject to sharing pursuant to clause (c) of this sentence); and (c) if no Revolving Obligations are outstanding (other than Revolving Obligations in which participations have been purchased pursuant to this Section), and the payment received is of a proportion of the aggregate amount of principal and interest due with respect to the New Term Loans held by it or other Secured Obligations owing to it which is greater than the proportion received by any other such Secured Party in respect of the New Term Loans held by such other Secured Party and the other Secured Obligations owing to it, the Secured Party receiving such proportionately greater payment shall purchase such participations in the New Term Loans held by the other Secured Parties and/or the other Secured Obligations owing to them, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the New Term Loans held by the New Term Lenders or the other Secured Obligations owing to the Secured Parties shall be shared by the Secured Parties pro rata; provided, that except as provided in clauses (a) and (b) of this Section, nothing in this Section shall impair the right of any Secured Party to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes or the other Secured Obligations owing to it; provided, that if any such non-pro rata payment is thereafter recovered or otherwise set aside such purchase of participations shall be rescinded (without interest); provided further, that notwithstanding anything to the contrary contained in this Section, (x) each Cash Management Bank shall be entitled to retain any payments it receives in respect of its Cash Management Obligations as a result of exercising any right of set-off, (y) each Fronting Bank shall be entitled to retain any payments it receives in respect of unreimbursed amounts drawn under its Letters of Credit as a result of exercising any right of set-off against its Letter of Credit Account and (z) the Hedging Bank shall be entitled to retain any payments it receives in respect of the Hedging Obligations as a result of exercising any right of set-off; and provided further, that all references to "Secured Obligations" in this Section shall mean all Secured Obligations other than pursuant to Sections 2.14, 52 2.17, 2.18, 8.6, 9.5 and 9.6 and any incremental Secured Obligations arising pursuant to Section 2.15. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding (or deemed to be holding) a participation in the unpaid amount of a Secured Obligation may exercise any and all rights of banker's lien, setoff (subject, in each case, to the same notice requirements as pertain to clause (iv) of the remedial provisions of Section 7.1) or counterclaim with respect to any and all moneys owing by the Borrower to such Lender, as fully as if such Lender held a Note and was the original obligee thereon, in the amount of such participation. Section 2.24. Security Interest in Letter of Credit Accounts. The Borrower hereby assigns and pledges to the Agent, for its benefit and for the ratable benefit of the Secured Parties, and hereby grants to the Agent and the Fronting Banks, for their respective benefits and for the ratable benefit of the Secured Parties, a first priority security interest, senior to all other Liens, if any, in all of the Borrower's right, title and interest in and to the Letter of Credit Accounts and any direct investment of the funds contained therein. A Fronting Bank's security interest in the Letter of Credit Account maintained by it shall be prior to the security interest in favor of the Agent and the other Secured Parties, and shall not be subject to the rights of any Person other than the Agent, the other Secured Parties and the Borrower so long as there are any Letter of Credit Outstandings or such Fronting Bank is obligated to issue Letters of Credit. Section 2.25. Release of Secured Parties. For the benefit of the Secured Parties, the Borrower hereby expressly releases and discharges the Secured Parties and the Secured Parties' direct and indirect Subsidiaries and Affiliates, together with each of their present and former shareholders, present and former officers, directors, agents and employees and each of their present and former attorneys, advisors, consultants, attorneys-in-fact, experts and other professional persons and representatives whether presently or formerly retained by attorneys for the Secured Parties or by the Secured Parties themselves, and the predecessors, successors and assigns of all or any of them (collectively, the "Releasees") from any and all manner of actions, claims, causes of action, suits, proceedings, debts, dues, sums of money, accounts, accountings, reckonings, demands, liabilities, losses, damages, acts, omissions, misfeasances, malfeasances, promises, breaches of contract, breaches of duty, breaches of relationship, and all other controversies of every type, kind, nature, description or character (all of the foregoing, collectively, the "Claims") whatsoever, whether known or unknown, foreseen or unforeseen, liquidated or unliquidated, and whether based upon facts now known or unknown, direct or derivative, in law, admiralty, equity or bankruptcy, against the Releasees, or any of them, which the Borrower, its Subsidiaries or their Affiliates and the predecessors, successors or assigns of any or all of them, ever jointly or individually had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to and including the Effective Date, directly or indirectly arising from or relating in any way to any and all transactions, relationships, or dealings relating in any way, directly or indirectly, to the Pre-Petition Credit Agreement, the DIP Credit Agreement and any of the other Existing Agreements, the documents and agreements setting forth the 53 cash management arrangements with the Cash Management Banks and the Hedging Agreement, as well as any agreements entered into, or notes, or other documents executed, in connection with the Pre-Petition Credit Agreement, the DIP Credit Agreement, any of the other Existing Agreements, the documents and agreements setting forth the cash management arrangements with the Cash Management Banks and the Hedging Agreement or as an adjunct or supplement thereto, and any prior agreements pursuant to which the Secured Parties (or any of them or their respective predecessors or successors) made (or did not make) loans or extensions of credit or any services or accommodations of any type or kind whatsoever available to or on behalf of the Borrower or the Debtor. SECTION 3. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each of the Agent, the Underwriters, the Fronting Banks, the Lenders and the other Secured Parties as follows: Section 3.1. Organization and Authority. The Borrower (i) as of the Effective Date, is a corporation duly organized and validly existing under the laws of the State of Delaware and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect, (ii) has the requisite corporate power and authority to effect the transactions contemplated hereby and by the other Loan Documents to which it is a party, and (iii) has all requisite corporate power and authority and the legal right to own, pledge, mortgage and operate its properties, and to conduct its business as now or currently proposed to be conducted. Section 3.2. Due Execution. The execution, delivery and performance by the Borrower of each of the Loan Documents to which it is a party (i) are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not (A) contravene the charter or by-laws of the Borrower, (B) violate any law (including, without limitation, the Securities Exchange Act of 1934) or regulation (including, without limitation, Regulations G, T, U or X of the Board, or any order or decree of any court or governmental instrumentality, (C) violate or result in a breach of, or constitute a default under, any material indenture, mortgage or deed of trust entered into as of the Effective Date or any material lease, agreement or other instrument entered into as of the Effective Date binding on the Borrower, any of its Subsidiaries or any of its properties, or (D) result in or require the creation or imposition of any Lien upon any of the property of the Borrower or any of its Subsidiaries other than the Liens granted pursuant to this Agreement and the other Loan Documents; and do not require the consent, authorization by or approval of or notice to or filing or registration with any Governmental Authority other than the entry of the Confirmation Order. This Agreement has been duly executed and delivered by the Borrower. This Agreement and each of the other Loan Documents to which the Borrower is a party, on and after the Effective Date, will be legal, valid and binding obligations of the Borrower, enforceable against the Borrower, in accordance with their respective terms. Section 3.3. Statements Made. The information that has been delivered in writing by the Borrower to any of the Secured Parties or to the Bankruptcy Court in connection with any Loan Document, and any financial statement delivered pursuant hereto or thereto (other than to the extent that any such statements constitute projections), contains no untrue statement of a material fact and does not omit to state a material fact necessary to make such statements not misleading; and, to the extent that any such information constitutes projections, such projections were prepared in good faith 54 on the basis of assumptions, methods, data, tests and information believed by the Borrower to be reasonable at the time such projections were furnished. Section 3.4. Financial Statements. The Borrower has furnished the Lenders with copies of (i) the audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries for the fiscal year ended November 30, 1996, accompanied by an unqualified opinion of KPMG Peat Marwick LLP and (ii) the unaudited consolidated financial statements of the Borrower and its Consolidated Subsidiaries for the nine month period ended August 30, 1997. Such financial statements present fairly the financial condition, the results of operations and cash flows of the Borrower and its Consolidated Subsidiaries on a consolidated basis as of such dates and for such periods; such balance sheets and the notes thereto disclose all liabilities, direct or contingent, of the Borrower and its Consolidated Subsidiaries as of the dates thereof required to be disclosed by GAAP, and such financial statements were prepared in a manner consistent with GAAP, subject (in the case of such nine month statements) to normal year end adjustments. No Material Adverse Effect has occurred since August 30, 1997. Section 3.5. Ownership. As of the date hereof, Lumberjack, which is wholly-owned by the Borrower, is the only direct or indirect Subsidiary of the Borrower, is inactive and has no significant assets. Section 3.6. Liens. Except for Liens existing on the Effective Date as reflected on Schedule 3.6, there are no Liens of any nature whatsoever on any assets of the Borrower other than: (i) Liens granted pursuant to the Existing Agreements and the DIP Financing Order; (ii) Permitted Liens; and (iii) Liens granted under the Loan Documents in favor of the Secured Parties. Neither the Borrower nor its Subsidiaries is a party to any contract, agreement, lease or instrument the performance of which, either unconditionally or upon the happening of an event, will result in or require the creation of a Lien on any assets of the Borrower or its Subsidiaries or otherwise result in a violation of this Agreement other than the Liens granted to the Secured Parties as provided for in this Agreement and the other Loan Documents. Section 3.7. Compliance with Law. Neither the Borrower nor its Subsidiaries is, to the best of the Borrower's knowledge, in violation of any Requirement of Law, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority the violation of which, or a default with respect to which, would have a Material Adverse Effect. Section 3.8. Insurance. All policies of insurance of any kind or nature owned by or issued to the Borrower, including, without limitation, insurance policies with respect to life, fire, theft, product liability, business interruption, public liability, property damage, other casualty, employee fidelity, workers' compensation, employee health and welfare, title, property and liability insurance, are in full force and effect and are of a nature and provide such coverage as is sufficient and as is customarily carried by companies of the size and character of the Borrower. 55 Section 3.9. Use of Proceeds. The proceeds of the Loans shall be used (i) to finance the Plan of Reorganization, (ii) for general working capital purposes of the Borrower and (ii) for other general corporate purposes of the Borrower (including, among such general corporate purposes, the making of Capital Expenditures, subject to the limitations provided for in Section 6.4). Section 3.10. Litigation. Except as set forth on Schedule 3.10, there are no unstayed actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower, its Subsidiaries or any of its properties, before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which is reasonably likely to be determined adversely to the Borrower and, if so determined adversely to the Borrower, would have a Material Adverse Effect. Section 3.11. Investment Company Act; etc. Neither the Borrower nor any of its Subsidiaries will be after giving effect to the transactions contemplated hereby or any Borrowing to be made or any Letter of Credit to be issued hereunder (x) an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended or (y) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or any foreign, federal or local statute or regulation limiting its ability to incur indebtedness for money borrowed or guarantee such indebtedness as contemplated hereby or by any of the other Loan Documents. Section 3.12. Tax Returns and Payments. The Borrower and each of its Subsidiaries have filed all federal income tax returns and all other material tax returns and reports, domestic and foreign, required to be filed by it and have paid all material taxes, assessments, fees and other governmental charges payable by it which have become due, other than those not yet delinquent. The Borrower and each of its Subsidiaries have paid, or have provided adequate reserves for the payment of, all material federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. There is no proposed tax assessment against the Borrower or any of its Subsidiaries which could, if the assessment were made, reasonably be expected to have a Material Adverse Effect. The last closed tax year of the Borrower and its Consolidated Subsidiaries is the fiscal year ended November 27, 1993. Section 3.13. ERISA. (a) No ERISA Event has occurred or is expected to occur with respect to any Plan in any fiscal year of the Borrower that would result in any liability of the Borrower or any Subsidiary in excess, together with the amount of all other liabilities of the Borrower and its Subsidiaries which would result from all other ERISA Events that have occurred or are expected to occur with respect to Plans during such fiscal year, of $3,000,000. (b) Schedule B (Actuarial Information to the annual report (Form 5500 series)) most recently completed with respect to each Plan, copies of which have been filed with the Internal Revenue Service and delivered to the Agent, is complete and accurate in all material respects and to the best knowledge of the Borrower represents a reasonable estimate of the funding status and financial condition of such Plan as of the date of such report, and, since the date of such Schedule B, 56 to the best knowledge of the Borrower there has been no change in such funding status or financial condition that could reasonably be expected to have a Material Adverse Effect. (c) Neither the Borrower, nor any Subsidiary nor any ERISA Affiliate of either of them has incurred, or is expected to incur, any Withdrawal Liability to Multiemployer Plans in excess in any fiscal year of the Borrower, of $3,000,000 in the aggregate for the Borrower, its Subsidiaries and the ERISA Affiliates of any of them. (d) Neither the Borrower, nor any Subsidiary nor any ERISA Affiliate of either of them has received any notification that any Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and to the best knowledge of the Borrower, no Multiemployer Plan is expected to be in reorganization or to be terminated within the meaning of Title IV of ERISA, in either case where all such reorganization or terminations would result in any liability in any fiscal year of the Borrower in excess of $3,000,000 in the aggregate for the Borrower, its Subsidiaries and the ERISA Affiliates of any of them. (e) With respect to each Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA and which is intended to qualify under Section 401 of the Code, a favorable determination letter has been received from the Internal Revenue Service stating that such Plan so qualifies, and nothing has occurred since the date of the issuance of such determination letter which would cause such Plan to cease to qualify under Section 401 of the Code. (f) None of the transactions contemplated by the Loan Documents or by any Plan constitutes a prohibited transaction as such term is defined in Section 406 of ERISA or Section 4975 of the Code. (g) Neither the Borrower, nor any Subsidiary, nor any ERISA Affiliate of any of them, nor any fiduciary of any Plan, has engaged in any transaction in violation of Section 404 of ERISA, which has resulted or could reasonably be expected to result in any liability in excess of $3,000,000 in the aggregate for the Borrower, its Subsidiaries and the ERISA Affiliates of any of them. (h) Neither the Borrower, nor any Subsidiary, nor any ERISA Affiliate of any of them, nor any Plan or fiduciary thereof, is a party to any litigation relating to or seeking benefits from any such Plan, nor does there exist one or more facts or events which could form the basis for any such litigation, where such litigation could reasonably be expected to result in any liability in excess of $3,000,000 in the aggregate for the Borrower, its Subsidiaries and the ERISA Affiliates of any of them. (i) No event has occurred, in connection with which the Borrower, any Subsidiary or any ERISA Affiliate of any of them, could be subject to any material liability under any statute, regulation or governmental order relating to any Plan or pursuant to any obligation of the Borrower, any Subsidiary or any ERISA Affiliate to indemnify any Person against any liability incurred under any 57 such statute, regulation or order as they relate to any such Plan, which could reasonably be expected to result in any liability in excess of $3,000,000 in the aggregate for the Borrower, its Subsidiaries and the ERISA Affiliates of any of them. (j) Except as set forth in Schedule 3.13 or as disclosed in the Debtor's 1996 Annual Report, neither the Borrower, nor any Subsidiary, nor any ERISA Affiliate of any of them, nor any welfare benefit plan maintained by the Borrower, any Subsidiary or any ERISA Affiliate of any of them has any present or future obligation to make any payment to or with respect to any present or former employee, officer, director or agent of the Borrower, any Subsidiary, or any ERISA Affiliate of any of them pursuant to any retiree medical benefit plan, or other retiree welfare benefit plan (and the aggregate liability of the Borrower, its Subsidiaries and the ERISA Affiliates of any of them in respect of all obligations disclosed on Schedule 3.13 or in the Debtor's 1996 Annual Report does not exceed $22,000,000), and no condition exists which would prevent the Borrower, any Subsidiary or any ERISA Affiliate of any of them from amending or terminating any such benefit plan or welfare benefit plan. (k) Each welfare benefit plan which covers or has covered present or former employees, officers, directors or agents of the Borrower, any Subsidiary, or any ERISA Affiliate of any of them and which is a "group health plan" as defined in Section 607(1) of ERISA, has been operated at all times in compliance with provisions of Part 6 of Title I of ERISA and Sections 162(k) and 4980B of the Code. Section 3.14. Good Title to Properties. Each of the Borrower and its Subsidiaries has good and marketable title to substantially all its properties and assets, including, without limitation, the Collateral, subject to no Liens, except such as would be permitted under Section 6.1. Section 3.15. Trademarks, Patents, etc. Each of the Borrower and its Subsidiaries possesses all the Trademarks, copyrights, patents, licenses, or rights in any thereof, adequate in all material respects for the conduct of its business as now conducted and presently proposed to be conducted, without conflict with the rights or, to the best knowledge of the Borrower, any presently claimed rights of others. Section 3.16. Labor Matters. Neither the Borrower nor any Subsidiary has experienced any strike, labor dispute, slowdown or work stoppage due to labor disagreements which could reasonably be expected to have a Material Adverse Effect, and to the best knowledge of the Borrower, there is no such strike, dispute, slowdown or work stoppage threatened against the Borrower or any Subsidiary. Section 3.17. Evnvironmewntal Matters. To the best of the Borrower's knowledge after due inquiry, except as set forth on Schedule 3.17: (a) the Property does not contain any Hazardous Substance in amounts or concentrations which (i) constitute a violation of, or (ii) could reasonably give rise to liability under, 58 any Environmental Law except in either case insofar as such violation or liability, or any aggregation thereof, could not reasonably be expected to result in a Material Adverse Effect; (b) the Property and all operations at the Property are in compliance, and have in the last three years been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at or under the Property, or violation of any Environmental Law with respect to the Property or the operations at the Property, which could reasonably be expected to result in a Material Adverse Effect; (c) neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, noncompliance, liability or potential liability regarding environmental matters or compliance with any Environmental Law with regard to any of the Property or the operations at the Property, nor does the Borrower or such Subsidiary have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that could reasonably be expected to result in a Material Adverse Effect; (d) Hazardous Substances have not been transported or disposed of from any of the Property in violation of, or in a manner or to a location which could reasonably give rise to liability under, any Environmental Law, nor have any Hazardous Substances been generated, treated, stored (other than materials stored in the normal course of its retail business in accordance with all applicable laws) or disposed of at, on or under any of the Property in violation of, or in a manner that could reasonably give rise to liability under, any applicable Environmental Law except insofar as any such violation or liability referred to above, or any aggregation thereof, could not reasonably be expected to result in a Material Adverse Effect; (e) no judicial proceedings or governmental or administrative action is pending or, to the knowledge of the Borrower after due inquiry, threatened, under any Environmental Law to which the Borrower is or will be named as a party with respect to the Property or the operations at the Property, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Property or such operations except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, could not reasonably be expected to result in a Material Adverse Effect; and (f) there has been no release or threat of release of any Hazardous Substance at or from the Property, or arising from or related to the operations of the Property in connection with the Property or otherwise in connection with such operations in violation of or in amounts or in a manner that could reasonably give rise to liability under any Environmental Law, except insofar as any such violation or liability referred to above, or any aggregation thereof, could not reasonably be expected to result in a Material Adverse Effect. 59 Section 3.18. Location and Divisions of the Borrower. As of the Effective Date, all of the Borrower's stores, warehouses, distribution centers, offices, headquarters and any other operating and organizational facilities and premises are listed on Schedule 3.18. The Borrower uses each of the division names set forth on Schedule 3.18 only in the states listed below each such name, and the Borrower does not do business under any names other than its own and the names of such divisions. Section 3.19. Solvency. On and as of the Effective Date, after giving effect to the restructuring of the Pre-Petition Term Loans, the Pre-Petition Revolving Credit Loans, the DIP Revolving Credit Loans and the DIP Letters of Credit and to all other debt of the Borrower pursuant to the Plan of Reorganization (including the Loans incurred or to be incurred by the Borrower and the Liens created, or to be created, in connection therewith): (a) the Borrower has no reason to believe that any final judgments against the Borrower or any affected Subsidiary in actions for money damages with respect to pending or threatened litigation will be rendered at a time when, or in an amount such that, the Borrower or such affected Subsidiary will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered) and the cash available to the Borrower and its Subsidiaries, after taking into account all other anticipated uses of the cash of the Borrower and its Subsidiaries (including the payments on or in respect of debt referred to in clause (c) of this Section), is anticipated to be sufficient to pay all such judgments promptly in accordance with their terms; (b) the sum of the present fair saleable value of the assets of the Borrower and its Subsidiaries will exceed the probable liability of the Borrower and its Subsidiaries on their respective debts; (c) neither the Borrower nor any of its Subsidiaries will have incurred or intends to, or believes that it will, incur debts beyond its ability to pay such debts as such debts mature (taking into account the timing and amounts of cash to be received by the Borrower and its Subsidiaries from any source, and of amounts to be payable on or in respect of debts of the Borrower and its Subsidiaries and the amounts referred to in clause (a) of this Section) and the cash available to the Borrower and its Subsidiaries, after taking into account all other anticipated uses of the cash of the Borrower and its Subsidiaries, is anticipated to be sufficient to pay all such amounts on or in respect of debts of the Borrower and its Subsidiaries, when such amounts are required to be paid; and (d) the Borrower and each of its Subsidiaries will have sufficient capital with which to conduct its present and proposed business and the property of the Borrower and each of its Subsidiaries does not constitute unreasonably small capital with which to conduct its present or proposed business. For purposes of this Section, "debt" means any liability on a claim, and "claim" means (i) any right to payment whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (ii) any right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. On the date of each Loan and the issuance of each Letter of Credit (and after giving effect to all Loans and Letters of Credit outstanding as of such date), the representations set forth in this Section shall be true and correct. With respect to clauses (b) and (d) of this Section, with respect to the Borrower, such representations and warranties are made to the best of the knowledge of the Borrower, except that 60 such representations and warranties are made without qualification to the extent that the untruth or inaccuracy of any such representation or warranty would result in a Material Adverse Effect. SECTION 4. CONDITIONS TO EFFECTIVENESS OF REORGANIZATION AND EXTENSIONS OF CREDIT Section 4.1. Conditions Precedent to Effectiveness of Reorganization, Initial Loans and Initial Letters of Credit The effectiveness of (i) the restructuring of the Borrower's obligations arising under the Pre-Petition Credit Agreement and the DIP Credit Agreement and (ii) the obligations of the Lenders to finance the Plan of Reorganization through the restructuring of such obligations under the Pre-Petition Credit Agreement and the DIP Credit Agreement and of the New Revolving Lenders to make the initial New Revolving Loans and of the relevant Fronting Bank to issue the initial Letter of Credit, in which the New Revolving Lenders shall participate, is subject to the following conditions precedent, each of which shall have been satisfied or waived (except as otherwise provided in this Section) by the Required Revolving Lenders and, in the case of the conditions contained in Sections 4.1(b)(i) and (ii), (c), (e), (f), (g), (h), (i) and (j), the Required Pre-Petition Lenders and all of the DIP Lenders, and all of which shall have been satisfied or waived on or prior to December 31, 1997, unless the Required Pre-Petition Lenders and all of the DIP Lenders shall have agreed to extend such date: (a) Supporting Documents. The Agent shall have received: (i) a copy of the Borrower's certificate of incorporation, certified as of a recent date by the Secretary of State of Delaware; (ii) a certificate of the Secretary of State of Delaware, dated as of a recent date, as to the good standing of the Borrower and as to the charter documents on file in the office of the Secretary of State; (iii)a certificate of the Secretary or an Assistant Secretary of the Borrower, dated the date of the initial Loans or the initial Letters of Credit hereunder, delivered as part of the Closing Certificate referred to in clause (iv) below and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on the date of such certification, (B) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of the Borrower authorizing the restructuring, the Borrowings of New Revolving Loans and the issuance of Letters of Credit hereunder, the execution, delivery and performance in accordance with their respective terms of this Agreement, the Notes, the other Loan Documents and any other documents required or contemplated hereunder or thereunder and the granting of the security interest in the Letter of Credit Accounts contemplated hereby, (C) that the certificate of incorporation of the 61 Borrower has not been amended since the date of the certificate of the Secretary of State furnished pursuant to clause (i) above (other than by the filing of the Certificate of Ownership and Merger with respect to the Borrower by the Debtor on December 2, 1997) and (D) as to the incumbency and specimen signature of each officer of the Borrower executing this Agreement, the Notes and the other Loan Documents or any other document delivered by it in connection herewith or therewith (such certificate to contain a certification by another officer of the Borrower as to the incumbency and signature of the officer signing the certificate referred to in this clause (iii)); (1) (iv) receipt by the Agent of a closing certificate signed by an executive officer of the Borrower, substantially in the form of Exhibit L (the "Closing Certificate"), with appropriate insertions and attachments satisfactory in form and substance to the Agent; and (v) receipt by the Agent of a Notice of Borrowing with respect to the New Term Loans and any New Revolving Loans to be made on the Effective Date, and, if applicable, receipt by the Agent and the relevant Fronting Bank of an Application for the issuance of any Letters of Credit to be issued on the Effective Date. (b) Agreement; Notes. On or before the Effective Date, the Agent shall have received (i) executed counterparts of this Agreement from each of the parties hereto, (ii) New Term Notes executed on behalf of the Borrower, dated the Effective Date, payable to the order of each of the New Term Lenders, substantially in the form of Exhibit A-1 hereto, in an aggregate principal amount equal to such New Term Lender's New Term Loans as determined in accordance with Section 1.55 of the Plan of Reorganization and in an amount at least equal to $265 million and (iii) New Revolving Notes executed on behalf of the Borrower payable to the order of each of the New Revolving Lenders, substantially in the form of Exhibit A-2 hereto and in amount equal to its Commitment. (c) Confirmation Order. The Agent shall have received a certified copy of an order (the "Confirmation Order") of the Bankruptcy Court, in substantially the form of Exhibit B, which shall contain provisions providing for, inter alia, (i) confirmation of the Plan of Reorganization, (ii) the release of all claims or causes of action by or on behalf of the Borrower or any of its Subsidiaries against the Secured Parties, (iii) an injunction against the prosecution of any such claim or cause of action, (iv) the nondischargeability of the Secured Obligations to the extent set forth in the DIP Financing Order and the waiver by the Borrower of any such discharge pursuant to Section 1141(d)(4) of the Bankruptcy Code, and (v) the continuation of superpriority administrative expense claims until the Effective Date and the continuation of the security interests granted to the respective Secured Parties pursuant to the DIP Financing Orders, which Confirmation Order shall have become a Final Order, shall not have been amended or modified without the prior written consent of the Agent, the 62 Required Pre-Petition Lenders and the Required Revolving Lenders and shall not have been stayed, reversed, vacated or rescinded in any respect. (d) Plan of Reorganization and Disclosure Statement. The Plan of Reorganization and Disclosure Statement shall be in the form filed with the Bankruptcy Court, and any amendments, modifications and each of the exhibits to the Plan of Reorganization and/or Disclosure Statement shall be satisfactory to the Agent, the Required Pre-Petition Lenders and the Required Revolving Lenders in their reasonable discretion. (e) Reclamation Claims. The Debtor shall not have paid during the Case and the Borrower shall not have paid or reasonably anticipate being obligated to pay, on or after the Effective Date, more than $30 million in the aggregate for all reclamation claims with legal priority. (f) Required Inventory. The Borrower shall have delivered an Inventory Compliance Certificate, dated the Effective Date, demonstrating that it has at least $300 million in Required Inventory. (g) Trade Payables. The Debtor shall have post-petition trade payables which are not backed by letters of credit, deposits or any other form of credit support of not less than $30.6 million in the aggregate outstanding on the Effective Date and shall reasonably expect to have access to at least such amount of such trade credit from and after the Effective Date. (h) Minimum EBITDA. The Debtor shall have EBITDA during the first four completed fiscal months of the Case of not less than $12.9 million or, in the event that the Effective Date occurs on or prior to December 10, 1997, shall have EBITDA during the first three and three-quarter completed fiscal months of the Case of not less than $12.4 million, together with reasonably estimated or projected EBITDA for the last week of the fourth fiscal month of the Case of $0.5 million. (i) Debt to EBITDA Ratio. As of the Effective Date, the Borrower shall have a Debt to EBITDA ratio of not more than 7.9 to 1 on the basis of EBITDA for the period consisting of the twelve completed fiscal months immediately preceding the Effective Date for which definitive financial information is available. (j) Projected EBITDA. The Debtor, after consultation with Houlihan Lokey Howard & Zukin or any successor financial advisor to the Debtor, shall have delivered financial projections to the Agent, setting forth on a reasonable basis in good faith, aggregate EBITDA for the Borrower for the period consisting of the two fiscal years immediately following the Effective Date of at least $196 million subject to adjustments for non-material changes to the Business Plan implemented during the Case and approved by the Required Pre-Petition Lenders and all of the DIP Lenders. 63 (k) Security and Pledge Agreement. The Borrower shall have duly executed and delivered to the Agent, for its benefit and the benefit of the other Secured Parties, an Amended and Restated Security and Pledge Agreement in substantially the form of Exhibit C (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security and Pledge Agreement"). (l) Mortgages. The Borrower shall have (x) duly executed and delivered to the Agent, for its benefit and the benefit of the other Secured Parties, mortgages and deeds of trust, substantially in the form of Exhibits D-1 and D-2 hereto, respectively, on the real properties constituting UBS Collateral and on the real properties securing the Synthetic Lease Obligations, together with Title Commitments or Policies as the Agent may require and Surveys relating thereto, (y) duly executed and delivered to the Agent, for its benefit and the benefit of the other Secured Parties, amended and restated mortgages and deeds of trust on the Properties included as part of Pre-Petition Collateral, substantially in the form of Exhibits D-3 and D-4 hereto (all of such mortgages and deeds of trust delivered pursuant to this subsection (l), collectively, together with any mortgages and deeds of trust executed and delivered after the Effective Date in respect of Available Property or After-Acquired Property, as amended, amended and restated, supplemented or otherwise modified from time to time, the "Mortgages"), in each case for the Agent's benefit and the benefit of the other Secured Parties, together with updated Title Policies with respect to such Properties and (z) provided evidence to the Agent of the filing of such Mortgages in the appropriate filing or recording offices and the payment of all taxes and recording fees relating thereto. (m) Financing Statements. The Agent shall have received (i) UCC-1 and/or UCC-3 Financing Statements executed on behalf of the Borrower for filing in all jurisdictions in which it would be necessary or desirable to make a filing in order to provide the Agent (for its benefit and the benefit of the other Secured Parties) with a perfected security interest in the Collateral and evidence of the filing of such UCC-1 and/or UCC-3 Financing Statements in all jurisdictions in which it would be necessary or desirable to provide the Agent (for its benefit and the benefit of the other Secured Parties) with a perfected security interest in the Collateral; and (ii) such UCC-11 searches as the Agent may require reflecting that no filings relating to Liens on the Collateral are of record in such jurisdictions except those permitted under the Loan Documents. (n) Vehicles. To the extent not previously provided, the Agent shall have received original certificates of title for Vehicles pledged to the Agent for its benefit and the benefit of the other Secured Parties with the Lien of the Agent noted thereon or accompanied by documentation required to effect the same. (o) Opinion of Counsel to the Borrower. The Secured Parties shall have received the favorable written opinion of counsel to the Borrower reasonably acceptable to the Agent, dated the Effective Date, substantially in the form of Exhibits G-1 and G-2. 64 (p) Payment of Fees. The Borrower shall have paid to the Agent, the Underwriters and the Fronting Banks the then unpaid balance of all accrued and unpaid Fees owed under and pursuant to this Agreement and the letter referred to in Section 2.18. (q) Payment of Other Amounts. The Borrower shall have paid all accrued and unpaid interest, fees and other amounts (other than principal amounts outstanding on the Effective Date under the Pre-Petition Credit Agreement which are being exchanged for New Common Stock) owing pursuant to or in connection with the Pre-Petition Credit Agreement and the DIP Credit Agreement. (r) [Intentionally Omitted]. (s) Corporate and Judicial Proceedings. All corporate and judicial proceedings and all instruments and agreements in connection with the transactions among the Borrower, the Agent, the Fronting Banks, the Underwriters and the Lenders contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Agent, and the Agent shall have received all information and copies of all documents and papers, including records of corporate and judicial proceedings, which the Agent may have reasonably requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate, governmental or judicial authorities. (t) Compliance with Laws. The Borrower shall have granted the Agent access to and the right to inspect all reports, audits and other internal information of the Borrower relating to environmental matters, and any third party verification of certain matters relating to compliance with Environmental Laws requested by the Agent, and the Agent shall be reasonably satisfied that the Borrower and its Subsidiaries are in compliance in all material respects with all applicable Environmental Laws and be satisfied with the costs of maintaining such compliance. (u) Designated Equity. The Borrower shall have twenty million shares of common stock issued and outstanding or authorized and reserved for issuance pursuant to the Plan of Reorganization (the "New Common Stock"), of which the New Revolving Lenders shall be entitled to receive 460,000 shares in consideration for their Commitments, and the New Term Lenders shall be entitled to receive the number of shares of New Common Stock determined in accordance with Section 3.4(a) of the Plan of Reorganization. (v) Post-Effective Date Board of Directors. The size and composition of the new Board of Directors of the Borrower as of the Effective Date (and the term of each director) shall be acceptable to the Agent and a majority of the Pre-Petition Lenders. (w) No Material Adverse Change. There shall not have occurred since September 1, 1997, a material adverse change, or development or event involving a prospective change, which, in the reasonable judgment of the Required Revolving Lenders, could have a Material Adverse Effect or could materially adversely affect the rights and remedies of the Agent or any of the other Secured Parties under the Loan Documents, and none of the Agent or any of the other Secured Parties shall 65 have become aware of any theretofore previously undisclosed materially adverse information with respect to the matters described in this clause (w); (x) Absence of Litigation. There shall be no actions, suits or proceedings by any Governmental Authority or other Person or investigation by any Governmental Authority or other Person pending or known by the Borrower to be threatened with respect to the Borrower or any of its Subsidiaries or (relating to the transactions contemplated hereunder) the Agent or any of the other Secured Parties which could reasonably be expected to have a Material Adverse Effect; there shall be no judgment, order, injunction or other restraint prohibiting any of the transactions contemplated by any of the Loan Documents; (y) Effectiveness of Synthetic Lease Loan Agreement and UBS Loan Agreement. All of the UBS Loan Documents and the Synthetic Lease Loan Documents shall have been executed and delivered in form and substance satisfactory to the Agent, and the Effective Date (as defined in each of the Synthetic Lease Loan Agreement and the UBS Loan Agreement) shall have occurred. (z) Information. The Agent shall have received such information (financial or otherwise) as may be reasonably requested by the Agent or the Underwriters. (aa) Closing Documents. The Agent shall have received all documents (including security documents granting the liens in favor of the Agent contemplated hereby) required by this Agreement reasonably satisfactory in form and substance to the Agent and, in the case of the issuance of a Letter of Credit, the relevant Fronting Bank shall have received all documents it requires in connection with its agreement to issue Letters of Credit hereunder in form and substance reasonably satisfactory to such Fronting Bank. Section 4.2. Conditions Precedent to Each Loan and Each Letter of Credit after the Effective Date. After the Effective Date, the obligation of the New Revolving Lenders to make each New Revolving Loan and of the relevant Fronting Bank to issue each Letter of Credit is subject to the following conditions precedent: (a) Notice. The Agent shall have received a Notice of Borrowing with respect to such New Revolving Loans or the Agent and the relevant Fronting Bank shall have received an Application for the issuance of such Letter of Credit as required by Sections 2.2(b) or 2.6, as the case may be, which Notice of Borrowing or Application shall be accompanied by an Inventory Compliance Certificate. (b) Representations and Warranties. All representations and warranties contained in this Agreement and the other Loan Documents or otherwise made in writing in connection herewith or therewith shall be true and correct in all material respects on and as of the date of each Borrowing of New Revolving Loans or the issuance of each Letter of Credit hereunder with the same effect as if made on and as of such date except to the extent such representations and warranties expressly relate to an earlier date. 66 (c) Compliance; No Default. On the date of each Borrowing of New Revolving Loans hereunder or the issuance of each Letter of Credit, the Borrower shall be in compliance with all of the terms and provisions set forth herein to be observed or performed, and no Default or Event of Default shall have occurred and be continuing. (d) Confirmation Order. The Confirmation Order shall be in full force and effect and shall not have been amended or modified without the prior written consent of the Agent, the Majority Term Lenders and the Required Revolving Lenders and shall not have been stayed, reversed, vacated or rescinded in any respect. (e) Payment of Fees. The Borrower shall have paid to the Agent, the Fronting Banks, the Underwriters and the New Revolving Lenders, the then unpaid balance of all accrued and unpaid Fees then payable under or pursuant to this Agreement. (f) Required Inventory. The Borrower shall have Required Inventory on the date of each Borrowing or the issuance of each Letter of Credit hereunder. The request by the Borrower for, and the acceptance by the Borrower of, each extension of credit hereunder shall be deemed to be a representation and warranty by the Borrower that the conditions specified in this Section have been satisfied at that time. SECTION 5. AFFIRMATIVE COVENANTS From the date hereof and for so long as any Commitment shall be in effect or any Letter of Credit shall remain outstanding (in a face amount in excess of the amount of cash then held in the relevant Letter of Credit Account pursuant to Section 2.12(h)), or any amount shall remain outstanding under any Note or unpaid under this Agreement, the Borrower agrees that it will, and it will cause each Subsidiary to: Section 5.1. Financial Statements, Reports, etc. Deliver to the Agent and each of the Fronting Banks and the Lenders (or, in the case of the weekly report delivered pursuant to Section 5.1(l), deliver to the Agent for distribution to the Fronting Banks and the Lenders): (a) as soon as available and in any event within 90 days after the end of each fiscal year, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year (unless, in accordance with GAAP, such comparative financial statements are not prepared), the consolidated statement of the Borrower and its Consolidated Subsidiaries to be audited for the Borrower by independent public accountants of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect); 67 (b) as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters and within 90 days after the end of the fourth fiscal quarter of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and related consolidated statements of income and cash flows for such fiscal quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the previous fiscal year, together with a comparison of such results to the relevant portion of the Annual Budget, each certified by a Financial Officer as fairly presenting the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments (it being understood that the Borrower shall also deliver copies of the financial statements delivered pursuant to this clause (b) with respect to the first two quarters of its 1998 fiscal year, together with copies of the related certificates delivered pursuant to clause (c) below, to Arthur Andersen LLP, financial advisors to the Debtor's Unsecured Creditors' Committee); (c) concurrently with any delivery of financial statements under clauses (a) or (b) above, (i) a certificate of a Financial Officer, substantially in the form of Exhibit N hereto, certifying such statements (A) stating that no Default or Event of Default has occurred, or, if such Default or Event of Default has occurred, specifying the nature, the period of existence and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (B) setting forth computations in reasonable detail satisfactory to the Agent demonstrating whether the Borrower was in compliance with the provisions of Sections 6.4, 6.7 and 6.16 on the date of such financial statements and (ii) a certificate of such accountants accompanying the audited consolidated financial statements delivered under (a) above certifying that, in the course of the regular audit of the business of the Borrower, such accountants have obtained no knowledge that an Event of Default has occurred and is continuing, or if, in the opinion of such accountants, an Event of Default has occurred and is continuing, specifying the nature thereof and all relevant facts with respect thereto; (d) within 15 Business Days of the end of each fiscal month (or, in the case of the last fiscal month of the Borrower in each fiscal year, within 45 days), commencing with the fiscal month in which the Effective Date has occurred, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, related statement of income and cash flows showing the financial condition of the Borrower and its Consolidated Subsidiaries and the results of operations as of the close of such fiscal month and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding month and the corresponding portion of the Borrower's previous fiscal year, together with a comparison of such results to the relevant portion of the Annual Budget. (e) as soon as practicable, and in any event within 45 days of the Effective Date, a pro forma statement of the Borrower's financial condition as of the Effective Date in form, scope and detail reasonably satisfactory to the Agent; (f) within 45 days after the commencement of each fiscal year, a forecast of the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries, by 68 month, for the twelve fiscal months commencing with the first month of such fiscal year (the "Annual Budget"), and not later than 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a narrative discussion by management of the Borrower of the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries for such period, together with a reforecast for the balance of such fiscal year, in all instances in form, scope and detail satisfactory to the Agent; (g) on the earlier of the date of delivery by the Borrower to the Agent, the Fronting Banks and the Lenders of the financial statements required to be delivered pursuant to Section 5.1(a) covering such fiscal year and 90 days after such fiscal year, an Excess Cash Flow Certificate setting forth the calculation of Excess Cash Flow based upon such fiscal year's audited financial statements then delivered; (h) promptly upon request therefor by the Agent, copies of all reports submitted by independent public accountants to the Borrower in connection with each annual, interim or special audit of the financial statements of the Borrower and its Consolidated Subsidiaries, including, without limitation, any comment letters submitted by such accountants to management in connection with their annual audit; (i) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer of the Borrower, in form and substance reasonably satisfactory to the Agent, describing all gains and losses by the Borrower and its Consolidated Subsidiaries for such fiscal quarter just ended from the sale or other disposition of their assets which do not constitute extraordinary gains or losses under GAAP and for which the sale price or book value for such capital asset at time of sale is greater than $3,000,000; (j) forthwith upon becoming aware of (i) any litigation or other proceeding which could reasonably be expected to have a Material Adverse Effect or (ii) any default with respect to any obligation of the Borrower under any agreement, instrument, or other undertaking to which the Borrower or any of its Subsidiaries is a party or by which it or any of its properties is bound or any event or condition which could reasonably be expected to have such a material adverse effect, notice thereof; (k) promptly upon becoming aware of any Material Adverse Effect since the Effective Date, notice thereof; (l) within six Business Days of the end of each week, a flash report reflecting sales and gross margins for such week in form, scope and detail reasonably satisfactory to the Agent; (m) (i) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan; 69 (ii) promptly and in any event within fifteen (15) days after the Borrower knows or has reason to know that any ERISA Event has occurred, a statement of the chief financial officer of the Borrower describing such ERISA Event and the action, if any, which the Borrower, any Subsidiary or any ERISA Affiliate of either of them proposes to take with respect thereto; (iii) promptly and in any event within ten (10) Business Days after receipt thereof by the Borrower or any Subsidiary or any ERISA Affiliate of either of them, copies of each notice from the PBGC stating its intention to terminate any Plan or to have a trustee appointed to administer any Plan; and (iv) promptly and in any event within ten (10) Business Days after receipt thereof by the Borrower or any Subsidiary or any ERISA Affiliate of either of them from the sponsor of a Multiemployer Plan, a copy of each notice concerning (1) the imposition of Withdrawal Liability by a Multiemployer Plan, (2) the reorganization or termination, within the meaning of Title IV of ERISA, of any Multiemployer Plan or (3) the amount of liability incurred, or which may be incurred, by the Borrower or any Subsidiary or any ERISA Affiliate of either of them in connection with any event described in clause (1) or (2) above; (n) promptly upon the formation of any Subsidiary, notice thereof; (o) promptly upon the release of any Liens or the satisfaction or discharge of all or a portion of the Liens securing the Real Estate Financing or the Liens granted under the Synthetic Lease Loan Documents or Liens granted to any other lenders, notice thereof; (p) promptly upon the merger of any Subsidiary into the Borrower, notice thereof; (q) promptly upon the opening of any store or other retail location, notice thereof and, to the extent such store or other retail location is in a jurisdiction in which UCC-1 Financing Statements have not been delivered to the Agent, promptly deliver executed UCC-1 Financing Statements on forms then provided by the Agent to the Borrower; (r) within three (3) Business Days after any amendment, modification, supplement to or waiver of any provisions of the UBS Loan Documents, the Synthetic Lease Loan Documents, the GE Credit Program Documents, or any other material credit arrangements, notice thereof, together with a copy of each such fully executed amendment, modification, supplement or waiver; (s) without limiting any of the Borrower's other obligations to give notice under the Loan Documents, within fifteen (15) days of the end of each fiscal quarter, furnish to the Agent lists of (i) all After-Acquired Property and Vehicles acquired by the Borrower or any Subsidiary during such quarter, (ii) all Trademarks for which the Borrower or any Subsidiary has filed a registration application during such quarter and (iii) all property which became Available Property during such 70 quarter, setting forth in each case the date of acquisition or filing thereof and otherwise substantially in the form of Exhibit O hereto, all certified by the chief financial officer of the Borrower; (t) on the second Business Day of the first and third full weeks of each fiscal month of the Borrower, deliver to the Agent and each Lender an Inventory Compliance Certificate, substantially in the form of Exhibit M hereto (an "Inventory Compliance Certificate"), certifying that the Borrower continues to maintain Required Inventory; (u) promptly, upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (v) promptly, and in any event within ten (10) Business Days prior to the proposed closing of any purchase or refinancing by the Borrower of any notes payable to one or more of the Synthetic Lease Banks, written notice as to the identity of the purchaser, the applicable purchase price and the proposed payment date, together with a copy of the proposed purchase and release documents; and (w) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Borrower or its Subsidiaries, or compliance with the terms of any material loan or financing agreements as the Agent, any Fronting Bank or any Lender may reasonably request. Section 5.2. Conduct of Business; Maintenance of Existence. Continue to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and, except as permitted by Section 6.3(f), will cause each Subsidiary to preserve, renew and keep in full force and effect, its respective corporate existence and its respective rights, privileges and franchises except for such rights, privileges and franchises when the failure of which to preserve, renew and keep in full force and effect could not reasonably be expected to have a Material Adverse Effect. Section 5.3. Maintenance of Property; Insurance. (a) Keep all material property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) Keep its material properties (including without limitation all Property) insured at all times with financially sound and reputable insurance companies, against such risks as is customary for companies of the same or similar size in the same or similar businesses; provided, that such insurance shall (i) insure the property (including without limitation all Property) of the Borrower and its Subsidiaries (other than motor vehicles) against all risk of loss or damage including, without limitation, loss by fire, explosion, theft and such other casualties as may be reasonably satisfactory to the Agent, but in no event in an amount less than the replacement cost value thereof, and (ii) insure the Borrower and its Subsidiaries, and the Agent and the other Secured Parties against comprehensive general and automobile liability in an amount not less than $1,000,000 per occurrence under primary insurance policies, with not less than $45,000,000 per occurrence coverage under umbrella insurance policies 71 for personal injury, bodily injury and property damage relating to the property and operations of the Borrower and its Subsidiaries, such policies to be in such form and amounts and having such coverage as may be reasonably satisfactory to the Agent. All such insurance shall, within twenty days after the Effective Date (i) contain a breach of warranty clause in favor of the Agent and the other Secured Parties in all loss or damage insurance policies and have a severability of interest clause in all liability insurance policies, (ii) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after written notice to the Agent thereof, (iii) name the Agent for the benefit of the Secured Parties as loss payee for physical damage insurance with respect to property as to which a Lien has been granted to the Agent, with the right to adjust the same (provided, that with respect to property to which a Lien permitted hereunder has been granted to another creditor, such other creditor may also be named as loss payee, with payment to be made as their interests may appear) and name the Agent and the other Secured Parties as additional insureds for liability insurance, with the Agent having the right to adjust the same, (iv) state that neither the Agent nor any of the other Secured Parties shall be responsible for premiums, commissions, club calls, assessments or advances, (v) contain a waiver of all rights of set-off, counterclaim, deduction or subrogation against the Agent and the other Secured Parties and (vi) be reasonably satisfactory in all other respects (including deductibles) to the Agent. (c) Furnish to the Agent, on or prior to the Effective Date, a schedule, a copy of which is annexed as Schedule 5.3, describing all insurance maintained by the Borrower, which schedule shall set forth, for each insurance policy, the policy number, the scope of coverage, the policy limits and deductibles, the insurer (and reinsurers, if applicable) and the expiration date. (d) Furnish to the Agent, original certificates of insurance complying with the requirements of this Section set forth above and containing signatures of duly authorized representatives of the insurer, on or prior to the date which is twenty days after the Effective Date and at all times prior to policy termination, cessation or cancellation. (e) Maintain such other insurance or self insurance as may be required by law or as the Agent may reasonably request. Section 5.4. Compliance with Laws. Comply in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of Governmental Authorities (including, without limitation, ERISA) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings, and the Borrower or such Subsidiary have set aside on its books adequate reserves (determined in accordance with GAAP) with respect thereto or where the failure to comply therewith could not reasonably be expected to have a Material Adverse Effect. Section 5.5. Obligations and Taxes. Pay all its material obligations promptly and in accordance with their terms and pay and discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become in default, as well as all material lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien or charge upon such 72 properties or any part thereof; provided, that the Borrower and its Subsidiaries shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings (if the Borrower or such Subsidiary shall have established on its books adequate reserves therefor). For purposes of this Section, the term "obligation" shall not include those obligations discharged under the Plan of Reorganization. Section 5.6. Notice of Event of Default, etc. Promptly give to the Agent notice in writing of any Default or Event of Default hereunder or under any of the other Loan Documents. Section 5.7. Access to Books and Records. Maintain or cause to be maintained at all times true and complete books and records of the financial operations of the Borrower and its Subsidiaries; and provide the Agent and its representatives access to all such books and records during regular business hours, in order that the Agent may examine and make abstracts from such books, accounts, records and other papers for the purpose of verifying the accuracy of the various reports delivered by the Borrower to the Agent, the Fronting Banks or the Lenders pursuant to this Agreement or for otherwise ascertaining compliance with this Agreement; and at any reasonable time and from time to time during regular business hours, upon reasonable notice, permit the Agent and any agents or representatives (including, without limitation, appraisers) thereof to visit the properties of the Borrower and its Subsidiaries and to conduct examinations of and to monitor the Collateral. Section 5.8. Modifications to Business Plan. As soon as practicable, furnish to the Agent, the Lenders and the Fronting Banks all material modifications to the Business Plan, and make its senior officers and advisors available to discuss the same with the Agent and its advisors upon the Agent's reasonable request. Section 5.9. Customer Charge Sales. Continue to maintain a "Project Card" and commercial credit receivables sales and administration program with the Credit Card Banks pursuant to the GE Credit Program Documents or a similar program (it being understood that a program shall not be deemed to be dissimilar solely by virtue of the fact that the Borrower shall act as the administrator or "servicer" of the receivables thereunder) with another Person, in each case on terms and conditions which are, in the aggregate, not materially less favorable to the Borrower nor materially more restrictive than those provided for in the GE Credit Program Documents as in effect on the Effective Date (except for changes in such terms and conditions which are acceptable to the Agent and the Required Lenders in their judgment reasonably exercised) . Section 5.10. Lender Meetings.From time to time as requested by the Agent, the Majority Term Lenders or the Majority Revolving Lenders, participate, and cause the chief financial officer to be available for and to participate in, a meeting of the Agent and the Lenders to be held, at reasonable intervals, at locations and at times requested by the Agent (and if applicable, the Majority Term Lenders or the Majority Revolving Lenders, as the case may be), and reasonably satisfactory to the Borrower. 73 Section 5.11. Available and After-Acquired Properties. If any real property, buildings, fixtures, equipment or improvements owned or leased by the Borrower or any Subsidiary become Available Property, or the Borrower or any Subsidiary acquires any interest in any real property including without limitation a leasehold interest and any related buildings, fixtures, equipment or improvements (each such property or interest, an "After-Acquired Property"), promptly, but in any event within 30 days, provide written notice thereof to the Agent, setting forth with specificity a description of such property or interest acquired, the location of the property interest, any structures or improvements thereon and an appraisal or its good faith estimate of the current fair market value of such property or interest. If the Agent so requests, the Borrower or the relevant Subsidiary shall promptly execute and deliver to the Agent a mortgage or deed of trust, substantially in the form of Exhibits D-3 and D-4 hereto, respectively (with such changes as may be deemed appropriate by the Agent's local real estate counsel for the state in question), together with such other documents or instruments as the Agent shall reasonably require, including (without limitation) a Title Policy, a Survey, a Phase I environmental report, UCC Financing Statements and an opinion of the Agent's local real estate counsel. The Borrower shall pay all reasonable fees and expenses, including attorneys' fees and expenses or the allocated charges and premiums, in connection with its obligation under this Section. If at any time after the date hereof, any existing Lien or sale-leaseback arrangement which prevents the further mortgaging of any real property of the Borrower or any Subsidiary, shall for any reason no longer prevent such further mortgaging, then such property shall also be deemed an After-Acquired Property for purposes of this Section. Section 5.12. Subsidiaries; Subsidiary Guarantees and Security Agreements. Use its best efforts to conduct all of its business, to the extent feasible, through a single corporate entity (i.e., the Borrower) and to avoid the formation or acquisition of Subsidiaries. Notwithstanding the foregoing, in the event that the Borrower determines that it is in its best interest to form or acquire a Subsidiary, the Borrower will, in addition to complying with the requirements of Section 6.10(iv), cause such Subsidiary to be wholly-owned, to have aggregate net payables owing to the Borrower of less than $10,000,000 at all times and to execute and deliver to the Agent for the benefit of the Secured Parties a guarantee, substantially in the form of Exhibit E hereto, a security agreement granting collateral security for the guaranteed obligations, substantially in the form of Exhibit F hereto, and such other documents and opinions in connection therewith as the Agent shall reasonably request, all in form and substance satisfactory to the Agent. Such guarantee, security agreement and such other documents shall be delivered to the Agent no later than 30 days after the date on which such Subsidiary has been formed or otherwise acquired by the Borrower. Section 5.13. Further Assurances. At the Borrower's cost and expense, upon request of the Agent, duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts as may be necessary or desirable in the opinion of the Agent or its counsel to give effect to the provisions and purposes of this Agreement and the other Loan Documents. Section 5.14. Maintenance of Cash Management System. Maintain and, to the extent practicable, cause each of its Subsidiaries to maintain, all of its significant operating accounts and 74 demand deposit accounts used for paying and receiving purposes in the ordinary course of its business with the Cash Management Banks, any of the Lenders which is a commercial bank or any Affiliate of any Lender which is a commercial bank or any other commercial bank acceptable to the Agent and the Required Lenders, in each case, which commercial bank agrees, if requested by the Agent, to be bound by the terms of this Agreement in writing. In connection with the foregoing, the Borrower will, to the extent practicable, cause substantially all of its available operating funds to be concentrated, on a daily basis, in a concentration account which shall at all times be maintained with one of the Cash Management Banks. Section 5.15. Environmental Undertaking. In the event the Agent determines that any representation hereunder may be incorrect or that the Borrower or any Subsidiary has failed to comply with any covenant contained in Section 6.15 in any material respect, promptly undertake such investigations, studies, samplings and testings relative to any Hazardous Substance at the Property in question as the Agent may request. Section 5.16. Post-Closing Matters (a) To the extent any Mortgages, Surveys or Title Policies were not delivered to the Agent on the Effective Date pursuant to Section 4.1(l), cause such Mortgages to be executed and delivered in recordable form for filing in the appropriate filing or recording offices within fifteen days of the Effective Date and cause any outstanding Surveys and Title Policies to be delivered to the Agent within 60 days of the Effective Date or such longer period not to exceed an additional 30 days to which the Agent may consent. All Title Policies and Surveys must be reasonably acceptable to the Agent in all respects. (b) To the extent that the Borrower shall not have delivered a Phase I environmental report with respect to the real properties constituting UBS Collateral as to which Mortgages are to be delivered pursuant to Section 4.1(l) as of the Effective Date, upon the Agent's reasonable request, at the Borrower's expense, cause such a report to be prepared and deliver the same to the Agent within 30 days of such request. All such Phase I environmental reports must be reasonably acceptable to the Agent in all respects. (c) To the extent that the Borrower shall not have delivered all of the documentation required by Section 5.3 to the Agent on the Effective Date, deliver the same within the time period provided therein. (d) To the extent that the Borrower shall not have delivered all of the original certificates of title for vehicles pledged to the Agent for its benefit and the benefit of the other Secured Parties as required pursuant to Section 4.1(n) as of the Effective Date, deliver the same within sixty (60) days of the Effective Date. 75 SECTION 6. NEGATIVE COVENANTS From the date hereof and for so long as any Commitment shall be in effect or any Letter of Credit shall remain outstanding (in a face amount in excess of the amount of cash then held in the relevant Letter of Credit Account, pursuant to Section 2.12(h)) or any amount shall remain outstanding under any Note or unpaid under this Agreement, the Borrower will not, and will not permit any Subsidiary to: Section 6.1. Liens. Incur, create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by the Borrower, other than (i) Liens which were existing on the Effective Date as reflected on Schedule 3.6 hereto, (ii) Liens of the same type as (and no more extensive than) those granted pursuant to the GE Credit Program Documents in favor of another Person replacing the Credit Card Banks in providing the Borrower's "Project Card" and commercial credit receivables sales and administration program in accordance with Section 5.9, (iii) Liens granted pursuant to the Security Documents; (iv) Liens granted on the UBS Collateral pursuant to the Real Estate Financing and Liens granted pursuant to the Synthetic Lease Loan Documents and (v) Permitted Liens. Section 6.2. Debt. Contract, create, incur, assume or suffer to exist any Debt, except for (i) the Loans and the Letters of Credit, (ii) Debt of the type described in clause (viii) of the definition of "Debt," to the extent that the aggregate notional or face amount of all such Debt, when taken together with all outstanding Hedging Obligations, does not exceed $36,000,000, (iii) Debt outstanding under the UBS Loan Documents and the Synthetic Lease Loan Documents, each as in effect on the Effective Date, and any Permitted Refinancing Debt, but not the increase or refunding of such Debt in whole or in part, except to the extent the same constitutes Permitted Refinancing Debt, (iv) Debt of the Borrower and its Subsidiaries outstanding under Capitalized Leases as in effect on the Effective Date, (v) Debt not in excess of $2,000,000 in the aggregate secured by Permitted Liens of the type described in clause (v) of the definition thereof, (vi) Debt of the Borrower and its Subsidiaries outstanding under Capitalized Leases entered into after the Effective Date to the extent permitted by Section 6.4, (vii) Debt arising from Investments that are permitted hereunder, and (viii) Debt incurred under the GE Credit Program Documents and any other agreements permitted under Section 5.9. Section 6.3. Consolidations, Mergers and Sales of Assets. (i) Consolidate or merge with or into any other Person, (ii) enter into a partnership or joint venture with another Person (other than by the acquisition of Minority Investments to the extent permitted by Section 6.10), or (iii) sell, lease, assign or otherwise transfer (whether voluntarily or involuntarily) all or any part of its assets except: (a) sales of Inventory in the ordinary course of business and customer receivable sales pursuant to the GE Credit Program Documents or any similar program entered into in accordance with Section 5.9; (b) sales or transfers of assets described in clauses (i), (ii) or (iv) of the definition of "Designated Collateral" and sales or transfers of any other assets of the Borrower (not permitted by any other provision of this Section); provided, that (1) the sale price of each such asset (whether 76 or not part of Designated Collateral) shall not be less than the fair market value of such asset at the time of sale thereof (and, if the sale price thereof is equal to or greater than $5,000,000, then the fair market value of such asset shall be determined in good faith and approved by the Board of Directors of the Borrower), (2) prior to or concurrently with each such sale for which the sale price is equal to or greater than $5,000,000, the Borrower shall deliver evidence to the Agent satisfactory to it of the fair market value at the time of sale of the asset being sold as determined by the Board of Directors of the Borrower, (3) not less than 65% of the sale price for each asset sold pursuant to this clause (b) shall be payable in cash on the date of such sale, (4) the non-cash portion of the sale price therefor, if any, shall be evidenced by one or more promissory notes maturing no later than three years after the date of such sale which shall be pledged to the Agent as provided in Section 6.10(v) or (vii), (5) no such sale shall be permitted unless (x) the asset so sold shall constitute Designated Collateral or shall be sold pursuant to a Permitted Pad Sale or (y) the sale price of the asset so sold, together with the sale price of all assets (excluding assets described in subclause (x) immediately above) previously sold under this clause (b) in the same fiscal year of the Borrower in which such asset is being sold, shall not exceed $2,000,000 and (6) if such sale is to an Affiliate, it is made in compliance with Section 6.9; (c) the replacement in the ordinary course of business of rolling stock and equipment of the Borrower and its Subsidiaries; (d) the sale or other disposition, subject to the Lien of the Agent, by the Borrower to any of its Subsidiaries in the ordinary course of business of machinery and equipment of the Borrower no longer necessary for the proper conduct of the Borrower's business having a value, together with the value of all other property of the Borrower so sold or disposed of in the same fiscal year of the Borrower, of not greater than $5,000,000 and the sale or other disposition, subject to the Lien of the Agent, by the Subsidiaries to the Borrower in the ordinary course of business of machinery and equipment of such Subsidiaries no longer necessary for the proper conduct of such Subsidiaries' respective businesses having a value, together with the value of all other property of such Subsidiaries so sold or disposed of in the same fiscal year of the Borrower, of not greater than $5,000,000; (e) the lease by the Borrower, as lessor, of those stores and real estate described on Schedule 6.3 and other real property of the Borrower not necessary for the operations of the Borrower or any of its Subsidiaries, in each instance under this clause (e) having a fair market value of not greater than $5,000,000 individually, or $10,000,000 in the aggregate at any one time for all real property leased under this clause (e); provided, that such leases shall be entered into with a Person who is not an Affiliate of the Borrower on an arms' length basis for fair consideration and such leases shall not be capital leases; (f) the merger of any wholly owned Subsidiary into the Borrower or the consolidation of any wholly owned Subsidiary with the Borrower in which the Borrower shall be the surviving corporation; (g) the transfer of a Property acceptable to the Majority Lenders in their judgment reasonably exercised to Paycap in substitution for a property subject to the terms of any of the Capco 77 Subleases; provided, that (i) at least fifteen (15) days prior to the proposed transfer, the Borrower shall furnish current independent appraisals satisfactory to the Agent which demonstrate that the value of the Property subject to a Mortgage proposed to be transferred is reasonably equivalent to the value of the property subject to such Capco Sublease and (ii) simultaneously with the transfer of such Property subject to a Mortgage, such Mortgage shall be released and such substituted property shall become an Available Property and shall be subjected to a mortgage or deed of trust, substantially in the form of Exhibits D-1 and D-2, respectively (with such changes as may be deemed appropriate by the Agent's local real estate counsel for the state in question), and the Borrower shall otherwise comply with its obligations under Section 5.11 with respect to such substituted Available Property; and (h) sales of assets securing the Real Estate Financing or the Synthetic Lease Obligations for fair market value; provided, that the Net Cash Proceeds thereof are applied to the repayment or prepayment of the Real Estate Financing or the Synthetic Lease Obligations (as the case may be). The Borrower shall deliver to the Agent, no less than three (3) Business Days prior to the date of any expected sale or other disposition permitted under clause (b) (but only if any such sale or disposition under such clause (b) has a sale price of $1,000,000 or more) or clause (e) of this Section 6.3, written notice of the expected date of the closing of such sale or other disposition and the expected date of receipt by the Borrower of the Net Cash Proceeds with respect thereto; provided, that with respect to any expected sale or other disposition of any Property subject to Liens in favor of the Agent, the Borrower shall deliver to the Agent, no less than thirty (30) Business Days prior to the closing thereof, (x) written notice of the identity of the purchaser or transferee, the expected date of the closing of such sale or other disposition and the principal terms of the sale or other disposition and (y) the form of the purchase agreement to be delivered at the closing thereof. Directly or indirectly, make any expenditures or incur any obligations for fixed or capital assets or in respect of Capitalized Leases, including, but not limited to (x) payments on account of any Debt permitted pursuant to Section 6.2 (v), and (y) goodwill associated with any permitted Capital Expenditure that constitutes an Investment (collectively, "Capital Expenditures"), in excess, in the aggregate for the Borrower and its Subsidiaries for all such Capital Expenditures (and for all such Dual Path Capital Expenditures and all such other permitted Capital Expenditures), of the respective amounts set forth below opposite each of the fiscal years set forth below: 78 Fiscal Year Total Amount Dual Path Other 1998 $59,600,000 $35,700,000 $23,900,000 1999 $52,100,000 $31,100,000 $21,000,000 2000 $41,200,000 $20,200,000 $21,000,000 2001 $51,300,000 $ 5,000,000 $46,300,000 2002 $52,300,000 $ 5,000,000 $47,300,000; provided, that if, during any fiscal year of the Borrower set forth above: (i) the aggregate amount of all Dual Path Capital Expenditures shall be less than the amount set forth in the table above for such fiscal year (after the application of all Dual Path Capital Expenditures during such fiscal year, first to amounts available for such purpose for such fiscal year pursuant to the operation of this proviso), then the amount of the Dual Path Capital Expenditures for the next fiscal year shall be increased by an amount equal to the unutilized portion of Dual Path Capital Expenditures for such fiscal year; and (ii) the aggregate amount of all other permitted Capital Expenditures shall be less than the amount set forth in the table above for such fiscal year (after the application of all other permitted Capital Expenditures during such fiscal year, first to amounts available for such purpose for such fiscal year pursuant to the operation of this proviso), then the amount of the other permitted Capital Expenditures for the next fiscal year shall be increased by an amount equal to the lesser of (x) an amount equal to the unutilized portion of other permitted Capital Expenditures and (y) 50% of the amount of other permitted Capital Expenditures for such fiscal year; 79 provided further, that commencing with the Borrower's 1999 fiscal year, to the extent that the sum of (x) the interest expense of the Borrower and its Consolidated Subsidiaries during such fiscal year plus (y) the Capital Expenditures made during such fiscal year pursuant to this Section is in excess of EBITDA for such fiscal year, the amount of Capital Expenditures permitted pursuant to this Section in the next fiscal year shall be reduced by the amount of such excess on a dollar-for-dollar basis. In the event that the Borrower or any of its Subsidiaries shall sell (or has sold), or shall receive (or has received) insurance proceeds in connection with the destruction of, a fixed or capital asset owned by it (other than a fixed or capital asset constituting Designated Collateral) and shall, within six months after the sale or 24 months after the destruction of such fixed or capital asset, purchase or enter into a Capitalized Lease with respect to a substantially similar fixed or capital asset as a replacement for such sold or destroyed fixed or capital asset, then for purposes of determining compliance with this Section, only that portion of the purchase price or Capitalized Lease obligation paid, incurred or accrued by the Borrower or such Subsidiary for such replacement fixed or capital asset in excess of the sale price or insurance proceeds, as the case may be, of the sold or destroyed similar fixed or capital asset shall be used in determining such compliance with this Section. Notwithstanding anything to the contrary contained in this Section, (x) until the first anniversary of the Effective Date, each Capital Expenditure permitted pursuant to this Section which involves aggregate expenses in excess of $1,000,000 or which involves the acquisition (whether by purchase, lease, exchange or otherwise) of any interest in real estate or any manufacturing or other business or operations shall be approved by the board of directors of the Borrower by the affirmative vote of a majority of the directors then in office (it being understood that after the first anniversary of the Effective Date the Borrower shall comply with any then applicable requirements of the board of directors concerning the approval of Capital Expenditures) and (y) there shall be excluded from the determination of the amount of Capital Expenditures made in any fiscal year, Capital Expenditures made during any such fiscal year to the extent of an amount equal to the Net Cash Proceeds received during such fiscal year from any Permitted Pad Sales of real property acquired by the Borrower. For purposes of this Section, (i) all obligations incurred under a Capitalized Lease shall be deemed to have been incurred on the date of execution of such lease and (ii) the amount of obligations incurred with respect to a Capitalized Lease on such date of execution of the lease shall be the capitalized amount thereof determined in accordance with GAAP. Section 6.5. No Negative Pledges. Enter into any agreements (a) prohibiting (or resulting in a default as a result of) the creation or assumption of any Lien upon the properties or assets of the Borrower or any of its Subsidiaries in favor of the Agent for the benefit of the Secured Parties (or any of them), except for restrictions contained in any lease prohibiting the mortgaging of such lease or of the property leased thereunder if either (i) such lease has a fair market value on the date of execution thereof of less than $100,000 or (ii) the Borrower or such Subsidiary shall have in good faith used reasonable efforts to obtain the agreement of the lessor that is a party thereto to exclude such restrictions from such lease and such lessor shall have refused so to agree, (b) requiring that the 80 Borrower or any Subsidiary also secure another obligation (other than any of the Secured Obligations) if any of the Secured Obligations are further secured or (c) restricting the ability of any Subsidiary to (i) pay dividends or make capital distributions to the Borrower or another Subsidiary, (ii) make Investments in the Borrower or any Subsidiary or (iii) repay Investments by the Borrower or another Subsidiary in such Subsidiary. Section 6.6. Termination of Plans. Take any action to terminate any of its Plans which could result in a material liability of the Borrower or any Subsidiary to any Person. Section 6.7. EBITDA; Debt to EBITDA Ratio. (a) Permit cumulative EBITDA for the four consecutive fiscal quarters ending nearest to the last day of the months listed below to be less than the amount specified opposite such month (increased, in the case of the first three periods set forth below, by the amount, if any, by which EBITDA for the fourth quarter of the Borrower's 1997 fiscal year exceeds $11.5 million): Fiscal Quarter Ending EBITDA February 1998 $ 43,200,000 May 1998 $ 33,600,000 August 1998 $ 39,200,000 November 1998 $ 59,300,000 February 1999 $ 62,400,000 May 1999 $ 66,500,000 August 1999 $ 70,600,000 November 1999 $ 74,500,000 February 2000 $ 78,800,000 May 2000 $ 87,000,000 August 2000 $ 95,700,000 November 2000 $101,000,000 February 2001 $103,000,000 May 2001 $106,200,000 August 2001 $109,100,000 November 2001 $113,400,000 February 2002 $113,700,000 May 2002 $113,100,000 August 2002 $115,800,000. 81 (b) Permit the Debt to EBITDA Ratio to be more, on the last day of any fiscal quarter of the Borrower ending during any month set forth below, than the ratio set forth opposite the applicable month below: Month Ratio February 1998 11.9 to 1 May 1998 15.0 to 1 August 1998 11.9 to 1 November 1998 7.2 to 1 February 1999 7.3 to 1 May 1999 6.9 to 1 August 1999 6.1 to 1 November 1999 5.6 to 1 February 2000 5.6 to 1 May 2000 4.9 to 1 August 2000 4.2 to 1 November 2000 3.7 to 1 February 2001 4.0 to 1 May 2001 3.9 to 1 August 2001 3.6 to 1 November 2001 3.3 to 1 February 2002 3.7 to 1 May 2002 3.7 to 1 August 2002 3.4 to 1 Section 6.8. Restricted Payments. Declare or make, any Restricted Payment, except: (i) (x) regular, scheduled or mandatory payments or mandatory prepayments of principal and interest on Debt for Borrowed Money and (y) optional prepayments of principal and interest on the Real Estate Financing and the Synthetic Lease Obligations (but only to the extent of the net proceeds of any Permitted Refinancing Debt incurred 82 for such purpose or the Net Cash Proceeds of the sale of any Property or other assets subject to the Real Estate Financing or the Synthetic Lease Loan Documents); (ii) transactions with Affiliates as expressly permitted under Section 6.9; and (iii) payments to the Borrower by a Subsidiary. Without limiting the foregoing, any exercise of a call with respect to the Real Estate Financing which entails the payment of a premium (whether or not with the net proceeds of Permitted Refinancing Debt or the sale of Property or other assets subject to the Real Estate Financing) shall require the prior written consent of the Majority Term Lenders and the Majority Revolving Lenders, acting together (or, failing that, Lenders whose Ratable Proportion, taken together, at least equals 66-2/3%). Section 6.9. Transactions with Affiliates. Sell or transfer any Property or other assets to, or otherwise engage in any other transactions with, any of its Affiliates other than in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower, or the affected Subsidiary, than could be obtained on an arm's-length basis from unrelated third parties. Section 6.10. Investments, Loans and Advances. Purchase, hold or acquire any capital stock, evidences of Debt or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment in, any other Person by the Borrower or any Subsidiary (all of the foregoing, "Investments"), except, in the case of the Borrower, for (i) the ownership by the Borrower of capital stock of any Subsidiary existing on the date hereof, (ii) Temporary Cash Investments; provided however that while any Loans or Letters of Credit are outstanding or any Commitments are in effect such Investments shall not exceed $15,000,000 in the aggregate at any one time outstanding and shall be maintained at all times in an investment account located in the United States with a Lender pursuant to arrangements which are consistent with the provisions of this Agreement, (iii) existing Investments set forth on Schedule 6.10, but not any increase in the amount thereof, (iv) Investments in Subsidiaries created or acquired after the Effective Date which constitute Dual Path Capital Expenditures in an aggregate amount not to exceed $10 million for all such Subsidiaries at any one time outstanding; provided, that the related shares of capital stock or other equity securities are pledged by the Borrower for the benefit of the Secured Parties pursuant to a Supplement, substantially in the form of Annex B to the Security and Pledge Agreement, and the Borrower causes each such Subsidiary to comply with the requirements of Section 5.11 (it being agreed that an Investment in a Subsidiary will no longer be deemed to be outstanding if such Subsidiary is merged into the Borrower) and provided further, that all such Subsidiaries are incorporated in a jurisdiction in the United States and substantially all of their assets are at all times located in the United States, (v) Investments in promissory notes representing the non-cash purchase price for the sales of assets permitted under Section 6.3(b); provided, that such promissory notes are pledged by the Borrower to the Agent for the benefit of the Secured Parties pursuant to a Supplement, substantially in the form of Annex A to the Security and Pledge Agreement; (vi) Minority Investments, in addition to those permitted under any other clause of this Section, in Persons organized or 83 incorporated in a jurisdiction in the United States, substantially all of whose assets are located in the United States; provided, that such Minority Investments constitute Dual Path Capital Expenditures and the aggregate amount of all such Minority Investments shall not exceed $2,000,000; and (vii) Investments (not permitted by any of clauses (i) through (vi) of this Section) in an amount not exceeding $1,000,000 in the aggregate outstanding at any one time; provided, that any shares of capital stock or other equity securities or promissory notes or other instruments comprising such Investments are pledged by the Borrower to the Agent for the benefit of the Secured Parties pursuant to a Supplement, substantially in the form of Annex B to the Security and Pledge Agreement. Section 6.11. Business Segments. (i) Suspend the operation of a segment material to the operation of its business as presently conducted, which suspension could materially impair the operations of the Borrower and its Subsidiaries taken as a whole; or (ii) engage at any time in any business or business activity other than the business currently conducted by it and business activities reasonably incidental thereto. Section 6.12. Accounting Changes. Make any significant change in its accounting treatment or financial reporting practices except as required by GAAP or change its fiscal year or the method of determining its fiscal quarter ends. Section 6.13. Amendment and Modification of Certain Documents. (a) Directly or indirectly, amend, modify, supplement, waive compliance with, or assent to noncompliance with any term, provision or condition of the Certificate of Incorporation of the Borrower as in effect on the Effective Date which the Agent or the Majority Revolving Lenders deem material. (b) Directly or indirectly, amend, modify, supplement, waive compliance with, or assent to noncompliance with, any term, provision or condition of the UBS Loan Agreement or any of the other UBS Loan Documents as in effect on the Effective Date hereof (A) which the Agent or the Majority Revolving Lenders deem material (including, without limitation, terms, provisions or conditions relating to events of default, acceleration rights or other remedies, tenor, interest rates, substitution of collateral, the non-recourse nature of such financing, covenants and prohibitions against amending any of the Loan Documents) or (B) which the Agent reasonably determines would place any further material restrictions on the Borrower or its Subsidiaries or materially increase the obligations of the Borrower or any of its Subsidiaries thereunder or confer on the holders thereof any material additional rights; and (c) Directly or indirectly, amend, modify, supplement, waive compliance with or assent to noncompliance with any term, provision or condition of the Synthetic Lease Loan Documents as in effect on the Effective Date (A) which the Agent or the Majority Revolving Lenders deem material (including, without limitation, terms, provisions or conditions relating to covenants, events of default, acceleration rights or other remedies, substitution of collateral, interest rates, tenor, prohibitions against amending any of the Loan Documents or requiring prepayments with respect to store closings) or (B) which the Agent reasonably determines would place any further material 84 restrictions on the Borrower or its Subsidiaries or increase the obligations of the Borrower or its Subsidiaries thereunder or confer on the holders thereof any material additional rights. Section 6.14. Sale/Lease-Backs. Enter into any arrangements, directly or indirectly, with any Person, whereby the Borrower or any such Subsidiary shall sell or transfer any property, whether now owned or hereafter acquired, used or useful in its business, in connection with the rental or lease of the property so sold or transferred. Section 6.15. Environmental Matters. (a) Use, generate, manufacture, produce, store, release, discharge or dispose of on, under or about any real property owned or leased (other than any such leased property which constitutes a minor part of a larger piece of property over which the Borrower or any such Subsidiary has any control (such as a lease of a small number of parking places in a large parking lot)) by the Borrower or any such Subsidiary (all such owned or leased real property, being hereinafter called the "Property"), or transport to or from the Property, any Hazardous Substance, or (to the extent within the Borrower's or any such Subsidiary's control) permit any other Person to do so, where such could reasonably be expected to have a Material Adverse Effect. (b) Fail to keep and maintain the Property in compliance with any Environmental Law where the failure to do so could reasonably be expected to have a Material Adverse Effect. (c) In the event that any investigation, site monitoring, containment, cleanup, removal, restoration or other remedial work of any kind or nature (the "Remedial Work") with respect to any portion of the Property is required to be performed by the Borrower or any of its Subsidiaries under any applicable Requirement of Law, or by any Governmental Authority or any other Person because of, or in connection with, any current or future presence, suspected presence, release or suspected release of a Hazardous Substance in or into the air, soil, groundwater or surface water at, on, under or within the Property (or any portion thereof), which could reasonably be expected to have a Material Adverse Effect (i) fail to notify the Agent promptly in writing, (ii) fail to commence, as soon as practicable, and thereafter diligently prosecute to completion, all such Remedial Work or (iii) fail to provide the Agent with the results of such investigations, studies and samplings as may be requested by the Agent. (d) As used herein, (i) "Environmental Law" means any federal, state or local law, statute, ordinance, or regulation now or hereafter in effect pertaining to health, safety, industrial hygiene, or environmental conditions, including, without limitation, regulations promulgated under the Resource Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et seq.) and (ii) the term "Hazardous Substance" means those substances included within the definitions of "hazardous substances", "hazardous materials", "toxic substances" or "solid waste" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss.6901 et seq. and the Hazardous Materials Transportation Act, 49 U.S.C. ss.5101 et seq., the Toxic Substance Control Act, 15 U.S.C. ss.2601 et seq., the Clean Water Act, 33 U.S.C. ss.1251 et seq., and the Clean Air Act, 42 U.S.C. ss.7401 et seq. and in the regulations promulgated pursuant to said laws, and such other substances, materials and 85 wastes which are or become regulated under applicable local, state or federal law, or which are classified as hazardous or toxic under federal, state, or local laws or regulations or any other substance which may give rise to liability under any Environmental Laws. Section 6.16. Rent Obligations. Create or permit any obligations for the payment of rent or occupancy of premises with respect to operating leases in the aggregate for the Borrower and its Subsidiaries, in any fiscal year of the Borrower set forth below in an amount in excess of the amount set forth opposite such year: Fiscal Year Rent 1998 $26,000,000 1999 $28,000,000 2000 $30,000,000 2001 $32,000,000 2002 $34,000,000. SECTION 7. EVENTS OF DEFAULT Section 7.1. Events of Default. In the case of the happening of any of the following events and the continuance thereof beyond the applicable period of grace, if any (each, an "Event of Default"): (a) any material representation or warranty made by the Borrower in this Agreement or in any other Loan Document or in connection with this Agreement or any other Loan Document or in connection with the execution and delivery of this Agreement or any of the other Loan Documents or the credit extensions hereunder or any material statement or representation made in any report, financial statement, certificate or other document furnished by the Borrower to the Agent, the Underwriters, the Lenders or the Fronting Banks under or in connection with this Agreement or any of the other Loan Documents, shall prove to have been false or misleading in any material respect when made or delivered; or (b) default shall be made in the payment of any principal of or interest on the Loans or any other amounts payable by the Borrower hereunder (including, without limitation, any Fees or reimbursement or cash collateralization obligations in respect of Letters of Credit), when and as the same shall become due and payable, whether at the due date thereof (including, without limitation, the relevant Maturity Date) or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; or 86 (c) default shall be made by the Borrower in the due observance or performance of any covenant, condition or agreement contained in Section 6 (and such default shall continue unremedied after notice to the Borrower in the case of Section 6.9) or in Section 5.11; or (d) default shall be made by the Borrower or any Subsidiary in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Agreement or any of the other Loan Documents and such default shall continue unremedied (w) in the case of Section 5 (other than Sections 5.1(a), (b) and (t), 5.2, 5.3(a), 5.5, 5.7, 5.9, 5.10, 5.14 and 5.16), after notice to the Borrower, (x) in the case of Sections 5.1(a), (b) and (t) and 5.14, for more than five (5) days after notice to the Borrower, (y) in the case of Sections 5.2 and 5.5, for more than thirty (30) days after notice to the Borrower and (z) in all other cases, for more than ten (10) days after notice to the Borrower; or (e) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall become unable, admit in writing its inability or fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (f) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (g) other than as provided in the Plan of Reorganization and upon the Substantial Consummation thereof, a Change of Control shall have occurred; or (h) any material provision of any Loan Document shall, for any reason, cease to be valid and binding on the Borrower or any Subsidiary, or the Borrower or such Subsidiary shall so assert in any pleading filed in any court; or (i) the Confirmation Order shall be reversed, revoked or vacated in whole or in part by a court of competent jurisdiction, or modified in a manner or subjected to a stay that adversely affects the Borrower's or any Subsidiary's ability to perform any of the Secured Obligations as determined by the Special Required Lenders or the Required Revolving Lenders, as the case may be, in their sole discretion; or 87 (j) any judgment or order as to a liability or Debt for the payment of money in excess of $5,000,000 shall be rendered against the Borrower or any Subsidiary and the enforcement thereof shall not be subject to any applicable stay; or (k) any non-monetary judgment or order shall be rendered against the Borrower or any Subsidiary which does or would reasonably be expected to (i) cause a Material Adverse Effect, or (ii) have a material adverse effect on the rights and remedies of the Agent, the Underwriters, the Fronting Banks or any Lender under any Loan Document, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (l) (i) any Event of Default occurs under the Synthetic Lease Loan Documents or the UBS Loan Documents or (ii) the Borrower or any Subsidiary shall fail to make any payment in respect of any other Debt aggregating $3,000,000 or more, in each case when due or within any applicable grace period or any event or condition shall occur which (x) results in the acceleration of the maturity of such other Debt or the termination of any commitment to lend any such other Debt or (y) enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such other Debt or any Person acting on such holder's behalf to accelerate the maturity thereof or terminate any commitment to lend such other Debt; or (m) any ERISA Event shall have occurred with respect to a Plan and, 30 days after notice of such occurrence shall have been given to the Borrower by the Agent (i) such ERISA Event shall still exist and (ii) the sum (determined as of the date of occurrence of such ERISA Event) of the Insufficiency of such Plan and the Insufficiency of any and all other Plans with respect to which an ERISA Event shall have occurred and then exist (or, in the case of a Plan with respect to which an ERISA Event described in clauses (b), (c), (e) and (f) of the definition of ERISA Event shall have occurred and then exist, the liability related thereto) is equal to or greater than $3,000,000; (n) the Borrower, any Subsidiary or any ERISA Affiliate of any of them shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower, any Subsidiary or any ERISA Affiliate of any of them as Withdrawal Liability (determined as of the date of such notification), exceeds $5,000,000 or requires payments exceeding $2,000,000 per annum; (o) the Borrower, any Subsidiary or any ERISA Affiliate of any of them shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated within the meaning of Title IV of ERISA if, as a result of such reorganization or termination, the aggregate annual contributions of the Borrower, the Subsidiaries and their ERISA Affiliates to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased over the aggregate amounts contributed to such Multiemployer Plans for the respective plan year of each such Multiemployer Plan immediately preceding the plan year in which the reorganization or termination occurs by an amount exceeding $2,000,000; or 88 (p) it shall be determined (whether by the Bankruptcy Court or by any other judicial or administrative forum) that the Borrower or any Subsidiary is liable for the payment of claims arising out of any failure to comply (or to have complied) with applicable Environmental Laws, the payment of which will have a Material Adverse Effect; then, and in every such event and at any time thereafter during the continuance of such event, the Agent may, and at the request of the Special Required Lenders or the Required Revolving Lenders (as the case may be) shall, by notice to the Borrower, take one or more of the following actions, at the same or different times: (i) terminate forthwith the Total Commitments; (ii) declare the Loans then outstanding to be forthwith due and payable, whereupon the principal of the Loans, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document (including, without limitation, all amounts due in respect of Letter of Credit Outstandings, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder), shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; (iii) require the Borrower upon demand to forthwith deposit in the respective Letter of Credit Accounts cash in the respective amounts equal to the sum of 105% of the then outstanding Standby and Documentary Letters of Credit (including any subsequent increases in the principal amounts thereof pursuant to provisions of such Letters of Credit as then in effect) and, to the extent the Borrower shall fail to furnish such funds as demanded by the Agent, the Agent shall be authorized to debit or cause to be debited the account of the Borrower maintained with the Agent or any other Secured Party in such amount; (iv) set-off or cause to be set-off amounts in the Letter of Credit Accounts or any other accounts maintained with the Agent or any other Secured Party and apply or cause such amounts to be applied to the obligations of the Borrower hereunder and under the other Loan Documents; and (v) exercise and enforce any and all remedies under the Loan Documents and under applicable law available to the Agent, the Fronting Banks and the Lenders; provided, that without any notice to the Borrower or any other act by the Agent or the Lenders, in the case of the occurrence of (x) any of the Events of Default specified in clauses (e) or (f) above with respect to the Borrower or any Subsidiary or (y) any of the Events of Default specified in clause (l) above with respect to the Real Estate Financing as to which UBS either accelerates the maturity of any of the Debt owing by the Borrower or any of its Subsidiaries to UBS with respect thereto or otherwise exercises any of its rights or remedies to liquidate, realize or foreclose upon any collateral securing such Debt, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) and all other Secured Obligations and liabilities of the Borrower hereunder and under the other Loan Documents (including, without limitation, all amounts due in respect of Letters of Credit Outstanding, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall become immediately due and payable as if the Letters of Credit had been drawn in full without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. In the case of any exercise of the right of set-off with respect to Letter of Credit Accounts, such right may be exercised only to pay unreimbursed draws under, and unpaid fees, costs and expenses incurred in connection with, any Letters of Credit issued by the Fronting Bank in the name of which Fronting Bank such Letter of Credit Account is maintained, 89 except to the extent that the balance of a Letter of Credit Account exceeds 105% of the Letter of Credit Outstandings (including any subsequent increases in the principal amounts thereof pursuant to provisions of such Letters of Credit as then in effect) that pertain to such Letter of Credit Account. Any such excess amount may be applied to other Secured Obligations. Section 7.2. Application of Proceeds. If a Default or an Event of Default shall have occurred and be continuing, all proceeds of the Collateral and all other payments received under this Agreement or the other Loan Documents (including as a result of or in connection with a proceeding under the Bankruptcy Code or any other similar state law proceeding involving the Borrower) which constitute identifiable proceeds of Collateral shall be applied by the Agent to payment of the Secured Obligations in the following order: (i) FIRST, to payment of all unreimbursed costs and expenses of the Agent which are payable by the Borrower pursuant to any of the Loan Documents and all unreimbursed costs and expenses of the Lenders which are payable pursuant to Section 9.5; (ii) SECOND, to payment first of the accrued and unpaid interest on, next the principal of and then all other amounts due under the Loan Documents in respect of the New Revolving Loans, any other Revolving Obligations (including any obligation of the Borrower to reimburse the Fronting Banks for unreimbursed drawings made under Letters of Credit and the cash collateralization of any undrawn Letters of Credit in an amount equal to 105% of the then undrawn amount thereof (including any subsequent increases in the principal amounts thereof pursuant to provisions of such Letters of Credit as then in effect)), any Hedging Obligations and any Cash Management Obligations remaining unpaid after the exercise of any set-off rights available to the Fronting Banks, the Hedging Bank or the Cash Management Banks pursuant to Section 2.23, such payment to be made ratably amongst the New Revolving Lenders, the Hedging Bank and the Cash Management Banks in accordance with the proportion which the aggregate principal amount of the outstanding New Revolving Loans owing to the New Revolving Lenders, or the aggregate amount of any of such other Secured Obligations (other than Term Obligations), at the time bears to the principal amount of all of such Revolving Obligations, Hedging Obligations and Cash Management Obligations, until such interest, principal and other amounts shall be paid in full (and, if the Total Commitments have not already been terminated at the time of any application of proceeds to the payment of the principal of the New Revolving Loans or Letter of Credit Outstandings, or to cash collateralize Letters of Credit, the Total Commitments shall be automatically and irrevocably reduced by the amount of such principal payment or the amount of the Letters of Credit cash collateralized, as the case may be); 90 (iii) THIRD, to payment first of the accrued and unpaid interest on, next the principal of and then all other amounts due under the Loan Documents in respect of the New Term Loans and any other Term Obligations, ratably amongst the New Term Lenders in accordance with the proportion which the aggregate principal amount of the outstanding Term Obligations owing to the New Term Lenders at the time bears to the aggregate principal amount of such Term Obligations until the interest on and principal of the Term Obligations shall be paid or provided for in full; (iv) FOURTH, to the payment of any remaining unpaid Secured Obligations ratably amongst the Secured Parties in accordance with the proportion which the amount of such other Secured Obligations owing to each such Secured Party bears to the aggregate principal amount of such other Secured Obligations owing to all of the Secured Parties until such other Secured Obligations shall be paid in full; and (v) FIFTH, the balance, if any, after all of the Secured Obligations have been satisfied, shall be returned to the Borrower or paid over to such other Person as may be required by law. The Borrower acknowledges and agrees that it shall remain liable to the extent of any deficiency between (x) the amount of the proceeds of the Collateral and all other payments received under this Agreement and applied pursuant to this Section to the sums referred to in the FIRST through FOURTH clauses above and (y) the aggregate amount of the sums referred to in the FIRST through FOURTH clauses above. SECTION 8. THE AGENT; THE ADMINISTRATIVE AGENT Section 8.1. Appointment and Authorization. Each Secured Party irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers, under this Agreement and the Notes and the other Loan Documents as are delegated to the Agent, as the case may be, by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Section 8.2. Agent and Affiliates. The Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same, as though it were not the Agent, and the Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if it were not the Agent. Section 8.3. Action by Agent. The obligations of the Agent hereunder and under the other Loan Documents are only those expressly set forth herein and therein. Without limiting the generality of the foregoing, Agent shall not be required to take any action with respect to any Default, except 91 as expressly provided in Section 7 and in the Security Documents and except that the Agent shall take such action with respect to such Default as shall be reasonably directed by the Special Required Lenders or the Required Revolving Lenders, as the case may be; provided, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable. Section 8.4. Consultation with Expoerts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 8.5. Liability of Agent. Notwithstanding any other provision, express or implied, to the contrary in this Agreement or any other Loan Document, neither the Agent nor any of its directors, officers, agents, employees, attorneys-in-fact or Affiliates shall be liable for any action taken or not taken by them in connection herewith or in connection with any other Loan Document (i) with the consent or at the request of the applicable Lenders, or (ii) in the absence of their own gross negligence or willful misconduct, as determined by a final order or judgment of a court of competent jurisdiction. Neither the Agent nor any of its directors, officers, agents, employees, attorneys-in-fact or Affiliates shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement, any other Loan Document or any Borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Section 4 (except where the satisfaction of the Agent is specifically required); or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes, any Letter of Credit, any other Loan Document or any other instrument or writing furnished in connection herewith or therewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire or similar writing) believed by it in good faith to be genuine or to be signed by the proper party or parties. Section 8.6. Reimbursement and Indemnification; Set-Off. (a) Each Lender agrees (i) to reimburse (x) the Agent and the Fronting Banks, on demand, in Ratable Proportion, for any expenses and fees incurred by the Agent or the Fronting Banks (as the case may be) for the benefit of the Lenders under or in connection with this Agreement, the Notes and any of the Loan Documents including, without limitation, counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, and any other expense incurred in connection with the operations or enforcement hereof or thereof not required to be reimbursed by the Borrower and (y) the Agent and the Fronting Banks in Ratable Proportion for any expenses, costs, fees or disbursements of the Agent or the Fronting Banks (as the case may be) incurred for the benefit of the Lenders that the Borrower has agreed to reimburse pursuant to Section 9.5 and has failed so to reimburse and (ii) to indemnify and hold harmless the Agent and the Fronting Banks and any of their respective directors, officers, employees, agents, advisors, consultants, attorneys-in-fact, experts, other professional persons and representatives and Affiliates, on demand, in Ratable Proportion from and against any and all penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of 92 money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceedings, or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise, which may be imposed on, incurred by, or asserted against any of them in any way relating to or arising out of this Agreement, the Notes or any of the other Loan Documents or any action taken or omitted by it or any of them under this Agreement, the Notes or any of the other Loan Documents to the extent not reimbursed by the Borrower (except such as shall result from their respective gross negligence or willful misconduct as determined by a final order or judgment of a court of competent jurisdiction). Without limiting the foregoing, the agreements contained in Section 10.6 of the Pre-Petition Credit Agreement shall continue in full force and effect as to the matters covered thereby. (b) The Agent is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all amounts received by the Agent for the account of a Defaulting Lender to the satisfaction of the unpaid obligations owing by such Defaulting Lender to the Agent, a Fronting Bank or CIBC, as the issuer of the Pre-Petition Letters of Credit and the rights of such Defaulting Lender with respect to all such amounts shall be subject and subordinate to the rights of the Agent, the relevant Fronting Bank, and CIBC, as the issuer of the Pre-Petition Letters of Credit, as the case may be, to be paid the amounts owing to it by such Defaulting Lender. Section 8.7. Credit Decision. Each Secured Party expressly acknowledges that neither the Agent nor any of its directors, officers, employees, agents, advisors, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Secured Party. Each Secured Party acknowledges that it has independently and without reliance upon the Agent or any other Secured Party, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Secured Party also acknowledges that it will independently and without reliance upon the Agent or any other Secured Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Except for notices, reports and other documents expressly required to be furnished to the Secured Parties by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Secured Party with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any Subsidiary which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. Section 8.8. Notice of Transfer. The Agent may deem and treat a Lender party to this Agreement as the owner of such Lender's portion of the Loans for all purposes, unless and until a written notice of the assignment or transfer thereof executed by such Lender and its assignee in accordance with Section 9.3 shall have been accepted by the Agent. Section 8.9. Successor Agent. The Agent may resign at any time by giving written notice thereof to the other Secured Parties and the Borrower. Upon any such resignation, the Majority Term 93 Lenders and the Majority Revolving Lenders, acting together (or, failing that, Lenders whose Ratable Proportion, taken together, at least equals 66-2/3%) shall have the right to appoint a successor Agent, which shall be reasonably satisfactory to the Borrower. If no successor Agent shall have been so appointed and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation, the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of a least $100,000,000, which shall be reasonably satisfactory to the Borrower. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement, except that CIBC shall remain obligated to First Bank in its capacity as Documentary Letter of Credit Bank with respect to Documentary Letters of Credit issued during the period that CIBC was the Agent. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. Section 8.10. Concerning the Administrative Agent. Notwithstanding any other provision of this Agreement, it is understood and agreed that the Administrative Agent shall have no obligations or duties under this Agreement and the other Loan Documents except such as are expressly set forth in this Agreement or the other Loan Documents. SECTION 9. MISCELLANEOUS Section 9.1. Notices. Notices and other communications provided for herein shall be in writing (including telegraphic, telex, facsimile or cable communication) and shall be mailed, telegraphed, telexed, transmitted, cabled or delivered to the Borrower at 2300 Main Street, 2 Pershing Square, 3rd Floor, Kansas City, MO 64108, Attention: Chief Financial Officer, to First Bank, so long as it shall be the Documentary Letter of Credit Bank, at 601 2nd Avenue South, Minneapolis, Minnesota 55402, Attention: Jack Quitmeyer (Fax No. 612-973-2148) and Barbara Engen, Letter of Credit Department (Fax No. 612-973-0838), and to any Lender, any other Fronting Bank or the Agent it at its address set forth on the signature pages of this Agreement, or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail; or when delivered to the telegraph company, charges prepaid, if by telegram; or when receipt is acknowledged, if by any telegraphic communications or facsimile equipment of the sender; in each case addressed to such party as provided in this Section or in accordance with the latest unrevoked written direction from such party; provided, that in the case of notices to the Agent, notices pursuant to the preceding sentence and pursuant to Section 2 shall be effective only when received by the Agent. Section 9.2. Survival of Agreement, Representations and Warranties, etc. All warranties, representations and covenants made by the Borrower herein or in any certificate or other instrument 94 delivered by it or on its behalf in connection with this Agreement shall be considered to have been relied upon by the Secured Parties and shall survive the making of the Loans herein contemplated, the issuance of the Letters of Credit and the issuance and delivery to the Lenders of the Notes, regardless of any investigation made by any Lender or Fronting Bank or on its behalf and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as the Total Commitments have not expired or been terminated. Section 9.3. Successors and Assigns. (a) (i) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent, the Fronting Banks, the Lenders, the Underwriters and the other Secured Parties and their respective successors and assigns. The Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Lenders and, in the case of its rights and obligations with respect to Letters of Credit, the relevant Fronting Bank. (ii) Each Lender may sell participations to any Person in all or part of any Loan, or all or part of its Notes or Commitment, in which event, without limiting the foregoing, the provisions of Sections 2.13, 2.14 and 2.17 shall inure to the benefit of each purchaser of a participation (provided, that such participant shall look solely to the seller of such participation for such benefits, and the Borrower's liability, if any, under Sections 2.13, 2.14 and 2.17 shall not be increased as a result of the sale of any such participation) and the pro rata treatment of payments, as described in Section 2.16, shall be determined as if such Lender had not sold such participation. In the event any Lender shall sell any participation, such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower relating to the Loans including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement (provided, that such Lender may grant its participant the right to consent to such Lender's execution of amendments, modifications or waivers which (i) reduce any Fees payable hereunder to the Lenders, (ii) reduce the amount of any scheduled principal payment on any Loan or reduce the principal amount of any Loan or the rate of interest payable hereunder or (iii) extend the maturity of the Borrower's obligations hereunder). The sale of any such participation shall not alter the rights and obligations of the Lender selling such participation hereunder with respect to the Borrower. (iii) Each Pre-Petition L/C Participant may sell participations to any Person in all or a portion of its rights and obligations under Section 9.14(c) of this Agreement, together with its obligations under the Pre-Petition Credit Agreement referred to therein (collectively, its "Pre-Petition L/C Obligations"); provided, that (x) such Pre-Petition L/C Participant shall retain the sole right to receive payments and to approve any amendment, modification or waiver with respect to Section 9.14(c), if any, (provided, that such Pre-Petition L/C Participant may grant its participant the right to consent to such Pre-Petition L/C Participant's execution of any amendments, modifications or waivers) and (y) the sale of any such participation shall not alter the rights and obligations of the Pre-Petition L/C Participant selling such participation hereunder with respect to CIBC. 95 (b) (i) Each Lender may assign to one or more Lenders or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the same portion of the related New Revolving Loans at the time owing to it and the related Note held by it); provided, that (w) other than in the case of an assignment to a Person at least 50% owned by the assignor Lender, or by a common parent of both, or to another Lender, the Agent must give its prior written consent, which consent will not be unreasonably withheld, (x) the aggregate amount of the Commitment and/or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall, unless otherwise agreed to in writing by the Borrower and the Agent, in no event be less than $5,000,000 (or $1,000,000 in the case of an assignment between Lenders) unless the Commitment and New Revolving Loans or the New Term Loans (as the case may be) so assigned constitute 100% of such Commitment and New Revolving Loans or New Term Loans of the assigning Lender, (y) each assignment shall be of a constant, not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement in respect of (A) its Commitment and New Revolving Loans, (B) its New Term Loans or (C) its Commitment and New Revolving Loans and its New Term Loans and (z) it shall not be necessary for any Lender to sell the same percentage of its Commitment and New Revolving Loans and its New Term Loans (as the case may be) (although each such percentage of its Commitment and New Revolving Loans and its New Term Loans must be a constant, not a varying percentage). The Agent shall advise the Fronting Banks that it has received such Assignment and Acceptance and shall provide a copy thereof to each of the Fronting Banks. (ii) Each Pre-Petition L/C Participant may assign to one or more Lenders or Eligible Assignees all or a portion of its Pre-Petition L/C Obligations; provided, that (w) other than in the case of an assignment to a Person at least 50% owned by the assignor Pre-Petition L/C Participant, or by a common parent of both, or to another Lender, the Agent must give its prior written consent, which consent will not be unreasonably withheld, (x) the aggregate amount of such Pre-Petition L/C Participant's Pre-Petition L/C Obligations subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall, unless otherwise agreed to in writing by the Borrower and the Agent, in no event be less than $1,000,000 unless the Pre-Petition L/C Participant's Pre-Petition L/C Obligations so assigned constitute 100% of such Pre-Petition L/C Participant's Pre-Petition L/C Obligations, (y) each assignment shall be of a constant, not a varying, percentage of all of the assigning Pre-Petition L/C Participant's Pre-Petition L/C Obligations and (z) it shall not be necessary for any Pre-Petition L/C Participant to sell the same percentage of its Pre-Petition L/C Obligations as of its Commitments and New Revolving Loans and/or its New Term Loans (as the case may be). (iii) The parties to each such assignment entered into pursuant to paragraphs (b)(i) and/or (b)(ii) above shall execute and deliver to the Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance with blanks appropriately completed, together with any Note subject to such assignment and a processing and recordation fee of $3,500 (for which the Borrower shall have no liability). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date 96 shall be within ten Business Days after the execution thereof (unless otherwise agreed to in writing by the Agent in its sole discretion), (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (B) the Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement and the other Loan Documents, together with copies of the financial statements referred to in Section 3.4 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, any of the other Loan Documents and any other instrument or document furnished pursuant thereto; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement, any of the other Loan Documents and any other instrument or document furnished pursuant thereto, as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement are required to be performed by it as a Lender. (d) The Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders shall treat each Person the name of which is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 97 (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and the assignee thereunder, together with any Note subject to such assignment and the fee payable in respect thereof, the Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled: (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt written notice thereof to the Borrower (together with a copy thereof). Within five Business Days after receipt of notice, the Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for the surrendered Note, a new Note to the order of such assignee in an amount equal to the Commitment and/or Loans assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained Commitments and/or Loans hereunder, a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment and/or Loans retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the surrendered Note or Notes. Thereafter, such surrendered Note or Notes shall be marked canceled and returned to the Borrower. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided, that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree in writing to be bound by the provisions of Section 9.4. (1) (g) For purposes of this Section 9.3 (and for no other purpose), in connection with any assignment by any Pre-Petition L/C Participant of all or a portion of its Pre-Petition L/C Obligations, references in this Section 9.3 to a "Lender" and to "Lenders" shall be deemed to include such Pre-Petition L/C Participant to the extent the context of the relevant provision shall so require. Section 9.4. Confidentiality. The Agent and each Lender agree to keep any information delivered or made available by the Borrower to it confidential from anyone other than persons employed or retained by the Agent or such Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided, that nothing herein shall prevent the Agent or any Lender from disclosing such information (i) to any other Lender, (ii) to any other person if reasonably incidental to the administration of the Loans, (iii) upon the order of any court or administrative agency, (iv) upon the request or demand of any regulatory agency or authority, (v) which has been publicly disclosed other than as a result of a disclosure by the Agent or any Lender which is not permitted by this Agreement, (vi) in connection with any litigation to which the Agent, any Lender, or their respective Affiliates may be a party to the extent reasonably required, (vii) to the extent reasonably required in connection with the exercise of any remedy hereunder, (viii) to the Agent's and such Lender's legal counsel, financial advisors and independent auditors, and (ix) to any actual or proposed participant or assignee of all or part of its rights hereunder subject to the proviso in Section 9.3(f). 98 Section 9.5. Expenses. Whether or not the transactions hereby contemplated shall be consummated, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Agent (including, but not limited to, the reasonable fees and disbursements of Zalkin, Rodin & Goodman LLP, special counsel for the Agent ("ZR&G"), Shook Hardy & Bacon L.L.P., special local and special real estate counsel for the Agent, any other counsel that the Agent shall retain and any third-party consultants, accountants and auditors advising the Agent or ZR&G, including (without limitation) Ernst & Young LLP, financial advisors to ZR&G), any Fronting Bank (including, but not limited to, the reasonable fees and disbursements of Dorsey & Whitney LLP, special counsel for First Bank) and any Lender or any Underwriter in connection with the preparation, execution, delivery and administration of this Agreement, the Notes and the other Loan Documents, the making of the Loans and the issuance of the Letters of Credit, the perfection of the Liens contemplated hereby, the syndication of the transactions contemplated hereby, any consent or waiver hereunder or thereunder, and any amendment or modification hereof or thereof, the reasonable and customary costs, fees and expenses of the Agent in connection with its monthly and other periodic field audits and monitoring of assets and, following the occurrence of an Event of Default, all reasonable out-of-pocket expenses incurred by the Underwriters, the Lenders, the Fronting Banks and the Agent in the enforcement or protection of the rights of any one or more of the Underwriters, the Lenders, the Fronting Banks or the Agent in connection with this Agreement, the Notes or the other Loan Documents including, but not limited to, the reasonable fees and disbursements of any counsel for the Underwriters, Lenders, the Fronting Banks or the Agent (including, without limitation, the allocated costs of in-house counsel). Such payments shall be made on demand upon delivery of a statement setting forth such costs and expenses. Whether or not the transactions hereby contemplated shall be consummated, the Borrower agrees to reimburse the Agent and the Underwriters for the expenses set forth in the Commitment Letter, and the reimbursement provisions thereof are hereby incorporated herein by reference. The obligations of the Borrower under this Section shall survive the termination of this Agreement and/or the payment and performance of the Secured Obligations. Section 9.6. Indemnities. (a) The Borrower agrees to defend, indemnify and hold harmless the Agent, the Lenders and the other Secured Parties and their respective directors, officers, employees, agents, advisors, consultants, attorneys-in-fact, experts, other professional persons and representatives and Affiliates (each, an "Indemnified Party"), on demand, from and against any and all penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceedings or disbursements incurred by such Indemnified Party, of any kind or nature whatsoever, known or unknown, contingent or otherwise, arising out of claims made by any Person in any way relating to the transactions contemplated hereby, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise solely out of or result from the gross negligence or willful misconduct of such Indemnified Party, as determined by a final order or judgment of a court of competent jurisdiction. (b) Without limiting the foregoing, the Borrower agrees to defend, indemnify and hold harmless each Indemnified Party, on demand, from and against any and all penalties, fines, 99 expenses, losses, settlements, costs, claims, causes of action, demands, liabilities, obligations, damages, actions, judgments, suits or disbursements incurred by such Indemnified Party, of any kind or nature whatsoever, known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Law applicable to the operations of the Borrower or any Subsidiary or the Property, or any orders, requirements or demands of Governmental Authorities or any other Person related thereto, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise solely out of or result from the gross negligence or willful misconduct of such Indemnified Party, as determined by a final order or judgment of a court of competent jurisdiction. (c) The indemnities set forth in this Section shall continue in full force and effect regardless of the termination of this Agreement and the payment and performance of the Secured Obligations. Section 9.7. CHOICE OF LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES AND BY FEDERAL LAW TO THE EXTENT APPLICABLE; PROVIDED, HOWEVER, THAT WITH RESPECT TO ANY MORTGAGE FILED IN JURISDICTIONS OUTSIDE OF THE STATE OF NEW YORK, THE LAWS OF SUCH JURISDICTION WHERE SUCH MORTGAGE WAS FILED SHALL APPLY. Section 9.8. No Waiver. No failure on the part of the Agent or any of the other Secured Parties to exercise, and no delay in exercising, any right, power or remedy hereunder or under the Notes or any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. Section 9.9. Extension of Maturity. Should any payment of principal of or interest on the Notes or any other amount due hereunder become due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension. Section 9.10. Amendments, etc. Unless otherwise specifically provided herein or in any other Loan Document, no amendment, modification or waiver of any provision of this Agreement, the Notes, the Security and Pledge Agreement or the other Loan Documents, and no consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and any such amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given; provided, that no such amendment, modification or waiver shall without the written consent of (i) all of the New Revolving Lenders and the Required Term Lenders, increase the Total Commitments; (ii) all of the New Revolving Lenders, (x) reduce the principal amount of any New Revolving Loan or the rate of interest payable thereon, or reduce any Fees payable hereunder in respect of the New Revolving Loans, (y) postpone the date 100 for any Commitment reduction or for any scheduled payment or any mandatory prepayment of principal, interest or Fees in respect of any New Revolving Loans or (z) amend, modify or waive any provision of this proviso (ii) or the definitions of Majority Revolving Lenders or Required Revolving Lenders; (iii) all of the New Term Lenders (x) reduce the principal amount of any New Term Loan or the rate of interest payable thereon, (y) postpone the date for any scheduled payment or any mandatory prepayment of principal or interest in respect of any New Term Loans or (z) amend, modify or waive any provision of this proviso (iii) or the definitions of Majority Term Lenders or Required Term Lenders; (iv) the Required Lenders, change the definition of Required Inventory or modify the substance of Sections 4.2(f) and 5.1(t) or the form of the Inventory Compliance Certificate; (v) the Required Pre-Petition Lenders, change the definition of Required Pre-Petition Lenders; and (vi) all of the Lenders, (w) amend, modify or waive any provision of this Agreement which provides for the unanimous consent or approval of the Lenders, (x) amend, modify or waive any provision of this Section (other than provisos (ii), (iii), (iv) and (v) above) or the definitions of Majority Lenders, Ratable Proportion, Required Lenders or Special Required Lenders, (y) substitute, discharge, surrender or release all or substantially all of the Collateral except as permitted by the Loan Documents or (z) change the percentage of Lenders holding Secured Obligations which may direct the Agent to take action pursuant to Section 7.1; and (vii) CIBC, as issuer of the Pre-Petition Letters of Credit, and all of the Pre-Petition L/C Participants, amend, modify or waive any provision of Section 9.14(c) or any provision of the Pre-Petition Credit Agreement referred to therein. No such amendment, modification or waiver may adversely affect the rights and obligations of the Agent or any Fronting Bank hereunder without its prior written consent. No notice to or demand on the Borrower shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not a Note shall have been marked to indicate such amendment, modification, waiver or consent, and any consent by a Lender, or any holder of a Note or any other Secured Obligation, shall bind any Person subsequently acquiring a Note (whether or not such Note is so marked) or such other Secured Obligations. No amendment to this Agreement shall be effective against the Borrower unless signed by the Borrower. Section 9.11. Invalidity; Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 9.12. Headings. Section headings used herein are for convenience only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. Section 9.13. Execution in Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same instrument. This Agreement shall become effective when the Agent shall have received counterparts hereof signed by all of the parties hereto and when the conditions contained or referred to in Section 4.1 shall have been satisfied or waived. 101 Section 9.14. Prior Agreements. (a) Subject to the provisions of Sections 9.14(b) and 9.14(c), this Agreement and the other Loan Documents represent the entire agreement of the parties with regard to the subject matter hereof and the terms of any letters and other documentation entered into between the Borrower and any Lender or the Agent prior to the execution of this Agreement which relate to Loans to be made hereunder shall be replaced by the terms of this Agreement; provided, that the obligations of the Borrower under the Commitment Letter and the Fee Letter shall survive the execution and delivery of this Agreement, except to the extent that such obligations are satisfied pursuant to or in connection with this Agreement. (b) The obligations of the Borrower under Sections 2.13, 2.14, 2.17, 5.11, 6.14, 9.5 and 9.6 of the DIP Credit Agreement and Sections 5.3, 5.4, 5.5, 5.9, 7.13, 8.28. 11.3 and 11.10 of the Pre-Petition Credit Agreement shall remain in full force and effect. (c) For the benefit of CIBC, as issuer of the Pre-Petition Letters of Credit, each New Term Lender which is also an L/C Participant (as defined in the Pre-Petition Credit Agreement) (each, a "Pre-Petition L/C Participant"), hereby (i) confirms its acceptance and purchase, pursuant to Section 3.4 of the Pre-Petition Credit Agreement, of an undivided interest in the Pre-Petition Letters of Credit in the amount set forth opposite its name on Annex B, (ii) acknowledges its understanding that, upon the occurrence of the Effective Date, the Borrower's reimbursement obligations under Sections 3.5 and 3.6 of the Pre-Petition Credit Agreement shall be discharged pursuant to the Plan of Reorganization and (iii) agrees that, upon any payment by CIBC under any Pre-Petition Letter of Credit, such Pre-Petition L/C Participant will pay to CIBC such Pre-Petition L/C Participant's share of such payment as determined in accordance with the provisions of the Pre-Petition Credit Agreement. Without limiting the foregoing, each Pre-Petition L/C Participant confirms that its agreements contained in Section 3.9 of the Pre-Petition Credit Agreement shall continue in full force and effect as to the matters covered thereby. In connection with the foregoing, (i) the Borrower acknowledges that CIBC is holding cash collateral pursuant to Section 9.2 of the Pre-Petition Credit Agreement with respect to the Pre-Petition Letters of Credit and hereby confirms its grant, assignment and pledge to CIBC, for its benefit and the ratable benefit of the Pre-Petition L/C Participants, of a first priority security senior in all of the Borrower's right, title and interest in and to such cash collateral and all proceeds thereof, senior to all other Liens (including, without limitation, the Liens securing the Secured Obligations), (ii) CIBC agrees to apply such cash collateral to reimburse itself in respect of any payment it makes under any Pre-Petition Letter of Credit prior to requesting that the Pre-Petition L/C Participants pay to CIBC their respective shares of any such payment and (iii) the Borrower acknowledges that the Borrower has no ownership or other interest of any kind whatsoever in any amounts paid by CIBC under any Pre-Petition Letter of Credit and that in the event a beneficiary of a Pre-Petition Letter of Credit returns any such amounts to the Borrower at any time, the Borrower will receive and hold the same in trust for, and will promptly pay the same to CIBC for the benefit of, CIBC and the Pre-Petition L/C Participants. (d) In the event of a conflict between the provisions of any of the Loan Documents and the Plan of Reorganization, such conflict shall be governed by the terms of the Loan Documents. 102 Section 9.15. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or Event of Default if such action is taken or condition exists. Section 9.16. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION. EACH OF THE BORROWER, THE AGENT, THE FRONTING BANKS, THE LENDERS AND EACH OTHER SECURED PARTY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THE LOAN DOCUMENTS OR THE COLLATERAL, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING BETWEEN THE BORROWER, ON THE ONE HAND, AND THE AGENT, THE FRONTING BANKS AND/OR ANY ONE OR MORE OF THE LENDERS OR OTHER SECURED PARTIES, ON THE OTHER HAND. THE BORROWER HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, OF ANY FEDERAL COURT, IN EACH CASE LOCATED IN NEW YORK COUNTY AND ANY APPELLATE COURT THEREFROM, IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY ONE OR MORE OF THE LOAN DOCUMENTS OR ANY DOCUMENT OR INSTRUMENT DELIVERED PURSUANT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE COLLATERAL AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT, OR TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT THE AGENT, ANY FRONTING BANK, ANY LENDER OR ANY OTHER SECURED PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE COLLATERAL AGAINST THE BORROWER, ANY SUBSIDIARY OR THEIR PROPERTIES OR ASSETS IN THE COURTS OF ANY JURISDICTION. THE BORROWER HEREBY WAIVES THE DEFENSES OF FORUM NON CONVENIENS AND IMPROPER VENUE. Section 9.17. Effect of Amendment and Restatement of the Pre-Petition Credit Agreement and the DIP Credit Agreement; Confirmation of Security Documents. On the Effective Date, the Pre-Petition Credit Agreement and the DIP Credit Agreement shall be amended and restated to read as set forth herein. The Borrower acknowledges and agrees that (i) the Liens securing payment of the Pre-Petition Obligations and the DIP Obligations are in all respects continuing and in full force and effect and secure the payment of the Secured Obligations and that the Notes outstanding under the Pre-Petition Credit Agreement and the DIP Credit Agreement are replaced by 103 the Notes issued hereunder and (ii) upon the effectiveness of this Agreement, all outstanding DIP Letters of Credit will be converted into Letters of Credit hereunder, in each case upon the terms and conditions set forth in this Agreement. Section 9.18. Reproduction of Documents. This Agreement, all documents constituting Annexes, Schedules or Exhibits hereto, and all documents relating hereto received by a party hereto, including, without limitation: (a) consents, waivers and modifications that may hereafter be executed; (b) the Security Documents and the other Loan Documents; and (c) financial statements, certificates, and other information previously or hereafter furnished to the Agent, any Lender or any other Secured Party may be reproduced by the party receiving the same by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. Each of the parties hereto agrees and stipulates that, to the extent permitted by law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such party in the regular course of business) and that, to the extent permitted by law, any enlargement, facsimile, or further reproduction of such reproduction shall likewise be admissible in evidence. 104 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and the year first written. PAYLESS CASHWAYS, INC. By: /s/ Stephen A. Lightstone ---------------------------------------- Title: Senior Vice President Two Pershing Square 2300 Main Street, 3rd Floor Kansas City, Missouri 64108 Telephone: (816) 234-6000 Fax: (816) 234-6077 CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent and as the Standby Letter of Credit Fronting Bank By: /s/ Robert N. Greer ---------------------------------------- Title: Assistant General Manager By: /s/ Nancy Deyirmenjian ---------------------------------------- Title: Assistant General Manager 425 Lexington Avenue New York, New York 10017 Attention: Agency Services Telephone: (212) 856-3711 Fax: (212) 856-3763 CANADIAN IMPERIAL BANK OF COMMERCE, as Hedging Bank By: /s/ Robert N. Greer ---------------------------------------- Title: Assistant General Manager By: /s/ Nancy Deyirmenjian ---------------------------------------- Title: Assistant General Manager 161 Bay Street, 8th Floor P.O. Box 500 Toronto, Ontario M5725A Attention: Wayne Halenda Telephone: (416) 594-8047 Fax: (416) 594-8230 105 CIBC OPPENHEIMER CORP., formerly known as CIBC Wood Gundy Securities Corp., as an Underwriter and as Co-arranger By: /s/ T.E. Doyle ---------------------------------------- Title: Managing Director 425 Lexington Avenue, 7th Floor New York, New York 10017 Attention: Dean Criares Telephone: (212) 856-3780 Fax: (212) 856-3763 CIBC INC., as a Pre-Petition Lender, a DIP Lender, a New Term Lender and a New Revolving Lender By: /s/ Robert N. Greer ---------------------------------------- Title: Executive Director 425 Lexington Avenue New York, New York 10017 Attention: Robert N. Greer Telephone: (212) 856-3881 Fax: (212) 856-4135 NATIONSBANK, N.A., as a Pre-Petition Lender, a DIP Lender, a New Term Lender, a New Revolving Lender, an Underwriter, as Syndication Agent and Co-arranger and as a Cash Management Bank By: /s/ Jay T. Wampler ---------------------------------------- Title: Senior Vice President Domestic and Eurodollar Lending Offices: 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Stacey Smith Telephone: (214) 508-0944 Fax: (214) 508-1864 106 All other notices: Attention: Jay T. Wampler Senior Vice President Telephone: (214) 508-3711 Fax: (214) 508-3533 LEHMAN COMMERCIAL PAPER INC. , as a Pre-Petition Lender, a DIP Lender, a New Term Lender, a New Revolving Lender, an Underwriter and as Documentation Agent By: /s/ Dennis J. Dee ---------------------------------------- Title: Vice President 3 World Financial Center, 10th Floor New York, New York 10285 Attention: Michele Swanson Telephone: (212) 526-0330 Fax: (212) 528-0819 GOLDMAN SACHS CREDIT PARTNERS L.P., as a Pre-Petition Lender, a DIP Lender, a New Term Lender, a New Revolving Lender, an Underwriter and as Administrative Agent By: /s/ John E. Urban ---------------------------------------- Title: Authorized Signer Domestic and Eurodollar Lending Offices: 85 Broad Street, 6th Floor New York, New York 10004 Attention: Alexa Komar Telephone: (212) 357-2625 Fax: (212) 357-4597 Other Notices: 85 Broad Street, 27th Floor New York, New York 10004 Attention: Marnie Gordon Telephone: (212) 902-2512 Fax: (212) 902-3757 107 and 85 Broad Street, 28th Floor New York, New York 10004 Attention: Jonathan Kolatch Telephone: (212) 902-8469 Fax: (212) 357-0922 CARGILL FINANCIAL SERVICES CORPORATION, as a Pre-Petition Term Lender, a DIP Lender, a New Term Lender and a New Revolving Lender By: /s/ Patrick J. Halloran ---------------------------------------- Title: Vice President 6000 Clearwater Drive Minnetonka, Minnesota 55343 Attention: Susan Peterson Telephone: (612) 984-3081 Fax: (612) 984-3913 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, as a Pre-Petition Lender, a DIP Lender, a New Term Lender and a New Revolving Lender By: /s/ Kathleen A. Zarn ---------------------------------------- Title: Vice President One Parkview Plaza, 5th Floor Oak Brook Terrace, Illinois 60181 Attention: Jeffrey W. Maillet Telephone: (630) 684-6438 Fax: (630) 684-6741 108 U.S. BANK NATIONAL ASSOCIATION, as a Pre-Petition Lender and a New Term Lender , as the Documentary Letter of Credit Fronting Bank and as a Cash Management Bank By: /s/ Jack L. Quitmeyer ---------------------------------------- Title: Vice President Domestic and Eurodollar Lending Offices: U.S. Bank National Association 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Attention: Jocelyn Kirkpatrick Telephone: (612) 973-2127 Fax: (612) 973-2148 All other notices: First Bank Place, MPFP1802 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Attention: Jack L. Quitmeyer Fax: (612) 973-2148 with a copy to: Joe Andersen U.S. Bancorp First Bank Place, MPFP2802 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Fax: (612) 973-3257 ABN AMRO BANK N.V., as a Pre-Petition Lender and a New Term Lender By: /s/ Steven C. Wimpenny ---------------------------------------- Title: Senior Vice President By: /s/ Steven Gutman ---------------------------------------- Title: Senior Vice President Domestic and Eurodollar Lending Offices: North America Special Credits 10 East 53rd Street, 37th Floor New York, New York l0022 Attention: Carol Martini Telephone: (212) 891-0642 Fax: (212) 891-0652 109 All other notices: 10 East 53rd Street, 37th Floor New York, New York l0022 Attention: Steven C. Wimpenny Telephone: (212) 891-0626 Fax: (212) 891-0650 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Pre-Petition Lender, a New Term Lender and as a Cash Management Bank By: /s/ Lynn D. Simmons ---------------------------------------- Title: Vice President 231 South LaSalle, 8th Floor Chicago, Illinois 60697 Attention: Lynn Simmons Telephone: (312) 828-8647 Fax: (312) 987-0234 Domestic and Eurodollar Lending Offices: P.O. Box 27128 Concord, California 94530 Attention: Kelsey Robinson Telephone: (510) 675-7719 Fax: (510) 675-7531 with a copy to: 231 South LaSalle, 8th Floor Chicago, Illinois 60697 Attention: Linda Jordan Fax: (312) 987-0234 110 THE BANK OF NOVA SCOTIA, as a Pre-Petition Lender and a New Term Lender By: /s/ A.T.D. Clarke ---------------------------------------- Title: Senior Manager Domestic and Eurodollar Lending Offices: Suite 2700 600 Peachtree Street, N.E. Atlanta, Georgia 30308 Attention: Pearl Jackson Telephone: (404) 877-1539 Fax: (404) 888-8998 All other notices: l Liberty Plaza, 25th Floor New York, New York 10006 Attention: Norman Gillespie Telephone: (212) 225-6405 Fax: (212) 225-5205 BEAR, STEARNS & CO. INC., as a Pre-Petition Lender and a New Term Lender By: /s/ Gregory A. Hanley ---------------------------------------- Title: Senior Managing Director Administrative Notices and Other Funding Information: 245 Park Avenue New York, New York 10167 Attention: Jennifer Herskowitz Telephone: (212) 272-6161 Fax: (212) 272-8079 All other notices: 245 Park Avenue New York, New York 10167 Attention: Alan J. Mintz Telephone: (212) 272-9499 Fax: (212) 272-8102 111 and Attention: Laura L. Torrado, Esq. Telephone: (212) 272-7811 Fax: (212) 272-8079 NATIONAL CITY BANK, INDIANA, as a Pre-Petition Lender and a New Term Lender By: /s/ F. Richard Blankenship III ---------------------------------------- Title: Vice President 101 West Washington Street Suite 1040E Indianapolis, Indiana 46255 Attention: David C. Hunt Telephone: (317) 267-6290 Fax: (317) 267-7088 MORGENS WATERFALL DOMESTIC PARTNERS II, L.L.C., as a Pre-Petition Lender and a New Term Lender By: /s/ Stuart Brown ---------------------------------------- Title: Authorized Agent 10 East 50th Street, 26th Floor New York, New York 10022 Attention: Ken Ageloff Telephone: (212) 705-0524 Fax: (212) 838-5540 112 NATIONSBANK OF TEXAS, N.A., as a Pre-Petition Lender and a New Term Lender By: /s/ Jay T. Wampler ---------------------------------------- Title: Senior Vice President Domestic and Eurodollar Lending Offices: 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Stacey Smith Telephone: (214) 508-0944 Fax: (214) 508-1864 All other notices: Attention: Jay T. Wampler Senior Vice President Telephone: (214) 508-3711 Fax: (214) 508-3533 OAKTREE CAPITAL MANAGEMENT, LLC, as agent for certain funds and accounts, as a Pre-Petition Lender and a New Term Lender By: /s/ Matthew S. Barrett ---------------------------------------- Title: Managing Director By: /s/ Kenneth Liang ---------------------------------------- Title: Managing Director & General Counsel 550 South Hope Street, 22nd Floor Los Angeles, California 90071 Attention: Telephone: Fax: (213) 694-1592 THE SUMITOMO BANK, LIMITED, as a Pre-Petition Lender and a New Term Lender By: John Kemper ---------------------------------------- Title: Senior Vice President Domestic and Eurodollar Lending Offices: 233 South Wacker Drive, Suite 4800 Chicago, Illinois 60606 Attention: Loan Administration Telephone: (312) 876-0525 Fax: (312) 876-1490 113 All other notices: Attention: Mr. Peter W. Prims Telephone: (312) 876-6422 Fax: (312) 876-6436 NOMURA HOLDING AMERICA INC., as a Pre-Petition Lender and a New Term Lender By: /s/ Dennis Dolan ---------------------------------------- Title: Managing Director 2 World Financial Center, 17th Floor New York, New York 10281-1198 Attention: Michael J. Doyle Telephone: (212) 667-1964 Fax: (212) 667-1708 i AMENDED AND RESTATED CREDIT AGREEMENT TABLE OF CONTENTS Page No. INTRODUCTORY STATEMENT........................................................1 SECTION 1. DEFINITIONS.......................................................3 Section 1.1. Defined Terms..............................................3 Section 1.2 Terms Generally...........................................28 SECTION 2. AMOUNT AND TERMS OF CREDIT.......................................29 Section 2.1. Assumption and Restructuring of Secured Obligations (other than Letters of Credit); Amortization of New Term Loans; Commitment to Lend........................29 Section 2.2. Making of Loans...........................................30 Section 2.3. Notes; Repayment of Loans.................................32 Section 2.4. Interest on Loans.........................................32 Section 2.5. Letters of Credit ........................................33 Section 2.6. Procedure for Issuance of Letters of Credit...............38 Section 2.7. Nature of Letter of Credit Obligations Absolute...........38 Section 2.8. Default Interest..........................................39 Section 2.9. Optional Termination or Reduction of Commitment...........40 Section 2.10. Alternate Rate of Interest................................40 Section 2.11. Refinancing of Loans......................................40 Section 2.12. Commitment Termination; Mandatory Prepayments; Mandatory Commitment Reduction; Cash Collateral...........41 Section 2.13. Optional Prepayment of Loans; Reimbursement of Lenders....43 Section 2.14. Reserve Requirements; Change in Circumstances.............45 Section 2.15. Change in Legality........................................46 Section 2.16. Pro Rata Treatment, etc...................................47 Section 2.17. Taxes.....................................................47 Section 2.18. Certain Fees..............................................49 Section 2.19. Commitment Fee............................................49 Section 2.20. Letter of Credit Fees.....................................49 Section 2.21. Nature of Fees............................................50 Section 2.22. Right of Set-Off. .......................................50 Section 2.23. Sharing of Setoffs........................................50 Section 2.24. Security Interest in Letter of Credit Accounts............52 Section 2.25. Release of Secured Parties................................52 SECTION 3. REPRESENTATIONS AND WARRANTIES ...................................53 Section 3.1. Organization and Authority................................53 Section 3.2. Due Execution.............................................53 Section 3.3. Statements Made...........................................53 Section 3.4. Financial Statements......................................54 Section 3.5. Ownership.................................................54 Section 3.6. Liens.....................................................54 ii Section 3.7. Compliance with Law.......................................54 Section 3.8. Insurance.................................................54 Section 3.9. Use of Proceeds...........................................55 Section 3.10. Litigation................................................55 Section 3.11. Investment Company Act; etc...............................55 Section 3.12. Tax Returns and Payments..................................55 Section 3.13. ERISA.....................................................55 Section 3.14. Good Title to Properties..................................57 Section 3.15. Trademarks, Patents, etc..................................57 Section 3.16. Labor Matters.............................................57 Section 3.17. Environmental Matters.....................................57 Section 3.18. Location and Divisions of the Borrower....................59 Section 3.19. Solvency..................................................59 SECTION 4. CONDITIONS TO EFFECTIVENESS OF REORGANIZATION AND EXTENSIONS OF CREDIT.............................................60 Section 4.1. Conditions Precedent to Effectiveness of Reorganization, Initial Loans and Initial Letters of Credit...............60 Section 4.2. Conditions Precedent to Each Loan and Each Letter of Credit after the Effective Date........................65 SECTION 5. AFFIRMATIVE COVENANTS............................................66 Section 5.1. Financial Statements, Reports, etc........................66 Section 5.2. Conduct of Business; Maintenance of Existence.............70 Section 5.3. Maintenance of Property; Insurance........................70 Section 5.4. Compliance with Laws......................................71 Section 5.5. Obligations and Taxes.....................................71 Section 5.6. Notice of Event of Default, etc...........................72 Section 5.7. Access to Books and Records...............................72 Section 5.8. Modifications to Business Plan............................72 Section 5.9. Customer Charge Sales.....................................72 Section 5.10. Lender Meetings...........................................72 Section 5.11. Available and After-Acquired Properties...................73 Section 5.12. Subsidiaries; Subsidiary Guarantees and Security Agreements.......................................73 Section 5.13. Further Assurances........................................73 Section 5.14. Maintenance of Cash Management System.....................73 Section 5.15. Environmental Undertaking.................................74 Section 5.16. Post-Closing Matters......................................74 SECTION 6. NEGATIVE COVENANTS...............................................75 Section 6.1. Liens.....................................................75 Section 6.2. Debt......................................................75 Section 6.3. Consolidations, Mergers and Sales of Assets...............75 Section 6.4. Capital Expenditures......................................77 Section 6.5. No Negative Pledges.......................................79 Section 6.6. Termination of Plans......................................80 Section 6.7. EBITDA; Debt to EBITDA Ratio..............................80 iii Section 6.8. Restricted Payments.......................................81 Section 6.9. Transactions with Affiliates..............................82 Section 6.10. Investments, Loans and Advances...........................82 Section 6.11. Business Segments.........................................83 Section 6.12. Accounting Changes........................................83 Section 6.13. Amendment and Modification of Certain Documents...........83 Section 6.14. Sale/Lease-Backs..........................................84 Section 6.15. Environmental Matters.....................................84 Section 6.16. Rent Obligations..........................................85 SECTION 7. EVENTS OF DEFAULT................................................85 Section 7.1. Events of Default.........................................85 Section 7.2. Application of Proceeds...................................89 SECTION 8. THE AGENT; THE ADMINISTRATIVE AGENT..............................90 Section 8.1. Appointment and Authorization.............................90 Section 8.2. Agent and Affiliates......................................90 Section 8.3. Action by Agent...........................................90 Section 8.4. Consultation with Experts.................................91 Section 8.5. Liability of Agent........................................91 Section 8.6. Reimbursement and Indemnification; Set-Off................91 Section 8.7. Credit Decision...........................................92 Section 8.8. Notice of Transfer........................................92 Section 8.9. Successor Agent...........................................92 Section 8.10. Concerning the Administrative Agent.......................93 SECTION 9. MISCELLANEOUS....................................................93 Section 9.1. Notices...................................................93 Section 9.2. Survival of Agreement, Representations and Warranties, etc...........................................93 Section 9.3. Successors and Assigns....................................94 Section 9.4. Confidentiality...........................................97 Section 9.5. Expenses..................................................98 Section 9.6. Indemnities...............................................98 Section 9.7. CHOICE OF LAW. ...........................................99 Section 9.8. No Waiver.................................................99 Section 9.9. Extension of Maturity.....................................99 Section 9.10. Amendments, etc. .........................................99 Section 9.11. Invalidity; Severability.................................100 Section 9.12. Headings.................................................100 Section 9.13. Execution in Counterparts; Effectiveness.................100 Section 9.14. Prior Agreements.........................................101 Section 9.15. Independence of Covenants................................102 Section 9.16. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION............102 Section 9.17. Effect of Amendment and Restatement of the Pre-Petition Credit Agreement and the DIP Credit Agreement; Confirmation of Security Documents............102 Section 9.18. Reproduction of Documents................................103 iv Annex A Ratable Proportion Annex B Pre-Petition Letters of Credit Exhibit A-1 New Term Notes Exhibit A-2 New Revolving Notes Exhibit B Confirmation Order Exhibit C Security and Pledge Agreement Exhibit D-1 Form of Mortgage Exhibit D-2 Form of Deed and Trust Exhibit D-3 Form of Amended and Restated Mortgage Exhibit D-4 Form of Amended and Restated Deed of Trust Exhibit E Subsidiary Guarantee Exhibit F Subsidiary Security Agreement Exhibit G-1 Opinion/Blackwell Exhibit G-2 Opinion/Wachtell Exhibit H Excess Cash Flow Certificate Exhibit I Notice of Borrowing Exhibit J-1 Application (Standby Letter of Credit Generally) Exhibit J-2 Application (Unsupported Trade Standby Letter of Credit) Exhibit K Notice of Refinancing of Loans Exhibit L Closing Certificate Exhibit M Inventory Compliance Certificate Exhibit N Covenant Compliance Certificate Exhibit O Quarterly Certificate Exhibit P Assignment and Acceptance Schedule 1.1(a) Commitments/Loans Schedule 1.1(b) Existing Agreements Schedule 1.1(c) UBS Collateral Schedule 3.6 Pre-Petition Liens Schedule 3.10 Litigation Schedule 3.13 ERISA Schedule 3.17 Environmental Matters Schedule 3.18 Locations and Divisions of the Borrower Schedule 5.3 Insurance Schedule 6.3 Disposition of Assets Schedule 6.10 Existing Investments COVER - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED CREDIT AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Among PAYLESS CASHWAYS, INC., as Borrower, THE LENDERS, THE UNDERWRITERS AND THE FRONTING BANKS PARTY HERETO, and CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated as of December 2, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-4 3 4.1B AMEND & RESTATED SECURITY & PLEDGE AGREEMENT 1 AMENDED AND RESTATED SECURITY AND PLEDGE AGREEMENT AMENDED AND RESTATED SECURITY AND PLEDGE AGREEMENT (the "Agreement"), dated as of December 2, 1997, by and between PAYLESS CASHWAYS, INC., a Delaware corporation, as successor by merger to Payless Cashways, Inc., an Iowa corporation (in such capacity, the "Grantor") and CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), as coordinating and collateral agent (in such capacities, the "Agent") for its benefit and the benefit of the other Secured Parties (as hereinafter defined). WHEREAS, pursuant to an Amended and Restated Credit Agreement, dated as of October 3, 1996 (as amended, supplemented or otherwise modified from time to time, the "Pre-Petition Credit Agreement"), among Payless Cashways, Inc., an Iowa corporation (the "Debtor"), CIBC, as administrative and collateral agent (in such capacity, the "Pre-Petition Agent"), certain co-agents named therein, CIBC as the letter of credit bank (the "Letter of Credit Bank") and the Lenders named therein (together with their successors and assigns, the "Pre-Petition Lenders"), the Pre-Petition Lenders agreed to extend credit to the Debtor in the aggregate principal amount of up to $468 million in the form of revolving credit and term loans and letters of credit; and WHEREAS, the Debtor and the Pre-Petition Agent are parties to that certain Amended and Restated Borrower Security Agreement, that certain Amended and Restated Note Pledge Agreement and that certain Amended and Restated Stock Pledge Agreement, each dated as of October 3, 1996 (collectively, the "Pre-Petition Security Agreements"), pursuant to which the Debtor granted to the Pre-Petition Agent, for its benefit and the benefit of the Pre-Petition Lenders, the Letter of Credit Bank and certain other parties (the "Pre-Petition Parties"), a security interest in the Pre-Petition Collateral (as defined in the Credit Agreement hereinafter defined) to secure the Debtor's obligations under the Pre-Petition Credit Agreement, the Pre-Petition Security Agreements and the other loan and security documents executed in connection therewith; and WHEREAS, on July 21, 1997 (the "Filing Date"), the Debtor filed a voluntary petition with the United States Bankruptcy Court for the Western District of Missouri (the "Bankruptcy Court") commencing a Chapter 11 case and has continued in the possession of its assets and in the management of its business pursuant to Sections 1107 and 1108 of the Bankruptcy Code (as defined in the Credit Agreement); and WHEREAS, pursuant to a Revolving Credit Agreement, dated as of July 21, 1997 (as heretofore modified, the "DIP Credit Agreement") among the Debtor, certain of the Pre-Petition Lenders (together with their successors and assigns, the "DIP Lenders"), the Fronting Banks (the "Fronting Banks") and the Underwriters (the "Underwriters") named therein and CIBC, as coordinating and collateral agent for its benefit and the benefit of the DIP Lenders, the Fronting Banks and the Underwriters (in such capacities, the "DIP Agent"), the DIP Lenders agreed to extend credit to the Debtor as debtor in possession in the aggregate principal amount of up to $125 million in the form of revolving credit loans, standby letters of credit and documentary letters of credit; and 2 WHEREAS, pursuant to the DIP Financing Order (as defined in the Credit Agreement), (i) the financing under the DIP Credit Agreement was approved by the Bankruptcy Court; (ii) the DIP Parties (as hereinafter defined) were granted superpriority claims and superpriority liens on all of the Debtor's assets subject only to valid and perfected prior Liens (as defined in the Credit Agreement) existing on the Filing Date in favor of third parties (other than the Pre-Petition Parties); and (iii) as part of the adequate protection ordered by the Bankruptcy Court, the Pre-Petition Parties were granted Liens on the properties and other assets subject to certain existing Liens in favor of UBS Mortgage Finance, Inc., as successor to The Prudential Insurance Company of America (together with UBS' successors and assigns, "UBS") and on all other collateral granted to the DIP Parties, subject only to the superpriority administrative claims and Liens granted to the DIP Parties and to other valid and perfected prior Liens existing on the Filing Date; and WHEREAS, the Debtor and the DIP Agent are parties to a Security and Pledge Agreement, dated as of July 21, 1997 (the "DIP Security Agreement"), pursuant to which the Debtor granted to the DIP Agent for its benefit and the benefit of the DIP Lenders, the Underwriters and the Fronting Banks (collectively, the "DIP Parties") a security interest in all of its assets, including the Pre-Petition Collateral, subject only to valid and perfected prior Liens existing on the Filing Date (other than the Liens granted to the Pre-Petition Agent for its benefit and the benefit of the Pre-Petition Parties) to secure the Debtor's obligations under the DIP Credit Agreement, the DIP Security Agreement and the other loan and security documents executed in connection therewith; and WHEREAS, on September 5, 1997, the Debtor filed its First Amended Plan of Reorganization with the Bankruptcy Court, which was modified on October 9, 1997 and confirmed by the Bankruptcy Court on November 19, 1997 (the "Plan of Reorganization"); and WHEREAS, pursuant to the Plan of Reorganization, the Debtor has merged with and into the Grantor on or before the Effective Date (as defined in the Credit Agreement); and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Grantor, the Pre-Petition Parties and the DIP Parties are entering into an Amended and Restated Credit Agreement, dated as of the date hereof (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"); and WHEREAS, unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined; and WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement, that the Grantor shall have executed and delivered to the Agent this Amended and Restated Security and Pledge Agreement for its benefit and the benefit of the other Secured Parties. NOW, THEREFORE, in consideration of the premises and (i) in order to induce the Secured Parties to enter into the Credit Agreement, (ii) in order to induce the Lenders to restructure, to continue and/or to make their respective Loans pursuant to the Credit Agreement, (iii) in order to induce the Fronting Banks to continue to issue, and the New Revolving Lenders to continue to 3 participate in, the Letters of Credit pursuant to the Credit Agreement, (iv) in consideration of the financial accommodation provided by the Hedging Bank and (v) in order to induce the Cash Management Banks to continue to provide their respective cash management services for the Grantor's cash management operations, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Grantor hereby agrees with the Agent, for its benefit and the benefit of the other Secured Parties, as follows: SECTION 1. Grant of Security and Pledge. The Grantor hereby assumes the obligations of the Debtor under the Pre-Petition Security Agreements and the DIP Security Agreement and hereby transfers, grants, bargains, sells, conveys, hypothecates, assigns, pledges and sets over to the Agent for its benefit and the benefit of the Lenders, the Fronting Banks, the Underwriters, the Pre-Petition Lenders, the Letter of Credit Bank, the Pre-Petition Agent, the DIP Agent, the DIP Fronting Banks, the DIP Lenders, the Hedging Bank and the Cash Management Banks (collectively, together with the Agent, the "Secured Parties"), a perfected pledge of and security interest in all of the Grantor's right, title and interest in and to the following (collectively, the "Collateral"), which pledge and security interest shall be a first priority security interest and Lien senior to any and all other Liens, except that it shall be junior to Liens securing the Grantor's obligations under the UBS Loan Documents (as hereinafter defined) and Liens securing the Synthetic Lease Obligations, each to the extent in existence and perfected as of the date hereof and shall be subject to the prior rights of the Credit Card Banks (as hereinafter defined) under the GE Credit Program Documents (as hereinafter defined) with respect to certain accounts receivable, returned merchandise and general intangibles of the Grantor financed thereunder: (a) all present and future accounts, accounts receivable and other rights of the Grantor to payment for goods sold or leased or for services rendered, whether now existing or hereafter arising and wherever arising, and whether or not they have been earned by performance (collectively, the "Accounts"); it being agreed that the security interest and Lien granted hereby in and on any Account representing a GECC Receivable, Contractor Receivable or Monogram Receivable (each as hereinafter defined) shall be subject and subordinate to perfected security interests in or Liens on such Accounts in favor of any Credit Card Bank, as well as to any rights of set-off or recoupment of the Credit Card Banks in respect of such Accounts; (b) all goods and merchandise now owned or hereafter acquired by the Grantor (wherever located, whether in the possession of the Grantor or of a bailee or other person for sale, storage, transit, processing, use or otherwise consisting of whole goods, components, supplies, materials, returned or repossessed goods or goods consigned by the Grantor to a third party) which are held for sale or lease or to be furnished (or have been furnished) under any contract of service or which are raw materials, work-in-process, finished goods or materials used or consumed in the business of the Grantor or processed by or on behalf of the Grantor, but expressly excluding inventory consigned to the Grantor by third parties (collectively, the "Inventory"); it being agreed that the security interest and Lien granted hereby in and on any Inventory constituting returned merchandise in respect of a Contractor Receivable or a Monogram Receivable shall be subject and subordinate to perfected security interests in or Liens on such Inventory in favor of any Credit Card Bank; 4 (c) all machinery, all manufacturing, distribution, selling, data processing and office equipment, all furniture, furnishings, appliances, fixtures (other than Fixtures as hereinafter defined) and trade fixtures, tools, tooling, molds, dies, vessels, aircraft and all other goods of every type and description (other than Inventory) which are used or bought for use primarily in business, in each instance whether now owned or hereafter acquired by the Grantor and wherever located (collectively, the "Equipment"); (d) all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any State or other jurisdiction wherever located and whether now owned or hereafter acquired, and, in any event, shall include, without limitation, the vehicles listed on Schedule 1 hereto, and all tires and other appurtenances to any of the foregoing (collectively, the "Vehicles"); (e) all contracts and contract rights of the Grantor, including, without limitation, all customer and supplier contracts, firm sale orders, rights under license and franchise agreements; all interest rate swap, cap or other interest rate protection arrangements, as the same may from time to time be amended, amended and restated, supplemented or otherwise modified, as to which (i) the Grantor is to receive moneys due and/or to become due to it thereunder or in connection therewith, (ii) the Grantor is entitled to damages arising out of, or for, breach or default in respect thereof or (iii) the Grantor is entitled to perform and to exercise all remedies thereunder, but excluding any contract, agreement or license which prohibits the assignment or encumbrance by the Grantor of such contract, agreement or license (or of its rights thereunder), except to the extent that such prohibition would be ineffective pursuant to Section 9-318(4) of the Uniform Commercial Code of the State of New York (the "Code") as from time to time in effect (collectively, the "Contracts"). (f) all rights, interests, choses in action, causes of action, claims and all other intangible property of the Grantor of every kind and nature (other than Accounts, Trademarks, Patents and Copyrights, each as defined herein), in each instance whether now owned or hereafter acquired by the Grantor, including, without limitation, all general intangibles; all corporate and other business records; all loans, royalties, and other obligations receivable; all inventions, designs, trade secrets, computer programs, software, printouts and other computer materials, goodwill, registrations, copyrights, licenses, franchises, customer lists, credit files, correspondence, and advertising materials; all interests in partnerships and joint ventures; all tax refunds and tax refund claims; all right, title and interest under leases, subleases, licenses and concessions and other agreements relating to real or personal property; all payments due or made to the Grantor in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property by any Governmental Authority or other Person; all deposit accounts (general or special) with any bank or other financial institution; all credits with and other claims against carriers and shippers; all rights to indemnification; all reversionary interests in pension and profit sharing plans and all reversionary, beneficial and residual interests in trusts or in which the Grantor otherwise has an interest; all proceeds of insurance of which the Grantor is beneficiary; and all letters of credit, guaranties, Liens, security interests and other security held by or granted to the Grantor; and all other intangible property, whether or not similar to the foregoing; in each instance, however and wherever arising, but excluding any contract, agreement or license which prohibits the assignment or encumbrance by 5 the Grantor of such contract, agreement or license (or of its rights thereunder), except to the extent that such prohibition would be ineffective pursuant to Section 9-318(4) of the Code as from time to time in effect (collectively, the "General Intangibles"); it being agreed that the security interest and Lien granted hereby in and on any General Intangibles representing a GECC Receivable or other obligation of any Credit Card Bank to the Grantor shall be subject and subordinate to perfected security interests in or Liens on such General Intangible in favor of any Credit Card Bank, as well as to any rights of set-off or recoupment of such Credit Card Bank in respect of such General Intangible; (g) all goods which have become so related to particular real estate that an interest in them arises under real estate law (the "Fixtures"), it being agreed that the security interest and Lien of the Agent hereunder shall be junior to the Liens in favor of UBS pursuant to the UBS Loan Documents and the Liens in favor of the Synthetic Lease Banks (as hereinafter defined) pursuant to the Synthetic Lease Documents (as hereinafter defined), each to the extent in existence and perfected on the date hereof; (h) all chattel paper, all negotiable instruments (as defined in the Code as presently in effect), all certificated securities (as defined in the Code as presently in effect), all notes (including, but not limited to, the notes listed on Schedule 3 annexed hereto and made a part hereof and any notes or other instruments and documents hereafter pledged pursuant to a Note Pledge Supplement (as hereinafter defined)) and debt instruments and all payments thereunder and instruments and other property from time to time delivered in respect thereof or in exchange therefor, all bills of lading, warehouse receipts and documents of title (each as defined in the Code as presently in effect), other documents evidencing transport and other documents, in each instance whether now owned or hereafter acquired by the Grantor (collectively, the "Pledged Notes"); (i) all property or interests in property now or hereafter acquired by the Grantor which may be owned or hereafter may come into the possession, custody or control of the Agent or any of the other Secured Parties or any agent or Affiliate of the Agent or any of the other Secured Parties in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise), and all rights and interests of the Grantor, whether now existing or hereafter arising and however and wherever arising, in respect of any and all (i) notes, drafts, letters of credit, stocks, bonds, and debt and equity securities, whether or not certificated, and warrants, options, puts and calls and other rights to acquire or otherwise relating to the same; (ii) money (including all cash and cash equivalents held in the Letter of Credit Accounts); (iii) proceeds of loans, including, without limitation, Loans made under the Credit Agreement; and (iv) insurance proceeds and books and records relating to any of the property covered by this Agreement; together, in each instance, with all accessions and additions thereto, substitutions therefor, and replacements, proceeds and products thereof; (j) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, prints and labels on which said trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, have appeared or appear, designs and general intangibles of like nature, now 6 existing or hereafter adopted or acquired, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, or any other country or political subdivision thereof (except for "intent to use" applications for trademark or service mark registrations filed pursuant to Section 1 (b) of the Lanham Act, unless and until an Amendment to Allege Use or a Statement of Use under Section 1 (c) of said Act has been filed), all whether now owned or hereafter acquired by the Grantor, including, but not limited to, those described in Schedule 4 annexed hereto and made a part hereof, and all reissues, extensions or renewals thereof and all licenses thereof together, in each case, with the goodwill of the business connected with the use of, and symbolized by, each such trademark, service mark, trade name and trade dress (all of the foregoing being herein referred to as the "Trademarks"); (k) all letters patent of the United States or any other country, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, all whether now owned or hereafter acquired by the Grantor, including, but not limited to, those described in Schedule 5 annexed hereto and made apart hereof, and all reissues, continuations, continuations-in-part or extensions thereof and all licenses thereof (all of the foregoing being herein referred to as the "Patents"); (l) all copyrights of the United States, or any other country, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Copyright Office or in any similar office or agency of the United States, any State thereof, or any other country or political subdivision thereof, all whether now owned or hereafter acquired by the Grantor, including, but not limited to, those described in Schedule 6 hereto and all renewals and extensions thereof and all licenses thereof (all of the foregoing being herein referred to as the "Copyrights"); (m) all books, records, ledger cards, computer tapes and diskettes and other property at any time evidencing or relating to the Accounts, Inventory, Equipment, Vehicles, Contracts, General Intangibles, Fixtures, Pledged Notes, Trademarks, Patents, Copyrights, Pledged Shares (as hereinafter defined) or any other Collateral; (n) (i) all the shares of capital stock owned by the Grantor listed on Schedule 7 hereto of the issuers listed thereon or of any other entity (individually, an "Issuer" and, collectively, the "Issuers") and all shares of capital stock or other equity securities of any Issuer obtained in the future by the Grantor (in each case whether certificated or uncertificated), and any certificates representing or evidencing such shares or other equity securities, which shall be pledged pursuant to a Stock Pledge Supplement (as hereinafter defined) (collectively, the "Pledged Shares"); (ii) subject to Section 9 below, all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed, in respect of, in exchange for or upon the conversion of the securities referred to in clauses (i) and (ii) above; and (iii) subject to Section 9 below, all rights and privileges of the Grantor, as applicable, with respect to the securities and other property referred to in clauses (i) and (ii) (the items referred to in clauses (i) through (iii) being collectively called the "Pledged Stock Collateral"); (o) all other personal property of the Grantor, whether tangible or intangible, and whether now owned or hereafter acquired; and (p) all proceeds and products of any of the foregoing, in any form, including, without limitation, any claims against third parties for loss or damage to or destruction of any or all of the foregoing. 7 As used herein, the following terms shall have the following meanings: "Contractor Receivables" shall mean those certain commercial credit accounts sold by the Grantor and its Subsidiaries (including any documents, instruments, chattel paper or intangibles evidencing any such transferred receivable or the transaction giving rise thereto) (i) pursuant to the terms of the GE Credit Program Documents or (ii) to any other Person pursuant to any similar contractual arrangement (but in such case solely to the extent such an arrangement is permitted by the Credit Agreement, including, without limitation, Section 5.9 thereof). "Credit Card Banks" shall mean General Electric Credit Corporation and Monogram Credit Card Bank of Georgia. "GECC Receivables" shall mean receivables (including any documents, instruments, chattel paper or intangibles evidencing any such transferred receivable or the transaction giving rise thereto) (i) payable to the Grantor by Monogram Credit Card Bank of Georgia pursuant to the terms of the GE Credit Program Documents arising out of private label credit card sales of merchandise or services made by the Grantor or (ii) payable to the Grantor or purchased by any other Person pursuant to any similar contractual arrangement solely to the extent such an arrangement is permitted by the Credit Agreement (including, without limitation, Section 5.9 thereof). "GE Credit Program Documents" shall mean (a) the Amended and Restated Monogram Credit Card Bank of Georgia Program Agreement, dated as of July 20, 1997, between the Debtor and Monogram Credit Card Bank of Georgia, as such agreement has been or may hereafter be amended, amended and restated, supplemented or modified from time to time to the extent permitted by the Credit Agreement, together with any agreements entered into by the Grantor and Monogram Credit Card Bank of Georgia, or any Affiliate, in replacement of such agreement to the extent permitted by the Credit Agreement (including, without limitation, Section 5.9 thereof); and (b) the Second Amended and Restated Commercial Credit Account Purchase and Service Program Agreement, dated as of July 20, 1997, between the Debtor and General Electric Capital Corporation, as such agreement may hereafter be amended, amended and restated, supplemented or modified from time to time to the extent permitted by the Credit Agreement, together with any agreement entered into by the Grantor and General Electric Capital Corporation, or any Affiliate, in replacement of such agreement to the extent permitted by the Credit Agreement (including, without limitation, Section 5.9 thereof). 8 "Monogram Receivables" shall mean all obligations now or hereafter owing to, and all rights now or hereafter acquired by, Monogram Credit Card Bank of Georgia arising out of any of the private label credit card sales referred to in clause (i) of the definition of "GECC Receivables." "Synthetic Lease Banks" shall mean the banks and financial institutions party to the Synthetic Lease Documents and their successors and assigns. "Synthetic Lease Documents" shall mean the Synthetic Lease Loan Agreement (as hereinafter defined), the Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing Statement from the Grantor in favor of the agent for the Synthetic Lease Banks for the Grantor's property located in Bloomington, Indiana and in Overland Park, Kansas and the Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing Statement from the Grantor in favor of the agent for the Synthetic Lease Banks for the Grantor's property located in Las Vegas, Nevada and any and all documents, agreements and instruments related thereto, each as amended, amended and restated, supplemented or otherwise modified to the extent permitted by the Credit Agreement. "Synthetic Lease Loan Agreement" shall mean that certain Loan Agreement, dated on or about the Effective Date, among the Grantor, the Synthetic Lease Banks and BA Leasing & Capital Corporation, as agent for the Synthetic Lease Banks, as amended, amended and restated, supplemented or otherwise modified to the extent permitted by the Credit Agreement. "UBS Loan Agreement" shall mean that certain Amended and Restated Loan Agreement, dated on or about the Effective Date, between the Grantor and UBS, as amended, amended and restated, supplemented or otherwise modified to the extent permitted by the Credit Agreement. "UBS Loan Documents" shall mean the UBS Loan Agreement, each of the mortgages and deeds of trust heretofore delivered by the Grantor to UBS, as such documents have been modified as of the Effective Date, with respect to the real property listed on Schedule 1.1(c) to the Credit Agreement, together with improvements, fixtures and appurtenances relating thereto, and any and all other documents, agreements and instruments relating thereto, each as amended, amended and restated, supplemented or otherwise modified to the extent permitted by the Credit Agreement. The Agent acknowledges that, for purposes of this Agreement, (i) the private label credit card sales and commercial account sales referred to in clause (i) of the definition of "GECC Receivables" constitute extensions of credit directly from Monogram Credit Card Bank of Georgia to cardholders or true sales of accounts and indebtedness from the Grantor to General Electric Capital Corporation, (ii) the Grantor has no right, title or interest in or to any Monogram Receivables or Contractor Receivables, except to the extent Grantor purchases such receivables pursuant to the terms of the GE Credit Program Documents and (iii) except to the extent so purchased by the Grantor, no Monogram Receivable or Contractor Receivable shall constitute Collateral (or any category of property included within the definition thereof) for purposes of this Agreement. The Agent agrees with the Grantor that neither the security interest created herein nor any related financing statements may be assigned by the Agent unless, prior to any such assignments, such financing statements are amended (a) to include 9 the definition of "GE Credit Program Documents" set forth herein, and (b) specifically to exclude the Monogram Receivables and the Contractor Receivables from the collateral covered by such financing statements. Subject to the terms and conditions and relying on the representations, warranties and covenants set forth herein and in the other Loan Documents, the Pre-Petition Security Agreements and the DIP Security Agreement are hereby amended and restated in their entirety and each reference to this Agreement shall be deemed to include a reference to the Pre-Petition Security Agreements and the DIP Security Agreement, each as amended and restated hereby. The Borrower agrees that the Liens and security interests granted under the Pre-Petition Security Agreements, the DIP Security Agreement and the DIP Financing Order, and the Debtor's obligations thereunder and in respect thereof, are continuing, valid and enforceable and are not subject to any defense, counterclaim, setoff or cause of action of any kind whatsoever. SECTION 2. Security for Secured Obligations. This Agreement and the Collateral secure the prompt and complete payment and performance when due of all obligations of the Grantor, now or hereafter existing, under, or arising, out of or in connection with the Credit Agreement, the Notes, the Letters of Credit and the other Loan Documents, and any other document made, delivered or given in connection therewith or herewith, in each case, whether for principal, interest, fees, expenses or otherwise, including (without limitation) all obligations of the Grantor now or hereafter existing under or in respect of this Agreement, including, but not limited to, (a) the due and punctual payment of principal of and interest on the Loans and the Notes and the reimbursement of all amounts drawn under Letters of Credit (including, without limitation, all interest accruing or payable at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing or payable at the then applicable rate provided in the Credit Agreement or other applicable agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Grantor), and (b) the due and punctual payment of the Fees, indemnities, costs, expenses and all other present and future, fixed or contingent, direct or indirect, monetary obligations, including, without limitation, any of the Secured Parties' attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses that are required to be paid by the Grantor to or on behalf of the Lenders, the Fronting Banks, the Underwriters and the Agent under the Loan Documents or to any of the other Secured Parties under the agreements in respect of the Hedging Obligations or the Cash Management Obligations (all such obligations of the Grantor being herein called the "Secured Obligations"). SECTION 3. Delivery of Pledged Stock Collateral and Pledged Notes; Other Action. Upon written request by the Agent, all certificates or instruments representing or evidencing the Pledged Stock Collateral and the Pledged Notes shall be delivered to and held by the Agent pursuant hereto and shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. Upon the occurrence and during the continuance of any Event of Default, the Agent shall have the right (for the ratable benefit of the Secured Parties), at any time in its discretion and without notice to the Grantor, to transfer to or to register or cause to be registered in the name of the Agent or any of its nominees any or all of the Pledged Stock Collateral and any or all of the Pledged Notes. 10 SECTION 4. Representations and Warranties. The Grantor represents and warrants as follows: (a) Locations of Inventory and Equipment; Chief Executive Office; Locations of Accounts; Teadenames. As of the Effective Date, all of the Inventory and/or Equipment is located at the places mes specified in Schedule 8 hereto. The chief places of business and chief executive offices of the Grantor and the offices where the Grantor keeps its records concerning any Accounts and all originals of all chattel paper which evidence any Account are located at the places specified in Schedule 9 hereto. All trade names under which the Grantor has sold and will sell Inventory are listed on Schedule 4 hereto. (b) Title; No Other Liens. The Grantor owns the Collateral free and clear of any Lien, security interest, charge or encumbrance except for the security interest created by this Agreement and except as permitted under Section 6.1 of the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except (x) such as may have been filed in favor of the Pre-Petition Agent relating to the Pre-Petition Credit Agreement or in favor of the Agent relating to this Agreement and (y) in favor of any holder of a Lien otherwise permitted under Section 6.1 of the Credit Agreement. (c) Trademarks, Patents and Copyrights. As of the Effective Date, the Grantor does not own any material Trademarks, Patents or Copyrights or have any material Trademarks, Patents or Copyrights registered in, or the subject of pending applications in, the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, other than those described in Schedules 4, 5 and 6 hereto. The registrations for the Collateral disclosed on such Schedules 4, 5 and 6 hereto are valid, subsisting, unexpired, enforceable and have not been abandoned. Except as set forth on Schedule 4 hereto, none of such Trademarks is the subject of any licensing or franchise agreement. No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of any such Trademark or the Grantor's ownership thereof. No action or proceeding is pending (i) seeking to limit, cancel or question the validity of any such Trademark, or (ii) which, if adversely determined, would have a Material Adverse Effect on the value of any such Trademark or the Grantor's ownership thereof. None of the material Patents or Copyrights has been abandoned or dedicated. (d) Pledged Shares. The Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. (e) Title to Shares; No Other Liens on Pledged Shares. The Grantor is the legal and beneficial owner of the Pledged Shares described on Schedule 7 free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interest created by this Agreement, the security interest in favor of the Pre-Petition Agent created by the Pre-Petition Security Agreements, the security interest in favor of the DIP Agent created by the DIP Security 11 Agreement, and the superpriority claims and Liens created by the DIP Financing Order and except as disclosed on Schedule 7. (f) Issuers of Pledged Stock. The Pledged Shares described in Section 1(n) hereof constitute all of the issued and outstanding shares of stock of each of the Issuers (other than any Issuer which is unaffiliated with the Grantor, hereinafter, an "Unaffiliated Issuer") and no Issuer (other than any Unaffiliated Issuer) is under any contractual obligation to issue any additional shares of stock or any other securities, rights or indebtedness. (g) Vehicles. The Vehicles listed on Schedule 1 hereto constitute a complete and correct list of all Vehicles owned by the Grantor as of the Effective Date. (h) Pledged Notes. The Pledged Notes delivered at any time by the Grantor to the Agent in accordance with this Agreement and the Credit Agreement shall at all times constitute all of the Pledged Notes owned by the Grantor at each such time. (i) No Consent. Except for the Confirmation Order and the filings referred to in Section 4(j) below, no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority is required for the grant and pledge by the Grantor of the security interests granted hereby or for the execution, delivery or performance of this Agreement by the Grantor. (j) Perfected First Priority Liens. Except with respect to any money not held by a Secured Party and any Accounts owing from Governmental Authorities in which a security interest cannot be perfected under the Code, upon the filing in the proper locations of appropriate financing statements under the UCC (as defined in the Credit Agreement), the filing of notices of lien or other documents with pertinent state motor vehicle offices (with respect to Vehicles), the filing of this Agreement with the United States Patent and Trademark Office and the United States Copyright Office (with respect to Patents (if any), Trademarks and Copyrights) and the transfer of possession to the Agent of any Pledged Notes and Pledged Shares, a security interest in which must be perfected by possession, the Liens granted pursuant to this Agreement (i) constitute perfected Liens on the Collateral in favor of the Agent, for its benefit and the benefit of the other Secured Parties, which are prior to all other Liens on the Collateral (except for any Liens permitted under Section 6.1 of the Credit Agreement and Liens which may be entitled to priority by operation of law) created or allowed by the Grantor and in existence on the date hereof and (ii) are enforceable as prior perfected Liens against all creditors of and purchasers from the Grantor (other than purchasers of Inventory sold in the ordinary course of the Grantor's business and other than unrelated third party purchasers with respect to other asset dispositions permitted by Section 6.3 of the Credit Agreement) and against any owner or purchaser of the real property where any of the Inventory or Equipment is located and any present or future creditor of the Grantor (other than any holder of a purchase money lien on Inventory permitted by Section 6.1(v) of the Credit Agreement to the extent provided in clause (v) of the definition of Permitted Liens), or such owner or purchaser, obtaining a Lien on the Collateral. (k) Accounts. Any amount which is at any time represented by the Grantor to the Lenders as owing by each account debtor in respect of any Account constituting part of the Collateral 12 will at such time be the correct amount actually owing by such account debtor thereunder. No amount payable to the Grantor under or in connection with any Account is evidenced by any negotiable instrument or chattel paper which has not been delivered to the Agent. (l) Contracts. No consent of any party (other than the Grantor) to any Contract is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement. To the best of the Grantor's knowledge after due inquiry, each Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the parties thereto, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). No consent or authorization of, filing with or other act by or in respect of any Governmental Authority or, to the best of the Grantor's knowledge after due inquiry, any other party to such Contract is required in connection with the execution, delivery, performance, validity or enforceability of any of the Contracts by the Grantor, other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any such Contract to any material adverse limitation, either specific or general in nature. Neither the Grantor nor (to the best of the Grantor's knowledge after due inquiry) any other party to any Contract is in default or is likely to become in default in the performance or observance of any of the terms thereof. The Grantor has fully performed all its obligations to date under each Contract. The right, title and interest of the Grantor in, to and under each Contract are not, to the best of the Grantor's knowledge after due inquiry, subject to any defense, offset, counterclaim or claim which would materially adversely affect the value of such Contract as Collateral, nor have any of the foregoing been asserted or alleged against the Grantor as to any Contract. The Grantor has delivered to the Agent a complete and correct copy of each Contract, including all amendments, supplements and other modifications thereto. No amount payable to the Grantor under or in connection with any Contract is evidenced by any instrument or chattel paper which has not been delivered to the Agent. (m) Farm Products. None of the Collateral constitutes, or is the Proceeds of, crops or livestock or supplies used or produced in farming operations or, if they are products of crops or livestock in their unmanufactured states, they are not in the possession of a debtor engaged in raising, fattening, grazing or other farming operations. (n) Governmental Obligors. On the Effective Date, less than $1,000,000 of the Accounts of the Grantor are owed to the Grantor by obligors which are Governmental Authorities. (o) Bank Accounts. Schedule 10 sets forth the location of each cash concentration account and all significant operating accounts and demand deposit accounts used for paying and receiving purposes in the ordinary course of the Grantor's business. (p) Survival of Representations and Warranties. All of the representations and warranties made in this Section 4 shall survive the execution and delivery hereof, the making of the Loans, the issuance of the Letters of Credit, the issuance and delivery to the Lenders of the Notes and the expiration or termination of the Total Commitments regardless of any investigation made by or 13 on behalf of any Secured Party and shall be deemed to be repeated and confirmed on the date of the making of each New Revolving Loan or the issuance of each Letter of Credit and each time any additional Collateral becomes subject to pledge hereunder. SECTION 5. Compliance with Laws; Further Assurances; Certain Covenants. (a) Compliance with Requirements of Law. The Grantor will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof or to the operation of the Grantor's business except where the necessity of compliance therewith is contested in good faith by appropriate proceedings or where the failure to comply would not have a Material Adverse Effect; provided, that the Grantor must comply with any Requirement of Law if the failure to do so would adversely affect the Secured Parties' rights in the Collateral or the priority of their Liens on the Collateral. (b) Financing Statements, etc. The Grantor agrees that from time to time, at the expense of the Grantor, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce any of its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary, or as the Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby. A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. The Grantor will not change its name (or any name under which it does business), identity or corporate structure to such an extent that any financing statement filed by the Agent in connection with this Agreement would become seriously misleading and will not move any of the Collateral to a location which would cause the Agent's Lien thereon to be adversely affected unless all necessary filings have been timely made to avoid such result. The Grantor hereby authorizes the Agent to file one or more financing or continuation statements and amendments thereto, relative to all or any part of the Collateral without signature of the Grantor where permitted by law. (c) Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any instrument or chattel paper, such instrument or chattel paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent, to be held as Collateral pursuant to this Agreement. (d) Maintenance of Recods; Identification of Collateral. The Grantor will keep and maintain at its own cost and expense satisfactory and complete records with respect to the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts. The Grantor will furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. 14 (e) Note Pledge Supplements. The Grantor hereby agrees from time to time hereafter, that upon the acquisition or creation of any Pledged Notes, it will execute and deliver to the Agent, for its benefit and the benefit of the other Secured Parties, a Note Pledge Supplement substantially in the form of Annex A hereto (each, a "Note Pledge Supplement"), and will deliver such Pledged Notes, in each case, accompanied by appropriate endorsements executed in blank. (f) Stock Pledge Supplements. The Grantor hereby agrees from time to time hereafter, that upon the acquisition of or investment in any Subsidiary of the Grantor or in any other Issuer, it will execute and deliver to the Agent, for its benefit and the benefit of the other Secured Parties, a Stock Pledge Agreement Supplement, substantially in the form of Annex B hereto (each, a "Stock Pledge Supplement"), and will deliver any additional certificated capital stock or other equity securities issued to the Grantor, in each case accompanied by appropriate endorsements executed in blank and, in the case of any uncertificated capital stock or other equity securities, will take or cause to be taken, all actions which may be necessary or may be reasonably requested by the Agent to perfect and preserve the security interest therein granted or purported to be granted hereby. (g) Defense of Agent's Rights. The Grantor agrees to defend the Agent's right, title and interest in and to, lien on and security interest in the Pledged Shares and the Pledged Notes against the claims and demands of all Persons whomsoever. (h) Uncertificated Equity Interests. If an Issuer of Pledged Shares is incorporated in a jurisdiction which does not permit the use of certificates to evidence equity ownership or if any of the Pledged Shares are not evidenced by certificates for any other reason, then the Grantor shall, to the extent permitted by applicable law, (i) record such pledge on the stock register of the Issuer, (ii) execute any customary stock pledge forms or other documents or (iii) take such other action as may be necessary to complete the pledge and give the Agent the right to transfer the Pledged Shares under the terms hereof and, in each such case, provide to the Agent an opinion of counsel, in form and substance satisfactory to it, in its judgment reasonably exercised, confirming the validity and perfection of such pledge. (i) Access to Books and Records; Right of Inspection. The Secured Parties shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Grantor, and the Secured Parties and their representatives may examine the same, take extracts therefrom and make photocopies thereof, and the Grantor agrees to render to the Secured Parties at the Grantor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Secured Parties and their representatives shall at all times also have the right to enter into and upon any premises where any of the Equipment or the Inventory or any other Collateral is located for the purpose of inspecting the same, observing its use or otherwise protecting their interests therein. (j) Payment of Obligations. The Grantor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for 15 labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if the Grantor is permitted not to do so pursuant to the Credit Agreement. (k) Notices. The Grantor will advise the Agent promptly, in reasonable detail, at the Agent's address set forth in the Credit Agreement, (i) of any Lien (other than Liens created hereby or permitted pursuant to Section 6.1 of the Credit Agreement) on, or claim asserted against, any of the Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have an adverse effect on the value of any material portion of the Collateral or on the Liens created hereunder. SECTION 6. As to Equipment and Inventory. (a) Locations. The Grantor shall keep the Equipment and Inventory (other than Inventory which has been sold in the ordinary course of business) at the places specified therefor in Schedule 8 hereto or, upon 30 days' prior written notice to the Agent, at other places in jurisdictions where all action required by Section 5(b) shall have been taken to assure the continuation of the perfection of the security interest of the Agent (for its benefit and the benefit of the other Secured Parties) with respect to the Equipment and Inventory. (b) Maintenance. The Grantor shall maintain or cause to be maintained in good repair, working order and condition, excepting ordinary wear and tear and damage due to casualty, all of the Equipment and, to the extent such Equipment is not obsolete, make or cause to be made all appropriate repairs, renewals and replacements thereof consistent with the past practice of the Grantor, as quickly as practicable after the occurrence of any loss or damage thereto. (c) Records, Physical Count and Other Inventory Covenants. With respect to the Inventory: (i) the Grantor shall at all times maintain records with respect to Inventory reasonably satisfactory to the Agent, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, the Grantor's cost therefor and daily withdrawals therefrom and additions thereto; (ii) the Grantor shall conduct a physical count of the Inventory at least once each year, but at any time or times as the Agent may request on or after an Event of Default occurs and is continuing or at any time when the Grantor shall not have Required Inventory, and promptly following each such physical inventory shall supply the Agent with a report in the form and with such specificity as may be reasonably satisfactory to the Agent concerning such physical count; (iii) the Grantor shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of the Agent, except for sales of Inventory and returns of Inventory to vendors, in each case in the ordinary course of the Grantor's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (iv) in addition to the requirements set forth above, upon the Agent's request, the Grantor shall, at its expense, conduct through the Asset Support Group or another inventory counting service reasonably acceptable to the Agent, or shall, at the Grantor's expense, permit the Agent to conduct (if the Agent so elects), a physical count of the Inventory in form, scope and methodology reasonably acceptable to the Agent no more than once in any twelve (12) month period, but at any time or times as the Agent may request on or after an Event of Default occurs and is continuing or at any time when the Grantor shall 16 not have Required Inventory, the results of which shall be reported directly by such inventory counting service to the Agent and the Grantor shall promptly deliver confirmation in a form satisfactory to the Agent that appropriate adjustments have been made to the Inventory records of the Grantor to reconcile the Inventory count to the Grantor's Inventory records; (v) the Grantor shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable Requirements of Law (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders related thereto); (vi) the Grantor shall retain all of its responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (vii) the Grantor shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate the Grantor to repurchase such Inventory (other than in the ordinary course of business consistent with past practices and policies of the Grantor or then current market practice) and (viii) the Grantor shall keep the Inventory in good and marketable condition. SECTION 7. As to Accounts and Contracts. (a) Locations. The Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts, and the offices where it keeps all originals of all chattel paper which evidence Accounts, at the location therefor specified in Section 4(a) or, upon 30 days' prior written notice to the Agent, at such other locations in a jurisdiction where all actions required by Section 5(b) shall have been taken with respect to the Accounts. (b) Amendments; diligence as to Rights; Notices. The Grantor will not (i) amend, modify, terminate or waive any provision of any Contract or any agreement giving rise to a material Account in any manner which could reasonably be expected to affect adversely the value of such Contract or material Account as Collateral, (ii) fail to exercise promptly and diligently each and every substantive right which it may have under each Contract or material Account (other than any right of termination) or (iii) fail to deliver to the Agent a copy of each substantive demand, notice or document received by it relating in any way to any Contract or material Account. (c) Collections. Except as otherwise provided in this subsection (c), the Grantor shall continue to collect in accordance with its customary practice, at its own expense, all amounts due or to become due to the Grantor under the Accounts and, prior to the occurrence of an Event of Default, the Grantor shall have the right to adjust, settle or compromise the amount or payment of any Account, or to release wholly or partly any account debtor or obligor thereon, or to allow any credit or discount thereon, all in accordance with its customary practices. Other than in the ordinary course of business, the Grantor will not grant any extension of the time of payment of any of the Accounts, compromise or settle the same for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon. In connection with such collections, the Grantor may, upon the occurrence and during the continuation of an Event of Default, take (and at the direction of the Agent shall take) such action as the Grantor or the Agent may reasonably deem necessary or advisable to enforce collection of the 17 Accounts; provided, that following the occurrence and during the continuation of an Event of Default, (x) upon the request of the Agent, the Grantor shall notify account debtors on the Accounts and the parties to the Contracts or (y) upon written notice by the Agent to the Grantor of its intention so to do, the Agent shall have the right to notify the account debtors or obligors under any such Accounts or Contracts, in each case, that the Accounts and Contracts have been assigned to the Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to the Grantor thereunder directly to the Agent and, upon such notification and at the expense of the Grantor, to enforce collection of any such Accounts or Contracts, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for payment of moneys due under any Account or Contract, to file any claim or take any other action or proceeding in any court of law or equity otherwise deemed appropriate by the Agent for the purpose of collecting any such money and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as the Grantor might have done. After receipt by the Grantor of the notice referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including instruments) received by the Grantor in respect of the Accounts or Contracts shall be received in trust for the benefit of the Agent (for its benefit and the benefit of the other Secured Parties) hereunder, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Agent in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to the Grantor if such Event of Default shall have been cured or waived or (B) if such Event of Default shall be continuing, paid to the Agent and applied to the Secured Obligations, in the order provided in Section 7.2 of the Credit Agreement, and (ii) the Grantor shall not adjust, settle or compromise the amount or payment of any Account or under any Contract, or release wholly or partly any account debtor or obligor thereon, or allow any credit or discount thereon. (d) Test Verifications. The Agent shall have the right to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Grantor shall furnish all such assistance and information as the Agent may reasonably require in connection therewith. At any time and from time to time, upon the Agent's request and at the expense of the Grantor, the Grantor shall cause independent public accountants or others satisfactory to the Agent to furnish to the Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. (e) Liability of Grantor. Anything herein to the contrary notwithstanding, the Grantor shall remain liable under each of the Accounts and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account and in accordance with and pursuant to the terms and provisions of each such Contract. None of the Secured Parties shall have any obligation or liability under any Account (or any agreement giving rise thereto) or under any Contract by reason of or arising out of this Agreement or the receipt by such Secured Party of any payment relating to such Account or Contract pursuant hereto, nor shall any Secured Party be obligated in any manner to perform any of the obligations of the Grantor under or pursuant to any Account (or any agreement giving rise thereto) or under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any 18 performance by any party under any Account (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (f) Compliance with Terms of Contracts, etc. The Grantor will perform and comply in all material respects with all its obligations under the Contracts and all its other contractual obligations relating to the Collateral. SECTION 8. As to Trademarks, Patents and Copyrights. (a) Use of Trademarks. Except with respect to any Trademark that the Grantor shall reasonably determine is of negligible economic value to it (and so advise the Agent in writing), the Grantor shall, either itself or through licensees, (i) continue to use the Trademarks on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain the Trademarks in full force free from any claim of abandonment for nonuse, (ii) maintain as in the past the quality of products and services offered under the Trademarks, (iii) employ the Trademarks with the appropriate notice of registration, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of the Trademarks unless the Agent shall obtain a perfected security interest therein pursuant to this Agreement and (v) not (and will not permit any licensee or sublicensees thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (b) No Abandonment, Dedication, etc. The Grantor will not do any act, or omit to do any act, whereby the Trademarks, Patents or Copyrights may become abandoned or dedicated. The Grantor shall notify the Agent immediately if it knows of any reason or has reason to know that any application or registration may become abandoned or dedicated or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office, or any court or tribunal in any country) regarding the Grantor's ownership of any Trademark, Patent or Copyright or its right to register the same or to keep and maintain the same. (c) Filings. The Grantor will not, either itself or through any agent, employee, licensee or designee, (i) file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof or for the registration of any Copyright with the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof or (ii) file any assignment of any Patent or Trademark, which the Grantor may acquire from a third party, with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof or of any Copyright which the Grantor may acquire from a third party, with the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, unless the Grantor shall, within 15 days after the date of any such filing, notify the Agent thereof, and, upon request of the Agent, execute and deliver any and all assignments, agreements, instruments, documents and papers as the Agent may 19 request to evidence the Agent's interest in such Copyright, Patent or Trademark and the goodwill and general intangibles of the Grantor relating thereto or represented thereby, and the Grantor hereby constitutes the Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all lawful acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit and the expiration or termination of the Total Commitments. The Grantor shall not sell Inventory under any other Trademark without providing the Agent 30 days' prior written notice of its intention to do so. (d) Maintenance of Registrations, etc. The Grantor will take all reasonable and necessary steps in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain each application and registration of all material Trademarks, Patents and Copyrights, including, without limitation, filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings. (e) Further Assurances. The Grantor will perform all acts and execute and deliver all further instruments and documents, including, without limitation, assignments for security in form suitable for filing with the United States Patent and Trademark Office, and the United States Copyright Office, or any similar office or agency in any other country or any political subdivision thereof, as may be reasonably requested by the Agent at any time to evidence, perfect, maintain, record and enforce the Agent's interest in all material Trademarks, Patents and Copyrights or otherwise in furtherance of the provisions of this Agreement, and the Grantor hereby authorizes the Agent to execute and file one or more financing statements (and similar documents) or copies thereof or of this Agreement with respect to material Patents, Trademarks and Copyrights signed only by the Agent. (f) Infringement, Misappropriation or Dilution Suits. In the event that any Patent, Trademark or Copyright included in the Collateral is infringed, misappropriated or diluted by a third party, the Grantor shall promptly notify the Agent after the Grantor learns thereof and shall, unless the Grantor shall reasonably determine that such Patent, Trademark or Copyright is of negligible economic value to the Grantor (which determination the Grantor shall promptly report to the Agent), promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as the Grantor shall reasonably deem appropriate or the Agent may reasonably request under the circumstances to protect such Patent, Trademark or Copyright. (g) Notification as to Trademark confusion. The Grantor will, upon acquiring knowledge of any use by any Person of any term or design likely to cause confusion with any material Trademark, promptly notify the Agent of such use and, if requested by the Agent, shall join with the Agent, at the Grantor's expense, in such action as the Agent, in its reasonable discretion, may deem advisable for the protection of the Agent's interest in and to the Trademarks. SECTION 9. As to the Pledged Stock Collateral; Voting Rights; Dividends; Etc. 20 (a) So long as no Event of Default shall have occurred and be continuing: (i) the Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Stock Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; provided, that the Grantor shall not exercise or shall refrain from exercising any such right if, in the Agent's reasonable judgment, such action would have a material adverse effect on the value of the Pledged Stock Collateral or any part thereof; (ii) notwithstanding the provisions of Section 1(n) hereof, the Grantor shall be entitled to receive and retain any and all dividends paid in respect of the Pledged Stock Collateral; provided, that any and all (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Stock Collateral, and (B) dividends and other distributions paid or payable in cash in respect of any Pledged Stock Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, shall be, and shall be forthwith delivered to the Agent to hold as, Pledged Stock Collateral and shall, if received by the Grantor, be received in trust for the benefit of the Agent and the other Secured Parties, be segregated from the other property or funds of the Grantor, and be forthwith delivered to the Agent as Pledged Stock Collateral in the same form as so received (with any necessary endorsement); and (iii) the Agent shall execute and deliver (or cause to be executed and delivered) to the Grantor all such proxies and other instruments as the Grantor may reasonably request for the purpose of enabling the Grantor to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends which it is authorized to receive and retain pursuant to paragraph (ii) above; (b) upon the occurrence and during the continuance of an Event of Default: (i) upon written notice from the Agent to the Grantor to such effect, all rights of the Grantor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 9(a)(i) and to receive the dividends which it would otherwise be authorized to receive and retain pursuant to Section 9(a)(ii) shall cease, and all such rights shall thereupon become vested in the Agent, who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Stock Collateral any such dividends; and 21 (ii) all dividends which are received by the Grantor contrary to the provisions of paragraph (b)(i) of this Section shall be received in trust for the benefit of the Agent and the other Secured Parties, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Agent as Pledged Stock Collateral in the same form as so received (with any necessary endorsement). SECTION 10. As to Pledged Notes. In case, upon the dissolution, liquidation (in whole or in part), bankruptcy or reorganization of the maker of any of the Pledged Notes or the merger or consolidation of any such maker with and into another Person, any sum or other property shall be paid or distributed with respect to any of the Pledged Notes, and such sum or property shall be paid or distributed on account of the principal of any of the Pledged Notes, such sum and property shall be paid over or delivered to the Agent to be held by the Agent as additional Collateral hereunder unless any such sum or property shall constitute cash in which case, so long as there shall exist no Default or Event of Default and the Grantor shall have Required Inventory, such cash shall be paid to the Agent to be applied to the payment of the Secured Obligations as provided in Section 2.12(g) of the Credit Agreement. If there shall exist a Default or an Event of Default or the Grantor shall not have Required Inventory, such cash shall be paid to the Agent to be applied to the Secured Obligations in the order provided in Section 7.2 of the Credit Agreement. All of the foregoing property (other than cash) shall constitute Pledged Notes for all purposes hereof. SECTION 11. Vehicles. The Grantor will maintain each Vehicle in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose. Promptly after the date hereof (and, with respect to any Vehicles acquired by the Grantor subsequent to the date hereof promptly after the date of acquisition), all applications for certificates of title indicating the Agent's first priority Lien on the Vehicle covered by such certificate, and any other necessary documentation, shall be filed by the Grantor in each office in each jurisdiction which the Agent shall deem advisable to perfect or protect its Liens on the Vehicles. In connection with the foregoing, the Grantor shall notify the Agent, in writing, promptly, but in any event within 30 days after the date of acquisition, of each Vehicle acquired subsequent to the date hereof. SECTION 12. Insurance. The Grantor shall, at its own expense, maintain insurance with respect to the Inventory, Equipment, Vehicles and any other customarily insured Collateral in such amounts, against such risks, in such form and with such insurers, as is provided for in Section 5.3 of the Credit Agreement. Without limiting the provisions of Section 5.3 of the Credit Agreement, upon the occurrence and during the continuance of any Event of Default or at any time when the Grantor shall not have Required Inventory, all insurance payments in respect of such Inventory and Equipment shall be held, paid to the Agent and applied to the Secured Obligations in the order provided in Section 7.2 of the Credit Agreement. 22 SECTION 13. Dispositions of Collateral; Liens; Additional Shares; Other Agreements. (a) Disposition of Collateral. The Grantor shall not sell, transfer, lease, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except for dispositions otherwise permitted by the Credit Agreement. (b) Liens. The Grantor shall not create, incur or suffer to exist, will defend the Collateral against and will take such other action as is necessary to remove, any Lien, or other claim upon or with respect to any of the Collateral to secure any obligation of any Person or entity, except for the security interest created by this Agreement and as otherwise permitted by the Credit Agreement, and will defend the right, title and interest of the Agent and the other Secured Parties in and to any of the Collateral against the claims and demands of all Persons whomsoever. (c) No Issuance of Stock. The Grantor agrees that it will (i) cause each of the Issuers (other than any Unaffiliated Issuer) not to issue any stock or other securities in addition to or substitution for the Pledged Shares issued by such Issuer, except to the Grantor and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all such additional shares of stock or other securities of each Issuer of the Pledged Shares. (d) Other Agreements. The Grantor is not and will not become a party to or otherwise be bound by any agreement, other than this Agreement and the other Loan Documents, which restricts in any manner the rights of any present or future holder of any of the Collateral other than the UBS Loan Agreement, the GE Credit Program Documents and the Synthetic Lease Documents. SECTION 14. Agent's Appointment as Attorney-in-Fact. The Grantor hereby irrevocably appoints the Agent and any officer or agent thereof with full power of substitution, the Grantor's attorney-in-fact (which appointment shall be irrevocable until the payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit and the expiration or termination of the Total Commitments and deemed coupled with an interest), with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Agent's discretion, upon and during the occurrence and continuation of an Event of Default, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (i) to obtain and adjust insurance required to be paid to the Agent pursuant to Section 12 or pursuant to Section 5.3 of the Credit Agreement; (ii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys, claims and other amounts due and to become due under or in respect of any of the Collateral (including, without limitation, any Pledged Notes) and to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto; 23 (iii) to receive, endorse, and collect any checks, drafts, notes, acceptances or other instruments, any invoices, freight or express bills, bills of lading, storage, warehouse receipts, assignments, verifications, notices or other documents and chattel paper, in connection with clause (i) or (ii) above; (iv) to receive, endorse and collect all instruments made payable to the Grantor representing any dividend or other distribution in respect of the Pledged Stock Collateral or any part thereof and to give full discharge for the same; (v) to file any claims or take any action or institute or defend any suit, action or proceeding at law or in equity which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral; (vi) to direct any party liable for any payment in respect of or arising out of any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Agent or as the Agent shall direct; (vii) to settle, compromise or adjust any suit, action or proceeding described in clause (v) above and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; (viii) to set off or cause to be set off amounts in any account maintained with any Secured Party or otherwise enforce rights against any of the Collateral in the possession of any Secured Party; (1) (ix) to pay or discharge Taxes and Liens levied or placed on or threatened against the Collateral (except where the Grantor is not required to discharge such tax or Lien pursuant to the provisions of this Agreement or the Credit Agreement), to effect any repairs or any insurance called for by the terms of this Agreement or the Credit Agreement, to adjust the same and to pay all or any part of the premiums therefor and the costs thereof; (x) to assign any Trademark, Patent or Copyright (along with the goodwill of the business to which any such Trademark, Patent or Copyright pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Agent shall in its sole discretion determine; and (xi) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Agent were the absolute owner thereof for all purposes, and to do, at the Agent's option and the Grantor's expense, at any time, or from time to time, all acts and things which the Agent deems necessary to protect, preserve or realize upon the Collateral and the Agent's Liens thereon and to effect the intent of this Agreement, all as fully and effectively as the Grantor might do. 24 The Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. SECTION 15. Other Powers; Agent May Perform. (a) The Grantor also authorizes the Agent at any time and from time to time to execute, in connection with any sale pursuant to Section 17 hereof, any endorsements, assignments or other instruments of conveyance or any transfer with respect to any Collateral. (b) If the Grantor fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by the Grantor under Section 18. If the Grantor fails to perform or comply with any of its agreements contained herein and the Agent, as provided for by the terms of this Agreement, the Credit Agreement or any other Loan Document, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Agent incurred in connection with such performance or compliance, together with interest thereon at a rate per annum 2% above the Alternate Base Rate at the time of such failure to perform or comply, shall be payable by the Grantor to the Agent on demand and shall constitute Secured Obligations secured hereby. SECTION 16. Limitation of Duty on the Part of Agent or Other Secured Parties; Release. (a) Duties. The powers conferred on the Agent hereunder are solely to protect its interest and the interests of the other Secured Parties in the Collateral and shall not impose any duty upon it or them to exercise any such powers. Except for the safe custody of any Collateral in the possession of any of them and the accounting for moneys actually received by any of them hereunder, neither the Agent nor any of the other Secured Parties shall have any duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral, including, without limitation, ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Stock Collateral, whether or not the Agent has or is deemed to have knowledge of such matters. Neither the Agent, nor any of the other Secured Parties, nor any of their respective directors, officers, employees, attorneys, agents, advisors, attorneys-in-fact, experts and Affiliates shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Grantor or otherwise. (b) Release. The Grantor releases the Agent and the other Secured Parties and each of their respective directors, officers, employees, attorneys, agents, advisors, attorneys-in-fact, experts and Affiliates, from and against any and all penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits proceedings or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise which 25 may be imposed on, incurred by or asserted against any of them in any way relating to or arising out of or with respect to this Agreement, the Collateral, and/or any actions taken or omitted to be taken by the Agent or any of the other Secured Parties with respect thereto (except to the extent that any of the foregoing arises solely from the gross negligence or willful misconduct of the party which would be so released as determined by a final order or judgment of a court of competent jurisdiction), and the Grantor hereby agrees to hold the Secured Parties and their respective directors, officers, employees, attorneys, agents, advisors, attorneys-in-fact, experts and Affiliates harmless from and against any and all penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceedings or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise which may be imposed on, incurred by or asserted against any of them. (c) Survival of Agreements. The agreements of the Grantor contained in this Section shall survive the payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit, the expiration or termination of the Total Commitments and the termination of the security interests granted hereby. SECTION 17. Remedies. If any Event of Default shall have occurred and be continuing, then, subject to the provisions of Section 7.1 of the Credit Agreement: (a) General. The Agent, on behalf of the Secured Parties may exercise, in addition to all other rights and remedies granted to it in this Agreement, the Credit Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code, as then in effect in the jurisdiction in which such rights are exercised. Without limiting the generality of the foregoing, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of any of the Secured Parties or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Agent until the selling price is paid by the purchaser thereof, but none of the Secured Parties shall incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. To the extent permitted by applicable law, in no event shall the obligations of the Grantor to any of the Secured Parties be credited with any part of the proceeds of sale of any Collateral until cash payment thereof has actually been received by the Agent. The Agent shall not 26 be obligated to make any such sale pursuant to any notice thereof, but may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. Any of the Secured Parties shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, and each Secured Party shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at such sale, to use and apply any of the Secured Obligations owed to such Person (or, in the case of the Agent, any or all of the Secured Obligations owed to the Secured Parties) as a credit on account of the purchase price payable by such Person at such sale. Each purchaser at any such sale shall acquire the property sold absolutely free from any claim or right on the part of the Grantor, and the Grantor hereby waives (to the full extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Grantor further agrees, at the Agent's request, to assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at the Grantor's premises or elsewhere. The Agent shall, at such time or times as it determines, apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Secured Parties hereunder, including, without limitation, reasonable attorneys' or other agents' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in the order provided in Section 7.2 of the Credit Agreement and, only after such application and after the payment by the Agent of any other amounts required by any provision of law to be paid to third parties, including, without limitation, Section 9-504(1)(c) of the Code, need the Agent account for the surplus, if any, to the Grantor. To the extent permitted by applicable law, the Grantor waives all claims, damages and demands it may acquire against any of the Secured Parties arising out of the exercise by any of them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition; provided, that no demand, advertisement or notice, all of which are hereby expressly waived, shall be required in connection with any sale or other disposition of any part of the Collateral which threatens to decline speedily in value or which is of a type customarily sold on a recognized market. The Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to satisfy the Secured Obligations in full and the fees and disbursements of any attorneys or other agents employed by any of the Secured Parties to collect such deficiency. (b) Suits. The Agent, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the security interests granted hereby and sell the Collateral, or any portion thereof, under one or more judgments or decrees of a court or courts of competent jurisdiction. (c) Pledged Notes. The Agent may in its discretion hold any or all of the Pledged Notes until maturity and receive any payments therefrom for its benefit and the benefit of the other Secured Parties or may sell any or all of such Pledged Notes in public or private sale. 27 (d) Use of Patents, Copyrights or Trademarks. The Agent may instruct the Grantor not to make any further use of the Patents, Copyrights or Trademarks or any mark similar thereto for any purpose. (e) Licensing. The Agent may license, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, any of the Trademarks, Patents or Copyrights throughout the world for such term or terms, on such conditions, and in such manner, as the Agent shall in its sole discretion determine. (f) Enforcement of Remedies against Licensees or Sublicensees. The Agent may (without assuming any obligations or liability thereunder), at any time, enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of the Grantor in, to and under any one or more license agreements with respect to any of the Collateral, and take or refrain from taking any action under any thereof, and the Grantor hereby releases the Agent and the other Secured Parties from, and agrees to hold the Agent and the other Secured Parties free and harmless from and against any claims arising out of, any action taken or omitted to be taken with respect to any such license agreement. (g) Grantor's Assistance in Manufacture and Sale of Products Bearing Trademarks, etc. In the event of any such license, assignment, sale or other disposition of the Collateral, or any of it, the Grantor shall supply its know-how and expertise in connection with the manufacture and sale of the products bearing or relating to Trademarks, Patents or Copyrights, and its customer lists and other records relating to the Trademarks, Patents or Copyrights and to the distribution of said products, to the Agent or its designee. (h) Assignment of Trademarks, etc. In order to implement the assignment, sale or other disposal of any of the Trademarks, Patents or Copyrights, the Agent may, at any time, pursuant to the authority granted in Section 14 hereof, execute and deliver on behalf of the Grantor, one or more instruments of assignment of the Trademarks, Patents or Copyrights (or any application of registration thereof), in form suitable for filing, recording or registration in any country. (i) Proceeds. Upon demand by the Agent, all Proceeds received by the Grantor consisting of cash, checks and other near-cash items shall be held by the Grantor in trust for the Agent and the other Secured Parties and segregated from other funds of the Grantor, and shall, forthwith upon receipt by the Grantor, be turned over to the Agent in the exact form received by the Grantor (duly indorsed by the Grantor to the Agent, if required). All cash or other Proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as Collateral for, and then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to Section 18) in whole or in part against, all or any part of the Secured Obligations in the order provided in Section 7.2 of the Credit Agreement. Any surplus of such cash or other Proceeds held by the Agent and remaining after payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit and the expiration or termination of the Total 28 Commitments shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. (j) Private Sale of Pledged Notes and Pledged Stock Collateral. If at any time when the Agent shall determine to exercise its right to sell all or any Pledged Notes or any part of the Pledged Stock Collateral pursuant to this Section, such Pledged Notes or Pledged Stock Collateral or the part thereof to be sold shall not be effectively registered under the Securities Act of 1933, as amended, and as from time to time in effect, and the rules and regulations thereunder (the "Securities Act"), the Agent is hereby expressly authorized to sell such Pledged Notes or Pledged Stock Collateral or such part thereof by private sale in such manner and under such circumstances as the Agent may deem necessary or advisable in order that such sale may legally be effected without such registration. The Grantor agrees that private sales so made may be at prices and other terms less favorable to the seller than if such Pledged Notes or Pledged Stock Collateral were sold at public sales, and that the Agent has no obligation to delay sale of any such Pledged Notes or Pledged Stock Collateral for the period of time necessary to permit the issuer of such Pledged Notes or Pledged Stock Collateral, even if such issuer would agree, to register such Pledged Notes or Pledged Stock Collateral for public sale under such applicable securities law. The Grantor agrees that private sales shall not, solely by virtue of being private sales, be deemed to have been made in a commercially unreasonable manner. Without limiting the generality of the foregoing, in any such event the Agent, in compliance with applicable securities laws, (a) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Stock Collateral or such part thereof shall have been filed under such Securities Act, (b) may approach and negotiate with a limited number of potential purchasers to effect such sale and (c) may restrict such sale to purchasers as to their number, nature of business and investment intention including without limitation to purchasers each of whom will represent and agree to the satisfaction of the Agent that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Notes or Pledged Stock Collateral, or part thereof, it being understood that the Agent may cause or require the Grantor, and the Grantor hereby agrees upon the written request of the Agent, to cause (i) a legend or legends to be placed on the certificates to be delivered to such purchasers to the effect that the Pledged Notes or Pledged Stock Collateral represented thereby have not been registered under the Securities Act and setting forth or referring to restrictions on the transferability of such securities; and (ii) the issuance of stop transfer instructions to such Issuer's transfer agent, if any, with respect to the Pledged Notes or Pledged Stock Collateral, or, if such Issuer transfers its own securities, a notation in the appropriate records of such Issuer. In the event of any such sale, the Grantor does hereby consent and agree that the Agent shall incur no responsibility or liability for selling all or any Pledged Notes or any part of the Pledged Stock Collateral at a price which the Agent may deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were public and deferred until after registration as aforesaid. (k) Registration of Pledged Notes or Pledged Stock Collateral. If the Agent, in its reasonable discretion, determines that it is necessary or advisable, in connection with the exercise by the Agent of its remedies under this Section, to effect a public registration of any Pledged Notes or Pledged Stock Collateral pursuant to the Securities Act or any state Blue Sky laws (or any similar 29 statutes then in effect), the Grantor shall, as expeditiously as possible (except with respect to any Pledged Notes or Pledged Shares of an Unaffiliated Issuer): (i) cause the issuer thereof to prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement with respect to the Collateral and use its best efforts to cause such registration statement to become and remain effective; (ii) cause the issuer thereof to prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Pledged Notes or Pledged Stock Collateral covered by such registration statement whenever the Agent shall desire to sell or otherwise dispose of such Pledged Notes or Pledged Stock Collateral; (1) (iii) furnish or cause the issuer thereof to furnish to the Agent such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as the Agent may reasonably request in order to facilitate the public sale or other disposition of such Pledged Notes or Pledged Stock Collateral by the Agent; (iv) cause the issuer thereof to register or qualify the Pledged Notes or Pledged Stock Collateral covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions within the United States as the Agent shall request, and do such other reasonable acts and things as maybe required of it to enable the Agent to consummate the public sale or other disposition in such jurisdictions of such Pledged Notes or Pledged Stock Collateral by the Agent; (1) (v) furnish or cause the issuer thereof to furnish, at the request of the Agent, on the date that the Pledged Notes or Pledged Stock Collateral shall be delivered to the underwriters for sale pursuant to such registration or, if such Pledged Notes or Pledged Stock Collateral are not being sold through underwriters, on the date that the registration statement with respect to such Pledged Notes or Pledged Stock Collateral becomes effective, (A) an opinion, dated such date, of the independent counsel representing the issuer of the applicable Pledged Notes or Pledged Shares for the purposes of such registration, addressed to the underwriters, if any, and if such Pledged Notes or Pledged Stock Collateral are not being sold through underwriters, then to the Agent, stating that such registration statement has become effective under the Securities Act and that (1) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (2) the registration statement, the related prospectus, and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need express no opinion as to financial statements contained therein), (3) such counsel has no reason to 30 believe that either the registration statement or the prospectus, or any amendment or supplement thereto, contains any untrue statement of a material fact required to be stated therein or necessary to make the statements therein not misleading, (4) the descriptions in the registration statement or the prospectus, or any amendment or supplement thereto, of all legal matters and contracts and other legal documents or instruments are accurate and fairly present the information required to be shown, and (5) such counsel does not know of any legal or governmental proceedings, pending or contemplated, required to be described in the registration statement or prospectus, or any amendment or supplement thereto, which are not described as required, nor of any contracts or documents or instruments of a character required to be described in the registration statement or prospectus, or any amendment or supplement thereto, or to be filed as exhibits to the registration statement which are not described or filed or incorporated by reference as required; and (B) a letter, dated such date, from the independent certified public accountants of the issuer of the applicable Pledged Notes or Pledged Shares addressed to the underwriters, if any, and if such Pledged Notes or Pledged Shares are not being sold through underwriters, then to the Agent, stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of such issuer included in the registration statement or the prospectus, or any amendment or supplement thereto, comply as to form in all respects with the applicable accounting requirements of the Securities Act. Such opinion of counsel shall additionally cover such other legal matters with respect to the registration in respect of which such opinion is being given as the Agent may reasonably request. Such letter from the independent certified public accountants shall additionally cover such other financial matters (including information as to the period ending not more than five Business Days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as the Agent may reasonably request; and (vi) otherwise use its best efforts to comply with or cause the issuer thereof to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, but not later than 18 months after the effective date of the registration statement, an earnings statement covering the period of at least 12 months beginning with the first full month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. All expenses incurred in complying with this Section, including, without limitation, all registration and filing fees, underwriting fees, printing expenses, fees and disbursements of counsel for the issuer of the Pledged Notes or Pledged Shares, the reasonable fees and expenses of counsel for the Agent and expenses of complying with the securities or Blue Sky laws of any jurisdictions, shall be paid by the Grantor. (1) Additional Inventory Remedies. Until the payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit and the 31 expiration or termination of the Total Commitments, at any time when an Event of Default has occurred and is continuing: (i) the Grantor will perform any and all reasonable actions requested by the Agent to enforce the Agent's security interest in the Inventory and all of the Agent's rights hereunder, such as leasing warehouses to the Agent or its designee, placing and maintaining signs, appointing custodians, transferring Inventory to warehouses, and delivering to the Agent, warehouse receipts, documents of title and such other documentation as the Agent may reasonably request; (ii) if any Inventory is in the possession or control of any of the Grantor's agents, contractors or processors or any other third party, the Grantor will notify the Agent thereof and will notify such agents, contractors or processors or third party of the Agent's security interest therein and, upon request, instruct them to hold all such Inventory for the Agent's and the Grantor's account, as their interests may appear, and subject to the Agent's instructions; (iii) the Agent shall have the right to hold all Inventory subject to the security interest granted hereunder; and (iv) the Agent shall have the right to take possession of the Inventory or any part thereof and to maintain such possession on the Grantor's premises or to remove any or all of the Inventory to such other place or places as the Agent desires in its sole discretion. If the Agent exercises its right to take possession of the Inventory, the Grantor, upon the Agent's demand, will assemble the Inventory and make it available to the Agent at the Grantor's premises at which it is located. 32 SECTION 18. Indemnity and Expenses (a) The Grantor agrees on demand, to pay, and to save, indemnify and keep the Secured Parties and their respective directors, officers, employees, attorney, agents, advisors, attorneys-in-fact, experts and Affiliates (each, an "Indemnified Party") harmless from and against any and all penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceeding or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses (i) with respect to, or resulting from, any delay by the Grantor in paying, any and all excise, sales or other Taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) arising out of the use of the Trademarks, Patents and Copyrights or any alleged defect in any product manufactured, promoted or sold by the Grantor or out of the manufacture, promotion, labeling, sale or advertisement of any such product by the Grantor, (iii) with respect to, or resulting from, any delay by the Grantor in complying with any Requirement of Law applicable to any of the Collateral or (iv) in connection with any of the transactions contemplated by this Agreement, including the fees and disbursements of counsel and of any other experts, which any of the Secured Parties or their respective directors, officers, employees, attorneys, consultants, experts or agents may incur in connection with (w) the administration or enforcement of this Agreement, including such expenses as are incurred to preserve the value of the Collateral and the validity, perfection, rank and value of any Liens granted hereunder, (x) the collection, sale or other disposition of any of the Collateral, (y) the exercise by the Agent of any of the rights conferred upon it hereunder or (z) any Default or Event of Default, but excluding any such penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceeding or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses incurred solely by reason of the gross negligence or willful misconduct of the Indemnified Party as determined by a final order or judgment of a court of competent jurisdiction. (b) In any suit, proceeding or action brought by any Indemnified Party under any Account or Contract for any sum owing thereunder, or to enforce any provisions of any Account or Contract, the Grantor agrees to pay, and will save, indemnify and keep such Indemnified Party harmless from and against any and all penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceeding or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the 33 Grantor or any of its Subsidiaries, but excluding any such penalties, fines, expenses, losses, settlements, costs, claims, causes of action, debts, dues, sums of money, accounts, accountings, reckonings, acts, omissions, demands, liabilities, obligations, damages, actions, judgments, suits, proceeding or disbursements of any kind or nature whatsoever, known or unknown, contingent or otherwise, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses incurred solely by reason of the gross negligence or willful misconduct of the Indemnified Party as determined by a final order or judgment of a court of competent jurisdiction. (c) Any amount due hereunder which is not paid on demand shall bear interest at a rate equal to the sum of 2% plus the Alternate Base Rate in effect at such time. (d) The agreements of the Grantor contained in this Section shall survive the payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit and the expiration or termination of the Total Commitments. All of the Grantor's obligations to indemnify each Secured Party and its directors, officers, employees, attorneys, consultants, experts and agents hereunder shall (without duplication) be in addition to, and shall not limit in any way, the Grantor's indemnification obligations contained in the Credit Agreement. SECTION 19. Security Interest Absolute. All rights of the Agent and security interests hereunder, and all obligations of the Grantor hereunder, shall be absolute and unconditional, irrespective of any circumstance which might constitute a defense available to, or a discharge of, any guarantor or other obligor in respect of the Secured Obligations. SECTION 20. Intentionally Omitted. SECTION 21. Louisiana Remedies. For purposes of executory process under applicable Louisiana law (and only for such purposes), upon the occurrence and during the continuance of an Event of Default, the Grantor hereby acknowledges the indebtedness owed under the Secured Obligations, CONFESSES JUDGMENT thereon and consents that judgment be rendered and signed, whether during the court's term or during vacation, in favor of the Agent, for its benefit and the benefit of the other Secured Parties, for the full amount of the Secured Obligations. Upon the occurrence of an Event of Default, and in addition to all of its rights, powers and remedies under this Agreement and applicable law, the Agent may, at its option, cause all or any part of the Collateral located in Louisiana (the "Louisiana Collateral") to be seized and sold under executory process or under writ of fieri facias issued in execution of an ordinary judgment obtained upon the Secured Obligations, without appraisement to the highest bidder, for cash or under such terms as the Agent deems acceptable. The Grantor hereby waives all and every appraisement of the Louisiana Collateral and waives and renounces the benefit of appraisement of the Louisiana Collateral seized and sold under executory or other legal process. The Grantor agrees to waive, and does hereby specifically waive: 34 (1) the benefit of appraisement provided for in Articles 2332, 2336, 2723 and 2724, Louisiana Code of Civil Procedure, and all other laws conferring such benefits; (2) the demand and three days delay accorded by Articles 2639 and 2721, Louisiana Code of Civil Procedure; (3) the notice of seizure required by Articles 2293 and 2721, Louisiana Code of Civil Procedure; (4) the three days delay accorded by Articles 2331 and 2722, Louisiana Code of Civil Procedure; (5) the benefit of the other provisions of Articles 2331, 2722 and 2723, Louisiana Code of Civil Procedure; (6) the benefit of the provisions of any other articles of the Louisiana Code of Civil Procedure not specifically mentioned above; and (7) all rights of division and discussion with respect to the Secured Obligations. Pursuant to the authority contained in La.R.S. 9:5136 through 9:5140.1, the Grantor and the Agent do hereby expressly designate the Agent or its designee to be keeper or receiver ("Keeper") for the benefit of the Agent or any assignee of the Agent, such designation to take effect immediately upon any seizure of any of the Louisiana Collateral under writ of executory process or under writ of sequestration or fieri facias as an incident to an action brought by the Agent. It is hereby agreed that the Keeper shall be entitled to receive as compensation, in excess of its reasonable costs and expenses incurred in the administration or preservation of the Louisiana Collateral, an amount equal to the lesser of $200 per day or four percent of the gross revenues of the Louisiana Collateral and the payment of such fees shall be secured by the security interest in the Louisiana Collateral granted in this Agreement. The designation of Keeper made herein shall not be deemed to require the Agent to provoke the appointment of a Keeper. SECTION 22. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing and shall be given in accordance with the applicable provisions of the Credit Agreement. For the purposes hereof, the addresses of the Grantor, the Agent and the other Secured Parties shall be the addresses in effect from time to time under the Credit Agreement or such other address provided in writing to the Agent and the Grantor. SECTION 23. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the payment in full in cash and the performance of all of the Secured Obligations, the expiration or cancellation of all of the Letters of Credit and the termination of the Total Commitments, (ii) be binding upon the Grantor, 35 its successors and assigns and (iii) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each of the other Secured Parties and their respective successors, transferees and assigns. Upon the payment in full in cash and the performance of the Secured Obligations, the expiration or termination of the Total Commitments, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantor subject to any existing Liens, security interests or encumbrances on such Collateral. Upon any such termination, the Agent will, at the Grantor's expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 24. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, AND BY FEDERAL LAW TO THE EXTENT APPLICABLE. SECTION 25. Severability. If any provision of this Agreement is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Agent and the other Secured Parties in order to carry out the intentions of the parties hereto as nearly as may be possible; and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 26. No Waiver; Cumulative Remedies None of the Secured Parties shall by any act (except by a written instrument executed and delivered in accordance with Section 27 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by any Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which such Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised alternatively, successively or concurrently and are not exclusive of any rights or remedies provided by law or at equity. SECTION 27. Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Grantor and the Agent; provided, that any provision of this Agreement may be waived by the Agent in a written letter or agreement executed by the Agent or by facsimile transmission from the Agent. Any amendment, modification or supplement of or to any provision of this Agreement, any termination or waiver of any provision of this Agreement and any consent to any departure by the Grantor from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which made or given. No notice 36 to or demand upon the Grantor in any instance hereunder shall entitle the Grantor to any other or further notice or demand in similar or other circumstances. This Agreement shall be binding upon and shall inure to the benefit of the Grantor, the Agent and the other Secured Parties and their respective successors, transferees and assigns; provided, that the Grantor may not assign its rights and obligations hereunder without the prior written consent of the Agent and each Lender. SECTION 28. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. SECTION 29. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION. THE GRANTOR AND THE AGENT HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT OR THE COLLATERAL, OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE GRANTOR AND THE AGENT. THE GRANTOR HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, OF ANY FEDERAL COURT, IN EACH CASE LOCATED IN NEW YORK COUNTY AND ANY APPELLATE COURT THEREFROM, IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT OR INSTRUMENT DELIVERED PURSUANT TO THIS AGREEMENT OR THE COLLATERAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT THE AGENT OR ANY OTHER SECURED PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE COLLATERAL AGAINST THE GRANTOR IN THE COURTS OF ANY JURISDICTION. THE GRANTOR HEREBY WAIVES THE DEFENSES OF FORUM NON CONVENIENS AND IMPROPER VENUE. SECTION 30. Counterparts. This Agreement may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same Agreement. 37 IN WITNESS WHEREOF, the Grantor and the Agent have caused this Amended and Restated Security and Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. GRANTOR: PAYLESS CASHWAYS, INC. By: /s/ Stephen A. Lightstone ----------------------------------------- Title: Senior Vice President-Finance AGENT: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent By: /s/ Robert N. Greer ----------------------------------------- Title: Assistant General Manager COVER - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED SECURITY AND PLEDGE AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Between PAYLESS CASHWAYS, INC., as Grantor, and CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated as of December 2, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- i TABLE OF CONTENTS PAGE SECTION 1. Grant of Security and Pledge....................................3 SECTION 2. Security for Secured Obligations................................9 SECTION 3. Delivery of Pledged Stock Collateral and Pledged Notes; Other Action....................................10 SECTION 4. Representations and Warranties.................................10 (a) Locations of Inventory and Equipment; Chief Executive Office; Locations of Accounts; Tradenames.......10 (b) Title; No Other Liens.....................................10 (c) Trademarks, Patents and Copyrights........................10 (d) Pledged Shares............................................11 (e) Title to Pledged Shares; No Other Liens on Pledged Shares.........................................11 (f) Issuers of Pledged Stock..................................11 (g) Vehicles..................................................11 (h) Pledged Notes.............................................11 (i) No Consent................................................11 (j) Perfected First Priority Liens............................12 (k) Accounts..................................................12 (l) Contracts.................................................12 (m) Farm Products.............................................13 (n) Governmental Obligors.....................................13 (o) Bank Accounts.............................................13 (p) Survival of Representations and Warranties................13 SECTION 5. Compliance with Laws; Further Assurances; Certain Covenants....13 (a) Compliance with Requirements of Law.......................13 (b) Financing Statements, etc. ..............................14 (c) Instruments and Chattel Paper.............................14 (d) Maintenance of Records; Identification of Collateral......14 (e) Note Pledge Supplements...................................14 (f) Stock Pledge Supplements..................................14 (g) Defense of Agent's Rights.................................15 (h) Uncertificated Equity Interests...........................15 (i) Access to Books and Records; Right of Inspection..........15 (j) Payment of Obligations....................................15 (k) Notices...................................................15 SECTION 6. As to Equipment and Inventory..................................16 (a) Locations.................................................16 (b) Maintenance...............................................16 (c) Records, Physical Count and Other Inventory Covenants.....16 ii SECTION 7. As to Accounts and Contracts...................................17 (a) Locations.................................................17 (b) Amendments; Diligence as to Rights; Notices...............17 (c) Collections...............................................17 (d) Test Verifications........................................18 (e) Liability of Grantor......................................18 (f) Compliance with Terms of Contracts, etc...................19 SECTION 8. As to Trademarks, Patents and Copyrights.......................19 (a) Use of Trademarks...............................19 (b) No Abandonment, Dedication, etc.................19 (c) Filings.........................................19 (d) Maintenance of Registrations, etc...............20 (e) Further Assurances..............................20 (f) Infringement, Misappropriation or Dilution Suits..................................20 (g) Notification as to Trademark Confusion..........20 SECTION 9. As to the Pledged Stock Collateral; Voting Rights; Dividends; Etc.................................................21 SECTION 10. As to Pledged Notes ...........................................22 SECTION 11. Vehicles.......................................................22 SECTION 12. Insurance .....................................................23 SECTION 13. Dispositions of Collateral; Liens; Additional Shares; Other Agreements.......................................23 (a) Disposition of Collateral.................................23 (b) Liens.....................................................23 (c) No Issuance of Stock......................................23 (d) Other Agreements..........................................23 SECTION 14. Agent's Appointment as Attorney-in-Fact........................23 SECTION 15. Other Powers; Agent May Perform................................25 SECTION 16. Limitation of Duty on the Part of Agent or Other Secured Parties; Release.......................................25 (a) Duties....................................................25 (b) Release...................................................26 (c) Survival of Agreements....................................26 SECTION 17. Remedies.......................................................26 (a) General...................................................26 (b) Suits.....................................................28 (c) Pledged Notes.............................................28 (d) Use of Patents, Copyrights or Trademarks..................28 (e) Licensing.................................................28 (f) Enforcement of Remedies against Licensees or Sublicensees...........................................28 (g) Grantor's Assistance in Manufacture and Sale of Products iii Bearing Trademarks, etc...................................28 (h) Assignment of Trademarks, etc. ..........................29 (i) Proceeds..................................................29 (j) Private Sale of Pledged Notes and Pledged Stock Collateral..................................29 (k) Registration of Pledged Notes or Pledged Stock Collateral..................................30 (l) Additional Inventory Remedies.............................32 SECTION 18. Indemnity and Expenses.........................................33 SECTION 19. Security Interest Absolute.....................................34 SECTION 20. Intentionally Omitted..........................................34 SECTION 21. Louisiana Remedies.............................................34 SECTION 22. Addresses for Notices..........................................35 SECTION 23. Continuing Security Interest...................................36 SECTION 24. GOVERNING LAW..................................................36 SECTION 25. Severability...................................................36 SECTION 26. No Waiver; Cumulative Remedies.................................36 SECTION 27. Waivers and Amendments; Successors and Assigns.................37 SECTION 28. Headings.......................................................37 SECTION 29. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION..................37 SECTION 30. Counterparts...................................................38 Annex A Form of Note Pledge Supplement Annex B Form of Stock Pledge Supplement Schedule 1 Vehicles Schedule 2 Contracts Schedule 3 Notes Schedule 4 Trademarks Schedule 5 Patents Schedule 6 Copyrights Schedule 7 Pledged Stock Schedule 8 Locations of Equipment and Inventory Schedule 9 Locations of Chief Executive Office, Chief Place of Business and Locations Where Records Concerning Accounts are Kept Schedule 10 Location of Concentration Accounts, Significant Operating Accounts And Demand Deposit Accounts EX-4 4 4.1C FORM OF SECOND MORTGAGE COVER UBS EXHIBIT D-1 FORM OF SECOND MORTGAGE State _____ Site No. _______ SECOND MORTGAGE, LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING Mortgagor: PAYLESS CASHWAYS, INC. 2300 Main Street Kansas City, Missouri 64108 Mortgagee: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent 425 Lexington Avenue New York, New York 10017 Mortgage Amount: $______________ Date: December 2, 1997 Premises: Record and SHOOK, HARDY & BACON L.L.P. Return to: 1200 Main St., Suite 3000 Kansas City, MO 64105 Attn.: Richard D. Woods, Esq. 1 SECOND MORTGAGE, LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING, dated as of December 2, 1997, by and between PAYLESS CASHWAYS, INC., a Delaware corporation, having an office at 2300 Main Street, Kansas City, Missouri 64108 ("Mortgagor"), and CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent under the Agreement (as hereinafter defined), having an office at 425 Lexington Avenue, New York, New York 10017 ("Mortgagee"). DEFINITIONS Mortgagor and Mortgagee agree that all capitalized terms used but not defined herein are defined in or by reference to the Agreement and shall have the same meanings herein as therein. Mortgagor and Mortgagee further agree that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms. "Agreement" means that certain Amended and Restated Credit Agreement dated on or about the date hereof by and among Payless Cashways, Inc., the Lenders signatory thereto, the Underwriters, U.S. Bank National Association, as a Fronting Bank, and Canadian Imperial Bank of Commerce, as a Fronting Bank and as Coordinating and Collateral Agent for the Lenders, the Fronting Banks, the Underwriters and the other Secured Parties, together with any future amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof. "Bankruptcy Case" means In re Payless Cashways, Inc., Case No. 97-50543 in the Bankruptcy Court. "Bankruptcy Code" means 11 U.S.C. ss.101 et seq. "Bankruptcy Court" means the United States Bankruptcy Court for the Western District of Missouri. "Bankruptcy Reorganization Plan" means Payless' plan of reorganization in the Bankruptcy Case, as confirmed by the Bankruptcy Court. "Default" means Default, as that term is defined in the Agreement. "Default Rate" means the rate of interest specified in Section 2.8(a) of the Agreement. 2 "DIP Agent" means the DIP Agent, as that term is defined in the Agreement. "DIP Credit Agreement" means the Revolving Credit Agreement, dated as of July 21, 1997, among Payless, as a Debtor-in-Possession, the Lenders, the Underwriters and the Fronting Banks party thereto and Canadian Imperial Bank of Commerce, as Coordinating and Collateral Agent, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. "DIP Obligations" means the DIP Obligations, as that term is defined in the Agreement. "Event of Default" means the events and circumstances described as such in Article II hereof. "Fixtures" means all of Mortgagor's right, title and interest in all furniture, furnishings, partitions, screens, awnings, venetian blinds, window shades, draperies, carpeting, pipes, ducts, conduits, dynamos, motors, engines, compressors, generators, boilers, stokers, furnaces, pumps, tanks, elevators, escalators, vacuum cleaning systems, call systems, switchboards, sprinkler systems, fire prevention and extinguishing apparatus, refrigerating, air conditioning, heating, dishwashing, plumbing, ventilating, gas, steam, electrical and lighting fittings and fixtures, licenses or permits of any kind and all building materials, equipment and goods now or hereafter delivered to the Premises (hereinafter defined) and intended to be installed therein, and all other machinery, fixtures, tools, implements, apparatus, appliances, equipment, goods, facilities and other personal property of similar character in which Mortgagor now has, or at any time hereafter acquires, an interest and which are now or hereafter affixed or attached to, or used in connection with the enjoyment, occupancy and/or operation of, all or any portion of the Premises, together with all renewals, replacements and substitutions thereof and additions and accessions thereto and the proceeds of all of the foregoing items. "Fronting Banks" means the Fronting Banks, as that term is defined in the Agreement. "Improvements" means all buildings, structures and other improvements presently existing or hereafter constructed on the land described in Exhibit A attached hereto. "Lease" has the meaning ascribed to such term in Section 3.01 hereof. "Leasehold" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. 3 "Leasehold Interest" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. "Lenders" means the Lenders, as that term is defined in the Agreement. "Lessee" has the meaning ascribed to such term in Section 3.01 hereof. "Loan Documents" means the Loan Documents, as that term is defined in the Agreement. "Loans" means the Loans, as that term is defined in the Agreement. "Mortgage" means this Second Mortgage, Leasehold Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing together with any future amendments, amendments and restatements, extensions, modifications or supplements hereto or hereof. "Mortgage Amount" means the principal sum of $__________________. "Mortgaged Property" has the meaning ascribed to such term in the Granting Clause, below. "Notes" means the Notes, as that term is defined in the Agreement. "Payless" means Payless Cashways, Inc., an Iowa corporation. "Post-Petition Mortgage Liens" has the meaning ascribed to such term in the fourth WHEREAS clause, below. "Pre-Petition Agent" means the Pre-Petition Agent, as that term is defined in the Agreement. "Pre-Petition Credit Agreement" means the Amended and Restated Credit Agreement dated as of October 3, 1996, by and among Payless, the lenders signatory thereto, Canadian Imperial Bank of Commerce, as letter of credit bank and as administrative and collateral agent, and The Bank of Nova Scotia, NationsBank of Texas, N.A. and Bank of America National Trust and Savings, as co-agents, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. 4 "Pre-Petition Obligations" means the Pre-Petition Obligations, as that term is defined in the Agreement. "Premises" means the land described in Exhibit A annexed hereto, together with the Improvements thereon or to be constructed thereon or therein, and all of the easements, rights, privileges and appurtenances thereunto belonging or in anywise appertaining thereto including, but not limited to, all of the estate, right, title, interest, claim or demand whatsoever of Mortgagor therein and in and to the strips and gores, streets and ways adjacent thereto, whether in law or in equity, in possession or expectancy, now or hereafter acquired and also any other realty, Leaseholds (hereinafter defined) or Fixtures encompassed by the term "Mortgaged Property", elsewhere herein defined. "Prior Mortgage" means that Mortgage and Security Agreement executed by Mortgagor to The Prudential Insurance Company of America, dated [June 15, 1989] [_________, 19____] and recorded on [_________, 1989] [_________, 19____], at Book ____, Page _____ of the real property records of ___________ County, _____________, as assigned to Prior Mortgagee and amended by that certain Amendment to Mortgage and Security Agreement dated December ____, 1997, as amended, amended and restated, supplemented or otherwise modified to the extent permitted by the Agreement. "Prior Mortgagee" means UBS Mortgage Finance, Inc., as mortgagee under the Prior Mortgage. "Rents" has the meaning ascribed to such term in Section 3.01 hereof. "Secured Obligations" has the meaning ascribed to such term in the paragraph entitled "Secured Obligations" below. "Secured Parties" means Secured Parties, as that term is defined in the Agreement. "UBS Collateral" means the real property listed on Schedule 1.1(c) to the Agreement, together with improvements, fixtures and appurtenances relating thereto, which is collateral pursuant to the relevant UBS Loan Documents. "UBS Loan Agreement" means that certain Amended and Restated Loan Agreement, dated December __, 1997, between Mortgagor and Prior Mortgagee, as the same may be hereafter amended, amended and restated, supplemented or otherwise modified to the extent permitted by Section 5.04 hereof. "UBS Loan Documents" means the UBS Loan Agreement, each of the mortgages and deeds of trust heretofore delivered by Mortgagor to Prior Mortgagee with respect to UBS 5 Collateral, as amended as of December ____, 1997 and any and all documents, agreements and instruments related thereto, each as may be amended, amended and restated, supplemented or otherwise modified to the extent permitted by Section 5.04 hereof. "Underwriters" means Underwriters, as that term is defined in the Agreement. W I T N E S S E T H : WHEREAS, on July 21, 1997, Payless filed a voluntary petition of bankruptcy under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court; and WHEREAS, prior to the commencement of the Bankruptcy Case, Payless was obligated to the Lenders or their predecessors-in-interest pursuant to, among other things, the Pre-Petition Credit Agreement; and WHEREAS, during the Bankruptcy Case, Payless became obligated to certain of the Lenders pursuant to the DIP Credit Agreement; and WHEREAS, pursuant to the orders of the Bankruptcy Court entered on July 21, 1997 and August 20, 1997 in the Bankruptcy Case, the DIP Agent and the Pre-Petition Agent were granted liens (the "Post-Petition Mortgage Liens") on the Mortgaged Property to secure the Pre-Petition Obligations and the DIP Obligations; and WHEREAS, as contemplated by Payless' Bankruptcy Reorganization Plan, Payless has merged with and into Mortgagor, with Mortgagor being the sole surviving entity; and WHEREAS, pursuant to the terms of the Bankruptcy Reorganization Plan and the Agreement, the parties have agreed among other things, (i) to permit the merger of Payless into Mortgagor, (ii) to secure various obligations of Payless (as Mortgagor's predecessor) in respect of the Pre-Petition Obligations and the DIP Obligations, and (iii) without duplication, to secure all obligations, whether now existing or hereafter incurred or arising, of Mortgagor under the Agreement, the Notes and/or the other Loan Documents, including, without limitation, the Secured Obligations; in each case as more particularly set forth in the Agreement and this Mortgage; and WHEREAS, Mortgagor is the actual, record and beneficial owner of the Premises or owns an actual beneficial interest therein; and WHEREAS, Mortgagor has agreed pursuant to the terms of the Agreement, the Notes, and/or the other Loan Documents evidencing the Secured Obligations to be liable for the Secured Obligations; and 6 WHEREAS, the parties intend that the Secured Obligations shall be secured by this Mortgage. GRANTING CLAUSE NOW, THEREFORE, Mortgagor, in consideration of the premises, and in order to secure the payment in full of the Mortgage Amount, the Secured Obligations, all interest due thereon and all other costs and expenses and other amounts due hereunder and in respect of the Secured Obligations, and the performance and discharge of all the provisions hereof, of the Secured Obligations and all other Loan Documents, hereby confirms the Post Petition Mortgage Liens and gives, grants, bargains, mortgages, pledges and grants a security interest to Mortgagee, all of Mortgagor's estate, right, title and interest in, to and under any and all of the following described property whether now owned or hereafter acquired (all such properties being collectively referred to as the "Mortgaged Property"), subject, however, to the Prior Mortgage: A. All Mortgagor's right, title and interest in and to the Premises and all right, title and interest of Mortgagor in and to the Improvements on the Premises or to be constructed thereon and all Fixtures now or hereafter situated in, on or about, or affixed or attached to the Improvements or the Premises or any building, structure or other improvement now or hereafter standing, constructed or placed upon or within the Premises, and all and singular the tenements, hereditaments, easements, rights-of-way or use, rights, privileges and appurtenances to the Premises, now or hereafter belonging or in anywise appertaining thereto, including, without limitation, any such right, title, interest, claim and demand in, to and under any agreement granting, conveying or creating, for the benefit of the Premises, any easement, right or license in any way affecting other property and in, to and under any streets, ways, alleys, vaults, gores or strips of land adjoining the Premises, or any parcel thereof, and all claims or demands either in law or in equity, in possession or expectancy, of, in and to the Premises. B. All right, title and interest of Mortgagor in and to all awards heretofore made or hereafter to be made for the taking by eminent domain of the whole or any part of the above described premises, or any estate or easement therein, including any awards for change of grade of streets, all of which awards are hereby assigned to Mortgagee, which Mortgagee is hereby authorized to collect (unless provided otherwise in the Agreement), and receive the proceeds of such awards and to give proper receipts and acquittances therefor and Mortgagee shall have the right and option to apply such excess towards the payment of any sum owing on account of this Mortgage and the Secured Obligations secured thereby, notwithstanding the fact that such sum may not then be due and payable. C. The Fixtures and the products and proceeds thereof. 7 D. All present and future leases, subleases and licenses and any guarantees thereof, rents, issues and profits and additional rents now or at any time hereafter covering or affecting all or any portion of the Mortgaged Property and all proceeds of, and all privileges and appurtenances belonging or in any way appertaining to, the Mortgaged Property, or any part thereof, and all other property subjected or required to be subjected to the lien and/or security interest of this Mortgage, including, without limitation, all of the income, revenues, earnings, rents, maintenance payments, tolls, issues, awards (including, without limitation, condemnation awards and insurance proceeds), products and profits thereof, which income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits are hereby expressly assigned with the right to take and collect the same upon the terms hereinafter set forth; and all the estate, right, title, interest and claim whatsoever, at law and in equity, which Mortgagor now has or may hereafter acquire in and to the aforementioned property and every part thereof; provided, that so long as no Event of Default (as hereinafter defined) shall have occurred and be continuing, all such income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits shall remain with and under the control of Mortgagor except as otherwise expressly provided herein or in any other written agreement between Mortgagor and Mortgagee. E. All right, title and interest of Mortgagor in and to all agreements, or contracts, now or hereafter entered into for the sale, leasing, brokerage, development, construction, renovation, management, maintenance and/or operation of the Premises (or any part thereof), including all moneys due and to become due thereunder, and all permits, licenses, bonds, insurance policies, plans and specifications relative to the construction and/or operation of the Improvements upon the Mortgaged Property. F. All right, title and interest (including, without limitation, all present and future rights to possession and use, and all present and future options and other rights to renew and to purchase) of Mortgagor, as lessee or sublessee, under any leases, subleases, licenses, occupancy agreements or concessions now in effect or to be entered into hereafter (collectively, the "Leasehold Instruments") whereby Mortgagor has any right to the use, possession or occupancy of the Premises or any part thereof (collectively, the "Leaseholds"). G. All of Mortgagor's claims and rights to the payment of damages arising from any rejection of a Leasehold or a Lease under or pursuant to the Bankruptcy Code. H. All Mortgagor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, 11 U.S.C. ss.365(h), including, without limitation, all of Mortgagor's rights to remain in possession of the Premises. I. Any other property and rights which are, by the provisions of the Agreement or any other Loan Document, required to be subject to the lien hereof, and any additional 8 property and rights that may from time to time hereafter by installation in or on the Mortgaged Property, or by writing of any kind, or otherwise, be subjected to the lien hereof by Mortgagor or by anyone on its behalf. J. All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all right, title and interest of Mortgagor in and to all unearned premiums accrued, accruing and to accrue under any or all insurance policies obtained by Mortgagor. TO HAVE AND TO HOLD the Mortgaged Property, subject to the Prior Mortgage, unto Mortgagee and its successors and assigns, upon the terms, provisions and conditions herein set forth, forever, and Mortgagor does hereby bind itself and its successors, legal representatives, and assigns to warrant and forever defend all and singular the Mortgaged Property unto Mortgagee and its successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, subject to the rights of the Prior Mortgagee. SECURED OBLIGATIONS This Mortgage, and all rights, titles, interests, liens, security interests, powers, privileges and remedies created hereby or arising hereunder or by virtue hereof, are given to secure the payment and performance of all indebtedness, obligations and liabilities arising under the Notes, the Agreement, this Mortgage and any other Loan Document, and any renewals, extensions, amendments, amendments and restatements, supplements or modifications thereof or thereto, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, and any and all fees, costs or expenses incurred by Mortgagee or the other Secured Parties, including, but not limited to, interest accruing at the then applicable rate provided in the Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Agreement or other applicable agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Mortgagor on the Loans and on all other obligations of the Mortgagor to the Secured Parties, taxes, recording expenses and attorneys' fees in connection with the execution and delivery of any of the aforesaid, and the consummation of the transactions contemplated thereby, the administration thereof, and, after default, the administration and collection thereof, all costs incurred of whatever nature by Mortgagee in the exercise of any rights hereunder or under any Loan Document and all other amounts payable by Mortgagor under this Mortgage (all of the foregoing indebtedness, obligations and liabilities being referred to herein as the "Secured Obligations"). 9 ARTICLE I PARTICULAR WARRANTIES, REPRESENTATIONS AND COVENANTS OF MORTGAGOR Section 1.01 Warranties and Representations. Mortgagor hereby warrants and represents as follows: (a) Mortgagor is the actual, record and beneficial owner of the Premises and holder of a good and marketable title to an indefeasible leasehold estate in the Leaseholds or owns an actual beneficial interest therein and fee estate in the rest of the Mortgaged Property, subject only to such exceptions to title as are listed in the title policy insuring the lien of this Mortgage and approved by Mortgagee and the Prior Mortgagee as permitted exceptions. Mortgagor is the owner of all of the remaining Mortgaged Property; Mortgagor will own the Fixtures free and clear of liens and claims except the Prior Mortgage and liens and claims in favor of Mortgagee; and this Mortgage is and will remain a valid and enforceable lien on the Mortgaged Property subject only to the permitted exceptions referred to above. (b) Mortgagor has full power and lawful authority, and has obtained the written consent of the Prior Mortgagee, to mortgage the Mortgaged Property in the manner and form herein done or intended hereafter to be done. Mortgagor will preserve such title, and will forever warrant and defend the validity and priority of the lien hereof, against the claims of all persons and parties whomsoever. (c) Except as otherwise specified in the Title Policy (as defined in the Agreement) or in the Survey (as defined in the Agreement), the Premises is not located in an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards or if it is so located, flood insurance acceptable to Mortgagee has been obtained. Section 1.02 Further Assurances. Mortgagor will, at its sole expense, do, execute, acknowledge and deliver every further act, deed, conveyance, mortgage, assignment, notice of assignment, transfer or assurance as Mortgagee shall from time to time reasonably require, for the better assuring, conveying, assigning, transferring and confirming unto Mortgagee the property and rights hereby conveyed, mortgaged or assigned or intended now or hereafter so to be, or which Mortgagor may be or may hereafter become bound to convey, mortgage or assign to Mortgagee or for carrying out the intention or facilitating the performance of the terms of this Mortgage, and for filing, registering or recording this Mortgage and, on demand, will execute and deliver, and hereby authorizes Mortgagee to execute in the name of Mortgagor to the extent it may lawfully do so, one or more financing statements, chattel 10 mortgages or comparable security instruments, and renewals thereof, to evidence more effectively the lien hereof upon the Fixtures. Section 1.03 Filings, Recordings and Payments. (a) Mortgagor forthwith upon the execution of this Mortgage, and thereafter from time to time, will, at its expense, cause this Mortgage and any security instrument creating a lien or evidencing the lien hereof upon the Fixtures and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien hereof upon, and the interest of Mortgagee in, the Mortgaged Property. (b) Mortgagor will pay all taxes, filing, registration and recording fees, and all expenses incident to the execution and acknowledgment of this Mortgage, any supplemental mortgage, any other Loan Document, and any security instrument with respect to the Fixtures, and any instrument of further assurance, and all federal, state, county and municipal stamp taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Agreement, this Mortgage, any supplemental mortgage, any other Loan Document, any security instrument with respect to the Fixtures or any instrument or further assurance, other than income, franchise or other similar taxes imposed on Mortgagee in respect of income derived by Mortgagee under the Secured Obligations. Section 1.04 Payment of Sums Due. Mortgagor will punctually pay the principal and interest and all other sums to become due in respect of the Agreement and any other Loan Document at the time and place and in the manner specified in the Agreement and any other Loan Document, according to the true intent and meaning thereof and without offset, counterclaim, defense or cause of action of any kind whatsoever , and without deduction or credit for any amount payable for taxes, all in immediately available funds in Dollars. Section 1.05 After Acquired Property. All right, title and interest of Mortgagor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Mortgaged Property, hereafter acquired by or released to Mortgagor or constructed, assembled or placed by Mortgagor on the Premises, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, conveyance, assignment or other act by Mortgagor, shall become subject to the lien of this Mortgage as fully and completely, and with the same effect, as though now owned by Mortgagor and specifically described in the granting clauses hereof (subject to the rights of the Prior Mortgagee), but at any and all times Mortgagor will execute and deliver to Mortgagee any and all such further assurances, mortgages, 11 conveyances or assignments thereof as Mortgagee may reasonably require for the purpose of expressing and specifically subjecting the same to the lien of this Mortgage. Section 1.06 Taxes, Fees and Other Charges. (a) Mortgagor, from time to time when the same shall become due, and prior to the date of imposition of interest or penalty (except as otherwise permitted in the Agreement), will pay and discharge, or cause to be paid and discharged, all taxes of every kind and nature (including real and personal property taxes and income, franchise, withholding, transfer or recordation taxes, profits and gross receipt taxes), all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges, and all other public charges, whether of a like or different nature, imposed upon or assessed against it or the Mortgaged Property or any part thereof or upon the revenues, rents, issues, income and profits of the Premises or arising in respect of the occupancy, use or possession thereof. Mortgagor will, at any time upon request by Mortgagee, promptly deliver to Mortgagee receipts evidencing the payment of same. Subject to the Prior Mortgage, upon the occurrence of an Event of Default under the Agreement, Mortgagee may, at any time and from time to time, at its option, to be exercised by written notice to Mortgagor, require the deposit by Mortgagor at the time of each payment of an installment of interest or principal under the Agreement of an additional amount sufficient to discharge the obligations under this subsection (a) when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Mortgagee, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Mortgagee in its sole discretion. Such amounts shall be held by Mortgagee without interest in an account acceptable to Mortgagee and applied to the payment of the obligations in respect to which such amounts were deposited or, at the option of Mortgagee and subject to applicable law, to the payment of the Secured Obligations in such order or priority as Mortgagee shall determine consistent with the Agreement, on or before the respective dates on which the same or any of them would become delinquent. If one month prior to the due date of any of the obligations under this subsection (a) the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, subject to the Prior Mortgage, Mortgagor within ten (10) days after demand, shall deposit the amount of the deficiency with Mortgagee. Nothing herein contained shall be deemed to affect any right or remedy of Mortgagee under the provisions of this Mortgage or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. (b) Except as otherwise permitted in the Agreement, Mortgagor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or permit the creation of, a lien on the Mortgaged Property or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom and in general will do or cause to be done 12 everything necessary so that the lien hereof shall be fully preserved, at the cost of Mortgagor, without expense to Mortgagee. Section 1.07 Intentionally Deleted. Section 1.08 Insurance. (a) Mortgagor agrees to at all times provide, maintain and keep in force the policies of insurance required to the maintained pursuant to the terms of the Agreement. (b) In the event Mortgagor fails to provide, maintain, keep in force or deliver and furnish to Mortgagee the policies of insurance required by the Agreement or this Mortgage, Mortgagee may procure such insurance or single-interest insurance for such risks covering Mortgagee's interest, and Mortgagor will pay all premiums thereon promptly upon demand by Mortgagee, and until such payment is made by Mortgagor the amount of all such premiums, together with interest thereon at the Default Rate shall be secured by this Mortgage. (c) After the happening of any casualty to the Mortgaged Property or any part thereof, Mortgagor shall give prompt written notice thereof to Mortgagee, and Mortgagee may make proof of loss if not made promptly by Mortgagor. In the event of such loss or damage, all proceeds of insurance shall be payable in the manner provided for in the Agreement (subject to the Prior Mortgage). Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Mortgagor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are insurance proceeds available or whether any such proceeds are sufficient in amount, and the application or release by Mortgagee of any insurance proceeds shall not cure or waive any Default or notice of Default under this Mortgage or invalidate any act done pursuant to such notice. Any monies received as payment for loss under any insurance shall be applied pursuant to the terms of the Agreement (subject to the Prior Mortgage). (d) In the event of foreclosure of this Mortgage or other transfer of title or assignment of the Premises in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Mortgagor in and to all policies of insurance required by this Section 1.08 shall inure to the benefit of and pass to the successor in interest to Mortgagor or the purchaser or grantee of the Premises. (e) Mortgagor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 1.08, unless Mortgagee has approved the insurance company and the form and content of the insurance policy, including, without limitation, the naming thereon of Mortgagee as a named 13 insured with loss, subject to the rights of the Prior Mortgagee, payable to Mortgagee under a standard mortgagee endorsement of the character above described and the inclusion of a provision therein obligating said insurance company to provide Mortgagee with notice thirty (30) days prior to cancellation, lapse or amendment of any policy. Mortgagor shall immediately notify Mortgagee whenever any such separate insurance is taken out and shall promptly deliver to Mortgagee the policy or policies of such insurance. (f) Subject to the Prior Mortgage, Mortgagee may at any time following the occurrence of an Event of Default under the Agreement, at its option, to be exercised by written notice to Mortgagor, require the deposit by Mortgagor, at the time of each payment of an installment of interest or principal under the Agreement, of an additional amount sufficient to discharge the obligations under this Section 1.08 when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Mortgagee with each installment, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Mortgagee in its sole discretion. Such amounts shall be held by Mortgagee without interest in an account acceptable to Mortgagee and applied to the payment of the obligations in respect of which such amounts were deposited on or before the respective dates on which the same or any of them would become delinquent or, at the option of Mortgagee, to the payment of the Secured Obligations in such order or priority as Mortgagee shall determine consistent with the Agreement. If one month prior to the due date of any of the aforementioned obligations the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, Mortgagor within five (5) days after demand shall deposit the amount of the deficiency with Mortgagee. Nothing herein contained shall be deemed to affect any right or remedy of Mortgagee under the provisions of this Mortgage or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. Section 1.09 Condemnation. (a) In the event the Mortgaged Property or any part thereof or interest therein, shall be taken or damaged by eminent domain, alteration of the grade of any street, or there shall occur any other injury to or decrease in the value of the Mortgaged Property, by reason of any public or quasi-public improvement or condemnation proceeding, or in any other similar manner ("Condemnation"), or should Mortgagor receive any notice or other information regarding such Condemnation or a proposed Condemnation, Mortgagor shall give prompt written notice thereof to Mortgagee. (b) Subject to the Prior Mortgage, all compensation, awards and other payments or relief payable as a result of any such Condemnation, shall be payable in the manner provided for in the Agreement. Subject to the Prior Mortgage, all such compensation, awards, damages, rights of action and proceeds awarded to Mortgagor (the "Proceeds") are hereby assigned to Mortgagee and Mortgagor agrees to execute such further assignments of the Proceeds as Mortgagee may require. Mortgagee shall be under no obligation to question 14 the amount of any such award or compensation and may accept the same in the amount paid. Subject to the Prior Mortgage, all Proceeds may be applied either against the Secured Obligations (in such order and priority as Mortgagee shall determine consistent with the Agreement) or to restore the Premises, at the discretion of Mortgagee, except as may be otherwise provided in the Agreement. (c) Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Mortgagor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are proceeds available or whether any such Proceeds are sufficient in amount, and the application or release by Mortgagee of any Proceeds shall not cure or waive any default or notice of default under this Mortgage or invalidate any act done pursuant to such notice. (d) Receipt by Mortgagee and application in reduction of indebtedness of any Proceeds less than the full amount of the then outstanding Secured Obligations shall not defer, alter or modify Mortgagor's obligation to continue to pay the regular installments of principal, interest on the outstanding principal balance and other charges owned in respect of the Secured Obligations and herein. (e) Subject to the Prior Mortgage, if prior to the receipt of the Proceeds by Mortgagee the condemned Premises shall have been sold on foreclosure of this Mortgage, Mortgagee shall, nevertheless, have the right to receive the Proceeds and to retain, for its own account, (i) an amount equal to the counsel fees, costs and disbursements incurred by Mortgagee in connection with collection of the Proceeds and not repaid by Mortgagor and (ii) the full amount of all such Proceeds, if Mortgagee is the successful purchaser at the foreclosure sale, to the extent of amounts owed in respect of the Secured Obligations. Section 1.10 Mortgagee's Performance of Mortgagor's Obligations. If Mortgagor shall fail to perform any of the covenants contained herein or any covenant contained in the Agreement or any other Loan Document, Mortgagee may, but shall not be obligated to, make advances and/or disbursements to perform the same. Mortgagor will repay on demand all sums so advanced and/or disbursed with interest at the Default Rate from the date of making such advance and/or disbursement until such sums have been repaid and all sums so advanced and/or disbursed, together with interest thereon at the Default Rate, shall be a lien upon the Mortgaged Property and shall be secured hereby. The provisions of this Section 1.10 shall not prevent any default in the observance of any covenant contained herein or with respect to the Secured Obligations or in any other Loan Document from constituting an Event of Default. 15 Section 1.11 Financial Records. Mortgagor will provide the financial statements to Mortgagee required pursuant to the terms of the Agreement. Section 1.12 Waste and Maintenance. Mortgagor will not threaten, commit, permit or suffer any waste to occur on or to the Mortgaged Property or any part thereof or alter or demolish the Mortgaged Property or any part thereof in any manner or make any change in its use (except as provided in the Agreement, or the Prior Mortgage) or any change which will in any way increase any fire or other hazards arising out of construction or operation of the Mortgaged Property. Mortgagor will, at all times, maintain the Mortgaged Property as required pursuant to the terms of the Agreement and the Prior Mortgage. Section 1.13 Enforcement Expenses. Except where inconsistent with the laws of the state in which the Mortgaged Property is located, Mortgagor agrees that if any action or proceeding be commenced, including an action to foreclose this Mortgage or to collect the indebtedness hereby secured, to which action or proceeding Mortgagee is made a party by reason of the execution of this Mortgage or the other Loan Documents which it secures, or in which it becomes necessary to defend or uphold the lien of this Mortgage, all sums paid by Mortgagee for the expense of any litigation to prosecute or defend or participate in the transaction and the rights and liens created hereby (including reasonable attorneys' fees) shall be paid by Mortgagor together with interest thereon from date of payment by Mortgagee at the Default Rate. All such sums paid and the interest thereon shall be immediately due and payable, shall be a lien upon the Mortgaged Property, and shall be secured hereby as shall be all such sums incurred in connection with enforcement by Mortgagee of its rights hereunder or under any other Loan Document. Section 1.14 Defense of Mortgagee's Interests. If the interest of Mortgagee in the Mortgaged Property or any part thereof or the lien or security interest of this Mortgage thereon shall be attacked, directly or indirectly, or if legal proceedings shall be instituted against Mortgagor or Mortgagee with respect thereto or against Mortgagor, Mortgagor, upon its learning thereof, will promptly give written notice thereof to Mortgagee and Mortgagor will, at Mortgagor's cost and expense, exert itself diligently to cure, or will cause to be cured, any defect that may have developed or be claimed to exist, and will take all necessary and proper steps for the protection and defense thereof and will take, or will cause to be taken, such action as is appropriate to the defense of any such legal proceedings, including, but not limited to, the employment of counsel and the prosecution and defense of litigation. Section 1.15 No Impairment of Security. In no event shall Mortgagor do or permit to be done, or omit to do or permit the omission of, any act or thing, the doing, or omission, of which would materially impair the security of this Mortgage or materially impair the value of the Mortgaged Property or any part thereof. 16 Section 1.16 Restrictions on Transfers and Mortgages. Unless otherwise permitted pursuant to the terms of the Agreement, Mortgagor will not directly or indirectly, by transfer, mortgage, conveyance, or sale of an interest in Mortgagor permit, do or suffer the assignment, lease, transfer, sale, conveyance or encumbrance of the Mortgaged Property, or any part thereof or any interest therein, without the express prior written consent of Mortgagee unless otherwise permitted pursuant to the terms of the Agreement and the Prior Mortgage. While the Secured Obligations are outstanding, neither the structure nor the ownership of Mortgagor may be changed without the express prior written consent of Mortgagee unless otherwise permitted pursuant to the terms of the Agreement and, while the Prior Mortgage is in effect, the Prior Mortgage. Section 1.17 Mortgagee's Defense. Mortgagee may appear in and defend any action or proceeding at law or in equity or in bankruptcy purporting to affect the Premises or the security hereof or the rights and powers of Mortgagee, and any appellate proceedings, and in such event Mortgagor shall pay all of Mortgagee's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding. All costs, charges and expenses so incurred, together with interest thereon at the Default Rate from the date of payment of same by Mortgagee as aforesaid, shall be secured by the lien of this Mortgage and shall be due and payable upon demand. Section 1.18 Environmental Compliance. Mortgagor will perform and comply promptly with, and cause the Premises to be maintained, used and operated in accordance with, all applicable federal, state and local laws pertaining to air and water quality, hazardous waste, waste disposal, air emissions and other environmental matters as set forth in the Agreement. Section 1.19 Zoning Changes. Mortgagor will not consent to, join in, permit or allow any change in the zoning laws or ordinances relating to or affecting the Premises which could reasonably be expected to materially adversely affect the Premises and will promptly notify Mortgagee of any changes to the zoning laws. Section 1.20 Grant of Security Interest. Mortgagor, as further security for the payment of said indebtedness and in addition to all the rights and remedies otherwise available to Mortgagee under this Mortgage and the other Loan Documents, grants to Mortgagee a security interest, under the Uniform Commercial Code as now in effect in the state where all or any of the Fixtures are located, in and to the Fixtures, and all proceeds thereof. Upon an Event of Default, Mortgagee shall have, in addition to all the other rights and remedies allowed by law, the rights and remedies of a secured party under the Uniform Commercial Code as in effect at that time. Mortgagor further agrees that the security interest created hereby also secures all expenses of Mortgagee (including reasonable expenses for legal services of every kind, and cost of any insurance, and payment of taxes or other 17 charges) incurred in or incidental to, the custody, care, sale or collection of, or realization upon, any of the property secured hereby or in any way relating to the enforcement or protection of the rights of Mortgagee hereunder, together with interest thereon at the Default Rate until paid. Section 1.21 Compliance with Laws and ADA Compliance. (a) Mortgagor warrants and covenants that the Premises are and will continue to be substantially in compliance with all applicable local, county, state and federal laws and regulations and all building, housing and fire codes, rules and regulations. (b) Without limiting the provisions of subsection (a) of this Section 1.21: (i) Mortgagor represents and warrants to Mortgagee that Mortgagor is substantially in compliance with the Americans with Disabilities Act of 1990 (42 U.S.C.A. sec. 12101 et. seq.), as the same may be amended from time to time (the "ADA") and all other federal, state and local laws pertaining to the accessibility of the Premises by persons with disabilities (the ADA and such other laws are, collectively, the "Accessibility Laws"); (ii) Mortgagor covenants to ensure that the Premises will at all times substantially comply with all applicable Accessibility Laws and, upon the request of Mortgagee, Mortgagor will conduct such surveys of the Premises as Mortgagee shall require to ascertain such compliance; (iii) Mortgagor will maintain accurate records of all expenditures made in connection with any alterations to the Premises and will deliver copies thereof to Mortgagee upon Mortgagee's request; and (iv) Mortgagor shall defend, indemnify and hold harmless Mortgagee, its employees, agents, officers and directors, attorneys and any parent or affiliate of Mortgagee, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, cost or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out or in any way related to any violations of the Accessibility Laws (including, without limitation, any costs incurred by Mortgagee in complying with any Accessibility Laws). Neither payment of the indebtedness secured hereby nor foreclosure shall operate as a discharge of Mortgagor's obligations under this subsection (b). In the event Mortgagor tenders a deed in lieu of foreclosure, Mortgagor shall deliver the Premises to Mortgagee (or its designee) substantially free of any violations of the Accessibility Laws. In the event Mortgagor does not timely perform any of the above obligations, Mortgagee after 30 days notice to Mortgagor may perform said obligations at the expense of Mortgagor and Mortgagor shall, upon written demand from Mortgagee, reimburse Mortgagee for all costs, including attorney's fees and out-of-pocket expenses, and all liabilities incurred by Mortgagee by reason of the foregoing, with interest thereon at the Default Rate from the date of such payment by Mortgagee to the date of repayment. Until paid, said costs and expenses shall be secured by this Mortgage. 18 Section 1.22 Other Multistate Mortgages. The indebtedness secured in part by this Mortgage is secured by mortgages and/or deeds of trust encumbering and conveying lands and other property and/or leasehold interests therein in other states as more particularly described in the Agreement, all of which mortgages and/or deeds of trust, including this instrument, being hereafter referred to as "the mortgage instruments." It is understood and agreed that all of the properties of all kinds conveyed or encumbered by the mortgage instruments are security for the Secured Obligations without allocation of any one or more of the parcels or portions thereof to any portion of the Secured Obligations less than the whole amount thereof unless so stated in said mortgage instruments. Subject to the Prior Mortgage, it is specifically covenanted and agreed that Mortgagee may proceed, at the same or at different times, to foreclose said mortgage instruments, or any of them, by any proceedings appropriate in the state where any of the land lies, and that no event of enforcement taking place in any state including, without limiting the generality of the foregoing, any pending foreclosure, judgment or decree of the foreclosure, foreclosure sale, rents received, possession taken, deficiency judgment or decree, or judgment taken on the Secured Obligations, shall in any way stay, preclude or bar enforcement of the mortgage instruments or any of them in any other state, and that, Mortgagee may pursue any or all its remedies to the maximum extent permitted by state law until all of the Secured Obligations now or hereafter secured by any or all of the mortgage instruments has been paid and discharged in full. Neither Mortgagor, nor any person claiming under Mortgagor, shall have or enjoy any right to marshaling of assets, all such right being hereby expressly waived as to Mortgagor and all persons claiming under it, including junior lienors. No release of personal liability of any person whatever and no release of any portion of the property now or hereafter subject to the lien of any of the mortgage instruments shall have any effect whatever by way of impairment or disturbance of the lien or priority of any of said mortgage instruments. Any foreclosure or other appropriate remedy brought in any of the states aforesaid may be brought and prosecuted as to any part of the mortgaged security, wherever located, without regard to the fact that foreclosure proceedings or other appropriate remedies have or have not been instituted elsewhere on any other land subject to the lien of said mortgage instruments or any of them. Section 1.23 Leasehold and Leasehold Instruments. (a) Mortgagor covenants and agrees to faithfully comply with and perform all of its obligations under the Leasehold Instruments, and to promptly cure any default by it under the Leasehold Instruments. 19 (b) Mortgagor may modify, amend or terminate any Leasehold Instrument without the prior written consent provided such action is consistent with the terms of the Agreement and the Prior Mortgage. (c) Mortgagor will promptly give Mortgagee a copy of any default notice given to Mortgagor with respect to any Leasehold Instrument. ARTICLE II EVENTS OF DEFAULT AND REMEDIES Section 2.01 Events of Default. The following shall constitute defaults hereunder and, after the giving of notice and the passage of time, if any, as provided herein, shall constitute "Events of Default" hereunder: (a) If Mortgagor shall fail to pay when due any Secured Obligation after the passage of any applicable notice or grace period, if any; or (b) If an Event of Default, as defined in the Agreement, shall occur under the Agreement. Section 2.02 Mortgagee's Remedies. (a) During the continuance of any Event of Default, Mortgagee, without notice or presentment, each of which are hereby waived by Mortgagor, may, subject to the provisions of the Agreement, declare the entire principal of the Secured Obligations then outstanding and all accrued and unpaid interest thereon and all other amounts owing in respect thereof (if not then due and payable, whether by acceleration or otherwise), to be due and payable immediately, and upon any such declaration the principal of the Secured Obligations and said accrued and unpaid interest shall become and be immediately due and payable, anything in the instruments evidencing the Secured Obligations or in this Mortgage to the contrary notwithstanding; (b) During the continuance of any Event of Default, Mortgagee may, subject to the Prior Mortgage, enter into and upon all or any part of the Premises, and, having and holding the same, may use, operate, manage and control the Mortgaged Property or any part thereof and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and likewise, from time to time, at the expense of Mortgagor, Mortgagee may make all necessary or proper repairs, renewals and replacements and such useful alterations, additions, betterments and improvements thereto and thereon as to it may deem advisable in its sole judgment; and in every such case Mortgagee shall have the right to manage and operate the Mortgaged Property and to carry on the business thereof and exercise all rights and powers of Mortgagor with respect thereto 20 either in the name of Mortgagor or otherwise as Mortgagee shall deem best; and Mortgagee shall be entitled, subject to the Prior Mortgage, with or without entering into or upon the Premises, to collect and receive all gross receipts, earnings, revenues, rents, maintenance payments, issues, profits and income of the Mortgaged Property and every part thereof, all of which shall for all purposes constitute property of Mortgagee; and, after deducting the expenses of conducting the business thereof and of all maintenance, repairs, renewals, replacement, alterations, additions, betterments and improvements and amounts necessary to pay taxes, assessments, insurance and prior or other proper charges upon the Mortgaged Property or any part thereof, as well as just and reasonable compensation for the services of Mortgagee and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, Mortgagee may apply the moneys arising as aforesaid in such manner and at such times as Mortgagee shall determine in its discretion consistent with the Agreement to the payment of the Secured Obligations and the interest thereon, when and as the same shall become payable and/or to the payment of any other sums required to be paid by Mortgagor under this Mortgage; (c) During the continuance of any such Event of Default, Mortgagor covenants and agrees as follows (subject, in each case, to the Prior Mortgage and Sections 5.05 and 5.06 of this Mortgage): (1) Mortgagee may, with or without entry, personally or by its agents or attorneys, insofar as applicable, sell the Mortgaged Property or any part thereof and pursuant to the procedures provided by law, and all estate, right, title, interest, claim and demand therein, and right of redemption thereof, at one or more sales as an entity or in parcels, and at such time and place upon such terms and after such notice thereof as may be required or permitted by law; or (2) Mortgagee may institute an action of mortgage foreclosure or institute other proceedings according to law for the foreclosure hereof, and may prosecute the same to judgment, execution and sale for the collection of the Secured Obligations secured hereby, and all interest with respect thereto, together with all taxes and insurance premiums advanced by Mortgagee and other sums payable by Mortgagor hereunder, and all fees, costs and expenses of such proceedings, including attorneys' fees and expenses; or (3) Mortgagee may, if default be made in the payment of any part of the Secured Obligations, proceed with foreclosure of the liens evidenced hereby in satisfaction of such item either through the courts or by conducting the sale as herein provided, and proceed with foreclosure of the security interest created hereby, all without declaring the whole of the Secured 21 Obligations due, and provided that if sale of the Mortgaged Property, or any portion thereof, is made because of default in payment of a part of the Secured Obligations, such sale may be made subject to the unmatured part of the Secured Obligations, but as to such unmatured part of the Secured Obligations (and it is agreed that such sale, if so made, shall not in any manner affect the unmatured part of the Secured Obligations) this Mortgage shall remain in full force and effect just as though no sale had been made under the provisions of this paragraph. And it is further agreed that several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured Obligations, it being the purpose to provide for a foreclosure and sale of the Mortgaged Property, or any part thereof, for any matured portion of the Secured Obligations without exhausting the power to foreclose and to sell the Mortgaged Property, or any part thereof, for any other part of the Secured Obligations whether matured at the time or subsequently maturing; or (4) Mortgagee may take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Loan Documents or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Mortgagee shall elect; or (5) Mortgagee may exercise in respect of the Mortgaged Property consisting of Fixtures, all of the rights and remedies available to a secured party upon default under the applicable provisions of the Uniform Commercial Code as then in effect in the state where the Mortgaged Property is located; or (6) Mortgagee may apply any proceeds or amounts held in escrow pursuant to the terms of this Mortgage to payment of any part of the Secured Obligations in such order of priority as Mortgagee may determine consistent with the Agreement; or (7) Any sale as aforesaid may be subject to such existing tenancies as Mortgagee, in its sole discretion, may elect. Section 2.03 Sale, Foreclosure, etc. (a) Mortgagee may adjourn from time to time any sale by it to be made under or by virtue of this Mortgage by announcement at the time and place appointed for such sale or for such adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, Mortgagee, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. 22 (b) Upon the completion of any sale or sales made by Mortgagee under or by virtue of this Article II, Mortgagee, or any officer of any court empowered to do so, shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, conveying, assigning and transferring all estate, right, title and interest in and to the properties, interests and rights sold. Subject to the Prior Mortgage, Mortgagee is hereby irrevocably appointed the true and lawful attorney of Mortgagor, in its name and stead, to make all the necessary conveyances, assignments, transfers and deliveries of any part of the Mortgaged Property and rights so sold, and for that purpose Mortgagee may execute all necessary instruments of conveyance, assignment and transfer and may substitute one or more persons with like power, Mortgagor hereby ratifying and confirming all that its said attorney or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, Mortgagor, if so requested by Mortgagee, shall ratify and confirm any such sale or sales by executing and delivering to Mortgagee or to such purchaser or purchasers all such instruments as may be advisable, in the reasonable judgment of Mortgagee, for the purpose and as may be designated in such request. (c) Upon any sale, whether under the power of sale hereby given or by virtue of judicial proceedings, it shall not be necessary for Mortgagee, or any public officer acting under execution or order of court, to have present or constructive possession of any of the Mortgaged Property. (d) The recitals contained in any conveyance made by Mortgagee to any purchaser at any sale made pursuant hereto or under applicable law shall be full evidence of the matters therein stated, and all prerequisites to such sale shall be presumed to have been satisfied and performed. (e) Any such sale or sales made under or by virtue of this Mortgage, whether under the power of sale hereby granted and conferred, or under or by virtue of any judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either by law or in equity, of Mortgagor in and to the premises and property sold, and shall be a perpetual bar, both at law and in equity, against Mortgagor, its successors and assigns, and (subject to the Prior Mortgage) against any and all persons or entities claiming the premises and property sold, or any part thereof, from through or under Mortgagor and its successors or assigns. (f) The receipt given by Mortgagee for the purchase money paid at any such sale, or the receipt given by any other person authorized to receive the same, shall be sufficient discharge therefor to any purchaser of the property, or any part thereof, sold as aforesaid, and no such purchaser, or his representatives, grantees or assigns, after paying such purchase money and receiving such receipt, shall be bound (i) to see to the application of such purchase money or any part thereof upon or for any trust or purpose of this Mortgage, (ii) by the misapplication 23 or nonapplication of any such purchase money, or any part thereof, or (iii) to inquire as to the authorization, necessity, expediency or regularity of any such sale. (g) In case the liens or security interests hereunder, or by the exercise of any other right or power, shall be foreclosed by Mortgagee's sale or by other judicial or non-judicial action, the purchaser at any such sale shall receive, as an incident to its ownership, immediate possession of the property purchased, and if Mortgagor or Mortgagor's successors shall hold possession of said property, or any part thereof, subsequent to foreclosure, Mortgagor or Mortgagor's successors shall be considered as tenants at sufferance of the purchaser at foreclosure sale, and anyone occupying the property after demand made for possession thereof shall be guilty of forcible detainer and shall be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages by reason thereof are hereby expressly waived. (h) In the event a foreclosure hereunder shall be commenced by Mortgagee, Mortgagee may at any time before the sale abandon the suit, and may then institute suit for the collection of the Secured Obligations and for the foreclosure of the liens and security interest hereof. If Mortgagee should institute a suit for the collection of the Secured Obligations and for a foreclosure of the liens and security interest hereof, it may at any time before the entry of a final judgment in said suit dismiss the same and proceed to sell the Mortgaged Property, or any part thereof, in accordance with provisions of this Mortgage. (i) Any reasonable expenses incurred by Mortgagee in prosecuting, resetting or settling the claim of Mortgagee shall become an additional Secured Obligation of Mortgagor hereunder. (j) In the event of any sale made under or by virtue of this Article II (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale), the entire principal of, and interest on, the Secured Obligations, if not previously due and payable, and all other sums required to be paid by Mortgagor pursuant to this Mortgage, immediately thereupon shall, anything in the Secured Obligations or in this Mortgage to the contrary notwithstanding, become due and payable. (k) The purchase money proceeds or avails of any sale made under or by virtue of this Article II, together with any other sums which then may be held by Mortgagee under this Mortgage, whether under the provisions of this Article II or otherwise, shall be applied in accordance with the laws of the state where the Mortgaged Property is located, and to the extent not inconsistent, first to the payment of the costs and expenses of such sale, including reasonable compensation to Mortgagee and its agents and counsel, second to the payment of the amounts due and owing under or in respect of the Secured Obligations for principal and interest and any other amounts including (without limitation) any other sums required to be paid 24 by Mortgagor pursuant to any provision of this Mortgage or any other Loan Document, with interest at the Default Rate from and after the happening of any Event of Default in the order set forth in Section 7.2 of the Agreement, all with interest at the Default Rate from the date such sums were or are required to be paid under this Mortgage, and third to the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. (l) Upon any sale made under or by virtue of this Article II, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Mortgagee and any other Secured Party may bid for and acquire the Mortgaged Property or any part thereof and Mortgagee and any other Secured Party in lieu of paying cash therefor may make settlement for the purchase price by crediting some or all of the indebtedness of Mortgagor secured by this Mortgage owing to such Secured Party (or, in the case of Mortgagee, owing to all Secured Parties) the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which Mortgagee is authorized to deduct under this Mortgage. Section 2.04 Payments, Judgment, etc. (a) In case an Event of Default under the Agreement and the acceleration of the obligations thereunder shall have occurred, then, Mortgagor will in accordance with the Agreement pay to Mortgagee the whole amount which then shall have become due and payable on the Secured Obligations, whether for principal and interest or both or otherwise, as the case may be, which interest shall then accrue at the Default Rate on the then unpaid principal of or other amounts constituting the Secured Obligations, and the sums required to be paid by Mortgagor pursuant to any provision of this Mortgage, and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to Mortgagee its agents and counsel and any expenses incurred by Mortgagee hereunder. In the event Mortgagor shall fail forthwith to pay such amounts upon demand, Mortgagee shall be entitled and empowered to institute such action or proceedings at law or in equity as may be advised by its counsel for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree. (b) Mortgagee shall be entitled to recover judgment as aforesaid either before or after or during the pendency of any proceedings for the enforcement of the provisions of this Mortgage and the right of Mortgagee to recover such judgment shall not be affected by any entry or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Mortgage or the foreclosure of the lien hereof; and in the event of a sale of the Mortgaged Property or any part thereof and of the application of the proceeds of sale, as provided in this Mortgage, to the payment of the indebtedness hereby secured, Mortgagee shall be entitled to enforce payment of, and to receive all amounts then remaining due and unpaid upon, the Secured Obligations, and to enforce payment of all other charges, payments and costs due under this Mortgage and shall be entitled to recover judgment 25 for any portion of the debt remaining unpaid, with interest thereon at the Default Rate. In case of proceedings against Mortgagor in insolvency or bankruptcy or any proceedings for its reorganization or involving the liquidation of its assets, then Mortgagee shall be entitled to prove the whole amount of principal and interest due upon the Secured Obligations to the full amount thereof, and all other payments, charges and costs due under this Mortgage without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property. (c) No recovery of any judgment by Mortgagee and no levy of an execution under any judgment upon the Mortgaged Property or upon any other property of Mortgagor shall affect, in any manner or to any extent, the lien of this Mortgage upon the Mortgaged Property or any part thereof, or any liens, rights, powers or remedies of Mortgagee hereunder, but such liens, rights, powers and remedies of Mortgagee shall continue unimpaired as before. (d) Any moneys thus collected by Mortgagee under this Section 2.04 shall be applied by Mortgagee in accordance with the provisions of paragraph (k) of Section 2.03. Section 2.05 Receiver, Waiver. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceedings by Mortgagee to obtain judgment for the principal of, or interest on, and any other amounts constituting the Secured Obligations, including (without limitation) all sums required to be paid by Mortgagor pursuant to any provision of this Mortgage or of any nature in aid of the enforcement of the Secured Obligations or of this Mortgage, Mortgagor will (a) waive the issuance and service of process and submit to a voluntary appearance in such action, suit or proceeding and (b) subject to the Prior Mortgage, if required by Mortgagee, consent to the appointment of a receiver or receivers of the Mortgaged Property or any part thereof and of all the earnings, revenues, rents, maintenance payments, issues, profits and income thereof in accordance with Section 2.11 hereof. After the happening of any Event of Default and during its continuance, or upon the commencement of any proceedings to foreclose this Mortgage or to enforce the specific performance hereof or in aid thereof or upon the commencement of any other judicial proceeding to enforce any right of Mortgagee, subject to the Prior Mortgage, Mortgagee shall be entitled, as a matter of right, if it shall so elect, without the giving of notice to any other party and without regard to the adequacy or inadequacy of any security for the Mortgage indebtedness, forthwith either before or after declaring the unpaid principal of the Secured Obligations to be due and payable, to the appointment of such a receiver or receivers. Section 2.06 Mortgagee's Possession. Notwithstanding the appointment of any receiver, liquidator or trustee of Mortgagor or of any of its property, or of the Mortgaged Property or any part thereof, Mortgagee shall, subject to the Prior Mortgage, be entitled to retain possession and control of the Mortgaged Property. 26 Section 2.07 Remedies Cumulative. No remedy herein conferred upon or reserved to Mortgagee is intended to be exclusive of any other remedy or remedies which Mortgagee may be entitled to exercise against Mortgagor and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder or in the Agreement or in any other Loan Document now or hereafter existing at law or in equity or by statute. No delay by or omission of Mortgagee to exercise any right or power shall be construed to be a waiver of any Event of Default or any acquiescence therein; and every power and remedy given in this Mortgage or in the Agreement or in any other Loan Document to Mortgagee may be exercised from time to time as often as may be deemed expedient by Mortgagee. The resort to any remedy provided hereunder or in the Agreement or in any other Loan Document or provided by law or at equity shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies against Mortgagor. By the acceptance of payment of principal of or interest on or any other amount due in respect of any of the Secured Obligations after its due date, Mortgagee does not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. Nothing in this Mortgage or in the Agreement or in any instrument evidencing the Secured Obligations shall affect the obligation of Mortgagor to pay (i) the principal of, and interest on, the Secured Obligations in the manner and at the time and place therein or in the Agreement expressed or (ii) the other Secured Obligations in the manner and at the time herein expressed. Section 2.08 Agreement by Mortgagor. Mortgagor will not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, any exemption from execution or sale of the Mortgaged Property or any part thereof, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Mortgage or any other Loan Document, or claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Mortgaged Property, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein, or pursuant to the decree, judgment or order of any court of competent jurisdiction, or, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof; and Mortgagor hereby expressly waives all benefit or advantage of any such law or laws and covenants not to hinder, delay or impede the execution of any power herein granted or delegated to Mortgagee, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Mortgagor, waives, to the extent that it lawfully may, all right to have the Mortgaged Property or any part thereof marshaled upon any foreclosure hereof. Section 2.09 Use and Occupancy Payments. During the continuance of any Event of Default and pending the exercise by Mortgagee of its right to exclude Mortgagor from all or any part of the Premises, unless Mortgagor is legally entitled to continue possession of the 27 Premises, Mortgagor agrees to pay to Mortgagee the fair and reasonable rental value, which amount shall be determined by the Mortgagee in its reasonable judgment, for the use and occupancy of the Premises or any portion thereof which are in its possession for such period and, upon default of any such payment, will, subject to the Prior Mortgage, vacate and surrender possession of the Premises to Mortgagee or to a receiver, if any, and in default thereof may be evicted by any summary action or proceeding for the recovery of possession of the Premises for non-payment of rent, however designated. Any payments received under this Section 2.09 by Mortgagee shall be applied in accordance with Section 2.03(k) of this Mortgage. Section 2.10 Mortgagee's Right to Purchase. In case of any sale under the foregoing provisions of this Article II, whether made under the power of sale hereby given or pursuant to judicial proceedings, Mortgagee may bid for and purchase any property, and may make payment therefor as hereinafter set forth or as set forth in Section 2.03 (l) above, and, upon compliance with the terms of said sale, may hold, retain and dispose of such property without further accountability therefor. For the purpose of making settlement or payment for the property or properties purchased, Mortgagee shall be entitled to use and apply such of the Secured Obligations held by it or the other Secured Parties, including (without limitation) any accrued and unpaid interest thereon, as it may elect, or as may be otherwise provided for in Section 2.03(l) above. Section 2.11 Appointment of Receiver. Upon application of Mortgagee to any court of competent jurisdiction, if any Event of Default shall have occurred and so long as it shall be continuing, to the extent permitted by law, and subject to the Prior Mortgage, a receiver may be appointed to take possession of and to operate, maintain, develop and manage the Mortgaged Property or any part thereof. In every case when a receiver of the whole or any part of the Mortgaged Property shall be appointed under this Section 2.11 or otherwise, the net income and profits of the Mortgaged Property shall, subject to the order of any court of competent jurisdiction, and subject to the Prior Mortgage, be paid over to, and shall be received by, Mortgagee to be applied as provided in Section 2.03(k) hereof. Section 2.12 No Waiver. Mortgagee may resort to any security given by this Mortgage or to any other security now existing or hereafter given to secure the payment of any of the Secured Obligations secured hereby, in whole or in part, and in such portions and in such order as may seem best to Mortgagee in its reasonable discretion, and any such action shall not in any way be considered as a waiver of any of the rights, benefits, liens or security interest created by this Mortgage. 28 ARTICLE III ASSIGNMENT OF LEASES AND RENTS Section 3.01 Lease Related Definitions. As used in this Mortgage: (a) "Lease" means any lease, sublease, or other similar agreement, now or hereafter existing, under the terms of which any person other than Mortgagor has or acquires any right to occupancy or use of the Mortgaged Property, or any part thereof, or interest therein; (b) "Lessee" means the lessee, sublessee, licensee, tenant or other person having the right to occupy or use all or any part of the Mortgaged Property under a Lease; and (c) "Rent" means the rents, additional rents and other consideration payable to Mortgagor by the Lessee under the terms of a Lease. Whenever reference is made in this Mortgage to a lease, license, lessee, licensee, tenancy or tenant, such reference shall be deemed to include a sublease, sublessee, license, licensee, subtenancy or subtenant, as the case may be. Section 3.02 Assignment of Leases and Rents. Mortgagor hereby assigns to Mortgagee all Leases, together with all Rents payable under the Leases, now or at any time hereafter existing, such assignment being subject to the Prior Mortgage and upon the following terms: (a) until receipt from Mortgagee of notice of the occurrence of an Event of Default, each Lessee may pay rent directly to Mortgagor, (b) upon receipt from Mortgagee of notice that an Event of Default exists, each Lessee shall, and is hereby authorized and directed to, pay directly to Mortgagee all Rent thereafter accruing, and the receipt of such Rent by Mortgagee shall be a release of such Lessee to the extent of all amounts so paid, (c) Rent so received by Mortgagee shall be applied by Mortgagee first to the expenses, if any, of collection and then in accordance with Article II hereof, (d) without impairing its rights hereunder, Mortgagee may, at its option, at any time and from time to time, release to Mortgagor Rent so received by Mortgagee, or any part thereof, (e) Mortgagee shall not be liable for its failure to collect, or its failure to exercise diligence in the collection of, Rent, but shall be accountable only for Rent that it shall actually receive. As among Mortgagee, Mortgagor and any person claiming through or under Mortgagor, the assignment contained in this Section 3.02 is intended to be absolute, unconditional and presently effective, and the provisions of subsection 3.02(a) are intended for the benefit of each Lessee and shall never inure to the benefit of Mortgagor or any person claiming through or under Mortgagor. It shall never be necessary for Mortgagee to institute legal proceedings of any kind whatsoever to enforce the provisions of this Section 3.02. Notwithstanding anything herein to the contrary, Mortgagor may collect such Rent until such time as an Event of Default shall occur hereunder. Section 3.03 Mortgagee's Consent. Nothing in this Article III shall ever be construed as (a) allowing any Lease without Mortgagee's prior written consent unless otherwise permitted under the Agreement, or (b) subordinating this Mortgage to any Lease. 29 Section 3.04 Lease Related Covenants. Mortgagor covenants to: (a) upon demand by Mortgagee, and subject to the Prior Mortgage, assign to Mortgagee, by separate instrument in form and substance satisfactory to Mortgagee, any and all Leases, and/or all Rents payable thereunder, including, but not limited to, any Lease which is now in existence or which may be executed after the date hereof; (b) not accept from any Lessee, nor permit any Lessee to pay, Rent for more than one month in advance except for payment in the nature of security for performance of Lessee's obligations unless otherwise provided for in the Lease; (c) comply with the terms and provisions of each Lease including, without limitation, the payment of all sums required to be paid by Mortgagor or which any Lessor has an option to pay under any Lease in order to prevent any reduction in or offset against any Rent payable under any Lease or any default thereunder; (d) not amend, extend, cancel, abridge, or otherwise modify, or accept surrender of, or renew, any Lease without the written consent of Mortgagee other than in the ordinary course of business, (e) not assign, transfer or mortgage any Lease without the written consent of Mortgagee; (f) not assign, transfer, pledge or mortgage any Rent; (g) not waive, excuse, release or condone any nonperformance of any covenant of any Lease by any Lessee other than in the ordinary course of business; (h) give to Mortgagee duplicate notice of each material default by each Lessee; (i) on all Leases executed after the date hereof, cause each Lessee to agree (and each Lessee under each Lease executed after the date hereof does so agree) to give to Mortgagee written notice of each and every material default by Mortgagor under its Lease and not exercise any remedies under such Lease unless Mortgagee fails to cure such material default within a reasonable period after Mortgagee has received such notice; provided, that Mortgagee shall never have any obligation or duty to cure any such material default; (j) enforce its rights with regard to all Leases in the ordinary course of business; and (k) not enter into any Lease, affecting the Mortgaged Property or any part thereof unless otherwise permitted under the Agreement and the Prior Mortgage, without the prior approval of Mortgagee. Section 3.05 Mortgagee Not Liable. Mortgagee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any Lease, or under or by reason of this assignment, and Mortgagor shall and does hereby agree to indemnify and to hold Mortgagee harmless from and against any and all liability, loss or damage which Mortgagee may or might incur under any Lease or under or by reason of this assignment and from and against any and all claims and demands whatsoever which may be asserted against Mortgagee by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in any Lease. Should Mortgagee incur any such liability, loss or damage under any Lease or under or by reason of this assignment, or in the defense of any such claims or demands, the amount thereof, including all costs, expenses and attorneys' fees, shall be secured hereby and constitute part of the Secured Obligations, and Mortgagor shall reimburse Mortgagee therefore immediately upon demand, and upon the failure of Mortgagor to do so, Mortgagee may declare all sums secured by this Mortgage immediately due and payable. 30 Section 3.06 Estoppel Certificates. On all Leases executed after the date hereof, all Leases shall provide for the giving by the Lessee of certificates with respect to the status of such Leases, and Mortgagor shall exercise its right to request such certificates within ten (10) days of any demand therefor by Mortgagee. Mortgagor shall furnish to Mortgagee, within ten (10) days after a request by Mortgagee to do so, an executed counterpart of all Leases. Section 3.07 Lease Approval Requirements. On all Leases executed after the date hereof, all Leases and Lessees of the Premises, or any part thereof, must be acceptable to and approved by Mortgagee unless otherwise provided under the Agreement; and all Lessees shall execute such estoppel certificates, subordinations, attornments and other agreements as Mortgagee may require. Under no circumstances shall Mortgagee be liable for any obligation to pay any leasing commission, brokerage fee or similar fee or charge in connection with any Lease nor shall Mortgagee be obligated to complete any Improvements for the benefit of any Lessee. ARTICLE IV MISCELLANEOUS Section 4.01 Benefit of Mortgagee. All of the grants, covenants, terms, provisions and conditions of this Mortgage shall run with the land and shall apply to, bind and inure to the benefit of the successors and assigns of the respective parties hereto; provided, that Mortgagor may not assign its obligations hereunder without the prior written consent of Mortgagee. Section 4.02 Savings Clause. In the event any one or more of the provisions contained in this Mortgage shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall, at the option of Mortgagee, not affect any other provision of this Mortgage but this Mortgage shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. Section 4.03 Notices. All notices hereunder shall be given pursuant to the terms of Section 9.1 of the Agreement. Section 4.04 Governing Law. This Mortgage shall, without regard to place of contract or payment, be construed and enforced according to the laws of the state where the Mortgaged Property is located, all without regard to principles of conflict of laws. Section 4.05 No Change. Neither this Mortgage nor any provision hereof may be changed, waived, discharged or terminated, except by an instrument in writing, signed by Mortgagee and Mortgagor. 31 Section 4.06 Security Agreement and Fixture Filing. This Mortgage shall be deemed to be a security agreement and fixture filing pursuant to the Uniform Commercial Code of the state where the Mortgaged Property is located. Section 4.07 No Usury. In the event that Mortgagee, in enforcing its rights hereunder, determines that charges and fees incurred in connection with the Secured Obligations may, under the applicable usury laws, cause the interest rate herein to exceed the maximum allowed by law, then such interest shall be recalculated and any excess over the maximum interest permitted by said laws shall be credited to the then principal outstanding balance to reduce said balance by that amount. It is the intent of the parties hereto that Mortgagor under no circumstances shall be required to pay, nor shall Mortgagee be entitled to collect, any interest which is in excess of the maximum legal rate permitted under the applicable usury laws. Section 4.08 Effect of Partial Release. No release of any part of the Mortgaged Property or of any other property conveyed to secure the Secured Obligations shall in any way alter, vary or diminish the force, effect or lien or security interest of this Mortgage on the Mortgaged Property or portion thereof remaining subject to the lien and security interest created hereby. Section 4.09 Mortgagee's Dealing with Successors and Lessees. Subject to the Prior Mortgage, in the event Mortgagor or any of Mortgagor's successors conveys or leases without the prior approval of Mortgagee (except as otherwise permitted herein or in the Agreement or the Prior Mortgage) any interest in the Mortgaged Property, or any part thereof, to any other party, Mortgagee may deal with any owner or lessee of any part of the Mortgaged Property with reference to this Mortgage and to the Secured Obligations, either by forbearance on the part of Mortgagee or release of all or any part of the Mortgaged Property or of any other property securing payment of any Secured Obligations, without in any way modifying or affecting Mortgagee's rights, remedies, liens or security interests hereunder (including the right to exercise any one or more of the remedies described or referred to in Article I, Article II, Article III or Article IV hereof in the event such conveyance is made in contravention of the provisions of this Mortgage) or the liability of Mortgagor or any other party liable for the payment of the Secured Obligations, in whole or in part. This shall not be construed to allow any such conveyance or leasing by Mortgagor, except as permitted herein or in the Agreement. Section 4.10 No Waiver by Mortgagee. All options and rights of election herein provided for the benefit of Mortgagee are continuing, and the failure to exercise any such option or right or election upon a particular default or breach or upon any subsequent default or breach shall not be construed as waiving the right to exercise such option or election at any later date. By the acceptance of payment of principal or interest after its due date, Mortgagee does not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. No exercise of 32 the rights and powers herein granted and no delay or omission in the exercise of such rights and powers shall be held to exhaust the same or be construed as a waiver thereof, and every such right and power may be exercised at any time and from time to time. All grants, covenants, terms and conditions hereof shall bind Mortgagor and all successive owners of the Premises. Section 4.11 Headings Descriptive. The headings of the several sections and subsections of this Mortgage are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Mortgage. SECTION 4.12 WAIVER OF TRIAL BY JURY. THE MORTGAGOR AND THE MORTGAGEE WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS MORTGAGE. Section 4.13 Indemnification. The Mortgagor agrees to pay, and to save, indemnify and keep the Mortgagee and its respective directors, officers, employees, attorneys, experts, and agents harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses), losses or damages (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Mortgaged Property, (ii) with respect to, or resulting from, any delay in complying with any requirement of law applicable to any of the Mortgaged Property or (iii) in connection with any of the transactions contemplated by this Mortgage, including the fees and disbursements of counsel and of any other experts, which Mortgagee or its respective directors, officers, employees, attorneys, experts or agents may incur in connection with (w) the administration or enforcement of this Mortgage, including such expenses as are incurred to preserve the value of the Mortgaged Property and the validity, perfection, rank and value of any liens granted hereunder, (x) the collection, sale or other disposition of any of the Mortgaged Property, (y) the exercise by the Mortgagee of any of the rights conferred upon it hereunder or (z) any Default or Event of Default, but excluding any such liabilities, costs and expenses, losses or damages incurred solely by reason of the gross negligence or willful misconduct of the party seeking to be indemnified as determined by a final order or judgment of a court of competent jurisdiction. Any amount due hereunder which is not paid on demand shall bear interest at a rate equal to the Default Rate and shall be a lien upon the Mortgaged Property and shall be secured hereby. The agreements of the Mortgagor contained in this Section 4.13 shall survive the payment and performance of the Secured Obligations and the termination of the liens and security interests granted hereby. All of the Mortgagor's obligations to indemnify Mortgagee and its directors, officers, employees, attorneys, experts and agents hereunder shall (without 33 duplication) be in addition to, and shall not limit in any way, the Mortgagor's indemnification obligations contained in the Agreement or in any other Loan Document. Section 4.14 Advances under the Agreement. It is understood and agreed that the funds to be advanced under this Mortgage are to be advanced subject to and in accordance with the provisions of the Agreement and the other Loan Documents, and that all sums advanced thereunder or hereunder are included within the Secured Obligations secured hereby. Section 4.15 Particular State Provisions. There is attached hereto and made a part hereof Exhibit B containing additional provisions that are necessary or appropriate under the laws of the state in which the Mortgaged Property is located or pursuant to the provisions of any permitted property liens. ARTICLE V CERTAIN PROVISIONS CONCERNING THE PRIOR MORTGAGE Section 5.01 Payment on Prior Mortgage. Mortgagor will promptly pay, when due and payable, the interest, principal, and all other sums and charges secured by and described in the Prior Mortgage and the other UBS Loan Documents. Section 5.02 Performance of UBS Loan Documents. Mortgagor will promptly perform and observe all of the terms, covenants, and conditions required to be performed and observed by Mortgagor under the UBS Loan Documents, within the periods (inclusive of grace periods) provided in the UBS Loan Documents, and will do all things necessary to avoid the occurrence of any default with respect to the UBS Loan Documents. Section 5.03 Default on UBS Loan Documents. Any Event of Default under the UBS Loan Documents shall be an Event of Default under Article II of this Mortgage. Section 5.04 No Modifications. Mortgagor will not directly or indirectly, amend, modify, supplement, waive compliance with, or assent to noncompliance with, any term, provision or condition of the UBS Loan Agreement or any of the other UBS Loan Documents as in effect on the Effective Date hereof (A) which the Mortgagee or the Majority Revolving Lenders deem material (including, without limitation, terms, provisions or conditions relating to events of default, acceleration rights or other remedies, tenor, interest rates, substitution of collateral, the non-recourse nature of such financing, covenants and prohibitions against amending any of the Loan Documents) or (B) which the Mortgagee reasonably determines would place any further material restrictions on the Mortgagor or its Subsidiaries or materially increase the obligations of the Mortgagor or any of its Subsidiaries thereunder or confer on the holders thereof any material additional rights. 34 Section 5.05 Consent of Prior Mortgagee. Notwithstanding anything to the contrary contained in this Mortgage, the rights of Mortgagee hereunder will be limited in that, unless and until all of the obligations secured by the Prior Mortgage have been indefeasibly paid in full, Mortgagee shall not, without obtaining the prior written consent of the Prior Mortgagee, which consent may be withheld in Prior Mortgagee's sole and absolute discretion (a) modify, amend, supplement or extend the terms and provisions of Article V of this Mortgage, or (b) commence an enforcement action or other remedial proceeding, or (c) exercise any remedies provided for under this Mortgage at law or in equity with respect to the Mortgaged Property (including, without limitation, the commencement of foreclosure proceedings or the appointment of a receiver), or (d) seek to enforce any judgment against the Mortgaged Property in a manner which is prohibited under this Article V, or (e) otherwise use its position as a junior lienor to take any actions with respect to the Mortgaged Property or to interfere with or otherwise impede any actions that Prior Mortgagee may wish to take with respect to the Mortgaged Property; provided, that notwithstanding the provisions set forth in (a) through (e) above, Mortgagee may make protective advances contemplated by this Mortgage, including without limitation, for past due real estate taxes, insurance premiums, repair costs and other amounts which could result in a lien or encumbrance upon the Mortgaged property and may join in any enforcement action or other remedial proceeding that has been commenced by or on behalf of the Prior Mortgagee to assure that Mortgagee's junior lien is not extinguished, diminished or otherwise adversely affected; provided further that the Prior Mortgagee consents to Mortgagee acting in Mortgagor's stead under this Mortgage, subject to all the conditions and requirements hereunder and under the UBS Loan Documents, if Mortgagor is in default with respect to its obligations to Mortgagee (it being understood that Mortgagee shall not, by the making of any protective advance, acquire by subrogation or otherwise any lien, estate or interest in the Mortgaged Property which may be prior to the lien, estate or interest of the Prior Mortgagee, but the amount of any such advances shall be secured by the lien of this Mortgage). Section 5.06 Subject to the UBS Loan Documents. Mortgagee acknowledges that the terms, conditions, provisions and lien of this Mortgage, any Assignment of Leases and Rents hereafter delivered to Mortgagee with respect to the Mortgaged Property and any documents hereafter delivered pursuant to Sections 1.02 and 1.03 of this Mortgage and all of Mortgagee's rights under this Mortgage are junior and subject to the terms, conditions, provisions and lien of the Prior Mortgage and the other UBS Loan Documents and all of Prior Mortgagee's rights thereunder. Mortgagee further acknowledges that if Mortgagor's compliance with any of the terms, covenants, conditions or other provisions of this Mortgage would be inconsistent with or cause a default under the UBS Loan Documents, Mortgagor shall not be obligated to comply with such term, covenant or condition or other provision contained in this Mortgage. Notwithstanding the foregoing, nothing herein shall preclude the operation of any term, covenant, provision, or condition of, or right of Mortgagee under, this Mortgage which is not inconsistent with the terms, covenants, provisions and conditions of, 35 and rights of Prior Mortgagee under the Prior Mortgage and the other UBS Loan Documents, and which would not cause a default under the UBS Loan Documents. Section 5.07 Third Party Beneficiary. It is expressly intended and agreed by the parties to this Mortgage that (a) the Prior Mortgagee is a third party beneficiary of this Mortgage and is relying upon the terms and provisions of this Article V, (b) the Prior Mortgage shall be recorded first, (c) the Prior Mortgagee shall have the right, in addition to all other remedies, to specifically enforce the provisions of this Article V and shall be entitled to injunctive and other equitable relief in connection therewith and (d) Mortgagor and Mortgagee expressly agree that the rights of the parties hereunder are the same as they would be if the Mortgagee and the Prior Mortgagee had executed a separate intercreditor agreement. Section 5.08 Consent to Non-Disturbance Agreement. Mortgagee hereby agrees to give a non-disturbance agreement to any lessee or tenant with respect to which the Prior Mortgagee shall have executed a similar non-disturbance agreement and, if the Mortgagee fails to give any such non-disturbance agreement, the Mortgagee nevertheless agrees not to disturb the possession or occupancy of any lessee or tenant of all or any portion of the Mortgaged Property without the prior written consent of the Prior Mortgagee in each instance. Section 5.09 Release of Mortgaged Property. Subject to the terms and provisions of Section 6.3(h) of the Agreement, in the event the Prior Mortgagee releases all or any portion of the Mortgaged Property from the lien of the Prior Mortgage, then Mortgagee hereby irrevocably appoints the Prior Mortgagee as its attorney-in-fact (coupled with an interest) to execute and deliver, in the name, and on behalf of Mortgagee, any and all documents necessary to release the Mortgaged property ( or such portion thereof being released from the lien of the Mortgage) from the lien of this Mortgage. Mortgagee hereby acknowledges that it shall not be entitled to receive any payment in connection with the release of the Mortgaged Property (or any portion thereof) from the lien of this Mortgage, including, without limitation, the proceeds of any sale thereof, unless and until the Prior Mortgagee is fully paid all sums due under the UBS Loan Documents. The Mortgagor hereby agrees that it will provide the Mortgagee with written notice as to the release of all or any portion of the Mortgaged Property from the lien of the Prior Mortgage. Section 5.10 Bankruptcy, Insolvency, etc. In the event of (a) any insolvency, dissolution, winding up, liquidation, readjustment, composition, reorganization or other similar proceedings relating to Mortgagor (whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership, or upon an assignment for the benefit of creditors, or any other marshaling of the assets and liabilities of Mortgagor, or any sale of all or substantially all of the Mortgaged Property, or otherwise ) or (b) any receivership or other equivalent proceeding with respect to the Mortgaged Property, the UBS 36 Loan shall first be indefeasibly paid in full before Mortgagee shall be entitled to retain any payment or distribution received as proceeds of the Mortgaged Property of any kind of character, whether in cash, property or securities. Mortgagee hereby irrevocably authorizes and agrees that the Prior Mortgagee may, at its sole discretion, in the name of Mortgagee, or otherwise, demand, sue for, collect, receive and give receipt for any and all payments or distributions of any kind or character, whether in cash, property or securities, which are proceeds of the Mortgaged Property to which Mortgagee would be entitled if the Mortgage were not subject to the Prior Mortgage pursuant to the terms hereof. Upon request, Mortgagee shall furnish to the Prior Mortgagee, as promptly as practicable, all information in its possession relating to the Mortgaged Property which the Prior Mortgagee considers reasonably necessary in connection with any action by the Prior Mortgagee permitted under the foregoing provisions of Section 5.10. Mortgagee will not initiate any proceedings to modify or lift the stay provided for in SECTION 362(a) of Title 11 of the United States Code in respect of the Mortgage or the Mortgaged Property. Notwithstanding anything to the contrary contained herein, nothing contained in this Section 5.10 shall preclude Mortgagee from asserting any claim in any such proceeding with respect to all Secured Obligations secured hereby as it pertains to any property, cash or securities of Borrower other than the Mortgaged Property. Section 5.11 Other Payments. In the event that the Mortgagee receives any payment or other distribution of any kind or character from the Mortgagor or from any other source whatsoever as proceeds of the Mortgaged Property, which it is not entitled to retain pursuant to this Article V, Mortgagee shall immediately deliver the same to the Prior Mortgagee, in the form received, together with any necessary endorsements, in each case for application pursuant to the UBS Loan Documents, but until so received by the Prior Mortgagee, the same shall be held in trust by Mortgagee as the property of the Prior Mortgagee. 37 ARTICLE VI RESTATEMENT OF POST-PETITION MORTGAGE LIENS Section 6.01 Post-Petition Mortgage Liens. This Mortgage amends and restates in their entirety the Post-Petition Mortgage Liens; provided that, to the fullest extent permitted by law, (a) the priority of all liens, security interests and other encumbrances evidenced hereby or arising hereunder shall relate back to the date and time the Post-Petition Mortgage Liens were granted; (b) nothing herein shall impair the creation, attachment, perfection or priority of the Post-Petition Mortgage Liens; and (c) nothing herein shall constitute a novation or discharge of the obligations secured by the Post-Petition Mortgage Liens. IN WITNESS WHEREOF, this Mortgage has been duly executed by Mortgagor and Mortgagee as of the day and year first above written. MORTGAGOR: PAYLESS CASHWAYS, INC. By: -------------------------------- Name: Title: MORTGAGEE: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent By: -------------------------------- Name: Title: CONSENTED AND AGREED TO: [UBS MORTGAGE FINANCE, INC.] 38 [BA LEASING & CAPITAL CORPORATION] By: ---------------------------------- Name: Title: [NOTARY BLOCK -- PAYLESS] [NOTARY BLOCK -- CIBC] [NOTARY BLOCK - PRIOR MORTGAGEE] 39 EXHIBIT A (DESCRIPTION OF LAND) 40 EXHIBIT B (LOCAL LAW PROVISIONS) EX-4 5 4.1D FORM OF SECOND DEED OF TRUST COVER UBS EXHIBIT D-2 FORM OF SECOND DEED OF TRUST State Site No. ----------- ---------- SECOND DEED OF TRUST, LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING Trustor: PAYLESS CASHWAYS, INC. 2300 Main Street Kansas City, Missouri 64108 Beneficiary: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent 425 Lexington Avenue New York, New York 10017 Trustee: Deed of Trust Amount: $____________ Date: December 2, 1997 Premises: Record and SHOOK, HARDY & BACON L.L.P. Return to: 1200 Main St., Suite 3000 Kansas City, MO 64105 Attn.: Richard D. Woods, Esq. 1 SECOND DEED OF TRUST, LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING, dated as of December 2, 1997, by and among PAYLESS CASHWAYS, INC., a Delaware corporation, having an office at 2300 Main Street, Kansas City, Missouri 64108 ("Trustor"), _______________________, a _____________ having an office at ____ _______________________ ("Trustee"), and CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent under the Agreement (as hereinafter defined), having an office at 425 Lexington Avenue, New York, New York 10017 ("Beneficiary"). DEFINITIONS Trustor and Beneficiary agree that all capitalized terms used but not defined herein are defined in or by reference to the Agreement and shall have the same meanings herein as therein. Trustor and Beneficiary further agree that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms. "Agreement" means that certain Amended and Restated Credit Agreement dated on or about the date hereof by and among Payless Cashways, Inc., the Lenders signatory thereto, the Underwriters, U.S. Bank National Association, as a Fronting Bank, and Canadian Imperial Bank of Commerce, as Fronting Bank and as Coordinating and Collateral Agent for the Lenders, the Fronting Banks, the Underwriters and the other Secured Parties, together with any future amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof. "Bankruptcy Case" means In re Payless Cashways, Inc., Case No. 97-50543 in the Bankruptcy Court. "Bankruptcy Code" means 11 U.S.C. ss.101 et seq. "Bankruptcy Court" means the United States Bankruptcy Court for the Western District of Missouri. "Bankruptcy Reorganization Plan" means Payless' plan of reorganization in the Bankruptcy Case, as confirmed by the Bankruptcy Court. "Deed of Trust" means this Second Deed of Trust, Leasehold Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing together with any future amendments, amendments and restatements, extensions, modifications or supplements hereto or hereof. 2 "Deed of Trust Amount" means the principal sum of $_________________. "Default" means Default, as that term is defined in the Agreement. "Default Rate" means the rate of interest specified in Section 2.8(a) of the Agreement. "DIP Agent" means the DIP Agent, as that term is defined in the Agreement. "DIP Credit Agreement" means the Revolving Credit Agreement, dated as of July 21, 1997, among Payless, as a Debtor-in-Possession, the Lenders, the Underwriters and the Fronting Banks party thereto and Canadian Imperial Bank of Commerce, as Coordinating and Collateral Agent, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. "DIP Obligations" means the DIP Obligations, as that term is defined in the Agreement. "Event of Default" means the events and circumstances described as such in Article II hereof. "Fixtures" means all of Trustor's right, title and interest in all furniture, furnishings, partitions, screens, awnings, venetian blinds, window shades, draperies, carpeting, pipes, ducts, conduits, dynamos, motors, engines, compressors, generators, boilers, stokers, furnaces, pumps, tanks, elevators, escalators, vacuum cleaning systems, call systems, switchboards, sprinkler systems, fire prevention and extinguishing apparatus, refrigerating, air conditioning, heating, dishwashing, plumbing, ventilating, gas, steam, electrical and lighting fittings and fixtures, licenses or permits of any kind and all building materials, equipment and goods now or hereafter delivered to the Premises (hereinafter defined) and intended to be installed therein, and all other machinery, fixtures, tools, implements, apparatus, appliances, equipment, goods, facilities and other personal property of similar character in which Trustor now has, or at any time hereafter acquires, an interest and which are now or hereafter affixed or attached to, or used in connection with the enjoyment, occupancy and/or operation of, all or any portion of the Premises, together with all renewals, replacements and substitutions thereof and additions and accessions thereto and the proceeds of all of the foregoing items. "Fronting Banks" means the Fronting Banks, as that term is defined in the Agreement. 3 "Improvements" means all buildings, structures and other improvements presently existing or hereafter constructed on the land described in Exhibit A attached hereto. "Lease" has the meaning ascribed to such term in Section 3.01 hereof. "Leasehold" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. "Leasehold Interest" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. "Lenders" means the Lenders, as that term is defined in the Agreement. "Lessee" has the meaning ascribed to such term in Section 3.01 hereof. "Loan Documents" means the Loan Documents, as that term is defined in the Agreement. "Loans" means the Loans, as that term is defined in the Agreement. "Mortgaged Property" has the meaning ascribed to such term in the Granting Clause, below. "Notes" means the Notes, as that term is defined in the Agreement. "Payless" means Payless Cashways, Inc., an Iowa corporation. "Post-Petition Mortgage Liens" has the meaning ascribed to such term in the fourth WHEREAS clause, below. "Pre-Petition Agent" means the Pre-Petition Agent, as that term is defined in the Agreement. "Pre-Petition Credit Agreement" means the Amended and Restated Credit Agreement dated as of October 3, 1996, by and among Payless, the lenders signatory thereto, Canadian Imperial Bank of Commerce, as letter of credit bank and as administrative and collateral agent, and The Bank of Nova Scotia, NationsBank of Texas, N.A. and Bank of America National Trust and Savings, as co-agents, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. 4 "Pre-Petition Obligations" means the Pre-Petition Obligations, as that term is defined in the Agreement. "Premises" means the land described in Exhibit A annexed hereto, together with the Improvements thereon or to be constructed thereon or therein, and all of the easements, rights, privileges and appurtenances thereunto belonging or in anywise appertaining thereto including, but not limited to, all of the estate, right, title, interest, claim or demand whatsoever of Trustor therein and in and to the strips and gores, streets and ways adjacent thereto, whether in law or in equity, in possession or expectancy, now or hereafter acquired and also any other realty, Leaseholds (hereinafter defined), or Fixtures encompassed by the term "Mortgaged Property", elsewhere herein defined. "Prior Deed of Trust" means that Deed of Trust, Mortgage and Security Agreement executed by Trustor to The Prudential Insurance Company of America, dated [June 15, 1989] [_______________, 19__ and recorded on [________, 1989] [____________, 19___], as assigned to Prior Beneficiary and amended by that certain Amendment to Deed of Trust, Mortgage and Security Agreement dated _________, 1997, as amended, amended and restated, supplemented or otherwise modified to the extent permitted by the Agreement. ["Prior Beneficiary" means UBS Mortgage Finance, Inc., as beneficiary under the Prior Deed of Trust.] "Rents" has the meaning ascribed to such term in Section 3.01 hereof. "Secured Obligations" has the meaning ascribed to such term in the paragraph entitled "Secured Obligations" below. "Secured Parties" means Secured Parties, as that term is defined in the Agreement. "UBS Collateral" means the real property listed on Schedule 1.1(c) to the Agreement, together with improvements, fixtures and appurtenances relating thereto, which is collateral pursuant to the relevant UBS Loan Documents. "UBS Loan Agreement" means that certain Amended and Restated Loan Agreement, dated December 2, 1997, between Trustor and Prior Beneficiary, as the same may be hereafter amended, amended and restated, supplemented or otherwise modified to the extent permitted by Section 5.04 hereof. "UBS Loan Documents" means the UBS Loan Agreement, each of the mortgages and deeds of trust heretofore delivered by Trustor to Prior Beneficiary with respect to UBS Collateral, as amended as of December 2, 1997 and any and all documents, agreements 5 and instruments related thereto, each as may be amended, amended and restated, supplemented or otherwise modified to the extent permitted by Section 5.04 hereof. "Underwriters" means Underwriters, as that term is defined in the Agreement. W I T N E S S E T H : WHEREAS, on July 21, 1997, Payless filed a voluntary petition of bankruptcy under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court; and WHEREAS, prior to the commencement of the Bankruptcy Case, Payless was obligated to the Lenders or their predecessors-in-interest pursuant to, among other things, the Pre-Petition Credit Agreement; and WHEREAS, during the Bankruptcy Case, Payless became obligated to certain of the Lenders pursuant to the DIP Credit Agreement; and WHEREAS, pursuant to the orders of the Bankruptcy Court entered on July 21, 1997 and August 20, 1997 in the Bankruptcy Case, the DIP Agent and the Pre-Petition Agent were granted liens (the "Post-Petition Mortgage Liens") on the Mortgaged Property to secure the Pre-Petition Obligations and the DIP Obligations; and WHEREAS, as contemplated by Payless' Bankruptcy Reorganization Plan, Payless has merged with and into Trustor, with Trustor being the sole surviving entity; and WHEREAS, pursuant to the terms of the Bankruptcy Reorganization Plan and the Agreement, the parties have agreed among other things, (i) to permit the merger of Payless into Trustor, (ii) to secure various obligations of Payless (as Trustor's predecessor) in respect of the Pre-Petition Obligations and the DIP Obligations, and (iii) without duplication, to secure all obligations, whether now existing or hereafter incurred or arising, of Trustor under the Agreement, the Notes and/or the other Loan Documents, including, without limitation, the Secured Obligations; in each case as more particularly set forth in the Agreement and this Deed of Trust; and WHEREAS, Trustor is the actual, record and beneficial owner of the Premises or owns an actual beneficial interest therein; and WHEREAS, Trustor has agreed pursuant to the terms of the Agreement, the Notes, and/or the other Loan Documents evidencing the Secured Obligations to be liable for the Secured Obligations; and 6 WHEREAS, the parties intend that the Secured Obligations shall be secured by this Deed of Trust. GRANTING CLAUSE NOW, THEREFORE, Trustor, in consideration of the premises, and in order to secure the payment in full of the Deed of Trust Amount, the Secured Obligations, all interest due thereon and all other costs and expenses and other amounts due hereunder and in respect of the Secured Obligations, and the performance and discharge of all the provisions hereof, of the Secured Obligations and all other Loan Documents, hereby confirms the Post Petition Mortgage Liens and gives, grants, bargains, sells, conveys, pledges and grants a security interest to Trustee in trust, with power of sale for the benefit of Beneficiary, all of Trustor's estate, right, title and interest in, to and under any and all of the following described property whether now owned or hereafter acquired (all such properties being collectively referred to as the "Mortgaged Property") subject, however, to the Prior Deed of Trust: A. All Trustor's right, title and interest in and to the Premises and all right, title and interest of Trustor in and to the Improvements on the Premises or to be constructed thereon and all Fixtures now or hereafter situated in, on or about, or affixed or attached to the Improvements or the Premises or any building, structure or other improvement now or hereafter standing, constructed or placed upon or within the Premises, and all and singular the tenements, hereditaments, easements, rights-of-way or use, rights, privileges and appurtenances to the Premises, now or hereafter belonging or in anywise appertaining thereto, including, without limitation, any such right, title, interest, claim and demand in, to and under any agreement granting, conveying or creating, for the benefit of the Premises, any easement, right or license in any way affecting other property and in, to and under any streets, ways, alleys, vaults, gores or strips of land adjoining the Premises, or any parcel thereof, and all claims or demands either in law or in equity, in possession or expectancy, of, in and to the Premises. B. All right, title and interest of Trustor in and to all awards heretofore made or hereafter to be made for the taking by eminent domain of the whole or any part of the above described premises, or any estate or easement therein, including any awards for change of grade of streets, all of which awards are hereby assigned to Trustee and Beneficiary, which Trustee and Beneficiary are hereby authorized to collect (unless provided otherwise in the Agreement) and receive the proceeds of such awards and to give proper receipts and acquittances therefor and Trustee and Beneficiary shall have the right and option to apply such excess towards the payment of any sum owing on account of this Deed of Trust and the Secured Obligations secured thereby, notwithstanding the fact that such sum may not then be due and payable. 7 C. The Fixtures and the products and proceeds thereof. D. All present and future leases, subleases and licenses and any guarantees thereof, rents, issues and profits and additional rents now or at any time hereafter covering or affecting all or any portion of the Mortgaged Property and all proceeds of, and all privileges and appurtenances belonging or in any way appertaining to, the Mortgaged Property, or any part thereof, and all other property subjected or required to be subjected to the lien and/or security interest of or conveyed pursuant to the terms of this Deed of Trust, including, without limitation, all of the income, revenues, earnings, rents, maintenance payments, tolls, issues, awards (including, without limitation, condemnation awards and insurance proceeds), products and profits thereof, which income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits are hereby expressly assigned with the right to take and collect the same upon the terms hereinafter set forth; and all the estate, right, title, interest and claim whatsoever, at law and in equity, which Trustor now has or may hereafter acquire in and to the aforementioned property and every part thereof; provided, that so long as no Event of Default (as hereinafter defined) shall have occurred and be continuing, all such income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits shall remain with and under the control of Trustor except as otherwise expressly provided herein or in any other written agreement between Trustor and Beneficiary. E. All right, title and interest of Trustor in and to all agreements, or contracts, now or hereafter entered into for the sale, leasing, brokerage, development, construction, renovation, management, maintenance and/or operation of the Premises (or any part thereof), including all moneys due and to become due thereunder, and all permits, licenses, bonds, insurance policies, plans and specifications relative to the construction and/or operation of the Improvements upon the Mortgaged Property. F. All right, title and interest (including, without limitation, all present and future rights to possession and use, and all present and future options and other rights to renew and to purchase) of Trustor, as lessee or sublessee, under any leases, subleases, licenses, occupancy agreements or concessions now in effect or to be entered into hereafter (collectively, the "Leasehold Instruments") whereby Trustor has any right to the use, possession or occupancy of the Premises or any part thereof (collectively, the "Leaseholds"). G. All of Trustor's claims and rights to the payment of damages arising from any rejection of a Leasehold or a Lease under or pursuant to the Bankruptcy Code. H. All of Trustor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, 11 U.S.C. ss.365(h), including, without limitation, all of Trustor's rights to remain in possession of the Premises. 8 I. Any other property and rights which are, by the provisions of the Agreement or any other Loan Document, required to be subject to the lien hereof or conveyed pursuant to the terms hereof, and any additional property and rights that may from time to time hereafter by installation in or on the Mortgaged Property, or by writing of any kind, or otherwise, be subjected to the lien hereof by Trustor or by anyone on its behalf. J. All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all right, title and interest of Trustor in and to all unearned premiums accrued, accruing and to accrue under any or all insurance policies obtained by Trustor. TO HAVE AND TO HOLD the Mortgaged Property, subject to the Prior Deed of Trust, unto Trustee for the benefit of Beneficiary and its successors and assigns, upon the terms, provisions and conditions herein set forth, forever, and Trustor does hereby bind itself and its successors, legal representatives, and assigns to warrant and forever defend all and singular the Mortgaged Property unto Beneficiary and Trustee and their successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, subject to the rights of the Prior Beneficiary. IN TRUST, to secure the payment and performance of the Secured Obligations, whereupon this Deed of Trust shall cease and be void and the Mortgaged Property shall be released at the cost of Trustor. SECURED OBLIGATIONS This Deed of Trust, and all rights, titles, interests, liens, security interests, powers, privileges and remedies created hereby or arising hereunder or by virtue hereof, are given to secure the payment and performance of all indebtedness, obligations and liabilities arising under the Notes, the Agreement, this Deed of Trust and any other Loan Document, and any renewals, extensions, amendments, amendments and restatements, supplements or modifications thereof or thereto, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, and any and all fees, costs or expenses incurred by Beneficiary or Trustee or the other Secured Parties, including, but not limited to, interest accruing at the then applicable rate provided in the Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Agreement or other applicable agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Trustor on the Loans and on all other obligations of the Trustor to the Secured Parties, taxes, recording expenses and attorneys' fees in connection with the execution and delivery of any of the aforesaid and the consummation of the transactions contemplated 9 thereby, the administration thereof, and, after default, the administration and collection thereof, all costs incurred of whatever nature by Beneficiary and Trustee in the exercise of any rights hereunder or under any Loan Document and all other amounts payable by Trustor under this Deed of Trust (all of the foregoing indebtedness, obligations and liabilities being referred to herein as the "Secured Obligations"). ARTICLE I PARTICULAR WARRANTIES, REPRESENTATIONS AND COVENANTS OF TRUSTOR Section 1.01 Warranties and Representations. Trustor hereby warrants and represents as follows: (a) Trustor is the actual, record and beneficial owner of the Premises and holder of a good and marketable title to an indefeasible leasehold estate in the Leaseholds or owns an actual beneficial interest therein and fee estate in the rest of the Mortgaged Property, subject only to such exceptions to title as are listed in the title policy insuring the lien of this Deed of Trust and approved by Beneficiary and the Prior Beneficiary as permitted exceptions. Trustor is the owner of all of the remaining Mortgaged Property; Trustor will own the Fixtures free and clear of liens and claims except the Prior Deed of Trust and liens and claims in favor of Beneficiary; and this Deed of Trust is and will remain a valid and enforceable lien on the Mortgaged Property subject only to the permitted exceptions referred to above. (b) Trustor has full power and lawful authority, and has obtained the written consent of the Prior Beneficiary, to convey, pledge and encumber the Mortgaged Property in the manner and form herein done or intended hereafter to be done. Trustor will preserve such title, and will forever warrant and defend the validity and priority of the lien hereof, against the claims of all persons and parties whomsoever. (c) Except as otherwise specified in the Title Policy (as defined in the Agreement) or in the Survey (as defined in the Agreement), the Premises is not located in an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards or if it so located, flood insurance acceptable to Beneficiary has been obtained. Section 1.02 Further Assurances. Trustor will, at its sole expense, do, execute, acknowledge and deliver every further act, deed, conveyance, mortgage, assignment, notice of assignment, transfer or assurance as Beneficiary shall from time to time reasonably require, for the better assuring, conveying, assigning, transferring and confirming unto Ben- 10 eficiary the property and rights hereby conveyed, mortgaged or assigned or intended now or hereafter so to be, or which Trustor may be or may hereafter become bound to convey, mortgage or assign to Trustee or Beneficiary or for carrying out the intention or facilitating the performance of the terms of this Deed of Trust, and for filing, registering or recording this Deed of Trust and, on demand, will execute and deliver, and hereby authorizes Beneficiary or Trustee to execute in the name of Trustor to the extent it may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, and renewals thereof, to evidence more effectively the lien hereof upon the Fixtures. Section 1.03 Filings, Recordings and Payments. (a) Trustor forthwith upon the execution of this Deed of Trust, and thereafter from time to time, will, at its expense, cause this Deed of Trust and any security instrument creating a lien or evidencing the lien hereof upon the Fixtures and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien hereof upon, and the interest of Trustee and Beneficiary in, the Mortgaged Property. (b) Trustor will pay all taxes, filing, registration and recording fees, and all expenses incident to the execution and acknowledgment of this Deed of Trust, any supplemental deed of trust, any other Loan Document, and any security instrument with respect to the Fixtures, and any instrument of further assurance, and all federal, state, county and municipal stamp taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Agreement, this Deed of Trust, any supplemental deed of trust, any other Loan Document, any security instrument with respect to the Fixtures or any instrument or further assurance, other than income, franchise or other similar taxes imposed on Beneficiary in respect of income derived by Beneficiary under the Secured Obligations. Section 1.04 Payment of Sums Due. Trustor will punctually pay the principal and interest and all other sums to become due in respect of the Agreement and any other Loan Document at the time and place and in the manner specified in the Agreement and any other Loan Document, according to the true intent and meaning thereof and without offset, counterclaim, defense or cause of action of any kind whatsoever, and without deduction or credit for any amount payable for taxes, all in immediately available funds in Dollars. Section 1.05 After Acquired Property. All right, title and interest of Trustor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Mortgaged Property, hereafter acquired by or released to Trustor or constructed, assembled or placed by Trustor on the Premises, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such 11 case, without any further mortgage, conveyance, assignment or other act by Trustor, shall become subject to the lien of this Deed of Trust as fully and completely, and with the same effect, as though now owned by Trustor and specifically described in the granting clauses hereof (subject to the rights of the Prior Beneficiary),but at any and all times Trustor will execute and deliver to Beneficiary any and all such further assurances, mortgages, deeds of trust, conveyances or assignments thereof as Beneficiary may reasonably require for the purpose of expressing and specifically subjecting the same to the lien of this Deed of Trust. Section 1.06 Taxes, Fees and Other Charges. (a) Trustor, from time to time when the same shall become due, and prior to the date of imposition of interest or penalty (except as otherwise permitted in the Agreement), will pay and discharge, or cause to be paid and discharged, all taxes of every kind and nature (including real and personal property taxes and income, franchise, withholding, transfer or recordation taxes, profits and gross receipt taxes), all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges, and all other public charges, whether of a like or different nature, imposed upon or assessed against it or the Mortgaged Property or any part thereof or upon the revenues, rents, issues, income and profits of the Premises or arising in respect of the occupancy, use or possession thereof. Trustor will, at any time upon request by Beneficiary, promptly deliver to Beneficiary receipts evidencing the payment of same. Subject to the Prior Deed of Trust, upon the occurrence of an Event of Default under the Agreement, Beneficiary may, at any time and from time to time, at its option, to be exercised by written notice to Trustor, require the deposit by Trustor at the time of each payment of an installment of interest or principal under the Agreement of an additional amount sufficient to discharge the obligations under this subsection (a) when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Beneficiary, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Beneficiary in its sole discretion. Such amounts shall be held by Beneficiary without interest in an account acceptable to Beneficiary and applied to the payment of the obligations in respect to which such amounts were deposited or, at the option of Beneficiary and subject to applicable law, to the payment of the Secured Obligations in such order or priority as Beneficiary shall determine consistent with the Agreement, on or before the respective dates on which the same or any of them would become delinquent. If one month prior to the due date of any of the obligations under this subsection (a) the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, subject to the Prior Deed of Trust, Trustor within ten (10) days after demand, shall deposit the amount of the deficiency with Beneficiary. Nothing herein contained shall be deemed to affect any right or remedy of Beneficiary under the provisions of this Deed of Trust or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. 12 (b) Except as otherwise permitted in the Agreement, Trustor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or permit the creation of, a lien on the Mortgaged Property or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom and in general will do or cause to be done everything necessary so that the lien hereof shall be fully preserved, at the cost of Trustor, without expense to Beneficiary. Section 1.07 Intentionally Deleted. Section 1.08 Insurance. (a) Trustor agrees to at all times provide, maintain and keep in force the policies of insurance required to the maintained pursuant to the terms of the Agreement. (b) In the event Trustor fails to provide, maintain, keep in force or deliver and furnish to Beneficiary the policies of insurance required by the Agreement or this Deed of Trust, Beneficiary may procure such insurance or single-interest insurance for such risks covering Beneficiary's interest, and Trustor will pay all premiums thereon promptly upon demand by Beneficiary, and until such payment is made by Trustor the amount of all such premiums, together with interest thereon at the Default Rate shall be secured by this Deed of Trust. (c) After the happening of any casualty to the Mortgaged Property or any part thereof, Trustor shall give prompt written notice thereof to Beneficiary, and Beneficiary may make proof of loss if not made promptly by Trustor. In the event of such loss or damage, all proceeds of insurance shall be payable in the manner provided for in the Agreement (subject to the Prior Deed of Trust). Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Trustor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are insurance proceeds available or whether any such proceeds are sufficient in amount, and the application or release by Beneficiary of any insurance proceeds shall not cure or waive any Default or notice of Default under this Deed of Trust or invalidate any act done pursuant to such notice. Any monies received as payment for loss under any insurance shall be applied pursuant to the terms of the Agreement (subject to the Prior Deed of Trust). (d) In the event of foreclosure of this Deed of Trust or other transfer of title or assignment of the Premises in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Trustor in and to all policies of insurance required by this Section 1.08 shall inure to the benefit of and pass to the successor in interest to Trustor or the purchaser or grantee of the Premises. 13 (e) Trustor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 1.08, unless Beneficiary has approved the insurance company and the form and content of the insurance policy, including, without limitation, the naming thereon of Beneficiary as a named insured with loss, subject to the rights of the Prior Beneficiary, payable to Beneficiary under a standard mortgagee endorsement of the character above described and the inclusion of a provision therein obligating said insurance company to provide Beneficiary with notice thirty (30) days prior to cancellation, lapse or amendment of any policy. Trustor shall immediately notify Beneficiary whenever any such separate insurance is taken out and shall promptly deliver to Beneficiary the policy or policies of such insurance. (f) Subject to the Prior Deed of Trust, Beneficiary may, at any time following the occurrence of an Event of Default under the Agreement, at its option, to be exercised by written notice to Trustor, require the deposit by Trustor, at the time of each payment of an installment of interest or principal under the Agreement, of an additional amount sufficient to discharge the obligations under this Section 1.08 when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Beneficiary with each installment, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Beneficiary in its sole discretion. Such amounts shall be held by Beneficiary without interest in an account acceptable to Beneficiary and applied to the payment of the obligations in respect of which such amounts were deposited on or before the respective dates on which the same or any of them would become delinquent or, at the option of Beneficiary, to the payment of the Secured Obligations in such order or priority as Beneficiary shall determine consistent with the Agreement. If one month prior to the due date of any of the aforementioned obligations the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, Trustor within five (5) days after demand shall deposit the amount of the deficiency with Beneficiary. Nothing herein contained shall be deemed to affect any right or remedy of Beneficiary under the provisions of this Deed of Trust or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. Section 1.09 Condemnation. (a) In the event the Mortgaged Property or any part thereof or interest therein, shall be taken or damaged by eminent domain, alteration of the grade of any street, or there shall occur any other injury to or decrease in the value of the Mortgaged Property, by reason of any public or quasi-public improvement or condemnation proceeding, or in any other similar manner ("Condemnation"), or should Trustor receive any notice or other information regarding such Condemnation or a proposed Condemnation, Trustor shall give prompt written notice thereof to Beneficiary. 14 (b) Subject to the Prior Deed of Trust, all compensation, awards and other payments or relief payable as a result of any such Condemnation, shall be payable in the manner provided for in the Agreement. Subject to the Prior Deed of Trust, all such compensation, awards, damages, rights of action and proceeds awarded to Trustor (the "Proceeds") are hereby assigned to Beneficiary and Trustor agrees to execute such further assignments of the Proceeds as Beneficiary may require. Beneficiary shall be under no obligation to question the amount of any such award or compensation and may accept the same in the amount paid. Subject to the Prior Deed of Trust, all Proceeds may be applied either against the Secured Obligations (in such order and priority as Beneficiary shall determine consistent with the Agreement) or to restore the Premises, at the discretion of Beneficiary, except as may be otherwise provided in the Agreement. (c) Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Trustor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are proceeds available or whether any such Proceeds are sufficient in amount, and the application or release by Beneficiary of any Proceeds shall not cure or waive any default or notice of default under this Deed of Trust or invalidate any act done pursuant to such notice. (d) Receipt by Beneficiary and application in reduction of indebtedness of any Proceeds less than the full amount of the then outstanding Secured Obligations shall not defer, alter or modify Trustor's obligation to continue to pay the regular installments of principal, interest on the outstanding principal balance and other charges owed in respect of the Secured Obligations and herein. (e) Subject to the Prior Deed of Trust, if prior to the receipt of the Proceeds by Beneficiary the condemned Premises shall have been sold on foreclosure of this Deed of Trust, Beneficiary shall, nevertheless, have the right to receive the Proceeds and to retain, for its own account, (i) an amount equal to the counsel fees, costs and disbursements incurred by Beneficiary in connection with collection of the Proceeds and not repaid by Trustor and (ii) the full amount of all such Proceeds, if Beneficiary is the successful purchaser at the foreclosure sale, to the extent of amounts owed in respect of the Secured Obligations. Section 1.10 Beneficiary's Performance of Trustor's Obligations. If Trustor shall fail to perform any of the covenants contained herein or any covenant contained in the Agreement or any other Loan Document, Beneficiary may, but shall not be obligated to, make advances and/or disbursements to perform the same. Trustor will repay on demand all sums so advanced and/or disbursed with interest at the Default Rate from the date of making such advance and/or disbursement until such sums have been repaid and all sums so 15 advanced and/or disbursed, together with interest thereon at the Default Rate, shall be a lien upon the Mortgaged Property and shall be secured hereby. The provisions of this Section 1.10 shall not prevent any default in the observance of any covenant contained herein or with respect to the Secured Obligations or in any other Loan Document from constituting an Event of Default. Section 1.11 Financial Records. Trustor will provide the financial statements to Beneficiary required pursuant to the terms of the Agreement. Section 1.12 Waste and Maintenance. Trustor will not threaten, commit, permit or suffer any waste to occur on or to the Mortgaged Property or any part thereof or alter or demolish the Mortgaged Property or any part thereof in any manner or make any change in its use (except as provided in the Agreement or the Prior Deed of Trust) or any change which will in any way increase any fire or other hazards arising out of construction or operation of the Mortgaged Property. Trustor will, at all times, maintain the Mortgaged Property as required pursuant to the terms of the Agreement and the Prior Deed of Trust. Section 1.13 Enforcement Expenses. Except where inconsistent with the laws of the state in which the Mortgaged Property is located, Trustor agrees that if any action or proceeding be commenced, including an action to foreclose this Deed of Trust or to collect the indebtedness hereby secured, to which action or proceeding Beneficiary is made a party by reason of the execution of this Deed of Trust or the other Loan Documents which it secures, or in which it becomes necessary to defend or uphold the lien of this Deed of Trust, all sums paid by Beneficiary for the expense of any litigation to prosecute or defend or participate in the transaction and the rights and liens created hereby (including reasonable attorneys' fees) shall be paid by Trustor together with interest thereon from date of payment by Beneficiary at the Default Rate. All such sums paid and the interest thereon shall be immediately due and payable, shall be a lien upon the Mortgaged Property, and shall be secured hereby as shall be all such sums incurred in connection with enforcement by Beneficiary of its rights hereunder or under any other Loan Document. Section 1.14 Defense of Beneficiary's Interests. If the interest of Beneficiary in the Mortgaged Property or any part thereof or the lien or security interest of this Deed of Trust thereon shall be attacked, directly or indirectly, or if legal proceedings shall be instituted against Trustee, Trustor or Beneficiary with respect thereto or against Trustor, Trustor upon its learning thereof, will promptly give written notice thereof to Beneficiary and Trustor will, at Trustor's cost and expense, exert itself diligently to cure, or will cause to be cured, any defect that may have developed or be claimed to exist, and will take all necessary and proper steps for the protection and defense thereof and will take, or will cause to be taken, such action as is appropriate to the defense of any such legal proceedings, including, but not limited to, the employment of counsel and the prosecution and defense of litigation. 16 Section 1.15 No Impairment of Security. In no event shall Trustor do or permit to be done, or omit to do or permit the omission of, any act or thing, the doing, or omission, of which would materially impair the security of this Deed of Trust or materially impair the value of the Mortgaged Property or any part thereof. Section 1.16 Restrictions on Transfers and Mortgages. Unless otherwise permitted pursuant to the terms of the Agreement, Trustor will not directly or indirectly, by transfer, mortgage, conveyance, or sale of an interest in Trustor permit, do or suffer the assignment, lease, transfer, sale, conveyance or encumbrance of the Mortgaged Property, or any part thereof or any interest therein, without the express prior written consent of Beneficiary unless otherwise permitted pursuant to the terms of the Agreement and the Prior Deed of Trust. While the Secured Obligations are outstanding, neither the structure nor the ownership of Trustor may be changed without the express prior written consent of Beneficiary unless otherwise permitted pursuant to the terms of the Agreement and, while the Prior Deed of Trust is in effect, the Prior Deed of Trust. Section 1.17 Beneficiary's Defense. Beneficiary or Trustee may appear in and defend any action or proceeding at law or in equity or in bankruptcy purporting to affect the Premises or the security hereof or the rights and powers of Beneficiary or Trustee, and any appellate proceedings, and in such event Trustor shall pay all of Beneficiary's and Trustee's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding. All costs, charges and expenses so incurred, together with interest thereon at the Default Rate from the date of payment of same by Beneficiary or Trustee as aforesaid, shall be secured by the lien of this Deed of Trust and shall be due and payable upon demand. Section 1.18 Environmental Compliance. Trustor will perform and comply promptly with, and cause the Premises to be maintained, used and operated in accordance with, all applicable federal, state and local laws pertaining to air and water quality, hazardous waste, waste disposal, air emissions and other environmental matters, as set forth in the Agreement. Section 1.19 Zoning Changes. Trustor will not consent to, join in, permit or allow any change in the zoning laws or ordinances relating to or affecting the Premises which could reasonably be expected to materially adversely affect the Premises and will promptly notify Beneficiary of any changes to the zoning laws. Section 1.20 Grant of Security Interest. Trustor, as further security for the payment of said indebtedness and in addition to all the rights and remedies otherwise available to Beneficiary or Trustee under this Deed of Trust and the other Loan Documents, grants to Beneficiary and Trustee a security interest, under the Uniform Commercial Code 17 as now in effect in the state where all or any of the Fixtures are located, in and to the Fixtures, and all proceeds thereof. Upon an Event of Default, Beneficiary and Trustee shall have, in addition to all the other rights and remedies allowed by law, the rights and remedies of a secured party under the Uniform Commercial Code as in effect at that time. Trustor further agrees that the security interest created hereby also secures all expenses of Beneficiary and Trustee (including reasonable expenses for legal services of every kind, and cost of any insurance, and payment of taxes or other charges) incurred in or incidental to, the custody, care, sale or collection of, or realization upon, any of the property secured hereby or in any way relating to the enforcement or protection of the rights of Beneficiary or Trustee hereunder, together with interest thereon at the Default Rate until paid. Section 1.21 Compliance with Laws and ADA Compliance. (a) Trustor warrants and covenants that the Premises are and will continue to be substantially in compliance with all applicable local, county, state and federal laws and regulations and all building, housing and fire codes, rules and regulations. (b) Without limiting the provisions of subsection (a) of this Section 1.21: (i) Trustor represents and warrants to Beneficiary that Trustor is substantially in compliance with the Americans with Disabilities Act of 1990 (42 U.S.C.A. sec. 12101 et. seq.), as the same may be amended from time to time (the "ADA") and all other federal, state and local laws pertaining to the accessibility of the Premises by persons with disabilities (the ADA and such other laws are, collectively, the "Accessibility Laws"); (ii) Trustor covenants to ensure that the Premises will at all times substantially comply with all applicable Accessibility Laws and, upon the request of Beneficiary, Trustor will conduct such surveys of the Premises as Beneficiary shall require to ascertain such compliance; (iii) Trustor will maintain accurate records of all expenditures made in connection with any alterations to the Premises and will deliver copies thereof to Beneficiary upon Beneficiary's request; and (iv) Trustor shall defend, indemnify and hold harmless Beneficiary, its employees, agents, officers and directors, attorneys and any parent or affiliate of Beneficiary, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, cost or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out or in any way related to any violations of the Accessibility Laws (including, without limitation, any costs incurred by Beneficiary in complying with any Accessibility Laws). Neither payment of the indebtedness secured hereby nor foreclosure shall operate as a discharge of Trustor's obligations under this subsection (b). In the event Trustor tenders a deed in lieu of foreclosure, Trustor shall deliver the Premises to Beneficiary (or its designee) substantially free of any violations of the Accessibility Laws. In the event Trustor does not timely perform any of the above obligations, Beneficiary after 30 days notice to Trustor may perform said obligations at the expense of Trustor and Trustor shall, upon written demand from Beneficiary, reimburse Beneficiary for all costs, including attorney's fees and out-of- 18 pocket expenses, and all liabilities incurred by Beneficiary by reason of the foregoing, with interest thereon at the Default Rate from the date of such payment by Beneficiary to the date of repayment. Until paid, said costs and expenses shall be secured by this Deed of Trust. Section 1.22 Other Multistate Mortgages. The indebtedness secured in part by this Deed of Trust is secured by mortgages and/or deeds of trust encumbering and conveying lands and other property and/or leasehold interests therein in other states as more particularly described in the Agreement, all of which mortgages and/or deeds of trust, including this instrument, being hereafter referred to as "the mortgage instruments." It is understood and agreed that all of the properties of all kinds conveyed or encumbered by the mortgage instruments are security for the Secured Obligations without allocation of any one or more of the parcels or portions thereof to any portion of the Secured Obligations less than the whole amount thereof unless so stated in said mortgage instruments. Subject to the Prior Deed of Trust, it is specifically covenanted and agreed that Beneficiary or Trustee may proceed, at the same or at different times, to foreclose said mortgage instruments, or any of them, by any proceedings appropriate in the state where any of the land lies, and that no event of enforcement taking place in any state including, without limiting the generality of the foregoing, any pending foreclosure, judgment or decree of the foreclosure, foreclosure sale, rents received, possession taken, deficiency judgment or decree, or judgment taken on the Secured Obligations, shall in any way stay, preclude or bar enforcement of the mortgage instruments or any of them in any other state, and that, Beneficiary or Trustee may pursue any or all its remedies to the maximum extent permitted by state law until all of the Secured Obligations now or hereafter secured by any or all of the mortgage instruments has been paid and discharged in full. Neither Trustor, nor any person claiming under Trustor, shall have or enjoy any right to marshaling of assets, all such right being hereby expressly waived as to Trustor and all persons claiming under it, including junior lienors. No release of personal liability of any person whatever and no release of any portion of the property now or hereafter subject to the lien of any of the mortgage instruments shall have any effect whatever by way of impairment or disturbance of the lien or priority of any of said mortgage instruments. Any foreclosure or other appropriate remedy brought in any of the states aforesaid may be brought and prosecuted as to any part of the mortgaged security, wherever located, without regard to the fact that foreclosure proceedings or other appropriate remedies have or have not been instituted elsewhere on any other land subject to the lien of said mortgage instruments or any of them. 19 Section 1.23 Leasehold and Leasehold Instruments. (a) Trustor covenants and agrees to faithfully comply with and perform all of its obligations under the Leasehold Instruments and to promptly cure any default by it under the Leasehold Instruments. (b) Trustor may modify, amend or terminate any Leasehold Instrument without the prior written consent provided such action is consistent with the terms of the Agreement and the Prior Deed of Trust. (c) Trustor will promptly give Beneficiary a copy of any default notice given to Trustor with respect to any Leasehold Instrument. ARTICLE II EVENTS OF DEFAULT AND REMEDIES Section 2.01 Events of Default. The following shall constitute defaults hereunder and, after the giving of notice and the passage of time, if any, as provided herein, shall constitute "Events of Default" hereunder: (a) If Trustor shall fail to pay when due any Secured Obligation after the passage of any applicable notice or grace period, if any; or (b) If an Event of Default, as defined in the Agreement, shall occur under the Agreement. Section 2.02 Beneficiary's Remedies. (a) During the continuance of any Event of Default, Beneficiary, without notice or presentment, each of which are hereby waived by Trustor, may, subject to the provisions of the Agreement, declare the entire principal of the Secured Obligations then outstanding and all accrued and unpaid interest thereon and all other amounts owing in respect thereof (if not then due and payable, whether by acceleration or otherwise), to be due and payable immediately, and upon any such declaration the principal of the Secured Obligations and said accrued and unpaid interest shall become and be immediately due and payable, anything in the instruments evidencing the Secured Obligations or in this Deed of Trust to the contrary notwithstanding; (b) During the continuance of any Event of Default, Beneficiary or Trustee may, subject to the Prior Deed of Trust, enter into and upon all or any part of the Premises, and, having and holding the same, may use, operate, manage and control the Mortgaged 20 Property or any part thereof and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and likewise, from time to time, at the expense of Trustor, Beneficiary and/or Trustee may make all necessary or proper repairs, renewals and replacements and such useful alterations, additions, betterments and improvements thereto and thereon as to it may deem advisable in its sole judgment; and in every such case Beneficiary and/or Trustee shall have the right to manage and operate the Mortgaged Property and to carry on the business thereof and exercise all rights and powers of Trustor with respect thereto either in the name of Trustor or otherwise as Beneficiary or Trustee shall deem best; and Beneficiary or Trustee shall be entitled, subject to the Prior Deed of Trust with or without entering into or upon the Premises, to collect and receive all gross receipts, earnings, revenues, rents, maintenance payments, issues, profits and income of the Mortgaged Property and every part thereof, all of which shall for all purposes constitute property of Beneficiary; and, after deducting the expenses of conducting the business thereof and of all maintenance, repairs, renewals, replacement, alterations, additions, betterments and improvements and amounts necessary to pay taxes, assessments, insurance and prior or other proper charges upon the Mortgaged Property or any part thereof, as well as just and reasonable compensation for the services of Beneficiary and/or Trustee and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, Beneficiary may apply the moneys arising as aforesaid in such manner and at such times as Beneficiary shall determine in its discretion consistent with the Agreement to the payment of the Secured Obligations and the interest thereon, when and as the same shall become payable and/or to the payment of any other sums required to be paid by Trustor under this Deed of Trust; (c) During the continuance of any such Event of Default, Trustor covenants and agrees as follows (subject, in each case, to the Prior Deed of Trust and Sections 5.05 and 5.06 of this Deed of Trust): (1) Trustee or Beneficiary may, with or without entry, personally or by their agents or attorneys, insofar as applicable, sell the Mortgaged Property or any part thereof and pursuant to the procedures provided by law, and all estate, right, title, interest, claim and demand therein, and right of redemption thereof, at one or more sales as an entity or in parcels, and at such time and place upon such terms and after such notice thereof as may be required or permitted by law; or (2) Trustee or Beneficiary may institute an action of mortgage foreclosure or institute other proceedings according to law for the foreclosure hereof, and may prosecute the same to judgment, execution and sale for the collection of the Secured Obligations secured hereby, and all interest with respect thereto, together with all taxes and insurance premiums advanced by 21 Beneficiary or Trustee and other sums payable by Trustor hereunder, and all fees, costs and expenses of such proceedings, including attorneys' fees and expenses; or (3) Trustee or Beneficiary may, if default be made in the payment of any part of the Secured Obligations, proceed with foreclosure of the liens evidenced hereby in satisfaction of such item either through the courts or by conducting the sale as herein provided, and proceed with foreclosure of the security interest created hereby, all without declaring the whole of the Secured Obligations due, and provided that if sale of the Mortgaged Property, or any portion thereof, is made because of default in payment of a part of the Secured Obligations, such sale may be made subject to the unmatured part of the Secured Obligations, but as to such unmatured part of the Secured Obligations (and it is agreed that such sale, if so made, shall not in any manner affect the unmatured part of the Secured Obligations) this Deed of Trust shall remain in full force and effect just as though no sale had been made under the provisions of this paragraph. And it is further agreed that several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured Obligations, it being the purpose to provide for a foreclosure and sale of the Mortgaged Property, or any part thereof, for any matured portion of the Secured Obligations without exhausting the power to foreclose and to sell the Mortgaged Property, or any part thereof, for any other part of the Secured Obligations whether matured at the time or subsequently maturing; or (4) Trustee or Beneficiary may take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Loan Documents or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Beneficiary or Trustee shall elect; or (5) Beneficiary or Trustee may exercise in respect of the Mortgaged Property consisting of Fixtures, all of the rights and remedies available to a secured party upon default under the applicable provisions of the Uniform Commercial Code as then in effect in the state where the Mortgaged Property is located; or (6) Beneficiary or Trustee may apply any proceeds or amounts held in escrow pursuant to the terms of this Deed of Trust to payment of any part of the Secured Obligations in such order of priority as Beneficiary may determine consistent with the Agreement; or 22 (7) Any sale as aforesaid may be subject to such existing tenancies as Beneficiary, in its sole discretion, may elect. Section 2.03 Sale, Foreclosure, etc. (a) Beneficiary or Trustee may adjourn from time to time any sale by it to be made under or by virtue of this Deed of Trust by announcement at the time and place appointed for such sale or for such adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, Beneficiary or Trustee, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. (b) Upon the completion of any sale or sales made by Beneficiary or Trustee under or by virtue of this Article II, Beneficiary or Trustee, or any officer of any court empowered to do so, shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, conveying, assigning and transferring all estate, right, title and interest in and to the properties, interests and rights sold. Subject to the Prior Deed of Trust, Beneficiary and Trustee are each hereby irrevocably appointed the true and lawful attorney of Trustor, in its name and stead, to make all the necessary conveyances, assignments, transfers and deliveries of any part of the Mortgaged Property and rights so sold, and for that purpose Beneficiary or Trustee may execute all necessary instruments of conveyance, assignment and transfer and may substitute one or more persons with like power, Trustor hereby ratifying and confirming all that its said attorney or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, Trustor, if so requested by Beneficiary or Trustee, shall ratify and confirm any such sale or sales by executing and delivering to Beneficiary or Trustee or to such purchaser or purchasers all such instruments as may be advisable, in the reasonable judgment of Beneficiary or Trustee, for the purpose and as may be designated in such request. (c) Upon any sale, whether under the power of sale hereby given or by virtue of judicial proceedings, it shall not be necessary for Beneficiary or Trustee, or any public officer acting under execution or order of court, to have present or constructive possession of any of the Mortgaged Property. (d) The recitals contained in any conveyance made by Beneficiary or Trustee to any purchaser at any sale made pursuant hereto or under applicable law shall be full evidence of the matters therein stated, and all prerequisites to such sale shall be presumed to have been satisfied and performed. (e) Any such sale or sales made under or by virtue of this Deed of Trust, whether under the power of sale hereby granted and conferred, or under or by virtue of any judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either by law or in equity, of Trustor in and to the premises and property sold, 23 and shall be a perpetual bar, both at law and in equity, against Trustor, its successors and assigns, and (subject to the Prior Deed of Trust) against any and all persons or entities claiming the premises and property sold, or any part thereof, from through or under Trustor and its successors or assigns. (f) The receipt given by Beneficiary or Trustee for the purchase money paid at any such sale, or the receipt given by any other person authorized to receive the same, shall be sufficient discharge therefor to any purchaser of the property, or any part thereof, sold as aforesaid, and no such purchaser, or his representatives, grantees or assigns, after paying such purchase money and receiving such receipt, shall be bound (i) to see to the application of such purchase money or any part thereof upon or for any trust or purpose of this Deed of Trust, (ii) by the misapplication or nonapplication of any such purchase money, or any part thereof, or (iii) to inquire as to the authorization, necessity, expediency or regularity of any such sale. (g) In case the liens or security interests hereunder, or by the exercise of any other right or power, shall be foreclosed by Beneficiary's or Trustee's sale or by other judicial or non-judicial action, the purchaser at any such sale shall receive, as an incident to its ownership, immediate possession of the property purchased, and if Trustor or Trustor's successors shall hold possession of said property, or any part thereof, subsequent to foreclosure, Trustor or Trustor's successors shall be considered as tenants at sufferance of the purchaser at foreclosure sale, and anyone occupying the property after demand made for possession thereof shall be guilty of forcible detainer and shall be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages by reason thereof are hereby expressly waived. (h) In the event a foreclosure hereunder shall be commenced by Beneficiary or Trustee, Beneficiary or Trustee may at any time before the sale abandon the suit, and may then institute suit for the collection of the Secured Obligations and for the foreclosure of the liens and security interest hereof. If Beneficiary or Trustee should institute a suit for the collection of the Secured Obligations and for a foreclosure of the liens and security interest hereof, it may at any time before the entry of a final judgment in said suit dismiss the same and proceed to sell the Mortgaged Property, or any part thereof, in accordance with provisions of this Deed of Trust. (i) Any reasonable expenses incurred by Beneficiary or Trustee in prosecuting, resetting or settling the claim of Beneficiary shall become an additional Secured Obligation of Trustor hereunder. (j) In the event of any sale made under or by virtue of this Article II (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale), the entire principal of, and interest on, the 24 Secured Obligations, if not previously due and payable, and all other sums required to be paid by Trustor pursuant to this Deed of Trust, immediately thereupon shall, anything in the Secured Obligations or in this Deed of Trust to the contrary notwithstanding, become due and payable. (k) The purchase money proceeds or avails of any sale made under or by virtue of this Article II, together with any other sums which then may be held by Beneficiary under this Deed of Trust, whether under the provisions of this Article II or otherwise, shall be applied in accordance with the laws of the state where the Mortgaged Property is located, and to the extent not inconsistent, first to the payment of the costs and expenses of such sale, including reasonable compensation to Beneficiary or Trustee and their agents and counsel, second to the payment of the amounts due and owing under or in respect of the Secured Obligations for principal and interest and any other amounts including (without limitation) any other sums required to be paid by Trustor pursuant to any provision of this Deed of Trust or any other Loan Document, with interest at the Default Rate from and after the happening of any Event of Default in the order set forth in Section 7.2 of the Agreement, all with interest at the Default Rate from the date such sums were or are required to be paid under this Deed of Trust, and third to the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. (l) Upon any sale made under or by virtue of this Article II, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Beneficiary and any other Secured Party or Trustee may bid for and acquire the Mortgaged Property or any part thereof and Beneficiary and any other Secured Party in lieu of paying cash therefor may make settlement for the purchase price by crediting some or all of the indebtedness of Trustor secured by this Deed of Trust owing to such Secured Party (or, in the case of Beneficiary, owing to all Secured Parties) the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which Beneficiary or Trustee is authorized to deduct under this Deed of Trust. Section 2.04 Payments, Judgment, etc. (a) In case an Event of Default under the Agreement and the acceleration of the obligations thereunder shall have occurred, then Trustor will in accordance with the Agreement pay to Beneficiary the whole amount which then shall have become due and payable on the Secured Obligations, whether for principal and interest or both or otherwise, as the case may be, which interest shall then accrue at the Default Rate on the then unpaid principal of or other amounts constituting the Secured Obligations, and the sums required to be paid by Trustor pursuant to any provision of this Deed of Trust, and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to Beneficiary and/or Trustee, their agents and counsel and any expenses incurred by Beneficiary or Trustee hereunder. In the event Trustor shall fail forthwith to pay such amounts upon demand, Beneficiary and/or Trustee shall be entitled and empowered to institute such action or proceedings at law or in equity as may be advised by its counsel for the 25 collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree. (b) Beneficiary and/or Trustee shall be entitled to recover judgment as aforesaid either before or after or during the pendency of any proceedings for the enforcement of the provisions of this Deed of Trust and the right of Beneficiary and/or Trustee to recover such judgment shall not be affected by any entry or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Deed of Trust or the foreclosure of the lien hereof; and in the event of a sale of the Mortgaged Property or any part thereof and of the application of the proceeds of sale, as provided in this Deed of Trust, to the payment of the indebtedness hereby secured, Beneficiary and/or Trustee shall be entitled to enforce payment of, and to receive all amounts then remaining due and unpaid upon, the Secured Obligations, and to enforce payment of all other charges, payments and costs due under this Deed of Trust and shall be entitled to recover judgment for any portion of the debt remaining unpaid, with interest thereon at the Default Rate. In case of proceedings against Trustor in insolvency or bankruptcy or any proceedings for its reorganization or involving the liquidation of its assets, then Beneficiary and/or Trustee shall be entitled to prove the whole amount of principal and interest due upon the Secured Obligations to the full amount thereof, and all other payments, charges and costs due under this Deed of Trust without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property. (c) No recovery of any judgment by Beneficiary or Trustee and no levy of an execution under any judgment upon the Mortgaged Property or upon any other property of Trustor shall affect, in any manner or to any extent, the lien of this Deed of Trust upon the Mortgaged Property or any part thereof, or any liens, rights, powers or remedies of Beneficiary or Trustee hereunder, but such liens, rights, powers and remedies of Beneficiary or Trustee shall continue unimpaired as before. (d) Any moneys thus collected by Beneficiary or Trustee under this Section 2.04 shall be applied by Beneficiary in accordance with the provisions of paragraph (k) of Section 2.03. Section 2.05 Receiver, Waiver. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceedings by Beneficiary or Trustee to obtain judgment for the principal of, or interest on, and any other amounts constituting the Secured Obligations, including (without limitation) all other sums required to be paid by Trustor pursuant to any provision of this Deed of Trust or of any nature in aid of the enforcement of the Secured Obligations or of this Deed of Trust, Trustor will (a) waive the issuance and service of process and submit to a voluntary appearance in such action, suit or proceeding and (b) subject to the Prior Deed of Trust, if required by Beneficiary or 26 Trustee, consent to the appointment of a receiver or receivers of the Mortgaged Property or any part thereof and of all the earnings, revenues, rents, maintenance payments, issues, profits and income thereof in accordance with Section 2.11 hereof. After the happening of any Event of Default and during its continuance, or upon the commencement of any proceedings to foreclose this Deed of Trust or to enforce the specific performance hereof or in aid thereof or upon the commencement of any other judicial proceeding to enforce any right of Beneficiary or Trustee, subject to the Prior Deed of Trust, Beneficiary or Trustee shall be entitled, as a matter of right, if it shall so elect, without the giving of notice to any other party and without regard to the adequacy or inadequacy of any security for the Deed of Trust indebtedness, forthwith either before or after declaring the unpaid principal of the Secured Obligations to be due and payable, to the appointment of such a receiver or receivers. Section 2.06 Beneficiary's Possession. Notwithstanding the appointment of any receiver, liquidator or trustee of Trustor or of any of its property, or of the Mortgaged Property or any part thereof, Beneficiary and Trustee shall, subject to the Prior Deed of Trust, be entitled to retain possession and control of the Mortgaged Property. Section 2.07 Remedies Cumulative. No remedy herein conferred upon or reserved to Beneficiary or Trustee is intended to be exclusive of any other remedy or remedies which Beneficiary or Trustee may be entitled to exercise against Trustor and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder or in the Agreement or in any other Loan Document now or hereafter existing at law or in equity or by statute. No delay by or omission of Beneficiary or Trustee to exercise any right or power shall be construed to be a waiver of any Event of Default or any acquiescence therein; and every power and remedy given in this Deed of Trust or in the Agreement or in any other Loan Document to Beneficiary or Trustee may be exercised from time to time as often as may be deemed expedient by Beneficiary or Trustee. The resort to any remedy provided hereunder or in the Agreement or in any other Loan Document or provided by law or at equity shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies against Trustor. By the acceptance of payment of principal of or interest on or any other amount due in respect of any of the Secured Obligations after its due date, Beneficiary and Trustee do not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. Nothing in this Deed of Trust or in the Agreement or in any instrument evidencing the Secured Obligations shall affect the obligation of Trustor to pay (i) the principal of, and interest on, the Secured Obligations in the manner and at the time and place therein or in the Agreement expressed or (ii) the other Secured Obligations in the manner and at the time herein expressed. Section 2.08 Agreement by Trustor. Trustor will not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, any exemption from execution or sale of the Mortgaged Property or 27 any part thereof, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Deed of Trust or any other Loan Document, or claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Mortgaged Property, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein, or pursuant to the decree, judgment or order of any court of competent jurisdiction, or, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof; and Trustor hereby expressly waives all benefit or advantage of any such law or laws and covenants not to hinder, delay or impede the execution of any power herein granted or delegated to Beneficiary or Trustee, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Trustor, waives, to the extent that it lawfully may, all right to have the Mortgaged Property or any part thereof marshaled upon any foreclosure hereof. Section 2.09 Use and Occupancy Payments. During the continuance of any Event of Default and pending the exercise by Beneficiary and Trustee of their rights to exclude Trustor from all or any part of the Premises, unless Trustor is legally entitled to continue possession of the Premises, Trustor agrees to pay to Beneficiary the fair and reasonable rental value, which amount shall be determined by the Beneficiary in its reasonable judgment, for the use and occupancy of the Premises or any portion thereof which are in its possession for such period and, upon default of any such payment, will, subject to the Prior Deed of Trust, vacate and surrender possession of the Premises to Beneficiary or Trustee or to a receiver, if any, and in default thereof may be evicted by any summary action or proceeding for the recovery of possession of the Premises for non-payment of rent, however designated. Any payments received under this Section 2.09 by Beneficiary shall be applied in accordance with Section 2.03(k) of this Deed of Trust. Section 2.10 Beneficiary's Right to Purchase. In case of any sale under the foregoing provisions of this Article II, whether made under the power of sale hereby given or pursuant to judicial proceedings, Beneficiary or Trustee may bid for and purchase any property, and may make payment therefor as hereinafter set forth or as set forth in Section 2.03(l) above, and, upon compliance with the terms of said sale, may hold, retain and dispose of such property without further accountability therefor. For the purpose of making settlement or payment for the property or properties purchased, Beneficiary and Trustee shall be entitled to use and apply such of the Secured Obligations held by it or the other Secured Parties, including (without limitation) any accrued and unpaid interest thereon, as it may elect, or as may be otherwise provided for in Section 2.03(l) above. Section 2.11 Appointment of Receiver. Upon application of Beneficiary or Trustee to any court of competent jurisdiction, if any Event of Default shall have occurred and so long as it shall be continuing, to the extent permitted by law, and subject to the Prior Deed of Trust, 28 a receiver may be appointed to take possession of and to operate, maintain, develop and manage the Mortgaged Property or any part thereof. In every case when a receiver of the whole or any part of the Mortgaged Property shall be appointed under this Section 2.11 or otherwise, the net income and profits of the Mortgaged Property shall, subject to the order of any court of competent jurisdiction, and subject to the Prior Deed of Trust, be paid over to, and shall be received by, Beneficiary or Trustee to be applied as provided in Section 2.03(k) hereof. Section 2.12 No Waiver. Beneficiary and/or Trustee may resort to any security given by this Deed of Trust or to any other security now existing or hereafter given to secure the payment of any of the Secured Obligations secured hereby, in whole or in part, and in such portions and in such order as may seem best to Beneficiary or Trustee in its reasonable discretion, and any such action shall not in any way be considered as a waiver of any of the rights, benefits, liens or security interest created by this Deed of Trust. ARTICLE III ASSIGNMENT OF LEASES AND RENTS Section 3.01 Lease Related Definitions. As used in this Deed of Trust: (a) "Lease" means any lease, sublease, or other similar agreement, now or hereafter existing, under the terms of which any person other than Trustor has or acquires any right to occupancy or use of the Mortgaged Property, or any part thereof, or interest therein; (b) "Lessee" means the lessee, sublessee, licensee, tenant or other person having the right to occupy or use all or any part of the Mortgaged Property under a Lease; and (c) "Rent" means the rents, additional rents and other consideration payable to Trustor by the Lessee under the terms of a Lease. Whenever reference is made in this Deed of Trust to a lease, license, lessee, licensee, tenancy or tenant, such reference shall be deemed to include a sublease, sublessee, license, licensee, subtenancy or subtenant, as the case may be. Section 3.02 Assignment of Leases and Rents. Trustor hereby assigns to Beneficiary and to Trustee for the benefit of Beneficiary all Leases, together with all Rents payable under the Leases, now or at any time hereafter existing, such assignment being subject to the Prior Deed of Trust and upon the following terms: (a) until receipt from Beneficiary of notice of the occurrence of an Event of Default, each Lessee may pay rent directly to Trustor, (b) upon receipt from Beneficiary of notice that an Event of Default exists, each Lessee shall, and is hereby authorized and directed to, pay directly to Beneficiary or Trustee (as therein specified) all Rent thereafter accruing, and the receipt of such Rent by Beneficiary or Trustee shall be a release of such Lessee to the extent of all amounts so paid, (c) Rent so received by Beneficiary or Trustee shall be applied by Beneficiary or Trustee first to the expenses, if any, of collection and then in accordance with Article II hereof, (d) without impairing its rights hereunder, Beneficiary or Trustee may, at its option, at any time and from time to time, release to Trustor 29 Rent so received by Beneficiary or Trustee, or any part thereof, (e) Beneficiary and Trustee shall not be liable for their failure to collect, or their failure to exercise diligence in the collection of, Rent, but shall be accountable only for Rent that they shall actually receive. As among Beneficiary, Trustee, Trustor and any person claiming through or under Trustor, the assignment contained in this Section 3.02 is intended to be absolute, unconditional and presently effective, and the provisions of subsection 3.02(a) are intended for the benefit of each Lessee and shall never inure to the benefit of Trustor or any person claiming through or under Trustor. It shall never be necessary for Beneficiary or Trustee to institute legal proceedings of any kind whatsoever to enforce the provisions of this Section 3.02. Notwithstanding anything herein to the contrary, Trustor may collect such Rent until such time as an Event of Default shall occur hereunder. Section 3.03 Beneficiary's Consent. Nothing in this Article III shall ever be construed as (a) allowing any Lease without Beneficiary's prior written consent unless otherwise permitted under the Agreement, or (b) subordinating this Deed of Trust to any Lease. Section 3.04 Lease Related Covenants. Trustor covenants to: (a) upon demand by Beneficiary and subject to the Prior Deed of Trust, assign to Beneficiary or Trustee, by separate instrument in form and substance satisfactory to Beneficiary, any and all Leases, and/or all Rents payable thereunder, including, but not limited to, any Lease which is now in existence or which may be executed after the date hereof; (b) not accept from any Lessee, nor permit any Lessee to pay, Rent for more than one month in advance except for payment in the nature of security for performance of Lessee's obligations unless otherwise provided for in the Lease; (c) comply with the terms and provisions of each Lease including, without limitation, the payment of all sums required to be paid by Trustor or which any Lessor has an option to pay under any Lease in order to prevent any reduction in or offset against any Rent payable under any Lease or any default thereunder; (d) not amend, extend, cancel, abridge, or otherwise modify, or accept surrender of, or renew, any Lease without the written consent of Beneficiary other than in the ordinary course of business, (e) not assign, transfer or mortgage any Lease without the written consent of Beneficiary; (f) not assign, transfer, pledge or mortgage any Rent; (g) not waive, excuse, release or condone any nonperformance of any covenant of any Lease by any Lessee other than in the ordinary course of business; (h) give to Beneficiary and Trustee duplicate notice of each material default by each Lessee; (i) on all Leases executed after the date hereof, cause each Lessee to agree (and each Lessee under each Lease executed after the date hereof does so agree) to give to Beneficiary and Trustee written notice of each and every material default by Trustor under its Lease and not exercise any remedies under such Lease unless Beneficiary or Trustee fails to cure such material default within a reasonable period after Beneficiary and Trustee have received such notice; provided, that Beneficiary or Trustee shall never have any obligation or duty to cure any such material default; (j) enforce its rights with regard to all Leases in the ordinary course of business; and (k) not enter into any Lease affecting 30 the Mortgaged Property or any part thereof unless otherwise permitted under the Agreement and the Prior Deed of Trust without the prior approval of Beneficiary. Section 3.05 Beneficiary Not Liable. Beneficiary and/or Trustee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any Lease, or under or by reason of this assignment, and Trustor shall and does hereby agree to indemnify and to hold Beneficiary and Trustee harmless from and against any and all liability, loss or damage which Beneficiary or Trustee may or might incur under any Lease or under or by reason of this assignment and from and against any and all claims and demands whatsoever which may be asserted against Beneficiary or Trustee by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in any Lease. Should Beneficiary or Trustee incur any such liability, loss or damage under any Lease or under or by reason of this assignment, or in the defense of any such claims or demands, the amount thereof, including all costs, expenses and attorneys' fees, shall be secured hereby and constitute part of the Secured Obligations, and Trustor shall reimburse Beneficiary therefore immediately upon demand, and upon the failure of Trustor to do so, Beneficiary may declare all sums secured by this Deed of Trust immediately due and payable. Section 3.06 Estoppel Certificates. On all Leases executed after the date hereof, all Leases shall provide for the giving by the Lessee of certificates with respect to the status of such Leases, and Trustor shall exercise its right to request such certificates within ten (10) days of any demand therefor by Beneficiary. Trustor shall furnish to Beneficiary or Trustee, within ten (10) days after a request by Beneficiary or Trustee to do so, an executed counterpart of all Leases. Section 3.07 Lease Approval Requirements. On all Leases executed after the date hereof, all Leases and Lessees of the Premises, or any part thereof, must be acceptable to and approved by Beneficiary unless otherwise provided under the Agreement; and all Lessees shall execute such estoppel certificates, subordinations, attornments and other agreements as Beneficiary may require. Under no circumstances shall Beneficiary or Trustee be liable for any obligation to pay any leasing commission, brokerage fee or similar fee or charge in connection with any Lease nor shall Beneficiary or Trustee be obligated to complete any Improvements for the benefit of any Lessee. 31 ARTICLE IV MISCELLANEOUS Section 4.01 Benefit of Beneficiary. All of the grants, covenants, terms, provisions and conditions of this Deed of Trust shall run with the land and shall apply to, bind and inure to the benefit of the successors and assigns of the respective parties hereto; provided, that Trustor may not assign its obligations hereunder without the prior written consent of Beneficiary. Section 4.02 Savings Clause. In the event any one or more of the provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall, at the option of Beneficiary, not affect any other provision of this Deed of Trust but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. Section 4.03 Notices. All notices hereunder shall be given pursuant to the terms of Section 9.1 of the Agreement, and supplementing such provisions, notices required to be given to Trustee shall be given at Trustee's address set forth herein. Section 4.04 Governing Law. This Deed of Trust shall, without regard to place of contract or payment, be construed and enforced according to the laws of the state where the Mortgaged Property is located, all without regard to principles of conflict of laws. Section 4.05 No Change. Neither this Deed of Trust nor any provision hereof may be changed, waived, discharged or terminated, except by an instrument in writing, signed by Beneficiary and Trustor. Section 4.06 Security Agreement and Fixture Filing. This Deed of Trust shall be deemed to be a security agreement and fixture filing pursuant to the Uniform Commercial Code of the state where the Mortgaged Property is located. Section 4.07 No Usury. In the event that Beneficiary, in enforcing its rights hereunder, determines that charges and fees incurred in connection with the Secured Obligations may, under the applicable usury laws, cause the interest rate herein to exceed the maximum allowed by law, then such interest shall be recalculated and any excess over the maximum interest permitted by said laws shall be credited to the then principal outstanding balance to reduce said balance by that amount. It is the intent of the parties hereto that Trustor under no circumstances shall be required to pay, nor shall Beneficiary be entitled to collect, any interest which is in excess of the maximum legal rate permitted under the applicable usury laws. 32 Section 4.08 Effect of Partial Release. No release of any part of the Mortgaged Property or of any other property conveyed to secure the Secured Obligations shall in any way alter, vary or diminish the force, effect or lien or security interest of this Deed of Trust on the Mortgaged Property or portion thereof remaining subject to the lien and security interest created hereby. Section 4.09 Beneficiary's Dealing with Successors and Lessees. Subject to the Prior Deed of Trust, in the event Trustor or any of Trustor's successors conveys or leases without the prior approval of Beneficiary (except as otherwise permitted herein or in the Agreement or the Prior Deed of Trust) any interest in the Mortgaged Property, or any part thereof, to any other party, Beneficiary and Trustee may deal with any owner or lessee of any part of the Mortgaged Property with reference to this Deed of Trust and to the Secured Obligations, either by forbearance on the part of Beneficiary or release of all or any part of the Mortgaged Property or of any other property securing payment of any Secured Obligations, without in any way modifying or affecting Beneficiary's and Trustee's rights, remedies, liens or security interests hereunder (including the right to exercise any one or more of the remedies described or referred to in Article I, Article II, Article III or Article IV hereof in the event such conveyance is made in contravention of the provisions of this Deed of Trust) or the liability of Trustor or any other party liable for the payment of the Secured Obligations, in whole or in part. This shall not be construed to allow any such conveyance or leasing by Trustor, except as permitted herein or in the Agreement. Section 4.10 No Waiver by Beneficiary. All options and rights of election herein provided for the benefit of Beneficiary and/or Trustee are continuing, and the failure to exercise any such option or right or election upon a particular default or breach or upon any subsequent default or breach shall not be construed as waiving the right to exercise such option or election at any later date. By the acceptance of payment of principal or interest after its due date, Beneficiary and/or Trustee does not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. No exercise of the rights and powers herein granted and no delay or omission in the exercise of such rights and powers shall be held to exhaust the same or be construed as a waiver thereof, and every such right and power may be exercised at any time and from time to time. All grants, covenants, terms and conditions hereof shall bind Trustor and all successive owners of the Premises. Section 4.11 Headings Descriptive. The headings of the several sections and subsections of this Deed of Trust are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Deed of Trust. SECTION 4.12 WAIVER OF TRIAL BY JURY. THE TRUSTOR, TRUSTEE AND BENEFICIARY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR 33 PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS DEED OF TRUST. Section 4.13 Indemnification. The Trustor agrees to pay, and to save, indemnify and keep the Beneficiary and its respective directors, officers, employees, attorneys, experts, and agents harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses), losses or damages (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Mortgaged Property, (ii) with respect to, or resulting from, any delay in complying with any requirement of law applicable to any of the Mortgaged Property or (iii) in connection with any of the transactions contemplated by this Deed of Trust, including the fees and disbursements of counsel and of any other experts, which Beneficiary or its respective directors, officers, employees, attorneys, experts or agents may incur in connection with (w) the administration or enforcement of this Deed of Trust, including such expenses as are incurred to preserve the value of the Mortgaged Property and the validity, perfection, rank and value of any liens granted hereunder, (x) the collection, sale or other disposition of any of the Mortgaged Property, (y) the exercise by the Beneficiary of any of the rights conferred upon it hereunder or (z) any Default or Event of Default, but excluding any such liabilities, costs and expenses, losses or damages incurred solely by reason of the gross negligence or willful misconduct of the party seeking to be indemnified as determined by a final order or judgment of a court of competent jurisdiction. Any amount due hereunder which is not paid on demand shall bear interest at a rate equal to the Default Rate and shall be a lien upon the Mortgaged Property and shall be secured hereby. The agreements of the Trustor contained in this Section 4.13 shall survive the payment and performance of the Secured Obligations and the termination of the liens and security interests granted hereby. All of the Trustor's obligations to indemnify Beneficiary and its directors, officers, employees, attorneys, experts and agents hereunder shall (without duplication) be in addition to, and shall not limit in any way, the Trustor's indemnification obligations contained in the Agreement or in any other Loan Document. Section 4.14 Advances under the Agreement. It is understood and agreed that the funds to be advanced under this Deed of Trust are to be advanced subject to and in accordance with the provisions of the Agreement and the other Loan Documents, and that all sums advanced thereunder or hereunder are included within the Secured Obligations secured hereby. Section 4.15 Limitation of Trustee's Liability. Trustee shall be protected in acting upon any notice, request, consent, demand, statement, note or other paper or document believed by Trustee to be genuine and to have been signed by the party or parties purporting to sign the 34 same. Trustee shall not be liable for any error of judgment, nor for any act done or step taken or omitted, nor for any mistakes of law or fact, nor for anything which Trustee may do or refrain from doing in good faith, nor generally shall Trustee have any accountability hereunder except for willful misconduct or gross negligence. Trustee may act hereunder and may sell or otherwise dispose of the Mortgaged Property or any part thereof as herein provided, although Trustee has been, may now or may hereafter be, attorneys, officers, agents or employees of Beneficiary, in respect of any matter of business whatsoever. Beneficiary and Trustee shall not be liable for any loss to any Chattels in their possession, provided that they shall use reasonable care with respect thereto; and any such loss shall not diminish the debt due. Section 4.16 Substitution of Trustee. Beneficiary shall have, and is hereby granted with warranty of further assurances, the irrevocable power to remove a Trustee or successor Trustee and to appoint a substitute Trustee or Trustees hereunder (including, in case of death or refusal to act of a Trustee or Trustees or their nonacceptance of, or dissatisfaction with, Trustee, absence or any other reason), to appoint a new or replacement substitute Trustee or Trustees, to be exercised at any time without notice and without specifying any reason therefor, by filing for record in the office where this instrument is recorded a Deed of Appointment or Notice of Substitution of Trustee. The power of appointment of a successor Trustee or Trustees may be exercised as often as and whenever Beneficiary may choose, and the exercise of the power of appointment, no matter how often, shall not be an exhaustion thereof. Upon the recordation of such Deed or Deeds of Appointment or Notice or Notices of Substitution of Trustee, Trustee or Trustees so appointed shall thereupon, without any further act or deed of conveyance, become fully vested with identically the same title and estate in and to the Mortgaged Property and with all the rights, powers, trusts and duties of their, his or its predecessor in the trust hereunder with like effect as if originally named as Trustee or as one of Trustees hereunder. Whenever in this Deed of Trust reference is made to Trustee, it shall be construed to mean Trustee or Trustees for the time being, whether original or successors or successor in trust; and all title, estate, rights, powers, trusts and duties hereunder given or appertaining to or devolving upon Trustee shall be in each of Trustees so that any action hereunder or purporting to be hereunder of any one of the original or any successor Trustee shall for purposes be considered to be, and as effective as, the action of all Trustees. Section 4.17 Particular State Provisions. There is attached hereto and made a part hereof Exhibit B containing additional provisions that are necessary or appropriate under the laws of the state in which the Mortgaged Property is located or pursuant to the provisions of any permitted property liens. 35 ARTICLE V CERTAIN PROVISIONS CONCERNING THE PRIOR MORTGAGE Section 5.01 Payment on Prior Deed of Trust. Trustor will promptly pay, when due and payable, the interest, principal, and all other sums and charges secured by and described in, the Prior Deed of Trust and the other UBS Loan Documents. Section 5.02 Performance of UBS Loan Documents. Trustor will promptly perform and observe all of the terms, covenants, and conditions required to be performed and observed by Trustor under the UBS Loan Documents, within the periods (inclusive of grace periods) provided in the UBS Loan Documents, and will do all things necessary to avoid the occurrence of any default with respect to the UBS Loan Documents. Section 5.03 Default on UBS Loan Documents. Any Event of Default under the UBS Loan Documents shall be an Event of Default under Article II of this Deed of Trust. Section 5.04 No Modifications. Trustor will not directly or indirectly, amend, modify, supplement, waive compliance with, or assent to noncompliance with, any term, provision or condition of the UBS Loan Agreement or any of the other UBS Loan Documents as in effect on December 2, 1997 (A) which the Beneficiary or the Majority Revolving Lenders deem material (including, without limitation, terms, provisions or conditions relating to events of default, acceleration rights or other remedies, tenor, interest rates, substitution of collateral, the non-recourse nature of such financing, covenants and prohibitions against amending any of the Loan Documents) or (B) which the Beneficiary reasonably determines would place any further material restrictions on the Trustor or its Subsidiaries or materially increase the obligations of the Trustor or any of its Subsidiaries thereunder or confer on the holders thereof any material additional rights. Section 5.05 Consent of Prior Beneficiary. Notwithstanding anything to the contrary contained in this Deed of Trust, the rights of Beneficiary hereunder will be limited in that, until all of the obligations secured by the Prior Deed of Trust have been indefeasibly paid in full, Beneficiary shall not, without obtaining the prior written consent of the Prior Beneficiary, which consent may be withheld in Prior Beneficiary's sole and absolute discretion (a) modify, amend, supplement or extend the terms and provisions of Article V of this Deed of Trust, or (b) commence an enforcement action or other remedial proceeding, or (c) exercise any remedies provided for under this Deed of Trust at law or in equity with respect to the Mortgaged Property (including, without limitation, the commencement of foreclosure proceedings or the appointment of a receiver), or (d) seek to enforce any judgment against the Mortgaged Property in a manner which is prohibited under this Article V, or (e) otherwise use its position as a junior 36 lienor to take any actions with respect to the Mortgaged Property, or to interfere with or otherwise impede any actions that Prior Beneficiary may wish to take with respect to the Mortgaged Property; provided, that notwithstanding the provisions set forth in (a) through (e) above, Beneficiary may make protective advances contemplated by this Deed of Trust, including without limitation, for past due real estate taxes, insurance premiums, repair costs and other amounts which could result in a lien or encumbrance upon the Mortgaged Property and may join in any enforcement action or other remedial proceeding that has been commenced by or on behalf of the Prior Beneficiary to assure that Beneficiary's junior lien is not extinguished, diminished or otherwise adversely affected; provided further that the Prior Beneficiary consents to Beneficiary acting in Trustor's stead under this Deed of Trust, subject to all the conditions and requirements hereunder, and under the UBS Loan Documents, if Trustor is in default with respect to its obligations to Beneficiary (it being understood that Beneficiary shall not, by the making of any protective advance, acquire by subrogation or otherwise any lien, estate or interest in the Mortgaged Property which may be prior to the lien, estate or interest of the Prior Beneficiary, but the amount of any such advances shall be secured by the lien of this Deed of Trust). Section 5.06 Subject to the UBS Loan Documents. Beneficiary acknowledges that the terms, conditions, provisions and lien of this Deed of Trust, any Assignment of Leases and Rents hereafter delivered to Beneficiary with respect to the Mortgaged Property and any documents hereafter delivered pursuant to Sections 1.02 and 1.03 of this Deed of Trust and all of Beneficiary's rights under this Deed of Trust, any Assignment of Leases and Rents hereafter delivered to Beneficiary with respect to the Mortgaged Property and any documents hereafter delivered pursuant to Section 1.02 and 1.03 are junior and subject to the terms, conditions, provisions and lien of the Prior Deed of Trust and the other UBS Loan Documents and all of Prior Beneficiary's rights thereunder. Beneficiary further acknowledges that if Trustor's compliance with any of the terms, covenants, conditions or other provisions of this Deed of Trust would be inconsistent with or cause a default under the UBS Loan Documents, Trustor shall not be obligated to comply with such term, covenant or condition or other provision contained in this Deed of Trust. Notwithstanding the foregoing, nothing herein shall preclude the operation of any term, covenant, provision, or condition of, or right of Beneficiary under, this Deed of Trust which is not inconsistent with, the terms, covenants, provisions and conditions of, and rights of Prior Beneficiary under the Prior Deed of Trust and the other UBS Loan Documents, and which would not cause a default under, the UBS Loan Documents. Section 5.07 Third Party Beneficiary. It is expressly intended and agreed by the parties to this Deed of Trust that (a) the Prior Beneficiary is a third party beneficiary of this Deed of Trust and is relying upon the terms and provisions of this Article V, (b) the Prior Deed of Trust shall be recorded first, (c) the Prior Beneficiary shall have the right, in addition to all other remedies, to specifically enforce the provisions of this Article V and shall be entitled to injunctive and other equitable relief in connection therewith and (d) Trustor and Beneficiary 37 expressly agree that the rights of the parties hereunder are the same as they would be if the Beneficiary and the Prior Beneficiary had executed a separate intercreditor agreement. Section 5.08 Consent to Non-Disturbance Agreement. Trustee and Beneficiary hereby agree to give a non-disturbance agreement to any lessee or tenant with respect to which the Prior Beneficiary shall have executed a similar non-disturbance agreement and, if the Trustee and Beneficiary fail to give any such non-disturbance agreement, the Trustee and Beneficiary nevertheless agree not to disturb the possession or occupancy of any lessee or tenant of all or any portion of the Mortgaged Property without the prior written consent of the Prior Beneficiary in each instance. Section 5.09 Release of Mortgaged Property. Subject to the terms and provisions of Section 6.3(h) of the Agreement, in the event the Prior Beneficiary releases all or any portion of the Mortgaged Property from the lien of the Prior Deed of Trust, then Beneficiary hereby irrevocably appoints the Prior Beneficiary as its attorney-in-fact (coupled with an interest) to execute and deliver, in the name, and on behalf of Beneficiary, any and all documents necessary to release the Mortgaged Property (or such portion thereof being released from the lien of the Prior Deed of Trust) from the lien of this Deed of Trust. Beneficiary hereby acknowledges that it shall not be entitled to receive any payment in connection with the release of the Mortgaged Property (or any portion thereof) from the lien of this Deed of Trust, including, without limitation, the proceeds of any sale thereof, unless and until the Prior Beneficiary is fully paid all sums due under the UBS Loan Documents. The Trustor hereby agrees that it will provide the Beneficiary with written notice as to the release of all or any portion of the Mortgaged Property from the lien of the Prior Deed of Trust. Section 5.10 Bankruptcy, Insolvency, etc. In the event of (a) any insolvency, dissolution, winding up, liquidation, readjustment, composition, reorganization or other similar proceedings relating to Trustor (whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership, or upon an assignment for the benefit of creditors, or any other marshaling of the assets and liabilities of Trustor, or any sale of all or substantially all of the Mortgaged Property, or otherwise ) or (b) any receivership or other equivalent proceeding with respect to the Mortgaged Property, all sums due under the UBS Loan Documents shall first be indefeasibly paid in full before Beneficiary shall be entitled to retain any payment or distribution received as proceeds of the Mortgaged Property of any kind or character, whether in cash, property or securities. Beneficiary hereby irrevocably authorizes and agrees that the Prior Beneficiary may, in its sole discretion, in the name of Beneficiary, or otherwise, demand, sue for, collect, receive and give receipt for any and all payments or distributions of any kind or character, whether in cash, property or securities, which are proceeds of the Mortgaged Property to which Beneficiary would be entitled if the Deed of Trust were not subject to the Prior Deed of Trust pursuant to the terms hereof. 38 Upon request, Beneficiary shall furnish to the Prior Beneficiary, as promptly as practicable, all information in its possession relating to the Mortgaged Property which the Prior Beneficiary considers reasonably necessary in connection with any action by the Prior Beneficiary permitted under the foregoing provisions of this Section 5.10. Beneficiary will not initiate any proceedings to modify or lift the stay provided for in SECTION 362(a) of Title 11 of the United States Code in respect of the Mortgage or the Mortgaged Property. Notwithstanding anything to the contrary contained herein, nothing contained in this Section 5.10 shall preclude Beneficiary from asserting any claim in any such proceeding with respect to all Secured Obligations secured hereby as it pertains to any property, cash or securities of Borrower other than the Mortgaged Property. Section 5.11 Other Payments. In the event that the Beneficiary receives any payment or other distribution of any kind or character from the Trustor or from any other source whatsoever as proceeds of the Mortgaged Property, which it is not entitled to retain pursuant to this Article V, Beneficiary shall immediately deliver the same to the Prior Beneficiary, in the form received, together with any necessary endorsements, in each case for application pursuant to the UBS Loan Documents, but until so received by the Prior Beneficiary, the same shall be held in trust by Beneficiary as the property of the Prior Beneficiary. ARTICLE VI RESTATEMENT OF POST-PETITION MORTGAGE LIENS Section 6.01 Post-Petition Mortgage Liens. This Deed of Trust amends and restates in their entirety the Post-Petition Mortgage Liens; provided that, to the fullest extent permitted by law, (as) the priority of all liens, security interests and other encumbrances evidenced hereby or arising hereunder shall relate back to the date and time the Post-Petition Mortgage Liens were granted; (b) nothing herein shall impair the creation, attachment, perfection or priority of the Post-Petition Mortgage Liens; and (c) nothing herein shall constitute a novation or discharge of the obligations secured by the Post-Petition Mortgage Liens. IN WITNESS WHEREOF, this Deed of Trust has been duly executed by Trustor and Beneficiary as of the day and year first above written. 39 TRUSTOR: PAYLESS CASHWAYS, INC. By: -------------------------------- Name: Title: BENEFICIARY: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent By: -------------------------------- Name: Title: CONSENTED AND AGREED TO: [UBS MORTGAGE FINANCE, INC.] By: ------------------------------- Name: Title: [NOTARY BLOCK -- PAYLESS] [NOTARY BLOCK -- CIBC] [NOTARY BLOCK - PRIOR MORTGAGEE] 40 EXHIBIT A (DESCRIPTION OF LAND) 41 EXHIBIT B (LOCAL LAW PROVISIONS) EX-4 6 4.1E FORM OF AMENDED & RESTATED MORTGAGE COVER EXHIBIT D-3 FORM OF AMENDED AND RESTATED MORTGAGE State: Site No(s).: --------- ------ AMENDED AND RESTATED MORTGAGE, LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING Mortgagor: PAYLESS CASHWAYS, INC. 2300 Main Street Kansas City, Missouri 64108 Mortgagee: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent 425 Lexington Avenue New York, New York 10017 Mortgage Amount: $500,000,000 Date: December 2, 1997 Premises: Record and SHOOK, HARDY & BACON L.L.P. Return to: 1200 Main St., Suite 3000 Kansas City, MO 64105 Attn.: Richard D. Woods, Esq. 1 AMENDED AND RESTATED MORTGAGE, LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING, dated as of December 2, 1997, by and between PAYLESS CASHWAYS, INC., a Delaware corporation, having an office at 2300 Main Street, Kansas City, Missouri 64108 ("Mortgagor"), and CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent under the Agreement (as hereinafter defined), having an office at 425 Lexington Avenue, New York, New York 10017 ("Mortgagee"). DEFINITIONS Mortgagor and Mortgagee agree that all capitalized terms used but not defined herein are defined in or by reference to the Agreement and shall have the same meanings herein as therein. Mortgagor and Mortgagee further agree that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms. "Agreement" means that certain Amended and Restated Credit Agreement dated as of December 2, 1997, by and among Mortgagor, the signatory Lenders thereto, the Underwriters, U.S. Bank National Association, as a Fronting Bank, and Canadian Imperial Bank of Commerce, as a Fronting Bank and as Coordinating and Collateral Agent for the Lenders, the Fronting Banks, the Underwriters and the other Secured Parties, together with any future amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof. "Bankruptcy Case" means In re Payless Cashways, Inc., Case No. 97-50543 in the Bankruptcy Court. "Bankruptcy Code" means 11 U.S.C. ss.101 et seq. "Bankruptcy Court" means the United States Bankruptcy Court for the Western District of Missouri. "Bankruptcy Reorganization Plan" means Payless' plan of reorganization in the Bankruptcy Case, as confirmed by the Bankruptcy Court. "Default" means Default, as that term is defined in the Agreement. "Default Rate" means the rate of interest specified in Section 2.8(a) of the Agreement. "DIP Agent" means the DIP Agent, as that term is defined in the Agreement. 2 "DIP Credit Agreement" means the Revolving Credit Agreement, dated as of July 21, 1997, among Payless, as a Debtor-in-Possession, the Lenders, the Underwriters and the Fronting Banks party thereto and Canadian Imperial Bank of Commerce, as Coordinating and Collateral Agent, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. "DIP Obligations" means the DIP Obligations, as that term is defined in the Agreement. "Event of Default" means the events and circumstances described as such in Article II hereof. "Fixtures" means all of Mortgagor's right, title and interest in all furniture, furnishings, partitions, screens, awnings, venetian blinds, window shades, draperies, carpeting, pipes, ducts, conduits, dynamos, motors, engines, compressors, generators, boilers, stokers, furnaces, pumps, tanks, elevators, escalators, vacuum cleaning systems, call systems, switchboards, sprinkler systems, fire prevention and extinguishing apparatus, refrigerating, air conditioning, heating, dishwashing, plumbing, ventilating, gas, steam, electrical and lighting fittings and fixtures, licenses or permits of any kind and all building materials, equipment and goods now or hereafter delivered to the Premises (hereinafter defined) and intended to be installed therein, and all other machinery, fixtures, tools, implements, apparatus, appliances, equipment, goods, facilities and other personal property of similar character in which Mortgagor now has, or at any time hereafter acquires, an interest and which are now or hereafter affixed or attached to, or used in connection with the enjoyment, occupancy and/or operation of, all or any portion of the Premises, together with all renewals, replacements and substitutions thereof and additions and accessions thereto and the proceeds of all of the foregoing items. "Fronting Banks" means the Fronting Banks, as that term is defined in the Agreement. "Improvements" means all buildings, structures and other improvements presently existing or hereafter constructed on the land described in Exhibit A attached hereto. "Lease" has the meaning ascribed to such term in Section 3.01 hereof. "Leasehold" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. "Leasehold Interest" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. "Lenders" means the Lenders, as that term is defined in the Agreement. "Lessee" has the meaning ascribed to such term in Section 3.01 hereof. 3 "Loan Documents" means the Loan Documents, as that term is defined in the Agreement. "Loans" means the Loans, as that term is defined in the Agreement. "Mortgage" means this Amended and Restated Mortgage, Leasehold Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing together with any future amendments, amendments and restatements, extensions, modifications or supplements hereto or hereof. "Mortgage Amount" means an aggregate principal amount outstanding at any time not to exceed $500,000,000. "Mortgaged Property" has the meaning ascribed to such term in the Granting Clause, below. "Notes" means the Notes, as that term is defined in the Agreement. "Payless" means Payless Cashways, Inc., an Iowa corporation. "Post-Petition Mortgage Liens" has the meaning ascribed to such term in the fifth WHEREAS clause, below. "Pre-Petition Agent" means the Pre-Petition Agent, as that term is defined in the Agreement. "Pre-Petition Credit Agreement" means the Amended and Restated Credit Agreement dated as of October 3, 1996, by and among Payless, the lenders signatory thereto, Canadian Imperial Bank of Commerce, as letter of credit bank and as administrative and collateral agent, and The Bank of Nova Scotia, NationsBank of Texas, N.A. and Bank of America National Trust and Savings, as co-agents, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. "Pre-Petition Mortgage" has the meaning ascribed to such term in the third WHEREAS clause, below. "Pre-Petition Obligations" means the Pre-Petition Obligations, as that term is defined in the Agreement. "Premises" means the land described in Exhibit A annexed hereto, together with the Improvements thereon or to be constructed thereon or therein, and all of the easements, rights, privileges and appurtenances thereunto belonging or in anywise appertaining thereto including, but not limited to, all of the estate, right, title, interest, claim or demand whatsoever of Mortgagor therein 4 and in and to the strips and gores, streets and ways adjacent thereto, whether in law or in equity, in possession or expectancy, now or hereafter acquired and also any other realty, Leaseholds (hereinafter defined) or Fixtures encompassed by the term "Mortgaged Property", elsewhere herein defined. "Rents" has the meaning ascribed to such term in Section 3.01 hereof. "Secured Obligations" has the meaning ascribed to such term in the paragraph entitled "Secured Obligations" below. "Secured Parties" means Secured Parties, as that term is defined in the Agreement. "Underwriters" means Underwriters, as that term is defined in the Agreement. W I T N E S S E T H : WHEREAS, on July 21, 1997, Payless filed a voluntary petition of bankruptcy under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court; and WHEREAS, prior to the commencement of the Bankruptcy Case, Payless was obligated to certain of the Lenders pursuant to, among other things, the Pre-Petition Credit Agreement; and WHEREAS, Payless' obligations under the Pre-Petition Credit Agreement and the other Credit Documents (as defined in the Pre-Petition Credit Agreement) were secured by, among other things, the following real property security instruments (individually and collectively, the "Pre-Petition Mortgage"): (a) the Mortgage, Leasehold Mortgage, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as mortgagor, in favor of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as mortgagee, and recorded ________ ___, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and (b) the Mortgage, Leasehold Mortgage, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as mortgagor, in favor of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as mortgagee, and recorded ________ ___, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and 5 (c) the Mortgage, Leasehold Mortgage, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as mortgagor, in favor of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as mortgagee, and recorded ________ ___, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and (d) the Mortgage, Leasehold Mortgage, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as mortgagor, in favor of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as mortgagee, and recorded ________ ___, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and WHEREAS, during the Bankruptcy Case, Payless became obligated to certain of the Lenders pursuant to the DIP Credit Agreement; and WHEREAS, pursuant to the orders of the Bankruptcy Court entered on July 21, 1997 and August 20, 1997 in the Bankruptcy Case, the DIP Agent and the Pre-Petition Agent were granted liens (the "Post-Petition Mortgage Liens") on the Mortgaged Property to secure the Pre-Petition Obligations and the DIP Obligations; and WHEREAS, as contemplated by Payless' Bankruptcy Reorganization Plan, Payless has merged with and into Mortgagor, with Mortgagor being the sole surviving entity; and WHEREAS, Canadian Imperial Bank of Commerce, the Coordinating and Collateral Agent under the Agreement and this Mortgage, is the same legal entity as Canadian Imperial Bank of Commerce, New York Agency, the administrative and collateral agent under the Pre-Petition Credit Agreement and the Pre-Petition Mortgage; and WHEREAS, pursuant to the terms of the Bankruptcy Reorganization Plan and the Agreement, the parties have agreed to amend and restate the Pre-Petition Mortgage pursuant to this Mortgage in order, among other things, (i) to reflect the merger of Payless into Mortgagor, (ii) to secure various obligations of Mortgagor (as Payless' successor) in respect of the Pre-Petition Obligations and the DIP Obligations, and (iii) without duplication, to secure all obligations, whether now existing or hereafter incurred or arising, of Mortgagor under the Agreement, the Notes and/or the other Loan Documents, including, without limitation, the Secured Obligations; in each case as more particularly set forth in the Agreement and this Mortgage; and WHEREAS, Mortgagor is the actual, record and beneficial owner of the Premises or owns an actual beneficial interest therein; and 6 WHEREAS, Mortgagor has agreed pursuant to the terms of the Agreement, the Notes, and/or the other Loan Documents evidencing the Secured Obligations to be liable for the Secured Obligations; and WHEREAS, the parties intend that the Secured Obligations shall be secured by this Mortgage; GRANTING CLAUSE NOW, THEREFORE, Mortgagor, in consideration of the premises, and in order to secure the payment in full of the Mortgage Amount, the Secured Obligations, all interest due thereon and all other costs and expenses and other amounts due hereunder and in respect of the Secured Obligations, and the performance and discharge of all the provisions hereof, of the Secured Obligations and all other Loan Documents, hereby gives, grants, bargains, mortgages, pledges and grants a security interest to Mortgagee, all of Mortgagor's estate, right, title and interest in, to and under any and all of the following described property whether now owned or hereafter acquired (all such properties being collectively referred to as the "Mortgaged Property"): A. All Mortgagor's right, title and interest in and to the Premises and all right, title and interest of Mortgagor in and to the Improvements on the Premises or to be constructed thereon and all Fixtures now or hereafter situated in, on or about, or affixed or attached to the Improvements or the Premises or any building, structure or other improvement now or hereafter standing, constructed or placed upon or within the Premises, and all and singular the tenements, hereditaments, easements, rights-of-way or use, rights, privileges and appurtenances to the Premises, now or hereafter belonging or in anywise appertaining thereto, including, without limitation, any such right, title, interest, claim and demand in, to and under any agreement granting, conveying or creating, for the benefit of the Premises, any easement, right or license in any way affecting other property and in, to and under any streets, ways, alleys, vaults, gores or strips of land adjoining the Premises, or any parcel thereof, and all claims or demands either in law or in equity, in possession or expectancy, of, in and to the Premises. B. All right, title and interest of Mortgagor in and to all awards heretofore made or hereafter to be made for the taking by eminent domain of the whole or any part of the above described premises, or any estate or easement therein, including any awards for change of grade of streets, all of which awards are hereby assigned to Mortgagee, which Mortgagee is hereby authorized to collect (unless provided otherwise in the Agreement), and receive the proceeds of such awards and to give proper receipts and acquittances therefor and Mortgagee shall have the right and option to apply such excess towards the payment of any sum owing on account of this Mortgage and the Secured Obligations secured thereby, notwithstanding the fact that such sum may not then be due and payable. C. The Fixtures and the products and proceeds thereof. 7 D. All present and future leases, subleases and licenses and any guarantees thereof, rents, issues and profits and additional rents now or at any time hereafter covering or affecting all or any portion of the Mortgaged Property and all proceeds of, and all privileges and appurtenances belonging or in any way appertaining to, the Mortgaged Property, or any part thereof, and all other property subjected or required to be subjected to the lien and/or security interest of this Mortgage, including, without limitation, all of the income, revenues, earnings, rents, maintenance payments, tolls, issues, awards (including, without limitation, condemnation awards and insurance proceeds), products and profits thereof, which income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits are hereby expressly assigned with the right to take and collect the same upon the terms hereinafter set forth; and all the estate, right, title, interest and claim whatsoever, at law and in equity, which Mortgagor now has or may hereafter acquire in and to the aforementioned property and every part thereof; provided, that so long as no Event of Default (as hereinafter defined) shall have occurred and be continuing, all such income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits shall remain with and under the control of Mortgagor except as otherwise expressly provided herein or in any other written agreement between Mortgagor and Mortgagee. E. All right, title and interest of Mortgagor in and to all agreements, or contracts, now or hereafter entered into for the sale, leasing, brokerage, development, construction, renovation, management, maintenance and/or operation of the Premises (or any part thereof), including all moneys due and to become due thereunder, and all permits, licenses, bonds, insurance policies, plans and specifications relative to the construction and/or operation of the Improvements upon the Mortgaged Property. F. All right, title and interest (including, without limitation, all present and future rights to possession and use, and all present and future options and other rights to renew and to purchase) of Mortgagor, as lessee or sublessee, under any leases, subleases, licenses, occupancy agreements or concessions now in effect or to be entered into hereafter (collectively, the "Leasehold Instruments") whereby Mortgagor has any right to the use, possession or occupancy of the Premises or any part thereof (collectively, the "Leaseholds"). G. All of Mortgagor's claims and rights to the payment of damages arising from any rejection of a Leasehold or a Lease under or pursuant to the Bankruptcy Code. H. All Mortgagor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, 11 U.S.C. ss.365(h), including, without limitation, all of Mortgagor's rights to remain in possession of the Premises. I. Any other property and rights which are, by the provisions of the Agreement or any other Loan Document, required to be subject to the lien hereof, and any additional property and rights that 8 may from time to time hereafter by installation in or on the Mortgaged Property, or by writing of any kind, or otherwise, be subjected to the lien hereof by Mortgagor or by anyone on its behalf. J. All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all right, title and interest of Mortgagor in and to all unearned premiums accrued, accruing and to accrue under any or all insurance policies obtained by Mortgagor. TO HAVE AND TO HOLD the Mortgaged Property, unto Mortgagee and its successors and assigns, upon the terms, provisions and conditions herein set forth, forever, and Mortgagor does hereby bind itself and its successors, legal representatives, and assigns to warrant and forever defend all and singular the Mortgaged Property unto Mortgagee and its successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof. SECURED OBLIGATIONS This Mortgage, and all rights, titles, interests, liens, security interests, powers, privileges and remedies created hereby or arising hereunder or by virtue hereof, are given to secure the payment and performance of all indebtedness, obligations and liabilities arising under the Notes, the Agreement, this Mortgage and any other Loan Document, and any renewals, extensions, amendments, amendments and restatements, supplements or modifications thereof or thereto, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, and any and all fees, costs or expenses incurred by Mortgagee or the other Secured Parties, including, but not limited to, interest accruing at the then applicable rate provided in the Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Agreement or other applicable agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Mortgagor on the Loans and on all other obligations of the Mortgagor to the Secured Parties, taxes, recording expenses and attorneys' fees in connection with the execution and delivery of any of the aforesaid, and the consummation of the transactions contemplated thereby, the administration thereof, and, after Default, the administration and collection thereof, all costs incurred of whatever nature by Mortgagee in the exercise of any rights hereunder or under any Loan Document and all other amounts payable by Mortgagor under this Mortgage (all of the foregoing indebtedness, obligations and liabilities being referred to herein as the "Secured Obligations"). 9 ARTICLE I PARTICULAR WARRANTIES, REPRESENTATIONS AND COVENANTS OF MORTGAGOR Section 1.01 Warranties and Representations. Mortgagor hereby warrants and represents as follows: (a) Mortgagor is the actual, record and beneficial owner of the Premises and holder of a good and marketable title to an indefeasible leasehold estate in the Leaseholds or owns an actual beneficial interest therein and fee estate in the rest of the Mortgaged Property, subject only to such exceptions to title as are listed in the title policy insuring the lien of this Mortgage and approved by Mortgagee as permitted exceptions. Mortgagor is the owner of all of the remaining Mortgaged Property; Mortgagor will own the Fixtures free and clear of liens and claims except those in favor of Mortgagee; and this Mortgage is and will remain a valid and enforceable first lien on the Mortgaged Property subject only to the permitted exceptions referred to above. (b) Mortgagor has full power and lawful authority to mortgage the Mortgaged Property in the manner and form herein done or intended hereafter to be done. Mortgagor will preserve such title, and will forever warrant and defend the validity and priority of the lien hereof, against the claims of all persons and parties whomsoever. (c) Except as otherwise specified in the Title Policy (as defined in the Agreement) or in the Survey (as defined in the Agreement), the Premises is not located in an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards or if it is so located, flood insurance acceptable to Mortgagee has been obtained. Section 1.02 Further Assurances. Mortgagor will, at its sole expense, do, execute, acknowledge and deliver every further act, deed, conveyance, mortgage, assignment, notice of assignment, transfer or assurance as Mortgagee shall from time to time reasonably require, for the better assuring, conveying, assigning, transferring and confirming unto Mortgagee the property and rights hereby conveyed, mortgaged or assigned or intended now or hereafter so to be, or which Mortgagor may be or may hereafter become bound to convey, mortgage or assign to Mortgagee or for carrying out the intention or facilitating the performance of the terms of this Mortgage, and for filing, registering or recording this Mortgage and, on demand, will execute and deliver, and hereby authorizes Mortgagee to execute in the name of Mortgagor to the extent it may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, and renewals thereof, to evidence more effectively the lien hereof upon the Fixtures. Section 1.03 Filings, Recordings and Payments. (a) Mortgagor forthwith upon the execution of this Mortgage, and thereafter from time to time, will, at its expense, cause this 10 Mortgage and any security instrument creating a lien or evidencing the lien hereof upon the Fixtures and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien hereof upon, and the interest of Mortgagee in, the Mortgaged Property. (b) Mortgagor will pay all taxes, filing, registration and recording fees, and all expenses incident to the execution and acknowledgment of this Mortgage, any supplemental mortgage, any other Loan Document, and any security instrument with respect to the Fixtures, and any instrument of further assurance, and all federal, state, county and municipal stamp taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Agreement, this Mortgage, any supplemental mortgage, any other Loan Document, any security instrument with respect to the Fixtures or any instrument or further assurance, other than income, franchise or other similar taxes imposed on Mortgagee in respect of income derived by Mortgagee under the Secured Obligations. Section 1.04 Payment of Sums Due. Mortgagor will punctually pay the principal and interest and all other sums to become due in respect of the Agreement and any other Loan Document at the time and place and in the manner specified in the Agreement and any other Loan Document, according to the true intent and meaning thereof and without offset, counterclaim, defense or cause of action of any kind whatsoever , and without deduction or credit for any amount payable for taxes, all in immediately available funds in Dollars. Section 1.05 After Acquired Property. All right, title and interest of Mortgagor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Mortgaged Property, hereafter acquired by or released to Mortgagor or constructed, assembled or placed by Mortgagor on the Premises, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, conveyance, assignment or other act by Mortgagor, shall become subject to the lien of this Mortgage as fully and completely, and with the same effect, as though now owned by Mortgagor and specifically described in the granting clauses hereof, but at any and all times Mortgagor will execute and deliver to Mortgagee any and all such further assurances, mortgages, conveyances or assignments thereof as Mortgagee may reasonably require for the purpose of expressing and specifically subjecting the same to the lien of this Mortgage. Section 1.06 Taxes, Fees and Other Charges. (a) Mortgagor, from time to time when the same shall become due, and prior to the date of imposition of interest or penalty (except as otherwise permitted in the Agreement), will pay and discharge, or cause to be paid and discharged, all taxes of every kind and nature (including real and personal property taxes and income, franchise, withholding, transfer or recordation taxes, profits and gross receipt taxes), all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges, and all other 11 public charges, whether of a like or different nature, imposed upon or assessed against it or the Mortgaged Property or any part thereof or upon the revenues, rents, issues, income and profits of the Premises or arising in respect of the occupancy, use or possession thereof. Mortgagor will, at any time upon request by Mortgagee, promptly deliver to Mortgagee receipts evidencing the payment of same. Upon the occurrence of an Event of Default under the Agreement, Mortgagee may, at any time and from time to time, at its option, to be exercised by written notice to Mortgagor, require the deposit by Mortgagor at the time of each payment of an installment of interest or principal under the Agreement of an additional amount sufficient to discharge the obligations under this subsection (a) when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Mortgagee, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Mortgagee in its sole discretion. Such amounts shall be held by Mortgagee without interest in an account acceptable to Mortgagee and applied to the payment of the obligations in respect to which such amounts were deposited or, at the option of Mortgagee and subject to applicable law, to the payment of the Secured Obligations in such order or priority as Mortgagee shall determine consistent with the Agreement, on or before the respective dates on which the same or any of them would become delinquent. If one month prior to the due date of any of the obligations under this subsection (a) the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, Mortgagor within ten (10) days after demand shall deposit the amount of the deficiency with Mortgagee. Nothing herein contained shall be deemed to affect any right or remedy of Mortgagee under the provisions of this Mortgage or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. (b) Except as otherwise permitted in the Agreement, Mortgagor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or permit the creation of, a lien on the Mortgaged Property or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom and in general will do or cause to be done everything necessary so that the lien hereof shall be fully preserved, at the cost of Mortgagor, without expense to Mortgagee. Section 1.07 Intentionally Deleted. Section 1.08 Insurance. (a) Mortgagor agrees to at all times provide, maintain and keep in force the policies of insurance required to the maintained pursuant to the terms of the Agreement. (b) In the event Mortgagor fails to provide, maintain, keep in force or deliver and furnish to Mortgagee the policies of insurance required by the Agreement or this Mortgage, Mortgagee may procure such insurance or single-interest insurance for such risks covering Mortgagee's interest, and Mortgagor will pay all premiums thereon promptly upon demand by Mortgagee, and until such 12 payment is made by Mortgagor the amount of all such premiums, together with interest thereon at the Default Rate shall be secured by this Mortgage. (c) After the happening of any casualty to the Mortgaged Property or any part thereof, Mortgagor shall give prompt written notice thereof to Mortgagee, and Mortgagee may make proof of loss if not made promptly by Mortgagor. In the event of such loss or damage, all proceeds of insurance shall be payable in the manner provided for in the Agreement. Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Mortgagor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are insurance proceeds available or whether any such proceeds are sufficient in amount, and the application or release by Mortgagee of any insurance proceeds shall not cure or waive any Default or notice of Default under this Mortgage or invalidate any act done pursuant to such notice. Any monies received as payment for loss under any insurance shall be applied pursuant to the terms of the Agreement. (d) In the event of foreclosure of this Mortgage or other transfer of title or assignment of the Premises in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Mortgagor in and to all policies of insurance required by this Section 1.08 shall inure to the benefit of and pass to the successor in interest to Mortgagor or the purchaser or grantee of the Premises. (e) Mortgagor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 1.08, unless Mortgagee has approved the insurance company and the form and content of the insurance policy, including, without limitation, the naming thereon of Mortgagee as a named insured with loss payable to Mortgagee under a standard mortgagee endorsement of the character above described and the inclusion of a provision therein obligating said insurance company to provide Mortgagee with notice thirty (30) days prior to cancellation, lapse or amendment of any policy. Mortgagor shall immediately notify Mortgagee whenever any such separate insurance is taken out and shall promptly deliver to Mortgagee the policy or policies of such insurance. (f) Mortgagee may at any time following the occurrence of an Event of Default under the Agreement, at its option, to be exercised by written notice to Mortgagor, require the deposit by Mortgagor, at the time of each payment of an installment of interest or principal under the Agreement, of an additional amount sufficient to discharge the obligations under this Section 1.08 when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Mortgagee with each installment, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Mortgagee in its sole discretion. Such amounts shall be held by Mortgagee without interest in an account acceptable to Mortgagee and applied to the payment of the obligations in respect of which such amounts were deposited on or before the respective dates on which the same or any of them would become delinquent or, at the option of 13 Mortgagee, to the payment of the Secured Obligations in such order or priority as Mortgagee shall determine consistent with the Agreement. If one month prior to the due date of any of the aforementioned obligations the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, Mortgagor within five (5) days after demand shall deposit the amount of the deficiency with Mortgagee. Nothing herein contained shall be deemed to affect any right or remedy of Mortgagee under the provisions of this Mortgage or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. Section 1.09 Condemnation. (a) In the event the Mortgaged Property or any part thereof or interest therein, shall be taken or damaged by eminent domain, alteration of the grade of any street, or there shall occur any other injury to or decrease in the value of the Mortgaged Property, by reason of any public or quasi-public improvement or condemnation proceeding, or in any other similar manner ("Condemnation"), or should Mortgagor receive any notice or other information regarding such Condemnation or a proposed Condemnation, Mortgagor shall give prompt written notice thereof to Mortgagee. (b) All compensation, awards and other payments or relief payable as a result of any such Condemnation, shall be payable in the manner provided for in the Agreement. All such compensation, awards, damages, rights of action and proceeds awarded to Mortgagor (the "Proceeds") are hereby assigned to Mortgagee and Mortgagor agrees to execute such further assignments of the Proceeds as Mortgagee may require. Mortgagee shall be under no obligation to question the amount of any such award or compensation and may accept the same in the amount paid. All Proceeds may be applied either against the Secured Obligations (in such order and priority as Mortgagee shall determine consistent with the Agreement) or to restore the Premises, at the discretion of Mortgagee, except as may be otherwise provided in the Agreement. (c) Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Mortgagor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are proceeds available or whether any such Proceeds are sufficient in amount, and the application or release by Mortgagee of any Proceeds shall not cure or waive any Default or notice of Default under this Mortgage or invalidate any act done pursuant to such notice. (d) Receipt by Mortgagee and application in reduction of indebtedness of any Proceeds less than the full amount of the then outstanding Secured Obligations shall not defer, alter or modify Mortgagor's obligation to continue to pay the regular installments of principal, interest on the outstanding principal balance and other charges owed in respect of the Secured Obligations and herein. 14 (e) If prior to the receipt of the Proceeds by Mortgagee the condemned Premises shall have been sold on foreclosure of this Mortgage, Mortgagee shall, nevertheless, have the right to receive the Proceeds and to retain, for its own account, (i) an amount equal to the counsel fees, costs and disbursements incurred by Mortgagee in connection with collection of the Proceeds and not repaid by Mortgagor and (ii) the full amount of all such Proceeds, if Mortgagee is the successful purchaser at the foreclosure sale, to the extent of amounts owed in respect of the Secured Obligations. Section 1.10 Mortgagee's Performance of Mortgagor's Obligations. If Mortgagor shall fail to perform any of the covenants contained herein or any covenant contained in the Agreement or any other Loan Document, Mortgagee may, but shall not be obligated to, make advances and/or disbursements to perform the same. Mortgagor will repay on demand all sums so advanced and/or disbursed with interest at the Default Rate from the date of making such advance and/or disbursement until such sums have been repaid and all sums so advanced and/or disbursed, together with interest thereon at the Default Rate, shall be a lien upon the Mortgaged Property and shall be secured hereby. The provisions of this Section 1.10 shall not prevent any default in the observance of any covenant contained herein or with respect to the Secured Obligations or in any other Loan Document from constituting an Event of Default. Section 1.11 Financial Records. Mortgagor will provide the financial statements to Mortgagee required pursuant to the terms of the Agreement. Section 1.12 Waste and Maintenance. Mortgagor will not threaten, commit, permit or suffer any waste to occur on or to the Mortgaged Property or any part thereof or alter or demolish the Mortgaged Property or any part thereof in any manner or make any change in its use (except as provided in the Agreement) or any change which will in any way increase any fire or other hazards arising out of construction or operation of the Mortgaged Property. Mortgagor will, at all times, maintain the Mortgaged Property as required pursuant to the terms of the Agreement. Section 1.13 Enforcement Expenses. Except where inconsistent with the laws of the state in which the Mortgaged Property is located, Mortgagor agrees that if any action or proceeding be commenced, including an action to foreclose this Mortgage or to collect the indebtedness hereby secured, to which action or proceeding Mortgagee is made a party by reason of the execution of this Mortgage or the other Loan Documents, or in which it becomes necessary to defend or uphold the lien of this Mortgage, all sums paid by Mortgagee for the expense of any litigation to prosecute or defend or participate in the transaction and the rights and liens created hereby (including reasonable attorneys' fees) shall be paid by Mortgagor together with interest thereon from date of payment by Mortgagee at the Default Rate. All such sums paid and the interest thereon shall be immediately due and payable, shall be a lien upon the Mortgaged Property, and shall be secured hereby as shall be all such sums incurred in connection with enforcement by Mortgagee of its rights hereunder or under any other Loan Document. 15 Section 1.14 Defense of Mortgagee's Interests. If the interest of Mortgagee in the Mortgaged Property or any part thereof or the lien or security interest of this Mortgage thereon shall be attacked, directly or indirectly, or if legal proceedings shall be instituted against Mortgagor or Mortgagee with respect thereto or against Mortgagor, Mortgagor, upon its learning thereof, will promptly give written notice thereof to Mortgagee and Mortgagor will, at Mortgagor's cost and expense, exert itself diligently to cure, or will cause to be cured, any defect that may have developed or be claimed to exist, and will take all necessary and proper steps for the protection and defense thereof and will take, or will cause to be taken, such action as is appropriate to the defense of any such legal proceedings, including, but not limited to, the employment of counsel and the prosecution and defense of litigation. Section 1.15 No Impairment of Security. In no event shall Mortgagor do or permit to be done, or omit to do or permit the omission of, any act or thing, the doing, or omission, of which would materially impair the security of this Mortgage or materially impair the value of the Mortgaged Property or any part thereof. Section 1.16 Restrictions on Transfers and Mortgages. Unless otherwise permitted pursuant to the terms of the Agreement, Mortgagor will not directly or indirectly, by transfer, mortgage, conveyance, or sale of an interest in Mortgagor permit, do or suffer the assignment, lease, transfer, sale, conveyance or encumbrance of the Mortgaged Property, or any part thereof or any interest therein, without the express prior written consent of Mortgagee unless otherwise permitted pursuant to the terms of the Agreement. While the Secured Obligations are outstanding, neither the structure nor the ownership of Mortgagor may be changed without the express prior written consent of Mortgagee unless otherwise permitted pursuant to the terms of the Agreement. Section 1.17 Mortgagee's Defense. Mortgagee may appear in and defend any action or proceeding at law or in equity or in bankruptcy purporting to affect the Premises or the security hereof or the rights and powers of Mortgagee, and any appellate proceedings, and in such event Mortgagor shall pay all of Mortgagee's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding. All costs, charges and expenses so incurred, together with interest thereon at the Default Rate from the date of payment of same by Mortgagee as aforesaid, shall be secured by the lien of this Mortgage and shall be due and payable upon demand. Section 1.18 Environmental Compliance. Mortgagor will perform and comply promptly with, and cause the Premises to be maintained, used and operated in accordance with, all applicable federal, state and local laws pertaining to air and water quality, hazardous waste, waste disposal, air emissions and other environmental matters as set forth in the Agreement. Section 1.19 Zoning Changes. Mortgagor will not consent to, join in, permit or allow any change in the zoning laws or ordinances relating to or affecting the Premises which could reasonably 16 be expected to materially adversely affect the Premises and will promptly notify Mortgagee of any changes to the zoning laws. Section 1.20 Grant of Security Interest. Mortgagor, as further security for the payment of said indebtedness and in addition to all the rights and remedies otherwise available to Mortgagee under this Mortgage and the other Loan Documents, grants to Mortgagee a security interest, under the Uniform Commercial Code as now in effect in the state where all or any of the Fixtures are located, in and to the Fixtures, and all proceeds thereof. Upon an Event of Default, Mortgagee shall have, in addition to all the other rights and remedies allowed by law, the rights and remedies of a secured party under the Uniform Commercial Code as in effect at that time. Mortgagor further agrees that the security interest created hereby also secures all expenses of Mortgagee (including reasonable expenses for legal services of every kind, and cost of any insurance, and payment of taxes or other charges) incurred in or incidental to, the custody, care, sale or collection of, or realization upon, any of the property secured hereby or in any way relating to the enforcement or protection of the rights of Mortgagee hereunder, together with interest thereon at the Default Rate until paid. Section 1.21 Compliance with Laws and ADA Compliance. (a) Mortgagor warrants and covenants that the Premises are and will continue to be substantially in compliance with all applicable local, county, state and federal laws and regulations and all building, housing and fire codes, rules and regulations. (b) Without limiting the provisions of subsection (a) of this Section 1.21: (i) Mortgagor represents and warrants to Mortgagee that Mortgagor is substantially in compliance with the Americans with Disabilities Act of 1990 (42 U.S.C.A. sec. 12101 et. seq.), as the same may be amended from time to time (the "ADA") and all other federal, state and local laws pertaining to the accessibility of the Premises by persons with disabilities (the ADA and such other laws are, collectively, the "Accessibility Laws"); (ii) Mortgagor covenants to ensure that the Premises will at all times substantially comply with all applicable Accessibility Laws and, upon the request of Mortgagee, Mortgagor will conduct such surveys of the Premises as Mortgagee shall require to ascertain such compliance; (iii) Mortgagor will maintain accurate records of all expenditures made in connection with any alterations to the Premises and will deliver copies thereof to Mortgagee upon Mortgagee's request; and (iv) Mortgagor shall defend, indemnify and hold harmless Mortgagee, its employees, agents, officers and directors, attorneys, and any parent or affiliate of Mortgagee, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, cost or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out or in any way related to any violations of the Accessibility Laws (including, without limitation, any costs incurred by Mortgagee in complying with any Accessibility Laws). Neither payment of the indebtedness secured hereby nor foreclosure shall operate as a discharge of Mortgagor's obligations under this subsection (b). In the event Mortgagor tenders a deed in lieu of foreclosure, Mortgagor shall deliver the Premises to Mortgagee (or its designee) substantially free of any violations of the Accessibility 17 Laws. In the event Mortgagor does not timely perform any of the above obligations, Mortgagee after 30 days notice to Mortgagor may perform said obligations at the expense of Mortgagor and Mortgagor shall, upon written demand from Mortgagee, reimburse Mortgagee for all costs, including attorneys' fees and out-of-pocket expenses, and all liabilities incurred by Mortgagee by reason of the foregoing, with interest thereon at the Default Rate from the date of such payment by Mortgagee to the date of repayment. Until paid, said costs and expenses shall be secured by this Mortgage. Section 1.22 Other Multistate Mortgages. The indebtedness secured in part by this Mortgage is secured by mortgages and/or deeds of trust encumbering and conveying lands and other property and/or leasehold interests therein in other states as more particularly described in the Agreement, all of which mortgages and/or deeds of trust, including this instrument, being hereafter referred to as "the mortgage instruments." It is understood and agreed that all of the properties of all kinds conveyed or encumbered by the mortgage instruments are security for the Secured Obligations without allocation of any one or more of the parcels or portions thereof to any portion of the Secured Obligations less than the whole amount thereof unless so stated in said mortgage instruments. It is specifically covenanted and agreed that Mortgagee may proceed, at the same or at different times, to foreclose said mortgage instruments, or any of them, by any proceedings appropriate in the state where any of the land lies, and that no event of enforcement taking place in any state including, without limiting the generality of the foregoing, any pending foreclosure, judgment or decree of the foreclosure, foreclosure sale, rents received, possession taken, deficiency judgment or decree, or judgment taken on the Secured Obligations, shall in any way stay, preclude or bar enforcement of the mortgage instruments or any of them in any other state, and that Mortgagee may pursue any or all its remedies to the maximum extent permitted by state law until all of the Secured Obligations now or hereafter secured by any or all of the mortgage instruments has been paid and discharged in full. Neither Mortgagor, nor any person claiming under Mortgagor, shall have or enjoy any right to marshaling of assets, all such right being hereby expressly waived as to Mortgagor and all persons claiming under it, including junior lienors. No release of personal liability of any person whatever and no release of any portion of the property now or hereafter subject to the lien of any of the mortgage instruments shall have any effect whatever by way of impairment or disturbance of the lien or priority of any of said mortgage instruments. Any foreclosure or other appropriate remedy brought in any of the states aforesaid may be brought and prosecuted as to any part of the mortgaged security, wherever located, without regard to the fact that foreclosure proceedings or other appropriate remedies have or have not been instituted elsewhere on any other land subject to the lien of said mortgage instruments or any of them. Section 1.23 Leasehold and Leasehold Instruments. 18 (a) Mortgagor covenants and agrees to faithfully comply with and perform all of its obligations under the Leasehold Instruments, and to promptly cure any default by it under the Leasehold Instruments. (b) Mortgagor may modify, amend or terminate any Leasehold Instrument without the prior written consent provided such action is consistent with the terms of the Agreement. (c) Mortgagor will promptly give Mortgagee a copy of any default notice given to Mortgagor with respect to any Leasehold Instrument. ARTICLE II EVENTS OF DEFAULT AND REMEDIES Section 2.01 Events of Default. The following shall constitute defaults hereunder and, after the giving of notice and the passage of time, if any, as provided herein, shall constitute "Events of Default" hereunder: (a) If Mortgagor shall fail to pay when due any Secured Obligation after the passage of any applicable notice or grace period, if any; or (b) If an Event of Default, as defined in the Agreement, shall occur under the Agreement. Section 2.02 Mortgagee's Remedies. (a) During the continuance of any Event of Default, Mortgagee, without notice or presentment, each of which are hereby waived by Mortgagor, may, subject to the provisions of the Agreement, declare the entire principal of the Secured Obligations then outstanding and all accrued and unpaid interest thereon and all other amounts owing in respect thereof (if not then due and payable, whether by acceleration or otherwise), to be due and payable immediately, and upon any such declaration the principal of the Secured Obligations and said accrued and unpaid interest shall become and be immediately due and payable, anything in the instruments evidencing the Secured Obligations or in this Mortgage to the contrary notwithstanding; (b) During the continuance of any Event of Default, Mortgagee may enter into and upon all or any part of the Premises, and, having and holding the same, may use, operate, manage and control the Mortgaged Property or any part thereof and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and likewise, from time to time, at the expense of Mortgagor, Mortgagee may make all necessary or proper repairs, renewals and replacements and such useful alterations, additions, betterments and improvements thereto and thereon as to it may deem advisable in its sole judgment; and in every such case Mortgagee shall have the right to manage and operate the Mortgaged Property and to carry on the business thereof and exercise all rights and powers of Mortgagor with respect thereto either in the 19 name of Mortgagor or otherwise as Mortgagee shall deem best; and Mortgagee shall be entitled, with or without entering into or upon the Premises, to collect and receive all gross receipts, earnings, revenues, rents, maintenance payments, issues, profits and income of the Mortgaged Property and every part thereof, all of which shall for all purposes constitute property of Mortgagee; and, after deducting the expenses of conducting the business thereof and of all maintenance, repairs, renewals, replacement, alterations, additions, betterments and improvements and amounts necessary to pay taxes, assessments, insurance and prior or other proper charges upon the Mortgaged Property or any part thereof, as well as just and reasonable compensation for the services of Mortgagee and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, Mortgagee may apply the moneys arising as aforesaid in such manner and at such times as Mortgagee shall determine in its discretion consistent with the Agreement to the payment of the Secured Obligations and the interest thereon, when and as the same shall become payable and/or to the payment of any other sums required to be paid by Mortgagor under this Mortgage; (c) During the continuance of any such Event of Default, Mortgagor covenants and agrees as follows: (1) Mortgagee may, with or without entry, personally or by its agents or attorneys, insofar as applicable, sell the Mortgaged Property or any part thereof and pursuant to the procedures provided by law, and all estate, right, title, interest, claim and demand therein, and right of redemption thereof, at one or more sales as an entity or in parcels, and at such time and place upon such terms and after such notice thereof as may be required or permitted by law; or (2) Mortgagee may institute an action of mortgage foreclosure or institute other proceedings according to law for the foreclosure hereof, and may prosecute the same to judgment, execution and sale for the collection of the Secured Obligations secured hereby, and all interest with respect thereto, together with all taxes and insurance premiums advanced by Mortgagee and other sums payable by Mortgagor hereunder, and all fees, costs and expenses of such proceedings, including attorneys' fees and expenses; or (3) Mortgagee may, if default be made in the payment of any part of the Secured Obligations, proceed with foreclosure of the liens evidenced hereby in satisfaction of such item either through the courts or by conducting the sale as herein provided, and proceed with foreclosure of the security interest created hereby, all without declaring the whole of the Secured Obligations due, and provided that if sale of the Mortgaged Property, or any portion thereof, is made because of default in payment of a part of the Secured Obligations, such sale may be made subject to the unmatured part of the Secured Obligations, but as to such unmatured part of the Secured Obligations (and it is agreed that such sale, if so made, shall not in any manner affect the unmatured part of the Secured Obligations) this Mortgage shall remain in full force and effect just as though no sale had been made under the provisions of this paragraph. And it is further agreed that several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured 20 Obligations, it being the purpose to provide for a foreclosure and sale of the Mortgaged Property, or any part thereof, for any matured portion of the Secured Obligations without exhausting the power to foreclose and to sell the Mortgaged Property, or any part thereof, for any other part of the Secured Obligations whether matured at the time or subsequently maturing; or (4) Mortgagee may take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Loan Documents or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Mortgagee shall elect; or (5) Mortgagee may exercise in respect of the Mortgaged Property consisting of Fixtures, all of the rights and remedies available to a secured party upon default under the applicable provisions of the Uniform Commercial Code as then in effect in the state where the Mortgaged Property is located; or (6) Mortgagee may apply any proceeds or amounts held in escrow pursuant to the terms of this Mortgage to payment of any part of the Secured Obligations in such order of priority as Mortgagee may determine consistent with the Agreement; or (7) Any sale as aforesaid may be subject to such existing tenancies as Mortgagee, in its sole discretion, may elect. Section 2.03 Sale, Foreclosure, etc. (a) Mortgagee may adjourn from time to time any sale by it to be made under or by virtue of this Mortgage by announcement at the time and place appointed for such sale or for such adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, Mortgagee, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. (b) Upon the completion of any sale or sales made by Mortgagee under or by virtue of this Article II, Mortgagee, or any officer of any court empowered to do so, shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, conveying, assigning and transferring all estate, right, title and interest in and to the properties, interests and rights sold. Mortgagee is hereby irrevocably appointed the true and lawful attorney of Mortgagor, in its name and stead, to make all the necessary conveyances, assignments, transfers and deliveries of any part of the Mortgaged Property and rights so sold, and for that purpose Mortgagee may execute all necessary instruments of conveyance, assignment and transfer and may substitute one or more persons with like power, Mortgagor hereby ratifying and confirming all that its said attorney or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, Mortgagor, if so requested by Mortgagee, shall ratify and confirm any such sale or sales by executing and delivering to Mortgagee or to such purchaser or purchasers all such 21 instruments as may be advisable, in the reasonable judgment of Mortgagee, for the purpose and as may be designated in such request. (c) Upon any sale, whether under the power of sale hereby given or by virtue of judicial proceedings, it shall not be necessary for Mortgagee, or any public officer acting under execution or order of court, to have present or constructive possession of any of the Mortgaged Property. (d) The recitals contained in any conveyance made by Mortgagee to any purchaser at any sale made pursuant hereto or under applicable law shall be full evidence of the matters therein stated, and all prerequisites to such sale shall be presumed to have been satisfied and performed. (e) Any such sale or sales made under or by virtue of this Mortgage, whether under the power of sale hereby granted and conferred, or under or by virtue of any judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either by law or in equity, of Mortgagor in and to the premises and property sold, and shall be a perpetual bar, both at law and in equity, against Mortgagor, its successors and assigns, and against any and all persons or entities claiming the premises and property sold, or any part thereof, from through or under Mortgagor and its successors or assigns. (f) The receipt given by Mortgagee for the purchase money paid at any such sale, or the receipt given by any other person authorized to receive the same, shall be sufficient discharge therefor to any purchaser of the property, or any part thereof, sold as aforesaid, and no such purchaser, or his representatives, grantees or assigns, after paying such purchase money and receiving such receipt, shall be bound (i) to see to the application of such purchase money or any part thereof upon or for any trust or purpose of this Mortgage, (ii) by the misapplication or nonapplication of any such purchase money, or any part thereof, or (iii) to inquire as to the authorization, necessity, expediency or regularity of any such sale. (g) In case the liens or security interests hereunder, or by the exercise of any other right or power, shall be foreclosed by Mortgagee's sale or by other judicial or non-judicial action, the purchaser at any such sale shall receive, as an incident to its ownership, immediate possession of the property purchased, and if Mortgagor or Mortgagor's successors shall hold possession of said property, or any part thereof, subsequent to foreclosure, Mortgagor or Mortgagor's successors shall be considered as tenants at sufferance of the purchaser at foreclosure sale, and anyone occupying the property after demand made for possession thereof shall be guilty of forcible detainer and shall be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages by reason thereof are hereby expressly waived. (h) In the event a foreclosure hereunder shall be commenced by Mortgagee, Mortgagee may at any time before the sale abandon the suit, and may then institute suit for the 22 collection of the Secured Obligations and for the foreclosure of the liens and security interest hereof. If Mortgagee should institute a suit for the collection of the Secured Obligations and for a foreclosure of the liens and security interest hereof, it may at any time before the entry of a final judgment in said suit dismiss the same and proceed to sell the Mortgaged Property, or any part thereof, in accordance with provisions of this Mortgage. (i) Any reasonable expenses incurred by Mortgagee in prosecuting, resetting or settling the claim of Mortgagee shall become an additional Secured Obligation of Mortgagor hereunder. (j) In the event of any sale made under or by virtue of this Article II (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale), the entire principal of, and interest on, the Secured Obligations, if not previously due and payable, and all other sums required to be paid by Mortgagor pursuant to this Mortgage, immediately thereupon shall, anything in the Secured Obligations or in this Mortgage to the contrary notwithstanding, become due and payable. (k) The purchase money proceeds or avails of any sale made under or by virtue of this Article II, together with any other sums which then may be held by Mortgagee under this Mortgage, whether under the provisions of this Article II or otherwise, shall be applied in accordance with the laws of the state where the Mortgaged Property is located, and to the extent not inconsistent, first to the payment of the costs and expenses of such sale, including reasonable compensation to Mortgagee and its agents and counsel, second to the payment of the amounts due and owing under or in respect of the Secured Obligations for principal and interest and any other amounts including (without limitation) any other sums required to be paid by Mortgagor pursuant to any provision of this Mortgage or any other Loan Document, with interest at the Default Rate from and after the happening of any Event of Default in the order set forth in Section 7.2 of the Agreement, all with interest at the Default Rate from the date such sums were or are required to be paid under this Mortgage, and third to the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. (l) Upon any sale made under or by virtue of this Article II, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Mortgagee and any other Secured Party may bid for and acquire the Mortgaged Property or any part thereof and Mortgagee and any other Secured Party in lieu of paying cash therefor may make settlement for the purchase price by crediting some or all of the indebtedness of Mortgagor secured by this Mortgage owing to such Secured Party (or, in the case of Mortgagee, owing to all Secured Parties) the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which Mortgagee is authorized to deduct under this Mortgage. 23 Section 2.04 Payments, Judgment, etc. (a) In case an Event of Default under the Agreement and the acceleration of the obligations thereunder shall have occurred, then, Mortgagor will in accordance with the Agreement pay to Mortgagee the whole amount which then shall have become due and payable on the Secured Obligations, whether for principal and interest or both or otherwise, as the case may be, which interest shall then accrue at the Default Rate on the then unpaid principal of or other amounts constituting the Secured Obligations, and the sums required to be paid by Mortgagor pursuant to any provision of this Mortgage, and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to Mortgagee its agents and counsel and any expenses incurred by Mortgagee hereunder. In the event Mortgagor shall fail forthwith to pay such amounts upon demand, Mortgagee shall be entitled and empowered to institute such action or proceedings at law or in equity as may be advised by its counsel for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree. (b) Mortgagee shall be entitled to recover judgment as aforesaid either before or after or during the pendency of any proceedings for the enforcement of the provisions of this Mortgage and the right of Mortgagee to recover such judgment shall not be affected by any entry or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Mortgage or the foreclosure of the lien hereof; and in the event of a sale of the Mortgaged Property or any part thereof and of the application of the proceeds of sale, as provided in this Mortgage, to the payment of the indebtedness hereby secured, Mortgagee shall be entitled to enforce payment of, and to receive all amounts then remaining due and unpaid upon, the Secured Obligations, and to enforce payment of all other charges, payments and costs due under this Mortgage and shall be entitled to recover judgment for any portion of the debt remaining unpaid, with interest thereon at the Default Rate. In case of proceedings against Mortgagor in insolvency or bankruptcy or any proceedings for its reorganization or involving the liquidation of its assets, then Mortgagee shall be entitled to prove the whole amount of principal and interest due upon the Secured Obligations to the full amount thereof, and all other payments, charges and costs due under this Mortgage without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property. (c) No recovery of any judgment by Mortgagee and no levy of an execution under any judgment upon the Mortgaged Property or upon any other property of Mortgagor shall affect, in any manner or to any extent, the lien of this Mortgage upon the Mortgaged Property or any part thereof, or any liens, rights, powers or remedies of Mortgagee hereunder, but such liens, rights, powers and remedies of Mortgagee shall continue unimpaired as before. (d) Any moneys thus collected by Mortgagee under this Section 2.04 shall be applied by Mortgagee in accordance with the provisions of paragraph (k) of Section 2.03. 24 Section 2.05 Receiver, Waiver. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceedings by Mortgagee to obtain judgment for the principal of, or interest on, and any other amounts constituting the Secured Obligations, including (without limitation) all sums required to be paid by Mortgagor pursuant to any provision of this Mortgage or of any nature in aid of the enforcement of the Secured Obligations or of this Mortgage, Mortgagor will (a) waive the issuance and service of process and submit to a voluntary appearance in such action, suit or proceeding and (b) if required by Mortgagee, consent to the appointment of a receiver or receivers of the Mortgaged Property or any part thereof and of all the earnings, revenues, rents, maintenance payments, issues, profits and income thereof in accordance with Section 2.11 hereof. After the happening of any Event of Default and during its continuance, or upon the commencement of any proceedings to foreclose this Mortgage or to enforce the specific performance hereof or in aid thereof or upon the commencement of any other judicial proceeding to enforce any right of Mortgagee, Mortgagee shall be entitled, as a matter of right, if it shall so elect, without the giving of notice to any other party and without regard to the adequacy or inadequacy of any security for the Mortgage indebtedness, forthwith either before or after declaring the unpaid principal of the Secured Obligations to be due and payable, to the appointment of such a receiver or receivers. Section 2.06 Mortgagee's Possession. Notwithstanding the appointment of any receiver, liquidator or trustee of Mortgagor or of any of its property, or of the Mortgaged Property or any part thereof, Mortgagee shall be entitled to retain possession and control of the Mortgaged Property. Section 2.07 Remedies Cumulative. No remedy herein conferred upon or reserved to Mortgagee is intended to be exclusive of any other remedy or remedies which Mortgagee may be entitled to exercise against Mortgagor and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder or in the Agreement or in any other Loan Document now or hereafter existing at law or in equity or by statute. No delay by or omission of Mortgagee to exercise any right or power shall be construed to be a waiver of any Event of Default or any acquiescence therein; and every power and remedy given in this Mortgage or in the Agreement or in any other Loan Document to Mortgagee may be exercised from time to time as often as may be deemed expedient by Mortgagee. The resort to any remedy provided hereunder or in the Agreement or in any other Loan Document or provided by law or at equity shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies against Mortgagor. By the acceptance of payment of principal of or interest on or any other amount due in respect of any of the Secured Obligations after its due date, Mortgagee does not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. Nothing in this Mortgage or in the Agreement or in any instrument evidencing the Secured Obligations shall affect the obligation of Mortgagor to pay (i) the principal of, and interest on, the Secured Obligations in the manner and at the time and place therein or in the Agreement expressed or (ii) the other Secured Obligations in the manner and at the time herein expressed. 25 Section 2.08 Agreement by Mortgagor. Mortgagor will not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, any exemption from execution or sale of the Mortgaged Property or any part thereof, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Mortgage or any other Loan Document, or claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Mortgaged Property, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein, or pursuant to the decree, judgment or order of any court of competent jurisdiction, or, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof; and Mortgagor hereby expressly waives all benefit or advantage of any such law or laws and covenants not to hinder, delay or impede the execution of any power herein granted or delegated to Mortgagee, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Mortgagor, waives, to the extent that it lawfully may, all right to have the Mortgaged Property or any part thereof marshaled upon any foreclosure hereof. Section 2.09 Use and Occupancy Payments. During the continuance of any Event of Default and pending the exercise by Mortgagee of its right to exclude Mortgagor from all or any part of the Premises, unless Mortgagor is legally entitled to continue possession of the Premises, Mortgagor agrees to pay to Mortgagee the fair and reasonable rental value, which amount shall be determined by the Mortgagee in its reasonable judgement, for the use and occupancy of the Premises or any portion thereof which are in its possession for such period and, upon default of any such payment, will vacate and surrender possession of the Premises to Mortgagee or to a receiver, if any, and in default thereof may be evicted by any summary action or proceeding for the recovery of possession of the Premises for non-payment of rent, however designated. Any payments received under this Section 2.09 by Mortgagee shall be applied in accordance with Section 2.03(k) of this Mortgage. Section 2.10 Mortgagee's Right to Purchase. In case of any sale under the foregoing provisions of this Article II, whether made under the power of sale hereby given or pursuant to judicial proceedings, Mortgagee may bid for and purchase any property, and may make payment therefor as hereinafter set forth or as set forth in Section 2.03 (l) above, and, upon compliance with the terms of said sale, may hold, retain and dispose of such property without further accountability therefor. For the purpose of making settlement or payment for the property or properties purchased, Mortgagee shall be entitled to use and apply such of the Secured Obligations held by it or the other Secured Parties, including (without limitation) any accrued and unpaid interest thereon, as it may elect, or as may be otherwise provided for in Section 2.03(l) above. Section 2.11 Appointment of Receiver. Upon application of Mortgagee to any court of competent jurisdiction, if any Event of Default shall have occurred and so long as it shall be continuing, to the extent permitted by law, a receiver may be appointed to take possession of and to operate, maintain, develop and manage the Mortgaged Property or any part thereof. In every case 26 when a receiver of the whole or any part of the Mortgaged Property shall be appointed under this Section 2.11 or otherwise, the net income and profits of the Mortgaged Property shall, subject to the order of any court of competent jurisdiction, be paid over to, and shall be received by, Mortgagee to be applied as provided in Section 2.03(k) hereof. Section 2.12 No Waiver. Mortgagee may resort to any security given by this Mortgage or to any other security now existing or hereafter given to secure the payment of any of the Secured Obligations secured hereby, in whole or in part, and in such portions and in such order as may seem best to Mortgagee in its reasonable discretion, and any such action shall not in any way be considered as a waiver of any of the rights, benefits, liens or security interest created by this Mortgage. ARTICLE III ASSIGNMENT OF LEASES AND RENTS Section 3.01 Lease Related Definitions. As used in this Mortgage: (a) "Lease" means any lease, sublease, or other similar agreement, now or hereafter existing, under the terms of which any person other than Mortgagor has or acquires any right to occupancy or use of the Mortgaged Property, or any part thereof, or interest therein; (b) "Lessee" means the lessee, sublessee, licensee, tenant or other person having the right to occupy or use all or any part of the Mortgaged Property under a Lease; and (c) "Rent" means the rents, additional rents and other consideration payable to Mortgagor by the Lessee under the terms of a Lease. Whenever reference is made in this Mortgage to a lease, license, lessee, licensee, tenancy or tenant, such reference shall be deemed to include a sublease, sublessee, license, licensee, subtenancy or subtenant, as the case may be. Section 3.02 Assignment of Leases and Rents. Mortgagor hereby assigns to Mortgagee all Leases, together with all Rents payable under the Leases, now or at any time hereafter existing, such assignment being upon the following terms: (a) until receipt from Mortgagee of notice of the occurrence of an Event of Default, each Lessee may pay rent directly to Mortgagor, (b) upon receipt from Mortgagee of notice that an Event of Default exists, each Lessee shall, and is hereby authorized and directed to, pay directly to Mortgagee all Rent thereafter accruing, and the receipt of such Rent by Mortgagee shall be a release of such Lessee to the extent of all amounts so paid, (c) Rent so received by Mortgagee shall be applied by Mortgagee first to the expenses, if any, of collection and then in accordance with Article II hereof, (d) without impairing its rights hereunder, Mortgagee may, at its option, at any time and from time to time, release to Mortgagor Rent so received by Mortgagee, or any part thereof, (e) Mortgagee shall not be liable for its failure to collect, or its failure to exercise diligence in the collection of, Rent, but shall be accountable only for Rent that it shall actually receive. As among Mortgagee, Mortgagor and any person claiming through or under Mortgagor, the assignment contained in this Section 3.02 is intended to be absolute, unconditional and presently effective, and the provisions of subsection 3.02(a) are intended for the benefit of each Lessee and 27 shall never inure to the benefit of Mortgagor or any person claiming through or under Mortgagor. It shall never be necessary for Mortgagee to institute legal proceedings of any kind whatsoever to enforce the provisions of this Section 3.02. Notwithstanding anything herein to the contrary, Mortgagor may collect such Rent until such time as an Event of Default shall occur hereunder. Section 3.03 Mortgagee's Consent. Nothing in this Article III shall ever be construed as (a) allowing any Lease without Mortgagee's prior written consent unless otherwise permitted under the Agreement, or (b) subordinating this Mortgage to any Lease. Section 3.04 Lease Related Covenants. Mortgagor covenants to: (a) upon demand by Mortgagee, assign to Mortgagee, by separate instrument in form and substance satisfactory to Mortgagee, any and all Leases, and/or all Rents payable thereunder, including, but not limited to, any Lease which is now in existence or which may be executed after the date hereof; (b) not accept from any Lessee, nor permit any Lessee to pay, Rent for more than one month in advance except for payment in the nature of security for performance of Lessee's obligations unless otherwise provided for in the Lease; (c) comply with the terms and provisions of each Lease including, without limitation, the payment of all sums required to be paid by Mortgagor or which any Lessor has an option to pay under any Lease in order to prevent any reduction in or offset against any Rent payable under any Lease or any default thereunder; (d) not amend, extend, cancel, abridge, or otherwise modify, or accept surrender of, or renew, any Lease without the written consent of Mortgagee other than in the ordinary course of business, (e) not assign, transfer or mortgage any Lease without the written consent of Mortgagee; (f) not assign, transfer, pledge or mortgage any Rent; (g) not waive, excuse, release or condone any nonperformance of any covenant of any Lease by any Lessee other than in the ordinary course of business; (h) give to Mortgagee duplicate notice of each material default by each Lessee; (i) on all Leases executed after the date hereof, cause each Lessee to agree (and each Lessee under each Lease executed after the date hereof does so agree) to give to Mortgagee written notice of each and every material default by Mortgagor under its Lease and not exercise any remedies under such Lease unless Mortgagee fails to cure such material default within a reasonable period after Mortgagee has received such notice; provided, that Mortgagee shall never have any obligation or duty to cure any such material default; (j) enforce its rights with regard to all Leases in the ordinary course of business; and (k) not enter into any Lease, affecting the Mortgaged Property or any part thereof unless otherwise permitted under the Agreement without the prior approval of Mortgagee. Section 3.05 Mortgagee Not Liable. Mortgagee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any Lease, or under or by reason of this assignment, and Mortgagor shall and does hereby agree to indemnify and to hold Mortgagee harmless from and against any and all liability, loss or damage which Mortgagee may or might incur under any Lease or under or by reason of this assignment and from and against any and all claims and demands whatsoever which may be asserted against Mortgagee by reason of any alleged obligations or undertakings on its part to perform or discharge 28 any of the terms, covenants or agreements contained in any Lease. Should Mortgagee incur any such liability, loss or damage under any Lease or under or by reason of this assignment, or in the defense of any such claims or demands, the amount thereof, including all costs, expenses and attorneys' fees, shall be secured hereby and constitute part of the Secured Obligations, and Mortgagor shall reimburse Mortgagee therefore immediately upon demand, and upon the failure of Mortgagor to do so, Mortgagee may declare all sums secured by this Mortgage immediately due and payable. Section 3.06 Estoppel Certificates. On all Leases executed after the date hereof, all Leases shall provide for the giving by the Lessee of certificates with respect to the status of such Leases, and Mortgagor shall exercise its right to request such certificates within ten (10) days of any demand therefor by Mortgagee. Mortgagor shall furnish to Mortgagee, within ten (10) days after a request by Mortgagee to do so, an executed counterpart of all Leases. Section 3.07 Lease Approval Requirements. On all Leases executed after the date hereof, all Leases and Lessees of the Premises, or any part thereof, must be acceptable to and approved by Mortgagee unless otherwise provided under the Agreement; and all Lessees shall execute such estoppel certificates, subordinations, attornments and other agreements as Mortgagee may require. Under no circumstances shall Mortgagee be liable for any obligation to pay any leasing commission, brokerage fee or similar fee or charge in connection with any Lease nor shall Mortgagee be obligated to complete any Improvements for the benefit of any Lessee. ARTICLE IV MISCELLANEOUS Section 4.01 Benefit of Mortgagee. All of the grants, covenants, terms, provisions and conditions of this Mortgage shall run with the land and shall apply to, bind and inure to the benefit of the successors and assigns of the respective parties hereto; provided, that Mortgagor may not assign its obligations hereunder without the prior written consent of Mortgagee. Section 4.02 Savings Clause. In the event any one or more of the provisions contained in this Mortgage shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall, at the option of Mortgagee, not affect any other provision of this Mortgage but this Mortgage shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. Section 4.03 Notices. All notices hereunder shall be given pursuant to the terms of Section 9.1 of the Agreement. 29 Section 4.04 Governing Law. This Mortgage shall, without regard to place of contract or payment, be construed and enforced according to the laws of the state where the Mortgaged Property is located, all without regard to principles of conflict of laws. Section 4.05 No Change. Neither this Mortgage nor any provision hereof may be changed, waived, discharged or terminated, except by an instrument in writing, signed by Mortgagee and Mortgagor. Section 4.06 Security Agreement and Fixture Filing. This Mortgage shall be deemed to be a security agreement and fixture filing pursuant to the Uniform Commercial Code of the state where the Mortgaged Property is located. Section 4.07 No Usury. In the event that Mortgagee, in enforcing its rights hereunder, determines that charges and fees incurred in connection with the Secured Obligations may, under the applicable usury laws, cause the interest rate herein to exceed the maximum allowed by law, then such interest shall be recalculated and any excess over the maximum interest permitted by said laws shall be credited to the then principal outstanding balance to reduce said balance by that amount. It is the intent of the parties hereto that Mortgagor under no circumstances shall be required to pay, nor shall Mortgagee be entitled to collect, any interest which is in excess of the maximum legal rate permitted under the applicable usury laws. Section 4.08 Effect of Partial Release. No release of any part of the Mortgaged Property or of any other property conveyed to secure the Secured Obligations shall in any way alter, vary or diminish the force, effect or lien or security interest of this Mortgage on the Mortgaged Property or portion thereof remaining subject to the lien and security interest created hereby. Section 4.09 Mortgagee's Dealing with Successors and Lessees. In the event Mortgagor or any of Mortgagor's successors conveys or leases without the prior approval of Mortgagee (except as otherwise permitted herein or in the Agreement) any interest in the Mortgaged Property, or any part thereof, to any other party, Mortgagee may deal with any owner or lessee of any part of the Mortgaged Property with reference to this Mortgage and to the Secured Obligations, either by forbearance on the part of Mortgagee or release of all or any part of the Mortgaged Property or of any other property securing payment of any Secured Obligations, without in any way modifying or affecting Mortgagee's rights, remedies, liens or security interests hereunder (including the right to exercise any one or more of the remedies described or referred to in Article I, Article II, Article III or Article IV hereof in the event such conveyance is made in contravention of the provisions of this Mortgage) or the liability of Mortgagor or any other party liable for the payment of the Secured Obligations, in whole or in part. This shall not be construed to allow any such conveyance or leasing by Mortgagor, except as permitted herein or in the Agreement. 30 Section 4.10 No Waiver by Mortgagee. All options and rights of election herein provided for the benefit of Mortgagee are continuing, and the failure to exercise any such option or right or election upon a particular default or breach or upon any subsequent default or breach shall not be construed as waiving the right to exercise such option or election at any later date. By the acceptance of payment of principal or interest after its due date, Mortgagee does not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. No exercise of the rights and powers herein granted and no delay or omission in the exercise of such rights and powers shall be held to exhaust the same or be construed as a waiver thereof, and every such right and power may be exercised at any time and from time to time. All grants, covenants, terms and conditions hereof shall bind Mortgagor and all successive owners of the Premises. Section 4.11 Headings Descriptive. The headings of the several sections and subsections of this Mortgage are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Mortgage. SECTION 4.12 WAIVER OF TRIAL BY JURY. THE MORTGAGOR AND THE MORTGAGEE WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS MORTGAGE. Section 4.13 Indemnification. The Mortgagor agrees to pay, and to save, indemnify and keep the Mortgagee and its respective directors, officers, employees, attorneys, experts, and agents harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses), losses or damages (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Mortgaged Property, (ii) with respect to, or resulting from, any delay in complying with any requirement of law applicable to any of the Mortgaged Property or (iii) in connection with any of the transactions contemplated by this Mortgage, including the fees and disbursements of counsel and of any other experts, which Mortgagee or its respective directors, officers, employees, attorneys, experts or agents may incur in connection with (w) the administration or enforcement of this Mortgage, including such expenses as are incurred to preserve the value of the Mortgaged Property and the validity, perfection, rank and value of any liens granted hereunder, (x) the collection, sale or other disposition of any of the Mortgaged Property, (y) the exercise by the Mortgagee of any of the rights conferred upon it hereunder or (z) any Default or Event of Default, but excluding any such liabilities, costs and expenses, losses or damages incurred solely by reason of the gross negligence or willful misconduct of the party seeking to be indemnified as determined by a final order or judgment of a court of competent jurisdiction. Any amount due hereunder which is not paid on demand shall bear interest at a rate equal to the Default Rate and shall be a lien upon the Mortgaged Property and shall be secured hereby. 31 The agreements of the Mortgagor contained in this Section 4.13 shall survive the payment and performance of the Secured Obligations and the termination of the liens and security interests granted hereby. All of the Mortgagor's obligations to indemnify Mortgagee and its directors, officers, employees, attorneys, experts and agents hereunder shall (without duplication) be in addition to, and shall not limit in any way, the Mortgagor's indemnification obligations contained in the Agreement or in any other Loan Document. Section 4.14 Advances under the Agreement. It is understood and agreed that the funds to be advanced under this Mortgage are to be advanced subject to and in accordance with the provisions of the Agreement and the other Loan Documents, and that all sums advanced thereunder or hereunder are included within the Secured Obligations secured hereby. Section 4.15 Particular State Provisions. There is attached hereto and made a part hereof Exhibit B containing additional provisions that are necessary or appropriate under the laws of the state in which the Mortgaged Property is located or pursuant to the provisions of any permitted property liens. ARTICLE V AMENDMENT AND RESTATEMENT Section 5.01 Pre-Petition Mortgage. This Mortgage amends and restates in its entirety the Pre-Petition Mortgage to which this Mortgage relates and the Post-Petition Mortgage Liens; provided, however, that, to the fullest extent permitted by law, (a) the priority of all liens, security interests and other encumbrances evidenced hereby or arising hereunder shall relate back to the date and time the Pre-Petition Mortgage to which this Mortgage relates was recorded, or to such earlier date and time as permitted by applicable law; (b) nothing herein shall impair the creation, attachment, perfection or priority of the liens, security interests and other encumbrances evidenced by or arising under the Pre-Petition Mortgage to which this Mortgage relates or the Post-Petition Mortgage Liens; and (c) nothing herein shall constitute a novation or discharge of the obligations secured by the Pre-Petition Mortgage to which this Mortgage relates or the Post-Petition Mortgage Liens. IN WITNESS WHEREOF, this Mortgage has been duly executed by Mortgagor and Mortgagee as of the day and year first above written. MORTGAGOR: PAYLESS CASHWAYS, INC. 32 By: -------------------------------- Name: Title: MORTGAGEE: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent By: -------------------------------- Name: Title: [NOTARY BLOCK -- PAYLESS] [NOTARY BLOCK -- CIBC] 33 EXHIBIT A (DESCRIPTION OF LAND) 34 EXHIBIT B (LOCAL LAW PROVISIONS) EX-4 7 4.1F FORM OF AMENDED & RESTATED DEED OF TRUST COVER EXHIBIT D-4 FORM OF AMENDED AND RESTATED DEED OF TRUST State: Site No(s).: --------- ------------- AMENDED AND RESTATED DEED OF TRUST, LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING Trustor: PAYLESS CASHWAYS, INC. 2300 Main Street Kansas City, Missouri 64108 Beneficiary: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent 425 Lexington Avenue New York, New York 10017 Trustee: Deed of Trust Amount: $500,000,000 Date: December 2, 1997 Premises: Record and SHOOK, HARDY & BACON L.L.P. Return to: 1200 Main St., Suite 3000 Kansas City, MO 64105 Attn.: Richard D. Woods, Esq. 1 AMENDED AND RESTATED DEED OF TRUST, LEASEHOLD DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FILING, dated as of December 2, 1997, by and among PAYLESS CASHWAYS, INC., a Delaware corporation, having an office at 2300 Main Street, Kansas City, Missouri 64108 ("Trustor"), _______________________, a _____________ having an office at ____ _______________________ ("Trustee"), and CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent under the Agreement (as hereinafter defined), having an office at 425 Lexington Avenue, New York, New York 10017 ("Beneficiary"). DEFINITIONS Trustor and Beneficiary agree that all capitalized terms used but not defined herein are defined in or by reference to the Agreement and shall have the same meanings herein as therein. Trustor and Beneficiary further agree that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms. "Agreement" means that certain Amended and Restated Credit Agreement dated as of December 2, 1997, by and among Trustor, the signatory Lenders thereto, the Underwriters, U.S. Bank National Association, as a Fronting Bank, and Canadian Imperial Bank of Commerce, as a Fronting Bank and as Coordinating and Collateral Agent for the Lenders, the Fronting Banks, the Underwriters and the other Secured Parties, together with any future amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof. "Bankruptcy Case" means In re Payless Cashways, Inc., Case No. 97-50543 in the Bankruptcy Court. "Bankruptcy Code" means 11 U.S.C. ss.101 et seq. "Bankruptcy Court" means the United States Bankruptcy Court for the Western District of Missouri. "Bankruptcy Reorganization Plan" means Payless' plan of reorganization in the Bankruptcy Case, as confirmed by the Bankruptcy Court. "Deed of Trust" means this Deed of Trust, Leasehold Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing together with any future amendments, amendments and restatements, extensions, modifications or supplements hereto or hereof. "Deed of Trust Amount" means an aggregate principal amount outstanding at any time not to exceed $500,000,000. 2 "Default" means Default, as that term is defined in the Agreement. "Default Rate" means the rate of interest specified in Section 2.8(a) of the Agreement. "DIP Agent" means the DIP Agent, as that term is defined in the Agreement. "DIP Credit Agreement" means the Revolving Credit Agreement, dated as of July 21, 1997, among Payless, as a Debtor-in-Possession, the Lenders, the Underwriters and the Fronting Banks party thereto and Canadian Imperial Bank of Commerce, as Coordinating and Collateral Agent, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. "DIP Obligations" means the DIP Obligations, as that term is defined in the Agreement. "Event of Default" means the events and circumstances described as such in Article II hereof. "Fixtures" means all of Trustor's right, title and interest in all furniture, furnishings, partitions, screens, awnings, venetian blinds, window shades, draperies, carpeting, pipes, ducts, conduits, dynamos, motors, engines, compressors, generators, boilers, stokers, furnaces, pumps, tanks, elevators, escalators, vacuum cleaning systems, call systems, switchboards, sprinkler systems, fire prevention and extinguishing apparatus, refrigerating, air conditioning, heating, dishwashing, plumbing, ventilating, gas, steam, electrical and lighting fittings and fixtures, licenses or permits of any kind and all building materials, equipment and goods now or hereafter delivered to the Premises (hereinafter defined) and intended to be installed therein, and all other machinery, fixtures, tools, implements, apparatus, appliances, equipment, goods, facilities and other personal property of similar character in which Trustor now has, or at any time hereafter acquires, an interest and which are now or hereafter affixed or attached to, or used in connection with the enjoyment, occupancy and/or operation of, all or any portion of the Premises, together with all renewals, replacements and substitutions thereof and additions and accessions thereto and the proceeds of all of the foregoing items. "Fronting Banks" means the Fronting Banks, as that term is defined in the Agreement. "Improvements" means all buildings, structures and other improvements presently existing or hereafter constructed on the land described in Exhibit A attached hereto. "Lease" has the meaning ascribed to such term in Section 3.01 hereof. "Leasehold" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. 3 "Leasehold Interest" has the meaning ascribed to such term in paragraph "F" of the Granting Clause, below. "Lenders" means the Lenders, as that term is defined in the Agreement. "Lessee" has the meaning ascribed to such term in Section 3.01 hereof. "LoanDocuments" means the Loan Documents, as that term is defined in the Agreement. "Loans" means the Loans, as that term is defined in the Agreement. "Mortgaged Property" has the meaning ascribed to such term in the Granting Clause, below. "Notes" means the Notes, as that term is defined in the Agreement. "Payless" means Payless Cashways, Inc., an Iowa corporation. "Post-Petition Mortgage Liens" has the meaning ascribed to such term in the fifth WHEREAS clause, below. "Pre-Petition Agent" means the Pre-Petition Agent, as that term is defined in the Agreement. "Pre-Petition Credit Agreement" means the Amended and Restated Credit Agreement dated as of October 3, 1996, by and among Payless, the lenders signatory thereto, Canadian Imperial Bank of Commerce, as letter of credit bank and as administrative and collateral agent, and The Bank of Nova Scotia, NationsBank of Texas, N.A. and Bank of America National Trust and Savings, as co-agents, together with any amendments, amendments and restatements, extensions, modifications or supplements thereto or thereof prior to the date of the Agreement. "Pre-Petition Deed of Trust" has the meaning ascribed to such term in the third WHEREAS clause, below. "Pre-Petition Obligations" means the Pre-Petition Obligations, as that term is defined in the Agreement. "Premises" means the land described in Exhibit A annexed hereto, together with the Improvements thereon or to be constructed thereon or therein, and all of the easements, rights, privileges and appurtenances thereunto belonging or in anywise appertaining thereto including, but not limited to, all of the estate, right, title, interest, claim or demand whatsoever of Trustor therein and in and to the strips and gores, streets and ways adjacent thereto, whether in law or in equity, in 4 possession or expectancy, now or hereafter acquired and also any other realty, Leaseholds (hereinafter defined), or Fixtures encompassed by the term "Mortgaged Property", elsewhere herein defined. "Rents" has the meaning ascribed to such term in Section 3.01 hereof. "Secured Obligations" has the meaning ascribed to such term in the paragraph entitled "Secured Obligations" below. "Secured Parties" means Secured Parties, as that term is defined in the Agreement. "Underwriters" means Underwriters, as that term is defined in the Agreement. W I T N E S S E T H : WHEREAS, on July 21, 1997, Payless filed a voluntary petition of bankruptcy under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court; and WHEREAS, prior to the commencement of the Bankruptcy Case, Payless was obligated to certain of the Lenders pursuant to, among other things, the Pre-Petition Credit Agreement; and WHEREAS, Payless' obligations under the Pre-Petition Credit Agreement and the other Credit Documents (as defined in the Pre-Petition Credit Agreement) were secured by, among other things, the following real property security instruments (individually and collectively, the "Pre-Petition Deed of Trust"): (a) the Deed of Trust, Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as trustor, to the trustee named therein, for the benefit of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as beneficiary, and recorded __________, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and (b) the Deed of Trust, Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as trustor, to the trustee named therein, for the benefit of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as beneficiary, and recorded __________, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and 5 (c) the Deed of Trust, Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as trustor, to the trustee named therein, for the benefit of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as beneficiary, and recorded __________, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and (d) the Deed of Trust, Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents, dated as of October 3, 1996, from Payless, as trustor, to the trustee named therein, for the benefit of Canadian Imperial Bank of Commerce, as administrative and collateral agent under the Pre-Petition Credit Agreement, as beneficiary, and recorded __________, 1996, at Book ___, Page ____ of the real property records of _________ County, ___________; and WHEREAS, during the Bankruptcy Case, Payless became obligated to certain of the Lenders pursuant to the DIP Credit Agreement; and WHEREAS, pursuant to the orders of the Bankruptcy Court entered on July 21, 1997 and August 20, 1997 in the Bankruptcy Case, the DIP Agent and the Pre-Petition Agent were granted liens (the "Post-Petition Mortgage Liens") on the Mortgaged Property to secure the Pre-Petition Obligations and the DIP Obligations; and WHEREAS, as contemplated by Payless' Bankruptcy Reorganization Plan, Payless has merged with and into Trustor, with Trustor being the sole surviving entity; and WHEREAS, Canadian Imperial Bank of Commerce, the Coordinating and Collateral Agent under the Agreement and this Deed of Trust, is the same legal entity as Canadian Imperial Bank of Commerce, New York Agency, the administrative and collateral agent under the Pre-Petition Credit Agreement and the Pre-Petition Deed of Trust; and WHEREAS, pursuant to the terms of the Bankruptcy Reorganization Plan and the Agreement, the parties have agreed to amend and restate the Pre-Petition Deed of Trust pursuant to this Deed of Trust in order, among other things, (i) to reflect the merger of Payless into Trustor, (ii) to secure various obligations of Trustor (as Payless' successor) in respect of the Pre-Petition Obligations and the DIP Obligations, and (iii) without duplication, to secure all obligations, whether now existing or hereafter incurred or arising, of Trustor under the Agreement, the Notes and/or the other Loan Documents, including, without limitation, the Secured Obligations; in each case as more particularly set forth in the Agreement and this Deed of Trust; and WHEREAS, Trustor is the actual, record and beneficial owner of the Premises or owns an actual beneficial interest therein; and 6 WHEREAS, Trustor has agreed pursuant to the terms of the Agreement, the Notes, and/or the other Loan Documents evidencing the Secured Obligations to be liable for the Secured Obligations; and WHEREAS, the parties intend that the Secured Obligations shall be secured by this Deed of Trust; GRANTING CLAUSE NOW, THEREFORE, Trustor, in consideration of the premises, and in order to secure the payment in full of the Deed of Trust Amount, the Secured Obligations, all interest due thereon and all other costs and expenses and other amounts due hereunder and in respect of the Secured Obligations, and the performance and discharge of all the provisions hereof, of the Secured Obligations and all other Loan Documents, hereby gives, grants, bargains, sells, conveys, pledges and grants a security interest to Trustee in trust, with power of sale for the benefit of Beneficiary, all of Trustor's estate, right, title and interest in, to and under any and all of the following described property whether now owned or hereafter acquired (all such properties being collectively referred to as the "Mortgaged Property"): A. All Trustor's right, title and interest in and to the Premises and all right, title and interest of Trustor in and to the Improvements on the Premises or to be constructed thereon and all Fixtures now or hereafter situated in, on or about, or affixed or attached to the Improvements or the Premises or any building, structure or other improvement now or hereafter standing, constructed or placed upon or within the Premises, and all and singular the tenements, hereditaments, easements, rights-of-way or use, rights, privileges and appurtenances to the Premises, now or hereafter belonging or in anywise appertaining thereto, including, without limitation, any such right, title, interest, claim and demand in, to and under any agreement granting, conveying or creating, for the benefit of the Premises, any easement, right or license in any way affecting other property and in, to and under any streets, ways, alleys, vaults, gores or strips of land adjoining the Premises, or any parcel thereof, and all claims or demands either in law or in equity, in possession or expectancy, of, in and to the Premises. B. All right, title and interest of Trustor in and to all awards heretofore made or hereafter to be made for the taking by eminent domain of the whole or any part of the above described premises, or any estate or easement therein, including any awards for change of grade of streets, all of which awards are hereby assigned to Trustee and Beneficiary, which Trustee and Beneficiary are hereby authorized to collect (unless provided otherwise in the Agreement) and receive the proceeds of such awards and to give proper receipts and acquittances therefor and Trustee and Beneficiary shall have the right and option to apply such excess towards the payment of any sum owing on account of this Deed of Trust and the Secured Obligations secured thereby, notwithstanding the fact that such sum may not then be due and payable. 7 C. The Fixtures and the products and proceeds thereof. D. All present and future leases, subleases and licenses and any guarantees thereof, rents, issues and profits and additional rents now or at any time hereafter covering or affecting all or any portion of the Mortgaged Property and all proceeds of, and all privileges and appurtenances belonging or in any way appertaining to, the Mortgaged Property, or any part thereof, and all other property subjected or required to be subjected to the lien and/or security interest of or conveyed pursuant to the terms of this Deed of Trust, including, without limitation, all of the income, revenues, earnings, rents, maintenance payments, tolls, issues, awards (including, without limitation, condemnation awards and insurance proceeds), products and profits thereof, which income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits are hereby expressly assigned with the right to take and collect the same upon the terms hereinafter set forth; and all the estate, right, title, interest and claim whatsoever, at law and in equity, which Trustor now has or may hereafter acquire in and to the aforementioned property and every part thereof; provided, that so long as no Event of Default (as hereinafter defined) shall have occurred and be continuing, all such income, revenues, earnings, rents, maintenance payments, tolls, issues, awards, products and profits shall remain with and under the control of Trustor except as otherwise expressly provided herein or in any other written agreement between Trustor and Beneficiary. E. All right, title and interest of Trustor in and to all agreements, or contracts, now or hereafter entered into for the sale, leasing, brokerage, development, construction, renovation, management, maintenance and/or operation of the Premises (or any part thereof), including all moneys due and to become due thereunder, and all permits, licenses, bonds, insurance policies, plans and specifications relative to the construction and/or operation of the Improvements upon the Mortgaged Property. F. All right, title and interest (including, without limitation, all present and future rights to possession and use, and all present and future options and other rights to renew and to purchase) of Trustor, as lessee or sublessee, under any leases, subleases, licenses, occupancy agreements or concessions now in effect or to be entered into hereafter (collectively, the "Leasehold Instruments") whereby Trustor has any right to the use, possession or occupancy of the Premises or any part thereof (collectively, the "Leaseholds"). G. All of Trustor's claims and rights to the payment of damages arising from any rejection of a Leasehold or a Lease under or pursuant to the Bankruptcy Code. H. All of Trustor's rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, 11 U.S.C. ss.365(h), including, without limitation, all of Trustor's rights to remain in possession of the Premises. 8 I. Any other property and rights which are, by the provisions of the Agreement or any other Loan Document, required to be subject to the lien hereof or conveyed pursuant to the terms hereof, and any additional property and rights that may from time to time hereafter by installation in or on the Mortgaged Property, or by writing of any kind, or otherwise, be subjected to the lien hereof by Trustor or by anyone on its behalf. J. All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards, and all right, title and interest of Trustor in and to all unearned premiums accrued, accruing and to accrue under any or all insurance policies obtained by Trustor. TO HAVE AND TO HOLD the Mortgaged Property, unto Trustee for the benefit of Beneficiary and its successors and assigns, upon the terms, provisions and conditions herein set forth, forever, and Trustor does hereby bind itself and its successors, legal representatives, and assigns to warrant and forever defend all and singular the Mortgaged Property unto Beneficiary and Trustee and their successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof. IN TRUST, to secure the payment and performance of the Secured Obligations, whereupon this Deed of Trust shall cease and be void and the Mortgaged Property shall be released at the cost of Trustor. SECURED OBLIGATIONS This Deed of Trust, and all rights, titles, interests, liens, security interests, powers, privileges and remedies created hereby or arising hereunder or by virtue hereof, are given to secure the payment and performance of all indebtedness, obligations and liabilities arising under the Notes, the Agreement, this Deed of Trust and any other Loan Document, and any renewals, extensions, amendments, amendments and restatements, supplements or modifications thereof or thereto, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, and any and all fees, costs or expenses incurred by Beneficiary or the other Secured Parties or Trustee, including, but not limited to, interest accruing at the then applicable rate provided in the Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Agreement or other applicable agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Trustor on the Loans and on all other obligations of the Trustor to the Secured Parties, taxes, recording expenses and attorneys' fees in connection with the execution and delivery of any of the aforesaid and the consummation of the transactions contemplated thereby, the administration thereof, and, after Default, the administration and collection thereof, all costs incurred of whatever nature by Beneficiary and Trustee in the exercise of any rights hereunder or under any Loan Document and all other amounts payable by Trustor under this Deed of Trust (all 9 of the foregoing indebtedness, obligations and liabilities being referred to herein as the "Secured Obligations"). ARTICLE I PARTICULAR WARRANTIES, REPRESENTATIONS AND COVENANTS OF TRUSTOR Section 1.01 Warranties and Representations. Trustor hereby warrants and represents as follows: (a) Trustor is the actual, record and beneficial owner of the Premises and holder of a good and marketable title to an indefeasible leasehold estate in the Leaseholds or owns an actual beneficial interest therein and fee estate in the rest of the Mortgaged Property, subject only to such exceptions to title as are listed in the title policy insuring the lien of this Deed of Trust and approved by Beneficiary as permitted exceptions. Trustor is the owner of all of the remaining Mortgaged Property; Trustor will own the Fixtures free and clear of liens and claims except those in favor of Beneficiary; and this Deed of Trust is and will remain a valid and enforceable first lien on the Mortgaged Property subject only to the permitted exceptions referred to above. (b) Trustor has full power and lawful authority to convey, pledge and encumber the Mortgaged Property in the manner and form herein done or intended hereafter to be done. Trustor will preserve such title, and will forever warrant and defend the validity and priority of the lien hereof, against the claims of all persons and parties whomsoever. (c) Except as otherwise specified in the Title Policy (as defined in the Agreement) or in the Survey (as defined in the Agreement), the Premises is not located in an area identified by the Secretary of Housing and Urban Development as an area having special flood hazards or if it so located, flood insurance acceptable to Beneficiary has been obtained. Section 1.02 Further Assurances. Trustor will, at its sole expense, do, execute, acknowledge and deliver every further act, deed, conveyance, mortgage, assignment, notice of assignment, transfer or assurance as Beneficiary shall from time to time reasonably require, for the better assuring, conveying, assigning, transferring and confirming unto Beneficiary the property and rights hereby conveyed, mortgaged or assigned or intended now or hereafter so to be, or which Trustor may be or may hereafter become bound to convey, mortgage or assign to Trustee or Beneficiary or for carrying out the intention or facilitating the performance of the terms of this Deed of Trust, and for filing, registering or recording this Deed of Trust and, on demand, will execute and deliver, and hereby authorizes Beneficiary or Trustee to execute in the name of Trustor to the extent it may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, and renewals thereof, to evidence more effectively the lien hereof upon the Fixtures. 10 Section 1.03 Filings, Recordings and Payments. (a) Trustor forthwith upon the execution of this Deed of Trust, and thereafter from time to time, will, at its expense, cause this Deed of Trust and any security instrument creating a lien or evidencing the lien hereof upon the Fixtures and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien hereof upon, and the interest of Trustee and Beneficiary in, the Mortgaged Property. (b) Trustor will pay all taxes, filing, registration and recording fees, and all expenses incident to the execution and acknowledgment of this Deed of Trust, any supplemental deed of trust, any other Loan Document, and any security instrument with respect to the Fixtures, and any instrument of further assurance, and all federal, state, county and municipal stamp taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Agreement, this Deed of Trust, any supplemental deed of trust, any other Loan Document, any security instrument with respect to the Fixtures or any instrument or further assurance, other than income, franchise or other similar taxes imposed on Beneficiary in respect of income derived by Beneficiary under the Secured Obligations. Section 1.04 Payment of Sums Due. Trustor will punctually pay the principal and interest and all other sums to become due in respect of the Agreement and any other Loan Document at the time and place and in the manner specified in the Agreement and any other Loan Document, according to the true intent and meaning thereof and without offset, counterclaim, defense or cause of action of any kind whatsoever, and without deduction or credit for any amount payable for taxes, all in immediately available funds in Dollars. Section 1.05 After Acquired Property. All right, title and interest of Trustor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Mortgaged Property, hereafter acquired by or released to Trustor or constructed, assembled or placed by Trustor on the Premises, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, conveyance, assignment or other act by Trustor, shall become subject to the lien of this Deed of Trust as fully and completely, and with the same effect, as though now owned by Trustor and specifically described in the granting clauses hereof, but at any and all times Trustor will execute and deliver to Beneficiary any and all such further assurances, mortgages, deeds of trust, conveyances or assignments thereof as Beneficiary may reasonably require for the purpose of expressing and specifically subjecting the same to the lien of this Deed of Trust. Section 1.06 Taxes, Fees and Other Charges. (a) Trustor, from time to time when the same shall become due, and prior to the date of imposition of interest or penalty (except as otherwise permitted in the Agreement), will pay and discharge, or cause to be paid and discharged, all taxes of every kind and nature (including real and personal property taxes and income, franchise, withhold- 11 ing, transfer or recordation taxes, profits and gross receipt taxes), all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges, and all other public charges, whether of a like or different nature, imposed upon or assessed against it or the Mortgaged Property or any part thereof or upon the revenues, rents, issues, income and profits of the Premises or arising in respect of the occupancy, use or possession thereof. Trustor will, at any time upon request by Beneficiary, promptly deliver to Beneficiary receipts evidencing the payment of same. Upon the occurrence of an Event of Default under the Agreement, Beneficiary may, at any time and from time to time, at its option, to be exercised by written notice to Trustor, require the deposit by Trustor at the time of each payment of an installment of interest or principal under the Agreement of an additional amount sufficient to discharge the obligations under this subsection (a) when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Beneficiary, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Beneficiary in its sole discretion. Such amounts shall be held by Beneficiary without interest in an account acceptable to Beneficiary and applied to the payment of the obligations in respect to which such amounts were deposited or, at the option of Beneficiary and subject to applicable law, to the payment of the Secured Obligations in such order or priority as Beneficiary shall determine consistent with the Agreement, on or before the respective dates on which the same or any of them would become delinquent. If one month prior to the due date of any of the obligations under this subsection (a) the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, Trustor within ten (10) days after demand shall deposit the amount of the deficiency with Beneficiary. Nothing herein contained shall be deemed to affect any right or remedy of Beneficiary under the provisions of this Deed of Trust or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. (b) Except as otherwise permitted in the Agreement, Trustor will pay, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers, and others which, if unpaid, might result in, or permit the creation of, a lien on the Mortgaged Property or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom and in general will do or cause to be done everything necessary so that the lien hereof shall be fully preserved, at the cost of Trustor, without expense to Beneficiary. Section 1.07 Intentionally Deleted. Section 1.08 Insurance. (a) Trustor agrees to at all times provide, maintain and keep in force the policies of insurance required to the maintained pursuant to the terms of the Agreement. (b) In the event Trustor fails to provide, maintain, keep in force or deliver and furnish to Beneficiary the policies of insurance required by the Agreement or this Deed of Trust, Beneficiary 12 may procure such insurance or single-interest insurance for such risks covering Beneficiary's interest, and Trustor will pay all premiums thereon promptly upon demand by Beneficiary, and until such payment is made by Trustor the amount of all such premiums, together with interest thereon at the Default Rate shall be secured by this Deed of Trust. (c) After the happening of any casualty to the Mortgaged Property or any part thereof, Trustor shall give prompt written notice thereof to Beneficiary, and Beneficiary may make proof of loss if not made promptly by Trustor. In the event of such loss or damage, all proceeds of insurance shall be payable in the manner provided for in the Agreement. Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Trustor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are insurance proceeds available or whether any such proceeds are sufficient in amount, and the application or release by Beneficiary of any insurance proceeds shall not cure or waive any Default or notice of Default under this Deed of Trust or invalidate any act done pursuant to such notice. Any monies received as payment for loss under any insurance shall be applied pursuant to the terms of the Agreement. (d) In the event of foreclosure of this Deed of Trust or other transfer of title or assignment of the Premises in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Trustor in and to all policies of insurance required by this Section 1.08 shall inure to the benefit of and pass to the successor in interest to Trustor or the purchaser or grantee of the Premises. (e) Trustor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 1.08, unless Beneficiary has approved the insurance company and the form and content of the insurance policy, including, without limitation, the naming thereon of Beneficiary as a named insured with loss payable to Beneficiary under a standard mortgagee endorsement of the character above described and the inclusion of a provision therein obligating said insurance company to provide Beneficiary with notice thirty (30) days prior to cancellation, lapse or amendment of any policy. Trustor shall immediately notify Beneficiary whenever any such separate insurance is taken out and shall promptly deliver to Beneficiary the policy or policies of such insurance. (f) Beneficiary may at any time following the occurrence of an Event of Default under the Agreement, at its option, to be exercised by written notice to Trustor, require the deposit by Trustor, at the time of each payment of an installment of interest or principal under the Agreement, of an additional amount sufficient to discharge the obligations under this Section 1.08 when they become due. The determination of the amount so payable and of the fractional part thereof to be deposited with Beneficiary with each installment, so that the aggregate of such deposit shall be sufficient for this purpose, shall be made by Beneficiary in its sole discretion. Such amounts shall be held by Beneficiary without interest in an account acceptable to Beneficiary and applied to the payment of the obligations in respect of which such amounts were deposited on or before the respective 13 dates on which the same or any of them would become delinquent or, at the option of Beneficiary, to the payment of the Secured Obligations in such order or priority as Beneficiary shall determine consistent with the Agreement. If one month prior to the due date of any of the aforementioned obligations the amounts then on deposit therefor shall be insufficient for the payment of such obligations in full, Trustor within five (5) days after demand shall deposit the amount of the deficiency with Beneficiary. Nothing herein contained shall be deemed to affect any right or remedy of Beneficiary under the provisions of this Deed of Trust or of any statute or rule of law to pay any such amount and to add the amount so paid together with interest at the Default Rate to the indebtedness hereby secured. Section 1.09 Condemnation. (a) In the event the Mortgaged Property or any part thereof or interest therein, shall be taken or damaged by eminent domain, alteration of the grade of any street, or there shall occur any other injury to or decrease in the value of the Mortgaged Property, by reason of any public or quasi-public improvement or condemnation proceeding, or in any other similar manner ("Condemnation"), or should Trustor receive any notice or other information regarding such Condemnation or a proposed Condemnation, Trustor shall give prompt written notice thereof to Beneficiary. (b) All compensation, awards and other payments or relief payable as a result of any such Condemnation, shall be payable in the manner provided for in the Agreement. All such compensation, awards, damages, rights of action and proceeds awarded to Trustor (the "Proceeds") are hereby assigned to Beneficiary and Trustor agrees to execute such further assignments of the Proceeds as Beneficiary may require. Beneficiary shall be under no obligation to question the amount of any such award or compensation and may accept the same in the amount paid. All Proceeds may be applied either against the Secured Obligations (in such order and priority as Beneficiary shall determine consistent with the Agreement) or to restore the Premises, at the discretion of Beneficiary, except as may be otherwise provided in the Agreement. (c) Unless otherwise provided in the Agreement, nothing herein contained shall be deemed to excuse Trustor from repairing or maintaining the Premises as provided in Section 1.12 hereof or restoring all damage or destruction to the Mortgaged Property, regardless of whether or not there are proceeds available or whether any such Proceeds are sufficient in amount, and the application or release by Beneficiary of any Proceeds shall not cure or waive any Default or notice of Default under this Deed of Trust or invalidate any act done pursuant to such notice. (d) Receipt by Beneficiary and application in reduction of indebtedness of any Proceeds less than the full amount of the then outstanding Secured Obligations shall not defer, alter or modify Trustor's obligation to continue to pay the regular installments of principal, interest on the outstanding principal balance and other charges owed in respect of the Secured Obligations and herein. 14 (e) If prior to the receipt of the Proceeds by Beneficiary the condemned Premises shall have been sold on foreclosure of this Deed of Trust, Beneficiary shall, nevertheless, have the right to receive the Proceeds and to retain, for its own account, (i) an amount equal to the counsel fees, costs and disbursements incurred by Beneficiary in connection with collection of the Proceeds and not repaid by Trustor and (ii) the full amount of all such Proceeds, if Beneficiary is the successful purchaser at the foreclosure sale, to the extent of amounts owed in respect of the Secured Obligations. Section 1.10 Beneficiary's Performance of Trustor's Obligations. If Trustor shall fail to perform any of the covenants contained herein or any covenant contained in the Agreement or any other Loan Document, Beneficiary may, but shall not be obligated to, make advances and/or disbursements to perform the same. Trustor will repay on demand all sums so advanced and/or disbursed with interest at the Default Rate from the date of making such advance and/or disbursement until such sums have been repaid and all sums so advanced and/or disbursed, together with interest thereon at the Default Rate, shall be a lien upon the Mortgaged Property and shall be secured hereby. The provisions of this Section 1.10 shall not prevent any default in the observance of any covenant contained herein or with respect to the Secured Obligations or in any other Loan Document from constituting an Event of Default. Section 1.11 Financial Records. Trustor will provide the financial statements to Beneficiary required pursuant to the terms of the Agreement. Section 1.12 Waste and Maintenance. Trustor will not threaten, commit, permit or suffer any waste to occur on or to the Mortgaged Property or any part thereof or alter or demolish the Mortgaged Property or any part thereof in any manner or make any change in its use (except as provided in the Agreement) or any change which will in any way increase any fire or other hazards arising out of construction or operation of the Mortgaged Property. Trustor will, at all times, maintain the Mortgaged Property as required pursuant to the terms of the Agreement. Section 1.13 Enforcement Expenses. Except where inconsistent with the laws of the state in which the Mortgaged Property is located, Trustor agrees that if any action or proceeding be commenced, including an action to foreclose this Deed of Trust or to collect the indebtedness hereby secured, to which action or proceeding Beneficiary is made a party by reason of the execution of this Deed of Trust or the other Loan Documents, or in which it becomes necessary to defend or uphold the lien of this Deed of Trust, all sums paid by Beneficiary for the expense of any litigation to prosecute or defend or participate in the transaction and the rights and liens created hereby (including reasonable attorneys' fees) shall be paid by Trustor together with interest thereon from date of payment by Beneficiary at the Default Rate. All such sums paid and the interest thereon shall be immediately due and payable, shall be a lien upon the Mortgaged Property, and shall be secured hereby as shall be all such sums incurred in connection with enforcement by Beneficiary of its rights hereunder or under any other Loan Document. 15 Section 1.14 Defense of Beneficiary's Interests. If the interest of Beneficiary in the Mortgaged Property or any part thereof or the lien or security interest of this Deed of Trust thereon shall be attacked, directly or indirectly, or if legal proceedings shall be instituted against Trustee, Trustor or Beneficiary with respect thereto or against Trustor, Trustor upon its learning thereof, will promptly give written notice thereof to Beneficiary and Trustor will, at Trustor's cost and expense, exert itself diligently to cure, or will cause to be cured, any defect that may have developed or be claimed to exist, and will take all necessary and proper steps for the protection and defense thereof and will take, or will cause to be taken, such action as is appropriate to the defense of any such legal proceedings, including, but not limited to, the employment of counsel and the prosecution and defense of litigation. Section 1.15 No Impairment of Security. In no event shall Trustor do or permit to be done, or omit to do or permit the omission of, any act or thing, the doing, or omission, of which would materially impair the security of this Deed of Trust or materially impair the value of the Mortgaged Property or any part thereof. Section 1.16 Restrictions on Transfers and Mortgages. Unless otherwise permitted pursuant to the terms of the Agreement, Trustor will not directly or indirectly, by transfer, mortgage, conveyance, or sale of an interest in Trustor permit, do or suffer the assignment, lease, transfer, sale, conveyance or encumbrance of the Mortgaged Property, or any part thereof or any interest therein, without the express prior written consent of Beneficiary unless otherwise permitted pursuant to the terms of the Agreement. While the Secured Obligations are outstanding, neither the structure nor the ownership of Trustor may be changed without the express prior written consent of Beneficiary unless otherwise permitted pursuant to the terms of the Agreement. Section 1.17 Beneficiary's Defense. Beneficiary or Trustee may appear in and defend any action or proceeding at law or in equity or in bankruptcy purporting to affect the Premises or the security hereof or the rights and powers of Beneficiary or Trustee, and any appellate proceedings, and in such event Trustor shall pay all of Beneficiary's and Trustee's costs, charges and expenses, including cost of evidence of title and attorneys' fees incurred in such action or proceeding. All costs, charges and expenses so incurred, together with interest thereon at the Default Rate from the date of payment of same by Beneficiary or Trustee as aforesaid, shall be secured by the lien of this Deed of Trust and shall be due and payable upon demand. Section 1.18 Environmental Compliance. Trustor will perform and comply promptly with, and cause the Premises to be maintained, used and operated in accordance with, all applicable federal, state and local laws pertaining to air and water quality, hazardous waste, waste disposal, air emissions and other environmental matters, as set forth in the Agreement. Section 1.19 Zoning Changes. Trustor will not consent to, join in, permit or allow any change in the zoning laws or ordinances relating to or affecting the Premises which could reasonably 16 be expected to materially adversely affect the Premises and will promptly notify Beneficiary of any changes to the zoning laws. Section 1.20 Grant of Security Interest. Trustor, as further security for the payment of said indebtedness and in addition to all the rights and remedies otherwise available to Beneficiary or Trustee under this Deed of Trust and the other Loan Documents, grants to Beneficiary and Trustee a security interest, under the Uniform Commercial Code as now in effect in the state where all or any of the Fixtures are located, in and to the Fixtures, and all proceeds thereof. Upon an Event of Default, Beneficiary and Trustee shall have, in addition to all the other rights and remedies allowed by law, the rights and remedies of a secured party under the Uniform Commercial Code as in effect at that time. Trustor further agrees that the security interest created hereby also secures all expenses of Beneficiary and Trustee (including reasonable expenses for legal services of every kind, and cost of any insurance, and payment of taxes or other charges) incurred in or incidental to, the custody, care, sale or collection of, or realization upon, any of the property secured hereby or in any way relating to the enforcement or protection of the rights of Beneficiary or Trustee hereunder, together with interest thereon at the Default Rate until paid. Section 1.21 Compliance with Laws and ADA Compliance. (a) Trustor warrants and covenants that the Premises are and will continue to be substantially in compliance with all applicable local, county, state and federal laws and regulations and all building, housing and fire codes, rules and regulations. (b) Without limiting the provisions of subsection (a) of this Section 1.21: (i) Trustor represents and warrants to Beneficiary that Trustor is substantially in compliance with the Americans with Disabilities Act of 1990 (42 U.S.C.A. sec. 12101 et. seq.), as the same may be amended from time to time (the "ADA") and all other federal, state and local laws pertaining to the accessibility of the Premises by persons with disabilities (the ADA and such other laws are, collectively, the "Accessibility Laws"); (ii) Trustor covenants to ensure that the Premises will at all times substantially comply with all applicable Accessibility Laws and, upon the request of Beneficiary, Trustor will conduct such surveys of the Premises as Beneficiary shall require to ascertain such compliance; (iii) Trustor will maintain accurate records of all expenditures made in connection with any alterations to the Premises and will deliver copies thereof to Beneficiary upon Beneficiary's request; and (iv) Trustor shall defend, indemnify and hold harmless Beneficiary, its employees, agents, officers and directors, attorneys, and any parent or affiliate of Beneficiary, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, cost or expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out or in any way related to any violations of the Accessibility Laws (including, without limitation, any costs incurred by Beneficiary in complying with any Accessibility Laws). Neither payment of the indebtedness secured hereby nor foreclosure shall operate as a discharge of Trustor's obligations under this subsection (b). In the event Trustor tenders a deed in lieu of foreclosure, Trustor shall deliver the Premises to Beneficiary 17 (or its designee) substantially free of any violations of the Accessibility Laws. In the event Trustor does not timely perform any of the above obligations, Beneficiary after 30 days notice to Trustor may perform said obligations at the expense of Trustor and Trustor shall, upon written demand from Beneficiary, reimburse Beneficiary for all costs, including attorneys' fees and out-of-pocket expenses, and all liabilities incurred by Beneficiary by reason of the foregoing, with interest thereon at the Default Rate from the date of such payment by Beneficiary to the date of repayment. Until paid, said costs and expenses shall be secured by this Deed of Trust. Section 1.22 Other Multistate Mortgages. The indebtedness secured in part by this Deed of Trust is secured by mortgages and/or deeds of trust encumbering and conveying lands and other property and/or leasehold interests therein in other states as more particularly described in the Agreement, all of which mortgages and/or deeds of trust, including this instrument, being hereafter referred to as "the mortgage instruments." It is understood and agreed that all of the properties of all kinds conveyed or encumbered by the mortgage instruments are security for the Secured Obligations without allocation of any one or more of the parcels or portions thereof to any portion of the Secured Obligations less than the whole amount thereof unless so stated in said mortgage instruments. It is specifically covenanted and agreed that Beneficiary or Trustee may proceed, at the same or at different times, to foreclose said mortgage instruments, or any of them, by any proceedings appropriate in the state where any of the land lies, and that no event of enforcement taking place in any state including, without limiting the generality of the foregoing, any pending foreclosure, judgment or decree of the foreclosure, foreclosure sale, rents received, possession taken, deficiency judgment or decree, or judgment taken on the Secured Obligations, shall in any way stay, preclude or bar enforcement of the mortgage instruments or any of them in any other state, and that Beneficiary or Trustee may pursue any or all its remedies to the maximum extent permitted by state law until all of the Secured Obligations now or hereafter secured by any or all of the mortgage instruments has been paid and discharged in full. Neither Trustor, nor any person claiming under Trustor, shall have or enjoy any right to marshaling of assets, all such right being hereby expressly waived as to Trustor and all persons claiming under it, including junior lienors. No release of personal liability of any person whatever and no release of any portion of the property now or hereafter subject to the lien of any of the mortgage instruments shall have any effect whatever by way of impairment or disturbance of the lien or priority of any of said mortgage instruments. Any foreclosure or other appropriate remedy brought in any of the states aforesaid may be brought and prosecuted as to any part of the mortgaged security, wherever located, without regard to the fact that foreclosure proceedings or other appropriate remedies have or have not been instituted elsewhere on any other land subject to the lien of said mortgage instruments or any of them. 18 Section 1.23 Leasehold and Leasehold Instruments. (a) Trustor covenants and agrees to faithfully comply with and perform all of its obligations under the Leasehold Instruments and to promptly cure any default by it under the Leasehold Instruments. (b) Trustor may modify, amend or terminate any Leasehold Instrument without the prior written consent provided such action is consistent with the terms of the Agreement. (c) Trustor will promptly give Beneficiary a copy of any default notice given to Trustor with respect to any Leasehold Instrument. ARTICLE II EVENTS OF DEFAULT AND REMEDIES Section 2.01 Events of Default. The following shall constitute defaults hereunder and, after the giving of notice and the passage of time, if any, as provided herein, shall constitute "Events of Default" hereunder: (a) If Trustor shall fail to pay when due any Secured Obligation after the passage of any applicable notice or grace period, if any; or (b) If an Event of Default, as defined in the Agreement, shall occur under the Agreement. Section 2.02 Beneficiary's Remedies. (a) During the continuance of any Event of Default, Beneficiary, without notice or presentment, each of which are hereby waived by Trustor, may, subject to the provisions of the Agreement, declare the entire principal of the Secured Obligations then outstanding and all accrued and unpaid interest thereon and all other amounts owing in respect thereof (if not then due and payable, whether by acceleration or otherwise), to be due and payable immediately, and upon any such declaration the principal of the Secured Obligations and said accrued and unpaid interest shall become and be immediately due and payable, anything in the instruments evidencing the Secured Obligations or in this Deed of Trust to the contrary notwithstanding; (b) During the continuance of any Event of Default, Beneficiary or Trustee may enter into and upon all or any part of the Premises, and, having and holding the same, may use, operate, manage and control the Mortgaged Property or any part thereof and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and likewise, from time to time, at the expense of Trustor, Beneficiary and/or Trustee may make all necessary or proper repairs, renewals and replacements and such useful alterations, addi- 19 tions, betterments and improvements thereto and thereon as to it may deem advisable in its sole judgment; and in every such case Beneficiary and/or Trustee shall have the right to manage and operate the Mortgaged Property and to carry on the business thereof and exercise all rights and powers of Trustor with respect thereto either in the name of Trustor or otherwise as Beneficiary or Trustee shall deem best; and Beneficiary or Trustee shall be entitled, with or without entering into or upon the Premises, to collect and receive all gross receipts, earnings, revenues, rents, maintenance payments, issues, profits and income of the Mortgaged Property and every part thereof, all of which shall for all purposes constitute property of Beneficiary; and, after deducting the expenses of conducting the business thereof and of all maintenance, repairs, renewals, replacement, alterations, additions, betterments and improvements and amounts necessary to pay taxes, assessments, insurance and prior or other proper charges upon the Mortgaged Property or any part thereof, as well as just and reasonable compensation for the services of Beneficiary and/or Trustee and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, Beneficiary may apply the moneys arising as aforesaid in such manner and at such times as Beneficiary shall determine in its discretion consistent with the Agreement to the payment of the Secured Obligations and the interest thereon, when and as the same shall become payable and/or to the payment of any other sums required to be paid by Trustor under this Deed of Trust; (c) During the continuance of any such Event of Default, Trustor covenants and agrees as follows: (1) Trustee or Beneficiary may, with or without entry, personally or by their agents or attorneys, insofar as applicable, sell the Mortgaged Property or any part thereof and pursuant to the procedures provided by law, and all estate, right, title, interest, claim and demand therein, and right of redemption thereof, at one or more sales as an entity or in parcels, and at such time and place upon such terms and after such notice thereof as may be required or permitted by law; or (2) Trustee or Beneficiary may institute an action of mortgage foreclosure or institute other proceedings according to law for the foreclosure hereof, and may prosecute the same to judgment, execution and sale for the collection of the Secured Obligations secured hereby, and all interest with respect thereto, together with all taxes and insurance premiums advanced by Beneficiary or Trustee and other sums payable by Trustor hereunder, and all fees, costs and expenses of such proceedings, including attorneys' fees and expenses; or (3) Trustee or Beneficiary may, if default be made in the payment of any part of the Secured Obligations, proceed with foreclosure of the liens evidenced hereby in satisfaction of such item either through the courts or by conducting the sale as herein provided, and proceed with foreclosure of the security interest created hereby, all without declaring the whole of the Secured Obligations due, and provided that if sale of the Mortgaged Property, or any portion thereof, is made because of default in payment of a part of the Secured Obligations, such sale may be made subject to the unmatured part of the Secured Obligations, but as to such unmatured part of the Secured 20 Obligations (and it is agreed that such sale, if so made, shall not in any manner affect the unmatured part of the Secured Obligations) this Deed of Trust shall remain in full force and effect just as though no sale had been made under the provisions of this paragraph. And it is further agreed that several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured Obligations, it being the purpose to provide for a foreclosure and sale of the Mortgaged Property, or any part thereof, for any matured portion of the Secured Obligations without exhausting the power to foreclose and to sell the Mortgaged Property, or any part thereof, for any other part of the Secured Obligations whether matured at the time or subsequently maturing; or (4) Trustee or Beneficiary may take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law for the specific performance of any covenant, condition or agreement in the Loan Documents or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Beneficiary or Trustee shall elect; or (5) Beneficiary or Trustee may exercise in respect of the Mortgaged Property consisting of Fixtures, all of the rights and remedies available to a secured party upon default under the applicable provisions of the Uniform Commercial Code as then in effect in the state where the Mortgaged Property is located; or (6) Beneficiary or Trustee may apply any proceeds or amounts held in escrow pursuant to the terms of this Deed of Trust to payment of any part of the Secured Obligations in such order of priority as Beneficiary may determine consistent with the Agreement; or (7) Any sale as aforesaid may be subject to such existing tenancies as Beneficiary, in its sole discretion, may elect. Section 2.03 Sale, Foreclosure, etc. (a) Beneficiary or Trustee may adjourn from time to time any sale by it to be made under or by virtue of this Deed of Trust by announcement at the time and place appointed for such sale or for such adjourned sale or sales; and, except as otherwise provided by any applicable provision of law, Beneficiary or Trustee, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. (b) Upon the completion of any sale or sales made by Beneficiary or Trustee under or by virtue of this Article II, Beneficiary or Trustee, or any officer of any court empowered to do so, shall execute and deliver to the accepted purchaser or purchasers a good and sufficient instrument, or good and sufficient instruments, conveying, assigning and transferring all estate, right, title and interest in and to the properties, interests and rights sold. Beneficiary and Trustee are each hereby irrevocably appointed the true and lawful attorney of Trustor, in its name and stead, to make all the necessary conveyances, assignments, transfers and deliveries of any part of the Mortgaged Property and rights so sold, and for that purpose Beneficiary or Trustee may execute all necessary 21 instruments of conveyance, assignment and transfer and may substitute one or more persons with like power, Trustor hereby ratifying and confirming all that its said attorney or such substitute or substitutes shall lawfully do by virtue hereof. Nevertheless, Trustor, if so requested by Beneficiary or Trustee, shall ratify and confirm any such sale or sales by executing and delivering to Beneficiary or Trustee or to such purchaser or purchasers all such instruments as may be advisable, in the reasonable judgment of Beneficiary or Trustee, for the purpose and as may be designated in such request. (c) Upon any sale, whether under the power of sale hereby given or by virtue of judicial proceedings, it shall not be necessary for Beneficiary or Trustee, or any public officer acting under execution or order of court, to have present or constructive possession of any of the Mortgaged Property. (d) The recitals contained in any conveyance made by Beneficiary or Trustee to any purchaser at any sale made pursuant hereto or under applicable law shall be full evidence of the matters therein stated, and all prerequisites to such sale shall be presumed to have been satisfied and performed. (e) Any such sale or sales made under or by virtue of this Deed of Trust, whether under the power of sale hereby granted and conferred, or under or by virtue of any judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either by law or in equity, of Trustor in and to the premises and property sold, and shall be a perpetual bar, both at law and in equity, against Trustor, its successors and assigns, and against any and all persons or entities claiming the premises and property sold, or any part thereof, from through or under Trustor and its successors or assigns. (f) The receipt given by Beneficiary or Trustee for the purchase money paid at any such sale, or the receipt given by any other person authorized to receive the same, shall be sufficient discharge therefor to any purchaser of the property, or any part thereof, sold as aforesaid, and no such purchaser, or his representatives, grantees or assigns, after paying such purchase money and receiving such receipt, shall be bound (i) to see to the application of such purchase money or any part thereof upon or for any trust or purpose of this Deed of Trust, (ii) by the misapplication or nonapplication of any such purchase money, or any part thereof, or (iii) to inquire as to the authorization, necessity, expediency or regularity of any such sale. (g) In case the liens or security interests hereunder, or by the exercise of any other right or power, shall be foreclosed by Beneficiary's or Trustee's sale or by other judicial or non-judicial action, the purchaser at any such sale shall receive, as an incident to its ownership, immediate possession of the property purchased, and if Trustor or Trustor's successors shall hold possession of said property, or any part thereof, subsequent to foreclosure, Trustor or Trustor's successors shall be considered as tenants at sufferance of the purchaser at foreclosure sale, and 22 anyone occupying the property after demand made for possession thereof shall be guilty of forcible detainer and shall be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages by reason thereof are hereby expressly waived. (h) In the event a foreclosure hereunder shall be commenced by Beneficiary or Trustee, Beneficiary or Trustee may at any time before the sale abandon the suit, and may then institute suit for the collection of the Secured Obligations and for the foreclosure of the liens and security interest hereof. If Beneficiary or Trustee should institute a suit for the collection of the Secured Obligations and for a foreclosure of the liens and security interest hereof, it may at any time before the entry of a final judgment in said suit dismiss the same and proceed to sell the Mortgaged Property, or any part thereof, in accordance with provisions of this Deed of Trust. (i) Any reasonable expenses incurred by Beneficiary or Trustee in prosecuting, resetting or settling the claim of Beneficiary shall become an additional Secured Obligation of Trustor hereunder. (j) In the event of any sale made under or by virtue of this Article II (whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale), the entire principal of, and interest on, the Secured Obligations, if not previously due and payable, and all other sums required to be paid by Trustor pursuant to this Deed of Trust, immediately thereupon shall, anything in the Secured Obligations or in this Deed of Trust to the contrary notwithstanding, become due and payable. (k) The purchase money proceeds or avails of any sale made under or by virtue of this Article II, together with any other sums which then may be held by Beneficiary under this Deed of Trust, whether under the provisions of this Article II or otherwise, shall be applied in accordance with the laws of the state where the Mortgaged Property is located, and to the extent not inconsistent, first to the payment of the costs and expenses of such sale, including reasonable compensation to Beneficiary or Trustee and their agents and counsel, second to the payment of the amounts due and owing under or in respect of the Secured Obligations for principal and interest and any other amounts including (without limitation) any other sums required to be paid by Trustor pursuant to any provision of this Deed of Trust or any other Loan Document, with interest at the Default Rate from and after the happening of any Event of Default in the order set forth in Section 7.2 of the Agreement, all with interest at the Default Rate from the date such sums were or are required to be paid under this Deed of Trust, and third to the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. (l) Upon any sale made under or by virtue of this Article II, whether made under the power of sale herein granted or under or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Beneficiary and any other Secured Party or Trustee may bid for and acquire the Mortgaged Property or any part thereof and Beneficiary and any other Secured Party in lieu of 23 paying cash therefor may make settlement for the purchase price by crediting some or all of the indebtedness of Trustor secured by this Deed of Trust owing to such Secured Party (or, in the case of Beneficiary, owing to all Secured Parties) the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which Beneficiary or Trustee is authorized to deduct under this Deed of Trust. Section 2.04 Payments, Judgment, etc. (a) In case an Event of Default under the Agreement and the acceleration of the obligations thereunder shall have occurred, then Trustor will in accordance with the Agreement pay to Beneficiary the whole amount which then shall have become due and payable on the Secured Obligations, whether for principal and interest or both or otherwise, as the case may be, which interest shall then accrue at the Default Rate on the then unpaid principal of or other amounts constituting the Secured Obligations, and the sums required to be paid by Trustor pursuant to any provision of this Deed of Trust, and in addition thereto such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to Beneficiary and/or Trustee, their agents and counsel and any expenses incurred by Beneficiary or Trustee hereunder. In the event Trustor shall fail forthwith to pay such amounts upon demand, Beneficiary and/or Trustee shall be entitled and empowered to institute such action or proceedings at law or in equity as may be advised by its counsel for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree. (b) Beneficiary and/or Trustee shall be entitled to recover judgment as aforesaid either before or after or during the pendency of any proceedings for the enforcement of the provisions of this Deed of Trust and the right of Beneficiary and/or Trustee to recover such judgment shall not be affected by any entry or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Deed of Trust or the foreclosure of the lien hereof; and in the event of a sale of the Mortgaged Property or any part thereof and of the application of the proceeds of sale, as provided in this Deed of Trust, to the payment of the indebtedness hereby secured, Beneficiary and/or Trustee shall be entitled to enforce payment of, and to receive all amounts then remaining due and unpaid upon, the Secured Obligations, and to enforce payment of all other charges, payments and costs due under this Deed of Trust and shall be entitled to recover judgment for any portion of the debt remaining unpaid, with interest thereon at the Default Rate. In case of proceedings against Trustor in insolvency or bankruptcy or any proceedings for its reorganization or involving the liquidation of its assets, then Beneficiary and/or Trustee shall be entitled to prove the whole amount of principal and interest due upon the Secured Obligations to the full amount thereof, and all other payments, charges and costs due under this Deed of Trust without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property. (c) No recovery of any judgment by Beneficiary or Trustee and no levy of an execution under any judgment upon the Mortgaged Property or upon any other property of Trustor shall affect, in any manner or to any extent, the lien of this Deed of Trust upon the Mortgaged 24 Property or any part thereof, or any liens, rights, powers or remedies of Beneficiary or Trustee hereunder, but such liens, rights, powers and remedies of Beneficiary or Trustee shall continue unimpaired as before. (d) Any moneys thus collected by Beneficiary or Trustee under this Section 2.04 shall be applied by Beneficiary in accordance with the provisions of paragraph (k) of Section 2.03. Section 2.05 Receiver, Waiver. After the happening of any Event of Default and immediately upon the commencement of any action, suit or other legal proceedings by Beneficiary or Trustee to obtain judgment for the principal of, or interest on, and any other amounts constituting the Secured Obligations, including (without limitation) all other sums required to be paid by Trustor pursuant to any provision of this Deed of Trust or of any nature in aid of the enforcement of the Secured Obligations or of this Deed of Trust, Trustor will (a) waive the issuance and service of process and submit to a voluntary appearance in such action, suit or proceeding and (b) if required by Beneficiary or Trustee, consent to the appointment of a receiver or receivers of the Mortgaged Property or any part thereof and of all the earnings, revenues, rents, maintenance payments, issues, profits and income thereof in accordance with Section 2.11 hereof. After the happening of any Event of Default and during its continuance, or upon the commencement of any proceedings to foreclose this Deed of Trust or to enforce the specific performance hereof or in aid thereof or upon the commencement of any other judicial proceeding to enforce any right of Beneficiary or Trustee, Beneficiary or Trustee shall be entitled, as a matter of right, if it shall so elect, without the giving of notice to any other party and without regard to the adequacy or inadequacy of any security for the Deed of Trust indebtedness, forthwith either before or after declaring the unpaid principal of the Secured Obligations to be due and payable, to the appointment of such a receiver or receivers. Section 2.06 Beneficiary's Possession. Notwithstanding the appointment of any receiver, liquidator or trustee of Trustor or of any of its property, or of the Mortgaged Property or any part thereof, Beneficiary and Trustee shall be entitled to retain possession and control of the Mortgaged Property. Section 2.07 Remedies Cumulative. No remedy herein conferred upon or reserved to Beneficiary or Trustee is intended to be exclusive of any other remedy or remedies which Beneficiary or Trustee may be entitled to exercise against Trustor and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder or in the Agreement or in any other Loan Document now or hereafter existing at law or in equity or by statute. No delay by or omission of Beneficiary or Trustee to exercise any right or power shall be construed to be a waiver of any Event of Default or any acquiescence therein; and every power and remedy given in this Deed of Trust or in the Agreement or in any other Loan Document to Beneficiary or Trustee may be exercised from time to time as often as may be deemed expedient by Beneficiary or Trustee. The resort to any remedy provided hereunder or in the Agreement or in any other Loan Document or provided by law or at equity shall not prevent the concurrent or subsequent 25 employment of any other appropriate remedy or remedies against Trustor. By the acceptance of payment of principal of or interest on or any other amount due in respect of any of the Secured Obligations after its due date, Beneficiary and Trustee do not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. Nothing in this Deed of Trust or in the Agreement or in any instrument evidencing the Secured Obligations shall affect the obligation of Trustor to pay (i) the principal of, and interest on, the Secured Obligations in the manner and at the time and place therein or in the Agreement expressed or (ii) the other Secured Obligations in the manner and at the time herein expressed. Section 2.08 Agreement by Trustor. Trustor will not at any time insist upon, or plead, or in any manner whatever claim or take any benefit or advantage of any stay or extension or moratorium law, any exemption from execution or sale of the Mortgaged Property or any part thereof, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Deed of Trust or any other Loan Document, or claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Mortgaged Property, or any part thereof, prior to any sale or sales thereof which may be made pursuant to any provision herein, or pursuant to the decree, judgment or order of any court of competent jurisdiction, or, after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof; and Trustor hereby expressly waives all benefit or advantage of any such law or laws and covenants not to hinder, delay or impede the execution of any power herein granted or delegated to Beneficiary or Trustee, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Trustor, waives, to the extent that it lawfully may, all right to have the Mortgaged Property or any part thereof marshaled upon any foreclosure hereof. Section 2.09 Use and Occupancy Payments. During the continuance of any Event of Default and pending the exercise by Beneficiary and Trustee of their rights to exclude Trustor from all or any part of the Premises, unless Trustor is legally entitled to continue possession of the Premises, Trustor agrees to pay to Beneficiary the fair and reasonable rental value, which amount shall be determined by the Beneficiary in its reasonable judgement, for the use and occupancy of the Premises or any portion thereof which are in its possession for such period and, upon default of any such payment, will vacate and surrender possession of the Premises to Beneficiary or Trustee or to a receiver, if any, and in default thereof may be evicted by any summary action or proceeding for the recovery of possession of the Premises for non-payment of rent, however designated. Any payments received under this Section 2.09 by Beneficiary shall be applied in accordance with Section 2.03(k) of this Deed of Trust. Section 2.10 Beneficiary's Right to Purchase. In case of any sale under the foregoing provisions of this Article II, whether made under the power of sale hereby given or pursuant to judicial proceedings, Beneficiary or Trustee may bid for and purchase any property, and may make 26 payment therefor as hereinafter set forth or as set forth in Section 2.03(l) above, and, upon compliance with the terms of said sale, may hold, retain and dispose of such property without further accountability therefor. For the purpose of making settlement or payment for the property or properties purchased, Beneficiary and Trustee shall be entitled to use and apply such of the Secured Obligations held by it or the other Secured Parties, including (without limitation) any accrued and unpaid interest thereon, as it may elect, or as may be otherwise provided for in Section 2.03(l) above. Section 2.11 Appointment of Receiver. Upon application of Beneficiary or Trustee to any court of competent jurisdiction, if any Event of Default shall have occurred and so long as it shall be continuing, to the extent permitted by law, a receiver may be appointed to take possession of and to operate, maintain, develop and manage the Mortgaged Property or any part thereof. In every case when a receiver of the whole or any part of the Mortgaged Property shall be appointed under this Section 2.11 or otherwise, the net income and profits of the Mortgaged Property shall, subject to the order of any court of competent jurisdiction, be paid over to, and shall be received by, Beneficiary or Trustee to be applied as provided in Section 2.03(k) hereof. Section 2.12 No Waiver. Beneficiary and/or Trustee may resort to any security given by this Deed of Trust or to any other security now existing or hereafter given to secure the payment of any of the Secured Obligations secured hereby, in whole or in part, and in such portions and in such order as may seem best to Beneficiary or Trustee in its reasonable discretion, and any such action shall not in any way be considered as a waiver of any of the rights, benefits, liens or security interest created by this Deed of Trust. ARTICLE III ASSIGNMENT OF LEASES AND RENTS Section 3.01 Lease Related Definitions. As used in this Deed of Trust: (a) "Lease" means any lease, sublease, or other similar agreement, now or hereafter existing, under the terms of which any person other than Trustor has or acquires any right to occupancy or use of the Mortgaged Property, or any part thereof, or interest therein; (b) "Lessee" means the lessee, sublessee, licensee, tenant or other person having the right to occupy or use all or any part of the Mortgaged Property under a Lease; and (c) "Rent" means the rents, additional rents and other consideration payable to Trustor by the Lessee under the terms of a Lease. Whenever reference is made in this Deed of Trust to a lease, license, lessee, licensee, tenancy or tenant, such reference shall be deemed to include a sublease, sublessee, license, licensee, subtenancy or subtenant, as the case may be. Section 3.02 Assignment of Leases and Rents. Trustor hereby assigns to Beneficiary and to Trustee for the benefit of Beneficiary all Leases, together with all Rents payable under the Leases, now or at any time hereafter existing, such assignment being upon the following terms: (a) until receipt from Beneficiary of notice of the occurrence of an Event of Default, each Lessee may pay 27 rent directly to Trustor, (b) upon receipt from Beneficiary of notice that an Event of Default exists, each Lessee shall, and is hereby authorized and directed to, pay directly to Beneficiary or Trustee (as therein specified) all Rent thereafter accruing, and the receipt of such Rent by Beneficiary or Trustee shall be a release of such Lessee to the extent of all amounts so paid, (c) Rent so received by Beneficiary or Trustee shall be applied by Beneficiary or Trustee first to the expenses, if any, of collection and then in accordance with Article II hereof, (d) without impairing its rights hereunder, Beneficiary or Trustee may, at its option, at any time and from time to time, release to Trustor Rent so received by Beneficiary or Trustee, or any part thereof, (e) Beneficiary and Trustee shall not be liable for their failure to collect, or their failure to exercise diligence in the collection of, Rent, but shall be accountable only for Rent that they shall actually receive. As among Beneficiary, Trustee, Trustor and any person claiming through or under Trustor, the assignment contained in this Section 3.02 is intended to be absolute, unconditional and presently effective, and the provisions of subsection 3.02(a) are intended for the benefit of each Lessee and shall never inure to the benefit of Trustor or any person claiming through or under Trustor. It shall never be necessary for Beneficiary or Trustee to institute legal proceedings of any kind whatsoever to enforce the provisions of this Section 3.02. Notwithstanding anything herein to the contrary, Trustor may collect such Rent until such time as an Event of Default shall occur hereunder. Section 3.03 Beneficiary's Consent. Nothing in this Article III shall ever be construed as (a) allowing any Lease without Beneficiary's prior written consent unless otherwise permitted under the Agreement, or (b) subordinating this Deed of Trust to any Lease. Section 3.04 Lease Related Covenants. Trustor covenants to: (a) upon demand by Beneficiary, assign to Beneficiary or Trustee, by separate instrument in form and substance satisfactory to Beneficiary, any and all Leases, and/or all Rents payable thereunder, including, but not limited to, any Lease which is now in existence or which may be executed after the date hereof; (b) not accept from any Lessee, nor permit any Lessee to pay, Rent for more than one month in advance except for payment in the nature of security for performance of Lessee's obligations unless otherwise provided for in the Lease; (c) comply with the terms and provisions of each Lease including, without limitation, the payment of all sums required to be paid by Trustor or which any Lessor has an option to pay under any Lease in order to prevent any reduction in or offset against any Rent payable under any Lease or any default thereunder; (d) not amend, extend, cancel, abridge, or otherwise modify, or accept surrender of, or renew, any Lease without the written consent of Beneficiary other than in the ordinary course of business, (e) not assign, transfer or mortgage any Lease without the written consent of Beneficiary; (f) not assign, transfer, pledge or mortgage any Rent; (g) not waive, excuse, release or condone any nonperformance of any covenant of any Lease by any Lessee other than in the ordinary course of business; (h) give to Beneficiary and Trustee duplicate notice of each material default by each Lessee; (i) on all Leases executed after the date hereof, cause each Lessee to agree (and each Lessee under each Lease executed after the date hereof does so agree) to give to Beneficiary and Trustee written notice of each and every material default by Trustor under its Lease and not exercise any remedies under such Lease unless Beneficiary or Trustee fails to cure such 28 material default within a reasonable period after Beneficiary and Trustee have received such notice; provided, that Beneficiary or Trustee shall never have any obligation or duty to cure any such material default; (j) enforce its rights with regard to all Leases in the ordinary course of business; and (k) not enter into any Lease affecting the Mortgaged Property or any part thereof unless otherwise permitted under the Agreement without the prior approval of Beneficiary. Section 3.05 Beneficiary Not Liable. Beneficiary and/or Trustee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any Lease, or under or by reason of this assignment, and Trustor shall and does hereby agree to indemnify and to hold Beneficiary and Trustee harmless from and against any and all liability, loss or damage which Beneficiary or Trustee may or might incur under any Lease or under or by reason of this assignment and from and against any and all claims and demands whatsoever which may be asserted against Beneficiary or Trustee by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in any Lease. Should Beneficiary or Trustee incur any such liability, loss or damage under any Lease or under or by reason of this assignment, or in the defense of any such claims or demands, the amount thereof, including all costs, expenses and attorneys' fees, shall be secured hereby and constitute part of the Secured Obligations, and Trustor shall reimburse Beneficiary therefore immediately upon demand, and upon the failure of Trustor to do so, Beneficiary may declare all sums secured by this Deed of Trust immediately due and payable. Section 3.06 Estoppel Certificates. On all Leases executed after the date hereof, all Leases shall provide for the giving by the Lessee of certificates with respect to the status of such Leases, and Trustor shall exercise its right to request such certificates within ten (10) days of any demand therefor by Beneficiary. Trustor shall furnish to Beneficiary or Trustee, within ten (10) days after a request by Beneficiary or Trustee to do so, an executed counterpart of all Leases. Section 3.07 Lease Approval Requirements. On all Leases executed after the date hereof, all Leases and Lessees of the Premises, or any part thereof, must be acceptable to and approved by Beneficiary unless otherwise provided under the Agreement; and all Lessees shall execute such estoppel certificates, subordinations, attornments and other agreements as Beneficiary may require. Under no circumstances shall Beneficiary or Trustee be liable for any obligation to pay any leasing commission, brokerage fee or similar fee or charge in connection with any Lease nor shall Beneficiary or Trustee be obligated to complete any Improvements for the benefit of any Lessee. ARTICLE IV MISCELLANEOUS Section 4.01 Benefit of Beneficiary. All of the grants, covenants, terms, provisions and conditions of this Deed of Trust shall run with the land and shall apply to, bind and inure to the 29 benefit of the successors and assigns of the respective parties hereto; provided, that Trustor may not assign its obligations hereunder without the prior written consent of Beneficiary. Section 4.02 Savings Clause. In the event any one or more of the provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall, at the option of Beneficiary, not affect any other provision of this Deed of Trust but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. Section 4.03 Notices. All notices hereunder shall be given pursuant to the terms of Section 9.1 of the Agreement, and supplementing such provisions, notices required to be given to Trustee shall be given at Trustee's address set forth herein. Section 4.04 Governing Law. This Deed of Trust shall, without regard to place of contract or payment, be construed and enforced according to the laws of the state where the Mortgaged Property is located, all without regard to principles of conflict of laws. Section 4.05 No Change. Neither this Deed of Trust nor any provision hereof may be changed, waived, discharged or terminated, except by an instrument in writing, signed by Beneficiary and Trustor. Section 4.06 Security Agreement and Fixture Filing. This Deed of Trust shall be deemed to be a security agreement and fixture filing pursuant to the Uniform Commercial Code of the state where the Mortgaged Property is located. Section 4.07 No Usury. In the event that Beneficiary, in enforcing its rights hereunder, determines that charges and fees incurred in connection with the Secured Obligations may, under the applicable usury laws, cause the interest rate herein to exceed the maximum allowed by law, then such interest shall be recalculated and any excess over the maximum interest permitted by said laws shall be credited to the then principal outstanding balance to reduce said balance by that amount. It is the intent of the parties hereto that Trustor under no circumstances shall be required to pay, nor shall Beneficiary be entitled to collect, any interest which is in excess of the maximum legal rate permitted under the applicable usury laws. Section 4.08 Effect of Partial Release. No release of any part of the Mortgaged Property or of any other property conveyed to secure the Secured Obligations shall in any way alter, vary or diminish the force, effect or lien or security interest of this Deed of Trust on the Mortgaged Property or portion thereof remaining subject to the lien and security interest created hereby. Section 4.09 Beneficiary's Dealing with Successors and Lessees. In the event Trustor or any of Trustor's successors conveys or leases without the prior approval of Beneficiary (except as 30 otherwise permitted herein or in the Agreement) any interest in the Mortgaged Property, or any part thereof, to any other party, Beneficiary and Trustee may deal with any owner or lessee of any part of the Mortgaged Property with reference to this Deed of Trust and to the Secured Obligations, either by forbearance on the part of Beneficiary or release of all or any part of the Mortgaged Property or of any other property securing payment of any Secured Obligations, without in any way modifying or affecting Beneficiary's and Trustee's rights, remedies, liens or security interests hereunder (including the right to exercise any one or more of the remedies described or referred to in Article I, Article II, Article III or Article IV hereof in the event such conveyance is made in contravention of the provisions of this Deed of Trust) or the liability of Trustor or any other party liable for the payment of the Secured Obligations, in whole or in part. This shall not be construed to allow any such conveyance or leasing by Trustor, except as permitted herein or in the Agreement. Section 4.10 No Waiver by Beneficiary. All options and rights of election herein provided for the benefit of Beneficiary and/or Trustee are continuing, and the failure to exercise any such option or right or election upon a particular default or breach or upon any subsequent default or breach shall not be construed as waiving the right to exercise such option or election at any later date. By the acceptance of payment of principal or interest after its due date, Beneficiary and/or Trustee does not waive the right either to require prompt payment when due of all other amounts secured hereby or to regard as an Event of Default the failure to pay any other such amounts. No exercise of the rights and powers herein granted and no delay or omission in the exercise of such rights and powers shall be held to exhaust the same or be construed as a waiver thereof, and every such right and power may be exercised at any time and from time to time. All grants, covenants, terms and conditions hereof shall bind Trustor and all successive owners of the Premises. Section 4.11 Headings Descriptive. The headings of the several sections and subsections of this Deed of Trust are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Deed of Trust. SECTION 4.12 WAIVER OF TRIAL BY JURY. THE TRUSTOR, TRUSTEE AND BENEFICIARY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS DEED OF TRUST. Section 4.13 Indemnification. The Trustor agrees to pay, and to save, indemnify and keep the Beneficiary and its respective directors, officers, employees, attorneys, experts, and agents harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses), losses or damages (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Mortgaged Property, (ii) with respect to, or resulting from, any delay in complying with any requirement of law applicable to any of the Mortgaged Property or (iii) in connection with any of the transactions contemplated by this Deed of Trust, including the fees and disbursements of counsel 31 and of any other experts, which Beneficiary or its respective directors, officers, employees, attorneys, experts or agents may incur in connection with (w) the administration or enforcement of this Deed of Trust, including such expenses as are incurred to preserve the value of the Mortgaged Property and the validity, perfection, rank and value of any liens granted hereunder, (x) the collection, sale or other disposition of any of the Mortgaged Property, (y) the exercise by the Beneficiary of any of the rights conferred upon it hereunder or (z) any Default or Event of Default, but excluding any such liabilities, costs and expenses, losses or damages incurred solely by reason of the gross negligence or willful misconduct of the party seeking to be indemnified as determined by a final order or judgment of a court of competent jurisdiction. Any amount due hereunder which is not paid on demand shall bear interest at a rate equal to the Default Rate and shall be a lien upon the Mortgaged Property and shall be secured hereby. The agreements of the Trustor contained in this Section 4.13 shall survive the payment and performance of the Secured Obligations and the termination of the liens and security interests granted hereby. All of the Trustor's obligations to indemnify Beneficiary and its directors, officers, employees, attorneys, experts and agents hereunder shall (without duplication) be in addition to, and shall not limit in any way, the Trustor's indemnification obligations contained in the Agreement or in any other Loan Document. Section 4.14 Advances under the Agreement. It is understood and agreed that the funds to be advanced under this Deed of Trust are to be advanced subject to and in accordance with the provisions of the Agreement and the other Loan Documents, and that all sums advanced thereunder or hereunder are included within the Secured Obligations secured hereby. Section 4.15 Limitation of Trustee's Liability. Trustee shall be protected in acting upon any notice, request, consent, demand, statement, note or other paper or document believed by Trustee to be genuine and to have been signed by the party or parties purporting to sign the same. Trustee shall not be liable for any error of judgment, nor for any act done or step taken or omitted, nor for any mistakes of law or fact, nor for anything which Trustee may do or refrain from doing in good faith, nor generally shall Trustee have any accountability hereunder except for willful misconduct or gross negligence. Trustee may act hereunder and may sell or otherwise dispose of the Mortgaged Property or any part thereof as herein provided, although Trustee has been, may now or may hereafter be, attorneys, officers, agents or employees of Beneficiary, in respect of any matter of business whatsoever. Beneficiary and Trustee shall not be liable for any loss to any chattels in their possession, provided that they shall use reasonable care with respect thereto; and any such loss shall not diminish the debt due. Section 4.16 Substitution of Trustee. Beneficiary shall have, and is hereby granted with warranty of further assurances, the irrevocable power to remove a Trustee or successor Trustee and to appoint a substitute Trustee or Trustees hereunder (including, in case of death or refusal to act of 32 a Trustee or Trustees or their nonacceptance of, or dissatisfaction with, Trustee, absence or any other reason), to appoint a new or replacement substitute Trustee or Trustees, to be exercised at any time without notice and without specifying any reason therefor, by filing for record in the office where this instrument is recorded a Deed of Appointment or Notice of Substitution of Trustee. The power of appointment of a successor Trustee or Trustees may be exercised as often as and whenever Beneficiary may choose, and the exercise of the power of appointment, no matter how often, shall not be an exhaustion thereof. Upon the recordation of such Deed or Deeds of Appointment or Notice or Notices of Substitution of Trustee, Trustee or Trustees so appointed shall thereupon, without any further act or deed of conveyance, become fully vested with identically the same title and estate in and to the Mortgaged Property and with all the rights, powers, trusts and duties of their, his or its predecessor in the trust hereunder with like effect as if originally named as Trustee or as one of Trustees hereunder. Whenever in this Deed of Trust reference is made to Trustee, it shall be construed to mean Trustee or Trustees for the time being, whether original or successors or successor in trust; and all title, estate, rights, powers, trusts and duties hereunder given or appertaining to or devolving upon Trustee shall be in each of Trustees so that any action hereunder or purporting to be hereunder of any one of the original or any successor Trustee shall for purposes be considered to be, and as effective as, the action of all Trustees. Section 4.17 Particular State Provisions. There is attached hereto and made a part hereof Exhibit B containing additional provisions that are necessary or appropriate under the laws of the state in which the Mortgaged Property is located or pursuant to the provisions of any permitted property liens. ARTICLE V AMENDMENT AND RESTATEMENT Section 5.01 Pre-Petition Deed of Trust. This Deed of Trust amends and restates in its entirety the Pre-Petition Deed of Trust to which this Deed of Trust relates and the Post-Petition Mortgage Liens; provided, however, that, to the fullest extent permitted by law, (a) the priority of all liens, security interests and other encumbrances evidenced hereby or arising hereunder shall relate back to the date and time the Pre-Petition Deed of Trust to which this Deed of Trust relates was recorded, or to such earlier date and time as permitted by applicable law; (b) nothing herein shall impair the creation, attachment, perfection or priority of the liens, security interests and other encumbrances evidenced by or arising under the Pre-Petition Deed of Trust to which this Deed of Trust relates or the Post-Petition Mortgage Liens; and (c) nothing herein shall constitute a novation or discharge of the obligations secured by the Pre-Petition Deed of Trust to which this Deed of Trust relates or the Post-Petition Mortgage Liens. 33 IN WITNESS WHEREOF, this Deed of Trust has been duly executed by Trustor and Beneficiary as of the day and year first above written. TRUSTOR: PAYLESS CASHWAYS, INC. By: -------------------------------- Name: Title: BENEFICIARY: CANADIAN IMPERIAL BANK OF COMMERCE, as Coordinating and Collateral Agent By: -------------------------------- Name: Title: 34 EXHIBIT A (DESCRIPTION OF LAND) 35 EXHIBIT B (LOCAL LAW PROVISIONS) EX-4 8 4.2A AMENDED & RESTATED LOAN AGREEMENT COVER - -------------------------------------------------------------------------------- AMENDED AND RESTATED LOAN AGREEMENT --------------------------------------- PAYLESS CASHWAYS, INC. as Borrower and UBS MORTGAGE FINANCE, INC. as Lender --------------------------------------- $100,809,000 As of December 2, 1997 - -------------------------------------------------------------------------------- 1 AMENDED AND RESTATED LOAN AGREEMENT AMENDED AND RESTATED LOAN AGREEMENT dated as of the 2nd day of December, 1997, by and between PAYLESS CASHWAYS, INC., an Delaware corporation (herein called "Borrower"), and UBS MORTGAGE FINANCE, INC., (herein called "Lender"). WHEREAS, Borrower previously entered into a loan agreement dated as of June 20, 1989, with The Prudential Insurance Company of America ("Prudential") under which Borrower executed and delivered to Prudential certain promissory notes in the original aggregate principal amount of $230,242,500 (the "Prior Notes") evidencing the amount of the loan (the "Loan") made by Prudential to Borrower, which loan agreement has been modified and amended by that certain (a) First Modification Agreement dated October 18, 1991, (b) Second Modification Agreement dated December 17, 1991, (c) Third Modification Agreement dated as of December 31, 1991, (d) Fourth Modification Agreement dated as of March 8, 1993, (e) Fifth Modification Agreement dated as of May 25, 1995, and (f) Sixth Modification Agreement dated as of November 22, 1995, (the loan agreement and all subsequent modifications thereto being hereafter referred to collectively as the "Prior Loan Agreement"); WHEREAS, Borrower filed on July 21, 1997, a voluntary petition with the United States Bankruptcy Court for the Western District of Missouri and has continued in the possession of its assets and in the management of its business pursuant to Sections 1107 and 1108 of the Bankruptcy Code; WHEREAS, UBS Mortgage Finance, Inc. has purchased all interest of Prudential under the Prior Loan Agreement and the Prior Notes; WHEREAS, Borrower has now requested certain additional modifications to the Prior Loan Agreement to, among other things, (1) consolidate the Prior Notes into a single note; (2) modify the rate of interest on the Loan; and (3) extend the maturity and change the amortization of the Loan; and WHEREAS, Lender has agreed to Borrower's request pursuant to the terms and conditions of this Amended and Restated Loan Agreement, which amends and restates the Prior Loan Agreement in its entirety. NOW, THEREFORE, in consideration of the premises and the mutual agreements, covenants and conditions hereinafter set forth, Borrower and Lender agree as follows: 2 ARTICLE I Definitions and References Section 1.1 Defined Terms. As used in this Agreement, each of the following terms has the meaning given it in this Section 1.1 or in the sections and subsections referred to below: "ACM" means asbestos-containing materials. "Affiliate" means, as to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by or is under common control with, such Person. "Agreement" means this Amended and Restated Loan Agreement. "Allocated Loan Amount" means with respect to each Individual Property the amount designated as such on Exhibit C hereto. Each payment of principal that is not made in connection with the release of an Individual Property from the Lien of the Mortgage shall reduce the Allocated Loan Amount of each Individual Property on a proportionate basis, by an amount equal to the amount of such principal payment multiplied by a fraction, the numerator of which is the Allocated Loan Amount of the Individual Property and the denominator of which is the total Allocated Loan Amounts for the Property. The Allocated Loan Amount of a Substitution Property shall be the Allocated Loan Amount of the Individual Property for which it was substituted. "Applicable Environmental Laws" has the meaning given it in subsection 4.1(k). "Applicable Laws" has the meaning given it in subsection 4.1(j). "Authorized Officer" means, with respect to any act to be performed or duty to be discharged by or on behalf of any Person who is not an individual, any officer, agent or representative thereof who is at the time in question authorized to perform such act or discharge such duty on behalf of such Person. "Bank Debt" means the Secured Obligations as defined in the Credit Agreement. "Bankruptcy Code" means The Bankruptcy Reform Act of 1978, as amended and codified as 11 U.S.C. Section 101 et seq. Bankruptcy Court" means the United States Bankruptcy Court for the Western District of Missouri or any other court having jurisdiction over the Chapter 11 case of Borrower. "Borrower" means Payless Cashways, Inc., a Delaware corporation. 3 "Business Day" means any day on which (a) commercial banks are not authorized or required to close in New York, New York and (b) dealings in Dollar deposits are carried out in the London interbank market and banks are open for business in London. "CERCLA" has the meaning given it in subsection 4.1(k). "Collateral" has the meaning given it in the Mortgage. "Consolidated" refers to the consolidation of any Person, in accordance with GAAP, with its properly consolidated subsidiaries. References herein to a Person's Consolidated financial statements, financial position, financial condition, liabilities, or other financial matters refer to the consolidated financial statements, financial position, financial condition, liabilities, or other financial matters of such Person and its properly consolidated subsidiaries. "Credit Agreement" means the Amended and Restated Credit Agreement, dated as of December 1, 1997, among Payless Cashways, Inc., Canadian Imperial Bank of Commerce, as coordinating and collateral agent, the underwriters, the fronting banks and the other secured parties party thereto, as amended, amended and restated, extended, supplemented or otherwise modified from time to time. "Debt" means, as to any Person, all indebtedness, liabilities and obligations of such Person, whether primary or secondary, direct or indirect, absolute or contingent. "Default" means any Event of Default and any default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an Event of Default. "Default Rate" means at any particular time the annual rate equal to the LIBOR Interest Rate then in effect plus 2%. "Depository" has the meaning given it in subsection 5.1(g). "Disclosure Schedule" means Schedule 1 attached hereto. "Domestic Business Day" is any day except a Saturday, Sunday or other day on which commercial banks are required or permitted by law to close in New York City. "Effective Date" shall mean the first Business Day after which the Order of the Bankruptcy Court confirming the Plan of Reorganization shall have become final and on which each of the conditions set forth in Sections 3.1 and 3.2 shall have been satisfied or waived in accordance with the terms hereof. 4 "Environmental Costs" means incurred and potential damages, losses, liabilities, costs and expenses of remediation work, and any other incurred or potential obligations, penalties, fines, impositions, fees, levies, lien, removal or bonding costs, claims, litigation, demands, causes of action, liabilities, losses (including, without limitation, any reduction in the value of the Property), damage, defenses, judgments, suits, proceedings, costs, disbursements or expenses (including, without limitation, attorneys' and experts' or other consultants' reasonable fees and disbursements) of any kind and nature whatsoever, including interest thereon. "Environmental Laws" means CERCLA; The Resource Conservation and Recovery Act, 42 U.S.C. ss. 1601, et seq.; The Hazardous Substances Transportation Act, 49 U.S.C. ss. 1801, et seq.; The Emergency Planning & Community Right-to-Know Act of 1986, 42 U.S.C. ss. 11001, et seq.; The Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq.; The Clean Air Act, 42 U.S.C. ss. 7401 et seq., The Clean Water Act, 33 U.S.C. ss. 1251 et seq.; The Safe Drinking Water Act, 42 U.S.C. ss. 300 et seq.; as any of the foregoing may be amended form time to time; and any other federal state and local laws or regulations, codes, statutes, orders, decrees, guidance documents, judgments or injunctions, now or hereafter issued, promulgated, approved or entered thereunder, relating to pollution, contamination or protection of the environment, including, without limitation, laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata, buildings or facilities) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes. "Environmental Matter" means any matter arising out of, relating to, or resulting from pollution, contamination or protection of the environment (including natural resources), and any matters relating to emission, discharge, release or threatened release, of Hazardous Substances into the air (indoor and outdoor), surface water, groundwater, soil, land surface or subsurface, buildings or facilities or otherwise arising out of, relating to, or resulting from the manufacture, processing distribution, use, treatment, storage, disposal, transport, handling, release or threatened release of Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all rules and regulations promulgated with respect thereto, including without limitation, all such rules and regulations promulgated by the Department of Labor, the Pension Benefit Guaranty Corporation and the Internal Revenue Service. "ERISA Plan" means any pension benefit plan subject to Title IV of ERISA maintained by Borrower or any Affiliate thereof to which Borrower is required to contribute or with respect to which Borrower has any liability. "Eurodollar Business Day" is any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London, England. 5 "Event of Default" has the meaning given it in section 7.1. "Federal Funds Rate" means for any period, a fluctuating interest rate per annum equal for each day during such period to the overnight "Federal Funds" rate reported in the Wall Street Journal on such day (or the most recent day so reported) or if not published, such rate (or its equivalent) as reported in an alternate publication selected by Lender. "FIFRA" has the meaning given to it in Section 4.1(k). "Funded Debt" means Debt for borrowed money. "Funding Losses" shall have the meaning ascribed to such term in Section 2.4(a) hereof. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor) and which, in the case of Borrower and its Consolidated Subsidiaries, (i) are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the most recent audited financial statements, and (ii) are consistently applied for all periods after the date hereof so as to properly reflect the financial condition, and the results of operations and changes in financial position, of Borrower and its Consolidated Subsidiaries. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board (or any such successor) in order for such principle or practice to continue as a generally accepted accounting principle or practice, all reports and financial statements required hereunder with respect to Borrower or with respect to Borrower and its Consolidated Subsidiaries may be prepared in accordance with such change. "Governmental Authority" means the United States, any State in which an Individual Property is located and any political subdivision of any of the foregoing, and any agency, department, commission, board, court, bureau or instrumentality of any of them. "Grace Period" has the meaning given it in Section 7.2. "Hazardous Substances" means Asbestos, ACM, PCBs, urea-formaldehyde and unreaformaldehyde foam insulation, nuclear fuel or waste, petroleum products and any hazardous waste, toxic substance, related components, related constituents, pollutant or contaminant, including without limitation, any substance defined or treated as a "hazardous substance", "extremely hazardous substance" or "toxic substance" (or comparable term) in any applicable Environmental Law and any other material, which may give rise to Environmental Costs. "Individual Property" means an individual tract included in the Property, each such individual tract being identified by a separate Store or Distribution Center number on Exhibit C hereto. 6 "Interest Accrual Period" means (i) initially, the period commencing on the Effective Date and ending one month thereafter, and (ii) thereafter, each period commencing on the last day of the next preceding Interest Accrual Period and ending one month thereafter; provided, that: (a) any Interest Accrual Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Accrual Period shall end on the next preceding Business Day; (b) any Interest Accrual Period which 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 Accrual Period) shall, subject to clause (c) below, end on the last Business Day of a calendar month; (c) if any Interest Accrual Period would otherwise include a date on which a scheduled payment of principal of any of the Loans as provided in Section 2.5 is required to be made under this Agreement but does not end on such date, then, subject to Section 2.5, (i) the Interest Accrual Period for the principal amount (if any) of the Loan required to be repaid on such date shall end on such date and (ii) the remainder (if any) shall have an Interest Accrual Period determined in accordance with the other provisions of this definition; and (d) any Interest Accrual Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. "Interest Determination Date" means the date that is the first day of each Interest Accrual Period. "Lender" means UBS Mortgage Finance, Inc., its successors and assigns. "LIBOR" means the rate of interest per annum determined as follows: (i) On each Interest Determination Date, LIBOR will be determined on the basis of the offered rate for deposits of not less than U.S. $1,000,000 for a period of one month, commencing on such Interest Determination Date, as the opening quote on Bloomberg under the ticker "US0001M" on the Marquet Quote ("Q") Page (or such other page as may replace the Bloomberg Page on that service for the purposes of displaying the London interbank offered rates of major banks). If no such opening offered rate appears, LIBOR with respect to the relevant Interest Accrual Period will be determined as described in (ii) below. 7 (ii) With respect to an Interest Determination Date on which no such opening offered rate appears on Bloomberg as described in (i) above, LIBOR shall be determined as the opening offered rate appearing on Telerate Page 3750 on such date. (iii) If, on any Interest Determination Date, Lender is required but unable to determine LIBOR in the manner provided in paragraphs (i) and (ii) above, LIBOR for the next Interest Accrual Period shall be LIBOR as determined on the previous Interest Determination Date. "LIBOR Interest Rate" shall have the meaning ascribed to such term in Section 2.3 hereof. "Lien" means, with respect to any property or assets, any right or interest therein of a creditor to secure Debt owed to it or any other arrangement with such creditor which provides for the payment of such Debt out of such property or assets or which allows such creditor to have such Debt satisfied out of such property or assets prior to the general creditors of any owner thereof, including without limitation any lien, mortgage, security interest, pledge, deposit, production payment, rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent thereto, or any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise, but excluding any right of offset which arises without agreement in the ordinary course of business. "Loan" has the meaning given it in the first paragraph of the preamble. "Loan Documents" means this Agreement, the Note, the Security Documents, and all other agreements, certificates, affidavits or other documents executed by Borrower or any officer of Borrower and delivered pursuant to Section 3.1. "Loan Interest" has the meaning given to it in Section 4.2. "Loan Pool" has the meaning given to it in Section 4.2. "Materially Adverse Effect" means (i) with respect to an Individual Property, any matter which would materially and adversely affect the value of such Individual Property, (ii) with respect to Borrower, any materially adverse change in the business, operations, condition (financial or otherwise), assets or prospects of Borrower, or (iii) any fact or circumstance as to which singly or in the aggregate, based upon which, Borrower has reason to believe there is a reasonable possibility of the occurrence of (a) a materially adverse change described in clause (i) or (ii), or (b) the inability of Borrower to perform its material obligations hereunder or under any other Loan Document. "Maturity Date" means the date seven years after the Effective Date. 8 "Mortgage" means collectively, all of the mortgages and deeds of trust included in the Security Documents and executed by Borrower. "Mortgaged Property" has the meaning given it in the Mortgage. "Net Cash Proceeds" shall mean with respect to any sale, transfer or other disposition of property or other assets: (a) the cash proceeds received by the Borrower (including, without limitation, all cash proceeds received by way of (i) deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received and (ii) receivables and other assets retained by the Borrower as part of the sales consideration), minus (b) reasonable and customary brokerage commissions and other reasonable and customary fees and expenses actually paid (including reasonable and customary fees and expenses of counsel) related to such sale, transfer or other disposition. "Note" has the meaning given it in Section 2.2. "Payment Date" means the last day of any Interest Accrual Period. "PCBs" means polychlorinated biphenyls. "Person" means an individual, corporation, partnership, association, joint stock company, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture, court or governmental unit or any agency or subdivision thereof, or any other legally recognizable entity. "Permitted Encumbrances" has the meaning given it in subsection 4.1(g). "Permitted Second Lien" has the meaning given it in Section 2.10. "Plan of Reorganization" shall mean that certain First Amended Plan of Reorganization, filed by the Debtor in the Case on September 5, 1997, as amended on October 9, 1997, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof as in effect on the date hereof. "Prepayment Premium" has the meaning given it in Section 2.6. "Prime Rate" means for any period, an interest rate per annum equal for each day during such period to the "Prime Rate" reported in The Wall Street Journal on such day (or the most recent day so reported). "Prior Notes" has the meaning given it in the first paragraph of the preamble. 9 "Prohibited Transaction" is a prohibited transaction as described under Section 406 of ERISA or Section 4975 of the Internal Revenue Code which is not the subject of a statutory exemption under Section 408(b) of ERISA or an administrative exemption granted pursuant to Section 408(a) of ERISA. "Property" has the meaning given it in the Mortgage. "RCRA" has the meaning given it in subsection 4.1(k). "Release Date" has the meaning given it in Section 2.7. "Release Fee" has the meaning given it in Section 2.7. "Release Notice" has the meaning given it in Section 2.7. "Secured Indebtedness" means collectively any principal and accrued interest which is outstanding under, and all other amounts which may be otherwise payable under the Note and the other Loan Documents and described in the Mortgage as being secured thereby. "Securitization" has the meaning given to it in Section 4.2. "Security Documents" means the instruments listed in the Security Schedule attached as Schedule 2 hereto and all other security agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties, financing statements, continuation statements, extension agreements and other agreements or instruments now, heretofore, or hereafter delivered by Borrower to Lender in connection with this Agreement or any transaction contemplated hereby to secure or guarantee the payment of any part of the Secured Indebtedness or the performance of Borrower's other duties and obligations under the Loan Documents. "Store" means an Individual Property designated as a store on Exhibit C hereto. "Subsidiary" means, with respect to any Person, any corporation, association, partnership, joint venture, or other business or corporate entity, enterprise or organization which is directly or indirectly (through one or more intermediaries) controlled by or owned fifty percent (50%) or more by such Person. "Substitution Date" has the meaning given it in Section 2.7. "Substitution Notice" has the meaning given it in Section 2.7. "Substitution Property" has the meaning given it in Section 2.7. 10 "Termination Event" means with respect to Borrower or any Affiliate of Borrower (a) the occurrence with respect to any ERISA Plan of (i) a reportable event described in Sections 4043(b)(5) or (6) of ERISA or (ii) any other reportable event described in Section 4043(b) of ERISA other than a reportable event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation under Section 4043(a) of ERISA, or (b) the withdrawal of Borrower or of any Affiliate of Borrower from an ERISA Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a notice of intent to terminate any ERISA Plan or the treatment of any ERISA Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate any ERISA Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any ERISA Plan. "Trustee" means any trustee named under a Security Document. "U.S. Person" is any person that is (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized under the laws of the United States or any State thereof or (iii) any estate or trust that is subject to U.S. federal income taxation regardless of the source of its income. Section 1.2 Exhibits and Schedules. All Exhibits and Schedules attached to this Agreement are a part hereof for all purposes. Section 1.3 Amendment of Defined Instruments. Unless the context otherwise requires or unless otherwise provided herein the terms defined in this Agreement which refer to a particular agreement, instrument or document also refer to and include all renewals, extensions, modifications, amendments, and restatements of such agreement, instrument or document, provided that nothing contained in this section shall be construed to authorize any such renewal, extension, modification, amendment or restatement. Section 1.4 References and Titles. All references in this Agreement to Exhibits, Schedules, articles, sections, subsections and other subdivisions refer to the Exhibits, Schedules, articles, sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivisions are for convenience only and do not constitute any part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words "this Agreement", "this instrument", "herein", "hereof", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this section" and "this subsection" and similar phrases refer only to the sections or subsections hereof in which such phrases occur. Pronouns in masculine, feminine and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. 11 Section 1.5 Calculations and Determinations. Unless otherwise expressly provided herein or unless Lender otherwise consents, all financial statements and reports furnished to Lender hereunder shall be prepared and all financial computations and determinations pursuant hereto shall be made in accordance with GAAP. ARTICLE II The Loan Section 2.1 Acknowledgment of Existing Obligations. It is hereby expressly understood and agreed by the parties hereto that the Note amends, restates, supplements, supersedes and replaces the Prior Notes in their entirety and that the indebtedness outstanding under and evidenced by the Prior Notes as of the date hereof has not been repaid, satisfied or discharged, but for all purposes has been replaced, substituted and restructured as provided herein and constitutes the indebtedness outstanding under the Note. Section 2.2 Exchange of Notes. The Lender agrees on the terms and conditions set forth in this Agreement to restructure the Loan to Borrower as of the Effective Date. Borrower acknowledges that the current unpaid principal amount of the Prior Notes is $97,359,451.26. The Loan, as restructured, shall be evidenced by one or more promissory notes (collectively, the "Note") substantially in the form of Exhibit A. Upon the Effective Date, Borrower shall deliver the duly executed Note to Lender and Lender shall mark each of the Prior Notes held by it to indicate that the Prior Note has been replaced and superseded by the Note. The Note shall be delivered in replacement for, but not in payment of, such superseded Prior Notes. Section 2.3 Interest. (a) Prior to the Effective Date, interest on the Prior Notes shall accrue and be added to the principal amount of the Loan. Such interest shall be calculated at the rates of interest stated in the Prior Notes without regard to the late payment rate and any other penalties provided for therein and in the Prior Loan Agreement. If the Effective Date shall not have occurred prior to January 1, 1998, then Borrower shall commence making payments of interest at the rates stated in the Prior Notes on the sum of the principal amount of the Prior Notes and all accrued interest thereon through December 31, 1997, beginning on the first scheduled payment date thereafter. (b) The principal amount outstanding hereunder shall bear interest at a rate per annum (the "LIBOR Interest Rate") equal to four percent (4%) in excess of LIBOR for the relevant Interest Accrual Period. (c) On and after the Effective Date, prior to the Maturity Date (or the date the unpaid principal balance otherwise becomes due, whether by acceleration or otherwise), interest accruing during each Interest Accrual Period shall be payable monthly in arrears on each Payment 12 Date. The entire unpaid principal balance of the Secured Indebtedness together with all accrued and unpaid interest, if not sooner paid, shall be payable in full on the Maturity Date. (d) All interest payable shall be computed on the basis of a 360-day year for the actual number of days elapsed. In computing the number of days during which interest accrues, the day on which funds are initially advanced shall be included regardless of the time of day such advance is made, and the day on which funds are repaid shall, subject to Section 2.8 below, be excluded. Section 2.4 Funding Losses; Change in Law, Etc. (a) Borrower hereby agrees to pay to Lender any amount necessary to compensate Lender for any losses or costs (including, without limitation, the costs of breaking any "LIBOR" contract, if applicable, or funding losses determined on the basis of Lender's reinvestment rate and the interest rate hereon) (Collectively, "Funding Losses") sustained by Lender: (i) if this Note, or any portion hereof, is repaid for any reason whatsoever on any date other than a Payment Date (including, without limitation, from condemnation or insurance proceeds), (ii) upon the conversion of the interest rate on the Loan to the Prime Rate in accordance with subsection (b) below, (iii) as a consequence of (x) any increased costs that Lender may sustain in maintaining the borrowing evidenced hereby or (y) the reduction of any amounts received or receivable from Borrower, in either case, due to the introduction of, or any change in, law or applicable regulation or treaty (including the administration or interpretation thereof), whether or not having the force of law, or due to the compliance by Lender, as the case may be, with any directive, whether or not having the force of law, or request from any central bank or domestic or foreign governmental authority, agency or instrumentality having jurisdiction and/or (iv) any other set of circumstances not attributable to Lender's acts. Payment of Funding Losses hereunder shall be in addition to any obligation to pay a Prepayment Premium in circumstances where such Prepayment Premium would be due and owing. b) If Lender determines (which determination shall be conclusive and binding upon Borrower, absent manifest error( (i) that Dollar deposits in an amount approximately equal to the principal balance outstanding hereunder are not generally available at such time in the London Interbank Market for deposits in Eurodollars, (ii) that the rate at which such deposits are being offered will not adequately and fairly reflect the cost to Lender of maintaining a LIBOR Interest Rate on the Loan or of funding the same in such market for such Interest Accrual period due to circumstances affecting the London Interbank Market generally, (iii) that reasonable means do not exist for ascertaining LIBOR, or (iv) that a LIBOR Interest Rate would be in excess of the maximum interest rate which Borrower may by law pay, then, in any such event, Lender shall so notify Borrower and as of the date of such notification with respect to an event described in clause (ii) or (iv) above, or as of the expiration of the applicable Interest Accrual Period with respect to an event 13 described in clause (i) or (iii) above, interest shall accrue at the Prime Rate until such time as the situations described above are no longer in effect or as otherwise provided in Section 7.1 hereof; provided, however, if the situation described in clause (ii) above occurs, (x) Borrower shall have the option, to be exercised by written notice to Lender, to pay Lender (in the manner reasonably required by Lender) for such increased cost of maintaining a LIBOR Interest Rate and (y) if the same only affects a portion of the Loan, then only such portion shall have interest accrue at the Prime Rate (provided the remaining portion is at least $1,000,000) and interest shall continue to accrue on the remaining portion at the LIBOR Interest Rate. (c) If the introduction of, or any change in, any law, regulation or treaty, or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof, shall make it unlawful for Lender to maintain the LIBOR Interest Rate with respect to the Loan, or any portion thereof, or to fund the Loan, or any portion thereof, in Eurodollars in the London Interbank Market, then the Loan (or such portion of the Loan) shall thereafter bear interest at the Prime Rate (unless the Default Rate shall be applicable) and Borrower shall pay to Lender the amount of Funding Losses (if any) incurred in connection with such conversion. The accrual of interest at the Prime Rate shall continue until such Payment Date, if any, as the situation described in this subsection (c) is no longer in effect. (d) If Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption of any other law, rule, regulation or guideline (including but not limited to any United States law, rule, regulation or guideline) regarding capital adequacy, or any change becoming effective in any of the foregoing or in the enforcement or interpretation or administration of any of the foregoing by any court or any domestic or foreign governmental authority, central bank or comparable agency charged with the enforcement or interpretation or administration thereof, or compliance by Lender or its holding company, as the case may be, with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of Lender or its holding company, as the case may be, to a level below that which Lender or its holding company, as the case may be, could have achieved but for such applicability, adoption, change or compliance (taking into consideration Lender's or its holding company's, as the case may be, policies with respect to capital adequacy) (the foregoing being hereinafter referred to as "Capital Adequacy Events"), then, upon demand by Lender, Borrower shall, pay to Lender, from time to time, such additional amount or amounts as will compensate Lender for any such reduction suffered. 14 (e) Any amount payable by Borrower under subsection (a) or subsection (d) of this Section 2.4 shall be paid to Lender within five (5) days of receipt by Borrower of a certificate signed by an officer of Lender setting forth the amount due and the basis for the determination of such amount, which statement shall be conclusive and binding upon Borrower, absent manifest error. Failure on the part of Lender to demand payment from Borrower for any such amount attributable to any particular period shall not constitute a waiver of Lender's right to demand payment of such amount for any subsequent or prior period. Lender shall use reasonable efforts to deliver to Borrower prompt notice of any event described in subsection (a) or (d) above and of the amount to be paid under this Section 2.4 as a result thereof; provided, however, any failure by Lender to so notify Borrower shall not affect Borrower's obligation to make the payments to be made under this Section 2.4 as a result thereof. All amounts which may become due and payable by Borrower in accordance with the provisions of this Section 2.4 shall constitute additional interest hereunder and shall be secured by the Mortgage and the other Loan Documents. (f) If Lender requests compensation for any losses or costs to be reimbursed pursuant to any one or more of the provisions of subsections (a)(iii) or (iv) or subsection(d) of this Section 2.4, of if any event occurs as described in subsections (b) or (c) above which would cause the Note no longer to bear interest at the LIBOR Interest Rate then, upon request of Borrower, Lender shall use reasonable efforts in a manner consistent with such institution's practice in connection with loans like the Loan to designate a different lending office for funding or booking the Secured Indebtedness or assign its rights and obligations under the Note to another of its offices, branches or affiliates if such designation or assignment in Lender's sole but good faith judgment (i) would eliminate, mitigate or reduce amounts payable by Borrower in connection with Funding Losses or Capital Adequacy Events or, with respect to an event described in subsection (b) or (c) above would allow the Note to continue to bear interest at the LIBOR Interest Rate without additional cost to Lender and (ii) would not be otherwise prejudicial to Lender; Borrower hereby agreeing to pay all reasonably incurred costs and expenses incurred by Lender in connection with any such designation or assignment. Section 2.5 Mandatory Payments. (a) Borrower shall make annual repayments of principal on the Loan (without premium) in installments of $4,000,000 on each anniversary of the Effective Date, beginning in 1998. Any prepayments of principal made by the Borrower pursuant to Section 2.7 and subsections 5.1(g) and (h) shall be credited against Borrower's obligation under this Section 2.5, with the amount of any such prepayment to be applied to the scheduled mandatory repayments in the order of their maturity without Prepayment Premium. Borrower shall not be entitled to release one or more Individual Properties in connection with any payment made pursuant to this Section 2.5. 15 (b) Notwithstanding any other provisions of this Agreement, the outstanding unpaid principal amount of the Note, together with all accrued interest thereon, shall become due and payable on the Maturity Date. Section 2.6 Optional Prepayment. (a) Borrower shall have no right to prepay all or any part of the principal of or interest on the Loan except as expressly provided in this Agreement. Subject to the terms and conditions of the Loan Documents and payment of the prepayment premium set forth below (the "Prepayment Premium") and all accrued interest thereon and other sums due under the Loan, if any, Borrower shall have the right to prepay all or any part of the outstanding principal balance of the Loan for the periods beginning on the second anniversary of the Effective Date as shown below. The Prepayment Premium for each such period shall be as follows: Prepayment Premium (as a percentage of principal Year being prepaid) Beginning the 2nd anniversary of the Effective Date 3% Beginning the 3rd anniversary of the Effective Date 2% Beginning the 4th anniversary of the Effective Date Beginning the 5th anniversary of the Effective Date and thereafter 0% Prepayments may be made on a Payment Date upon the giving of not less than twenty (20) days prior written notice to Lender. Lender shall not be obligated to accept any prepayment unless accompanied by the applicable Prepayment Premium, if any. Except as expressly set forth therein, no Prepayment Premium shall be required with respect to prepayments of the Loan made pursuant to any other provisions of this Agreement provided however that Lender shall be entitled to receive the applicable Prepayment Premium (if any) set forth above upon acceleration of the Loan upon an Event of Default pursuant to Section 7.2. Borrower shall not be entitled to release one or more Individual Properties in connection with any optional partial prepayment of the Loan pursuant to this section. (b) At any time after the date hereof until the Maturity Date, prior to seeking any financing and any commitment for financing from a third party relating to the refinancing of the Loan, Borrower shall first notify Lender in writing of its intention to 16 obtain such financing, and offer to Lender the opportunity to consider whether or not Lender will provide the financing. As and when Borrower determines that it will seek to obtain financing, Borrower shall promptly send to Lender such notice thereof. If Lender is willing to consider providing the financing, Lender shall, prior to the expiration of the period ending fifteen (15) days after Lender's receipt of the notice, deliver to Borrower an initial term sheet describing the proposed basic business terms and conditions regarding the financing, it being understood that such initial term sheet shall not be binding upon Lender and shall in no event be deemed a commitment by Lender to lend. After the receipt by Borrower of the initial term sheet, Borrower and Lender shall have fifteen (15) days within which to agree in writing on the terms and conditions of a final term sheet, describing the basic terms and conditions upon which Lender is prepared to seek internal approvals to extend the financing, it being understood that such final term sheet shall not be binding upon Lender and shall in no event be deemed a commitment by Lender to lend. Borrower agrees to cooperate with Lender and negotiate in good faith in an effort to arrive at a final term sheet, without, however, being obligated to reach such an agreement. Section 2.7 Partial Releases. (a) Partial Releases of Individual Properties. In connection with its proposed sale, upon Borrower's written request, Lender shall release that portion of an Individual Property not required for the operation of the Store or other facility located thereon from the Lien of the Mortgage, provided each and every one of the following terms and conditions of this subsection 2.7(a) is satisfied, in Lender's sole opinion: (i) Borrower shall give notice (hereinafter called a "Release Notice") to Lender of its intent to have a portion of an Individual Property released from the Lien of the Mortgage at least thirty (30) days prior to the date set forth in the Release Notice for the granting of such release (hereinafter called the "Release Date") and describing the terms of the proposed sale. (ii) At the time of the Release Notice and on the Release Date, there shall not have occurred and be continuing under any of the Loan Documents either (A) a Default that is capable of being cured by the payment of money or (B) an Event of Default. (iii) Borrower shall furnish Lender with evidence satisfactory to Lender that the Mortgage remains a valid first Lien on the remaining Property covered by the Mortgage or deed of trust that included such released Individual Property and not so released, including without limitation an endorsement to existing title insurance policies or equivalent assurance in form, of substance and within policy limits satisfactory to Lender. All costs of the foregoing shall be paid by Borrower. 17 (iv) In order to obtain the partial release, Borrower shall pay the following amounts: (A) an amount equal to the Net Cash Proceeds arising from the sale of the Property being released to be applied to the outstanding principal amount of the Loan; (B) other amounts, if any, advanced by Lender under the Loan Documents and relating to the Individual Property to be released; and (C) all costs incurred by Lender relating to the proposed partial release, including but not limited to reasonable legal fees and expenses of outside counsel, appraisal costs, survey costs, and title costs. (b) Partial Releases upon Closure of Store. When a Store is closed, Borrower must give Lender written notice of closure at least thirty (30) days prior to closure, other than the Stores listed on Schedule 2.7(b), which stores were closed prior to the Effective Date. At any time after the date of such Store closure, in connection with a proposed sale, Borrower may obtain a partial release of the lien of the Mortgage with respect to the Individual Property on which such closed Store is located on the following terms and conditions: (i) Borrower shall give the notice described in Section 2.7(a)(i). (ii) At the time of the Release Notice and on the Release Date, there shall not have occurred and be continuing under any of the Loan Documents either (A) a Default that is capable of being cured by the payment of money or (B) an Event of Default. (iii) Borrower shall pay to Lender the following amounts: (A) an amount equal to the Net Cash Proceeds arising from the sale of the Property being released to be applied to the outstanding principal amount of the Loan; (B) other amounts, if any, advanced by Lender under the Loan Documents and relating to the Individual Property to be released ; and 18 (C) all costs incurred by Lender relating to the proposed partial release, including but not limited to reasonable legal fees and expenses of outside counsel. (c) Partial Release Upon Substitution of an Individual Property. Upon Borrower's written request, Lender shall permit the release of the Lien on, and substitution for, certain Individual Properties provided the following terms and conditions are satisfied, in Lender's sole opinion: (i) Borrower shall give notice (hereinafter called the "Substitution Notice") to Lender of its intent to release and substitute Individual Properties at least sixty (60) days prior to the date set forth in the Substitution Notice for such release and substitution (hereinafter called the "Substitution Date"). The Substitution Notice shall describe the Individual Property to be released and the property to be substituted (the "Substitution Property"). (ii) At the time of the Substitution Notice and on the Substitution Date, there shall not have occurred and be continuing under any of the Loan Documents either (A) a Default that is capable of being cured by the payment of money or (B) an Event of Default. (iii) Each Substitution Property shall be similar by type, remaining economic life, land value, and desirability of location and shall have a value equal to or greater, as determined by Lender, than the value of the Individual Property being released; provided, however, in all events the Substitution Property must be fully operational and operating. Notwithstanding the preceding, a Substitution Property may only be substituted for an Individual Property on a one-for-one basis, and the Substitution Property must be acceptable to Lender in all respects, including title, zoning, appraisal, engineering and environmental respects. (iv) Borrower shall pay all costs incurred by Lender relating to the proposed partial release and substitution, even if the proposed transaction is not completed, including but not limited to reasonable legal fees and expenses of outside counsel, title costs and, with respect to the Substitution Property, appraisal, engineering, environmental, and survey costs. (v) Borrower shall furnish Lender with evidence satisfactory to Lender that (a) the Lender has a valid first Lien on the Substitution Property. Lender recognizes that if an Individual Property is substituted, the Substitution Property will also be encumbered by the Permitted Second Lien, but only to the extent permitted by Section 2.10 and (b) the Mortgage remains a valid first lien on any remaining Property covered by the mortgage or deed of trust that included the released Individual Property and not so released, including without limitation an 19 endorsement to existing title policies or equivalent assurance in form, substance and within policy limits reasonably satisfactory to Lender. (vi) only properties to which the Borrower holds fee simple title may be Substitution Properties. No Individual Properties in which Borrower holds only a leasehold estate may be used as a substitute either for another ground-leased property or for a fee-owned property. (vii) No more than ten (10) Individual Properties may be released during the term of the Loan pursuant to this subsection 2.7(c). (d) Sales at Arm's Length. Lender shall not be obligated to release any Individual Property pursuant to subsection 2.7(a) or 2.7(b) above unless the sale (i) has been negotiated on an arm's length basis, (ii) is to a bona fide third party purchaser, (iii) is for cash consideration only, and (iv) is at a price in conformity with market values for similar properties in the area in which the Individual Property is located. Section 2.8 Payments to Lender. Borrower will make each payment which it owes under the Loan Documents not later than 12:00 p.m., Eastern Standard Time or Eastern Daylight Time, whichever is applicable, on the date such payment becomes due and payable, in lawful money of the United States of America and by wire transfer of immediately available funds to such bank or place, or in such other manner, as Lender may from time to time designate. Payments shall be made without any setoff, deduction or counterclaim whatsoever. Until otherwise designated in writing by Lender, payments shall be made by wire transfer to [UBS Mortgage Finance, c/o Chase Manhattan Bank, New York, New York, ABA #021 000021 Account #140-0-91821]. Any payment received by Lender after such time will be deemed to have been made on the next following Business Day. Should any such payment become due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day. Each payment under a Loan Document shall be due and payable at the place provided therein and, if no specific place of payment is provided, shall be due and payable at the place of payment of the Note. If on any date on which payments of principal and interest are due or past due on the Note, Borrower pays less than the full amount due thereunder, Lender may, in addition to any other rights or remedies provided herein, apply such money as it elects to the Secured Indebtedness then due and payable. In the event any payment of principal or interest under this Agreement or the other Loan Documents is made directly by the holder of the Permitted Second Lien on behalf of Borrower (pursuant to Section 7.2 hereof) and not by way of an advance by the holder of the Permitted Second Lien under the Credit Agreement, evidence detailing such payment shall be simultaneously delivered by the holder of the Permitted Second Lien to Lender with each payment. Section 2.9 Limitation on Liability. Lender shall not seek or enforce any money judgment or deficiency judgment, or otherwise assert personal liability or responsibility, against Borrower with respect to any and all obligations secured by the Mortgage or other obligations 20 arising out of the Loan Documents in excess of the amount realized upon foreclosure against (or sale, pursuant to power of sale, of) all or, at Lender's option, a portion of the security therefor, it being agreed that, except as hereinafter provided, the sole remedy of Lender shall be to proceed against the security for the Loan under the Loan Documents; provided, however, that nothing contained herein or in any other Loan Document shall (a) limit Lender's rights and remedies (other than its right to seek a money judgment or deficiency judgment which is limited as provided above) against the Borrower hereunder or under any other Loan Document, either at law or in equity, or (b) relieve Borrower from personal liability and responsibility: (a) for damages suffered by Lender by reason of a violation of subsections 4.1(k) and (q) and 5.1(p) and (aa) hereof and for any amounts required to be paid by Borrower under Sections 5.2 and 7.4 hereof; (b) for waste resulting in a material diminution in value to any of the Property committed or permitted by Borrower with respect to the Property, including without limitation any waste resulting from Borrower's failure to restore the Property after removal of trade fixtures as required by this Agreement, to the extent and only to the extent that the Property affected thereby has suffered a diminution in value as a result thereof; (c) for insurance proceeds and condemnation awards in respect of the Property received by Borrower and not turned over to Lender or used by Borrower with Lender's consent for restoration or repair of the Property as provided in the Mortgage; (d) for unpaid real estate taxes and assessments or other governmental or other impositions (including without limitation utility charges) that create a Lien on any of the Property that would not be extinguished by a foreclosure of the Mortgage, prorated to date of foreclosure, with respect to the Property; (e) regarding leases affecting the Property, (a) for any sums expended by Lender in fulfilling the obligations of Borrower for which Lender is personally liable, including without limitation the return of security deposits to tenants if not delivered to Lender upon foreclosure or sale pursuant to power of sale, or (b) for any rents or other income from leases either (i) after the occurrence of an Event of Default, not applied to the fixed and operating expenses of the Property, including without limitation, payments on the Loan or (ii) under future leases that do not comply with the requirement of the Mortgage that such leases be designated as superior or subordinate to the Mortgage at Lender's option; (f) for the Net Cash Proceeds attributable to any Individual Properties sold in violation of the provisions contained in subsection 7.1(d) hereof; 21 (g) for the Allocated Loan Amount attributable to any Individual Property covered by the Lien of the Mortgage with respect to which such Lien ceases to be enforceable by reason of avoidance under bankruptcy or other fraudulent transfer laws; (h) for any damages incurred by Lender by reason of any fraud or material misrepresentation with intent to deceive by Borrower in connection with the Property, the Loan Documents, the application for the Loan or any other aspect of the Loan; (i) for costs and expenses incurred by Lender with respect to the Property at any time after six (6) months after the date on which the Loan becomes due and payable in full, by acceleration or otherwise, or after any event described in subsection 7.1(f); and (j) for interest accruing on the Loan from the date six (6) months after the date on which the Loan becomes due and payable in full, by acceleration or otherwise, or after any event described in subsection 7.1(f) until title to all of the Property passes from the Borrower pursuant to enforcement of the Mortgage. Nothing contained herein shall impair Lender's rights under Applicable Laws, including without limitation applicable bankruptcy law; nor shall anything contained herein impair Lender's status and rights as a holder of senior indebtedness pursuant to any instrument under which Lender would be granted senior status or a derivative recourse claim. Section 2.10 Permitted Second Lien. Borrower shall have the right to encumber the Property with a second Lien (hereinafter called the "Permitted Second Lien") which Permitted Second Lien shall be substantially in the form of Exhibit B hereto. The Permitted Second Lien shall secure only the Bank Debt and any refinancing thereof. The Permitted Second Lien documents shall provide, among other things, that the Permitted Second Lien is not forecloseable until Lender accelerates the maturity of the Note. The Permitted Second Lien documents shall further provide that in the event Lender accelerates the maturity of the Note, the sole remedy of the holder of the Permitted Second Lien is to cooperate and join Lender in the simultaneous foreclosure of both Liens in accordance with Lender's schedule for foreclosure, time being of the essence. The Permitted Second Lien documents shall contain such additional provisions as may be required by state and local law to accomplish the foregoing objectives. During the term of any such Permitted Second Lien, Borrower shall provide Lender, without cost to Lender, with annual estoppel certificates, stating the then correct balance of Bank Debt, the current interest rate on the Bank Debt, and the remaining amortization schedule for the Bank Debt of the then current year. ARTICLE III Conditions Precedent 22 Section 3.1 Documents to be Delivered. As a condition to the effectiveness of this Agreement, Lender shall have received all of the following, at Lender's office in New York, New York, duly executed and delivered and in form, substance and date satisfactory to Lender: (a) The Note. (b) A certificate of the chief financial officer of Borrower in form and substance satisfactory to Lender. (c) Favorable opinion(s) of counsel to Borrower, substantially in the form set forth in Exhibit D. (d) Each Security Document listed in the Security Schedule, together with appropriate UCC Financing Statements. (e) Each additional closing item described in Schedule 3. Section 3.2 Additional Conditions Precedent. In addition the following conditions precedent have been satisfied: (a) All representations and warranties made by Borrower in any Loan Document shall be true on and as of the date made and on the Effective Date (except where such representations expressly relate to an earlier date). (b) Borrower shall have performed and complied with all agreements and conditions required in the Loan Documents to be performed or complied with by it on or prior to the date of the Loan. (c) Borrower shall have obtained confirmation by the Bankruptcy Court of its Plan of Reorganization. (d) No Default under this Agreement shall exist and be continuing. (e) Each additional condition described in Schedule 4. ARTICLE IV Representations and Warranties Section 4.1 Borrower's Representations and Warranties. To induce Lender to enter into this Agreement and to restructure the Loan, the Borrower represents and warrants to Lender that: 23 (a) No Default. Borrower is not in Default in the performance of any of the covenants and agreements contained herein. No event has occurred and is continuing which constitutes a Default. (b) Organization and Good Standing. Borrower is a corporation duly organized, validly existing and in good standing under the laws of its state of organization, having all corporate powers required to carry on its business and enter into and carry out the transactions contemplated hereby. Borrower has all requisite power and all governmental certificates of authority, licenses, permits, qualifications, and other documentation to own, lease and operate its properties and to carry on its business as now conducted and as contemplated to be conducted except where failure to obtain any such governmental certificate of authority, license, permit, qualification or other documentation would not have a Materially Adverse Effect. Borrower is duly qualified, in good standing, and authorized to do business in all other jurisdictions within the United States wherein the character of the properties owned or held by it or the nature of the business transacted by it makes such qualification necessary. (c) Authorization. Borrower has duly taken all corporate action necessary to authorize the execution and delivery by it of the Loan Documents to which it is a party and to authorize the consummation of the transactions contemplated thereby and the performance of its obligations thereunder. (d) No Conflicts or Consents. The execution and delivery the Loan Documents to which Borrower is a party, the performance by Borrower of its obligations under such Loan Documents, and the consummation of the transactions contemplated by the various Loan Documents, do not and will not (i) conflict with any provision of (A) any applicable domestic or foreign law, statute, decree, rule or regulation, except where failure to comply therewith would not have a Materially Adverse Effect (B) the certificate of incorporation or bylaws, of Borrower, or (C) any judgment, license, order or permit applicable to or binding upon Borrower, (ii) result in the acceleration of any Debt of Borrower, (iii) result in or require the creation of any Lien upon any assets or properties of Borrower except as expressly contemplated in the Loan Documents, or (iv) contravene, result in a breach of or constitute a default under any mortgage, deed of trust, lease, promissory note, loan agreement or other material contract or material agreement entered into as of the Effective Date to which Borrower is a party or any of its properties may currently be bound or affected. Except as expressly contemplated in the Loan Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by Borrower of any Loan Document or to consummate any transactions contemplated by the Loan Documents. (e) Enforceable Obligations. This Agreement is, and the other Loan Documents are or, when duly executed and delivered, will be, legal and binding 24 obligations of Borrower enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights. (f) Title and Authority. Borrower is the lawful owner of good and marketable title to the Property and has good right and authority to grant, bargain, sell, transfer, assign and mortgage the Mortgaged Property and to grant a security interest in the Collateral. Borrower does not do business with respect to the Property under any trade name other than as set forth on the Disclosure Schedule attached hereto as Schedule 1. (g) Permitted Encumbrances. The Property is free and clear from all Liens, security interests and encumbrances except the Lien and security interest evidenced by the Security Documents and the encumbrances set forth in the Security Documents, including without limitation the Permitted Second Lien, and the mechanic's or materialmen's Liens, lienable bills or other claims constituting or that may constitute a Lien on the Property, or any part thereof that are set forth on the Disclosure Schedule (hereinafter called the "Permitted Encumbrances"). (h) No Financing Statement. There is no financing statement covering all or any part of the Property or its proceeds on file in any public office except with respect to the Permitted Second Lien or as described in the Disclosure Schedule (i) Location of Collateral. All tangible Collateral is located on the Property. (j) Compliance with Covenants and Laws. To the best of knowledge of Borrower, the Property and the intended use thereof by Borrower comply with all applicable restrictive covenants, zoning ordinances and building codes, flood disaster laws, applicable health and environmental laws and regulations and all other applicable laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions (all of the foregoing hereinafter sometimes collectively called "Applicable Laws"), except where failure to comply therewith would not have a Materially Adverse Effect, which compliance is, except with respect to parking, without reliance on adjacent or other properties not covered by the Lien of the Mortgage. Borrower has obtained all requisite zoning, utility, building, health and operating permits from each governmental authority or municipality having jurisdiction over the Property except where failure to obtain any such permit would not have a Materially Adverse Effect. Borrower has not been notified by any Governmental Authority of or is otherwise aware of any material violation of parking or zoning requirements that Borrower believes cannot be corrected by providing additional surface parking on portions of the Property suitable for parking purposes except as previously disclosed to Lender. The existing parking provided on each Individual Property is adequate to meet the business requirements of the operations conducted thereon. 25 (k) Environmental. To the best of Borrower's knowledge after due inquiry, except as set forth on Schedule 1, Borrower covenants and represents to Lender that, (i) no Hazardous Substances are now or have ever been located, produced, used, stored, treated, transported, incorporated, discharged, emitted, released, deposited or disposed of in, upon, under, over or from the Property in a manner that may give rise to any actual or potential liability to pay response costs or other damages, losses or expenses or otherwise violate any Environmental Laws which could reasonably be expected to result in a Materially Adverse Effect; (ii) no Hazardous Substances are currently located, stored, or used at the Property, except with respect to such Hazardous Substances which are (x) customarily located, stored or used in retail stores similar to the Property or (y) unique and necessary to a Borrower's business located at the Property, provided that such Hazardous Substances described in (x) or (y) are at all times stored, located and used in compliance with all Environmental Laws; (iii) no Hazardous Substances have been discharged, released or emitted, upon or from the Property into the environment and no threat exists of a discharge, release or emission of a Hazardous Substance upon or from the Property into the environment, which discharge, release or emission, in either case, would subject the owner of the Property to any damages, penalties or liabilities under any applicable Environmental Laws which could reasonably be expected to result in a Materially Adverse Effect; (iv) the Property has not ever been used as or for a mine, a landfill, a dump or other disposal facility or a gasoline service station; (v) no underground storage tank is now located on or at the Property or if previously located therein has been removed therefrom in compliance with all applicable Environmental Laws and any clean-up of the surrounding soil in connection therewith has been completed or is such that, in each case, it could not reasonably result in a Materially Adverse Effect; (vi) no asbestos, ACM, materials containing urea-formaldehyde, or transformers, capacitors, ballasts or other equipment that contain PCBs are located on at or under the Property which could reasonably be expected to result in a Materially Adverse Effect; (vii) the Property has never been used by Borrower or any Affiliate or, to the best of Borrower's knowledge, after reasonable investigation, any other person or entity (including any prior owner of the Property) as a permanent or temporary treatment, storage or disposal site for any Hazardous Substance; (viii) no violation of any Environmental Law now exists or has ever existed in, upon, under, over or from the Property, no notice of any such violation or any alleged violation thereof has been issued or given by any governmental entity or agency, and there is not now nor has there ever been any investigation or report involving the Property by any governmental entity or agency which in any way relates to Hazardous Substances which could reasonably be expected to result in a Materially Adverse Effect; (ix) no Person has given any notice of or asserted any claim, cause of action, penalty, cost or demand for payment or compensation, whether or not involving any injury or threatened injury to human health, the environment or natural resources, resulting or allegedly resulting from any activity or event described in clauses (i)-(viii) above and to the knowledge of Borrower, no basis for such a claim exists which, in each case, could be expected to result in a Materially Adverse Effect; (x) there are not now, nor to Borrower's best knowledge have there ever been, any actions, suits, proceedings or 26 damage settlements relating in any way to Hazardous Substances, in, upon, under, over or from the Property which could reasonably be expected to result in a Materially Adverse Effect; (xi) no oral or written notification of a Release (as such term is defined in 42 U.S.C. ss. 9601(22)) of any Hazardous Substances has been filed by or on behalf of Borrower through authorized employees or agents and the Property are not listed in the United States Environmental Protection Agency's List of Hazardous Waste Sites or any other list of Hazardous Substance sites maintained by any federal, state or local governmental agency which could reasonably be expected to result in a Materially Adverse Effect; (xii) there are no environmental liens on the Property, and, to the best knowledge of Borrower, no governmental actions have been taken or are in process which could subject the Property to such liens; and (xiii) Borrower has not transported or arranged for the transportation of any Hazardous Substances to any location which is listed or proposed for listing under CERCLA or on any similar state list or which is the subject of federal, sate or local enforcement actions or other investigations. (l) No Suits. There are no judicial or administrative actions, suits, judgments or any other proceedings pending or, to the best of knowledge of Borrower, threatened against or affecting Borrower, any other person liable, directly or indirectly, for the Secured Indebtedness, or the Property, which do or may have a Materially Adverse Effect on Borrower or on the Property, or involving the validity, enforceability or priority of any of the Loan Documents except as set forth in the Disclosure Schedule. (m) Financial Statements. The financial statements identified in the Disclosure Schedule fairly present Borrower's Consolidated financial position at the respective dates thereof and the Consolidated results of Borrower's operations and the changes in Borrower's Consolidated financial position for the respective periods thereof. Except as noted therein, the financial statements were prepared in accordance with GAAP. (n) Names and Places of Business. Borrower has not, during the preceding five years, been known by or used or had any other corporate, trade, or fictitious name, except as disclosed in the Disclosure Schedule. Except as otherwise indicated in the Disclosure Schedule, the chief executive office and principal place of business of the Borrower are (and for the preceding five years have been) located at the address set out in Section 8.3. (o) Condition of Property. To the best of knowledge of Borrower and except in the Disclosures Schedule (a) the Property is served by electric, gas, storm and sanitary sewers or septic sewer systems, sanitary water supply, telephone and other utilities required for the use thereof at or within the boundary lines of the Property; (b) all streets, alleys and easements necessary to serve the Property for the use represented by the Borrower have been completed and are serviceable and such streets have been dedicated and accepted by applicable governmental entities; (c) the Property is in good condition and repair, and is free from damage caused by fire or other casualty except as set forth in the Disclosure Schedule; (d) there is no latent or patent structural or other significant defect 27 or deficiency in the Property; (e) Design and as-built conditions of the Property are such that no drainage or surface or other water will drain across or rest upon either the Property or land of others so as to have a Materially Adverse Effect; (f) none of the Property is within a flood plain except as indicated on the surveys of the Property delivered to Lender; (g) none of the improvements on the Property create an encroachment over, across or upon any of the Property boundary lines, rights of way or easements, and no buildings or other improvements on adjoining land create such an encroachment except as indicated on the surveys of the Property delivered to Lender. (p) Not a Foreign Person. Borrower is not a "foreign person" within the meaning of the Internal Revenue Code of 1986, as amended (hereinafter called the "Code"), Sections 1445 and 7701 (i.e., no Related Person is a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder). (q) ERISA. As of the date hereof and throughout the term of the Loan, (i) Borrower is not an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, (ii) the assets of the Borrower do not constitute "plan assets" of one or more such plans within the meaning of 29 C.F.R. ss. 2510.3-101, (iii) Borrower is not a "governmental plan" within the meaning of Section 3(32) of ERISA, and (iv) Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans. Except as disclosed in the Disclosure Schedule, no Termination Event has occurred with respect to any ERISA Plan. (r) Investment Company Act, etc. Borrower is not (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or (ii) subject to regulation under the Public Utility Holding Company Act of 1935. Section 4.2 Placement of Loan. (a) Borrower acknowledges that Lender or its assignee (each a "Placement Party") may elect to place the Loan, in a pool of loans, and/or notes secured by or dependent on the cash flow of mortgage loans, which will constitute security for a rated securities offering (such pool is called a "Loan Pool"; such rated securities offering, a "Securitization"). (b) At the request of Lender, Borrower will, at Lender's sole cost and expense, use its best efforts to assist Lender to satisfy the market standards to which Lender customarily adheres or which may be required in the marketplace or by the rating agencies in order to enable a Placement Party to place the Loan in a Loan Pool, including, without limitation, to cooperate with Lender's preparation of a private placement memorandum or registration statement and amendments and supplements thereto to privately place or 28 publicly distribute the Note or the Loan or securities issued in connection therewith in a manner that satisfies the requirements of the Securities Act of 1933, as amended and applicable state law requirements, provided Borrower shall not be required to disclose individual store sales or other nonpublic information which would, in Borrower's judgment, adversely affect its business prospects or competitive position. Notwithstanding the foregoing proviso, Borrower shall disclose individual store sales to Lender to provide to rating agencies and will provide Lender with total sales information for the Property on an aggregate basis, for fiscal year 1996 and annually thereafter. (c) Lender shall be permitted to share any information provided by Borrower pursuant to this Section 4.2 in connection with the placement of a Loan Interest in a Loan Pool with the investment banking firms, rating agencies, accounting firms, law firms and other third-party advisory firms involved with any transfer of the Loan, the Loan Documents or the applicable Securitization. It is understood that the information provided by Borrower to Lender may ultimately be incorporated into the offering documents for the Securitization and thus various investors may also see some or all of the information. (d) Borrower acknowledges that any transfer of the Loan or the placement of the Loan Interest in a Loan Pool may occur at any time during the term of this Agreement and the provisions of this Section 4.2 shall be applicable throughout the term of the Loan. ARTICLE V Covenants of Borrower Section 5.1 Covenants. Borrower warrants, covenants and agrees that, until the full and final payment of the Secured Indebtedness and the termination of this Agreement (unless Lender has previously agreed otherwise): (a) Payment and Performance. Borrower will pay all amounts due under the Loan Documents in accordance with the terms thereof and will observe, perform and comply with every covenant, term and condition expressed or implied in the Loan Documents. (b) Existence. Borrower will continuously maintain its existence and its right to do business in each state in which it owns Property together with its franchises and trade names to the extent required by Applicable Laws. (c) Operation of Property. Borrower will operate the Property in a good and workmanlike manner and in accordance with all Applicable Laws except where failure to comply therewith will not have a Materially Adverse Effect and will pay all fees or charges of any kind in connection therewith. Borrower will keep the Property occupied so as not to impair the insurance carried thereon except where an Individual Property is 29 closed if appropriate insurance is maintained thereon. Borrower will not use or occupy, or allow the use or occupancy of, the Property in any manner which (i) violates any Applicable Laws except where failure to comply therewith will not have a Materially Adverse Effect or (ii) constitutes a public or private nuisance or (iii) makes void, voidable or cancelable, any insurance then in force with respect thereto. Borrower will not initiate any zoning reclassification of the Property or seek any variance under existing zoning ordinances applicable to the Property or use or, to the extent controllable by Borrower, permit the use of any Property in such a manner which would result in such use becoming a nonconforming use under applicable zoning ordinances or other Applicable Laws. Borrower will not impose any restrictive covenants or encumbrances upon the Property (other than Permitted Encumbrances), execute or file any subdivision plat affecting the Property or consent to the annexation of the Property to any municipality, without the prior written consent of Lender. Borrower shall not cause or, to the extent controllable by Borrower, permit any drilling or exploration for, or extraction, removal or production of, minerals from the surface or subsurface of the Property. Borrower will not knowingly do or suffer to be done any act whereby the value of any part of the Property will be lessened. Borrower will not operate or permit the Property to be operated as a cooperative or condominium building or buildings in which the tenants or occupants participate in the ownership, control or management of the Property or any part thereof, as tenant stockholders or otherwise. Borrower will allow Lender or its authorized representative to enter the Property at any reasonable time to inspect the Property and Borrower's books and records pertaining thereto and Borrower will assist Lender or said representative in whatever reasonable way necessary to make such inspection. If Borrower receives a notice of claim from any federal, state or other governmental entity pertaining to the Property, regarding a matter which could have a Materially Adverse Effect or a notice that the Property is not in compliance with any Applicable Laws except where failure to comply therewith would not have a Materially Adverse Effect, Borrower will promptly furnish a copy of such notice or claim to Lender. (d) Debts for Construction. Borrower will cause all debts and liabilities relating to utilities servicing the Property to be promptly paid. Borrower will cause all debts and liabilities of any character, including without limitation all debts and liabilities for labor, material, fixtures and equipment which are subject to the Security Documents, incurred in the construction, maintenance, operation and development of the Property to be promptly paid except where failure to make such payments would not result in a Materially Adverse Effect. Notwithstanding the foregoing, Borrower may in good faith, by appropriate proceedings, contest the validity, applicability or amount of any debt or liability and pending such contest Borrower shall not be deemed in default hereunder if Borrower provide Lender with security satisfactory to Lender in its reasonable discretion and if the Borrower promptly causes to be paid any amount adjudged by a court of competent jurisdiction to be due, with all costs and interest thereon, promptly after such judgment becomes final; provided, however, that in any event each such contest shall be concluded and any debt, liability, lien, interest and costs shall be paid, bonded around or 30 otherwise removed prior to the date any writ or order is issued under which the Property may be sold. (e) Ad Valorem Taxes. The Borrower will cause to be paid prior to delinquency all taxes and assessments heretofore or hereafter levied or assessed against the Property, or any part thereof, or against the Trustee or Lender for or on account of the Note or the other Secured Indebtedness or the interest created by the Security Documents; except that Borrower may in good faith, by appropriate proceedings, contest the validity, applicability, or amount of any asserted tax or assessment, provided that appropriate reserves consistent with GAAP are established at the time of any such contest and Borrower provides Lender with satisfactory evidence thereof. (f) Repair and Maintenance. Borrower will keep and maintain the Property, including the parking, recreational and landscaped portions thereof, in good order, repair, operating condition and appearance, causing all necessary structural and non-structural repairs, renewals, replacements, additions and improvements to be promptly made, and will not allow any of the property to be misused, abused or wasted or to deteriorate. Borrower shall provide Lender with written notice of any material damage to or destruction of the Property or any portion thereof within five (5) Business Days of such occurrence. Borrower will promptly replace all worn-out or obsolete fixtures or personal property covered by the Security Documents with fixtures or personal property comparable to the replaced fixtures or personal property when new, and will repaint the Property when needed. Notwithstanding the foregoing, Borrower will not without the prior written consent of Lender, (i) remove from the Property any fixtures or personal property covered by the Security Documents except (A) such as is replaced by Borrower by an article of equal suitability and value owned by Borrower, free and clear of any Lien or security interest (except that created by the Security Documents or the Permitted Second Lien) or (B) such fixtures or personal property (other than heating and air conditioning equipment) having a value of less than $100,000, the removal of which would not have a Materially Adverse Effect on the Individual Property to which it relates, or (ii) make any structural alterations which diminish the value of the improvements on the Property, or (iii) expend more than $150,000 in the aggregate in any twelve (12) calendar monthly period on structural alterations on any Individual Property, or (iv) erect any new buildings, structures, or building additions on any Individual Property (except such new buildings, structures or building additions that do not diminish the value of such Individual Property and the cost of construction of which is not in excess of $200,000 in the aggregate in any twelve (12) calendar month period). Notwithstanding the above, Borrower may repair or replace the roof and/or the asphalt parking lot at any Individual Property provided such repairs or replacement shall meet all applicable building codes and requirements and shall result in the roof and/or parking lot being of equal or grater quality as the roofs and/or parking lots of comparable retail establishments. (g) Insurance and Casualty. 31 (i) Application of Proceeds. Borrower will keep the Property insured against loss or damage by fire, explosion, windstorm, hail, flood (if the Property shall at any time be located in the 100-year flood plain in which flood insurance has been made available pursuant to the Flood Disaster protection Act of 1973), tornado and such other hazards as may be reasonably required by Lender by policies of fire, extended coverage and other insurance in such company or companies, in such amounts as are sufficient to prevent the application of any co-insurance contributions on loss and not less than the full replacement cost of the improvements located on the Property and all personal property included in the Collateral, upon such terms and provisions, in such forms, and with such loss payees, insureds and endorsements (including without limitation the "replacement cost" endorsement with a waiver of depreciation), all as may be acceptable to Lender. Such insurance shall include boiler and machinery insurance, if applicable, covering boilers and other high pressure vessels, the air conditioning system and high pressure piping, machinery and equipment. Such insurance shall also include earthquake insurance for that portion of the Property located outside California, New Mexico and Nevada to the extent and in the amounts maintained by the Borrower as of the date of this Agreement and in the amount of at least $15,000,000 for that portion of the Property located within California, New Mexico and Nevada, to the extent that such coverage is available at commercially reasonable rates and, in the event the Property is leased at aggregate annual rentals in excess of $250,000, rental loss insurance in at least the aggregate annual amount of all rent and additional rents payable by tenants under leases of the Property. The Borrower will also provide such other insurance as Lender may from time to time reasonably require, in such companies, upon such terms and provisions, in such amounts, and with such endorsements, all as are approved by Lender. Borrower will deliver to Lender certified copies of the original policies evidencing such insurance and any additional insurance which shall be taken out upon any part of the Property and receipts evidencing the payment of all premiums, and will deliver certificates evidencing renewals of all such policies of insurance to Lender at least fifteen (15) days before any such insurance shall expire. Without limiting the discretion of Lender with respect to required endorsements to insurance policies, Borrower further agrees that all such policies shall provide that proceeds thereunder will be payable to Lender as its interest may appear pursuant and subject to a mortgage clause (without contribution) of standard form attached to or otherwise made a part of the applicable policy. In the event of foreclosure of any Security Document, or other transfer of title to the Property in extinguishment in whole or in part of the Secured Indebtedness, all right, title and interest of Borrower in and to such policies then in force concerning the Property covered by such Security Document and all proceeds payable thereunder shall thereupon vest in the purchaser at such foreclosure or Lender or other transferee in the event of such other transfer of title. In the event any of the Property covered by such 32 insurance is destroyed or damaged by fire, explosion, windstorm, hail or by any other casualty against which insurance shall have been required hereunder, (A) Lender may, but shall not be obligated to, make proof of loss if not made promptly by Borrower, (B) each insurance company concerned is hereby authorized and directed to make payment for such loss directly to Lender instead of to Borrower and (C) Lender shall apply the insurance proceeds as follows: (A) first, to reimburse Lender or the Trustee for all costs and expenses, including reasonable attorney's fees, incurred in connection with the collection of such proceeds; and (B) second, if (a) the amount of the loss is more than $250,000, (b) there is then existing a Default that is capable of being cured by the payment of money or an Event of Default, (c) in Lender's judgment, restoration cannot be completed within twelve (12) months after such destruction, or (d) the insurer denies liability to any named insured, then in any such event, the remainder of said proceeds shall be applied to the Secured Indebtedness (without premium or penalty); and (C) third, if none of the facts described in (a) through (d) of subsection (B) above exists (or if Lender waives the matters described in subsection (B)), the remainder of such proceeds shall be applied to the repair, restoration or replacement of the Individual Property so destroyed or damaged to as good or better condition as existed prior to such destruction or damage in accordance with plans and specifications approved in writing by Lender in its reasonable discretion and any amounts not so applied shall, at Lender's option, be applied to the payment (without premium or penalty) of the Secured Indebtedness. Notwithstanding the foregoing, Lender shall have the option to apply any such insurance proceeds, in whole or in part, to the repair, restoration or replacement of the Property rather than applying such proceeds to the payment of the Secured Indebtedness, without regard to the extent of the damage to the Property or the existence of a Default hereunder. If Lender elects or is required to apply insurance proceeds to restoration, (i) the proceeds may, at Lender's election, be held in a mutually acceptable interest bearing account to be disbursed in installments by Lender or by a disbursing agent (hereinafter called the "Depository") selected by Lender at Borrower's expense and whose fees and expenses shall be paid by Borrower, (ii) Borrower shall, upon demand by Lender, from time to time, deposit 33 with Lender or the Depository in an interest bearing account selected by Lender in its sole discretion, the amount of any deductible under such insurance coverage and such amounts in excess of the amount, from time to time, on deposit as may be necessary to complete such restoration and (iii) the insurance proceeds and such other amounts deposited pursuant to (ii) above shall be disbursed from time to time as restoration progresses satisfactorily in Lender's reasonable judgment, based upon receipt of appropriate lien waivers and a certificate of the architect or engineer in charge of the work, the form and content of such certificate to be reasonably satisfactory to Lender, and title insurance protection against mechanic's and materialmen's liens. If an Event of Default occurs and is continuing prior to full disbursement of the insurance proceeds, any undisbursed portion may, at Lender's option, be applied to the payment of the Secured Indebtedness, whether or not then due and in any order of priority, and such application shall be deemed to be a prepayment of the outstanding principal balance of the Loan and shall be subject to a Prepayment Premium computed in accordance with Section 2.6 hereof and subject to the limitations thereunder. (ii) Partial Release. If Lender elects to apply insurance proceeds to the Secured Indebtedness and the insurance proceeds are greater than or equal to the sum of the then current Allocated Loan Amount of the Individual Property to which such proceeds relate, together with accrued interest thereon, other amounts advanced by Lender with respect thereto and all costs incurred by Lender with respect thereto, then Lender shall release from the Lien of the Mortgage such Individual Property. If Lender elects to apply insurance proceeds to the Secured Indebtedness and the insurance proceeds are less than the then current Allocated Loan Amount of the Individual Property to which such proceeds relate plus accrued interest thereon, other amounts advanced by Lender with respect thereto and all costs incurred by Lender relating to the proposed release, then at Borrower's option, upon thirty (30) days' prior written notice to Lender, Borrower may obtain a release of such Individual Property from the Lien of the Mortgage upon payment to Lender of such amount as is necessary, when added to such insurance proceeds, to pay the then current Allocated Loan Amount plus accrued interest thereon, other amounts advanced by Lender with respect thereto and all costs incurred by Lender relating to the proposed release. (iii) Notice and Restoration. In any event, the unpaid portion of the Secured Indebtedness shall remain in full force and effect and the Borrower shall not be excused in the payment thereof. If any act or occurrence of any kind or nature (including any casualty on which insurance was not obtained or obtainable) shall result in damage to or loss or destruction of any of the Property, Borrower shall give immediate notice thereof to Lender and, unless otherwise so instructed by Lender or in the event Lender has applied the insurance proceeds to the Note, shall promptly, at Borrower's sole cost and expense and regardless of whether the 34 insurance proceeds, if any, shall be sufficient for the purpose, diligently restore, repair, replace and rebuild the Individual Property so damaged or destroyed as nearly as possible to its value, condition and character immediately prior to such damage, loss or destruction in accordance with plans and specifications submitted to and approved by Lender in writing. (h) Condemnation. (i) Application of Proceeds. Immediately upon obtaining knowledge of the institution or threat of institution of any proceedings for the condemnation of the Property or any portion thereof, or any other proceedings arising out of injury or damage to the Property, or any portion thereof, Borrower will notify Lender of the pendency of such proceedings. Lender may participate in any such proceedings, and Borrower shall from time to time deliver to Lender all instruments requested by it to permit such participation. Borrower shall, at its expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. All proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the Property and all judgments, decrees and awards for injury or damage to the Property shall be paid to Lender and shall be applied as follows: (A) first, to reimburse Lender or the Trustee for all costs and expenses, including reasonable attorney's fees, incurred in connection with collection of such proceeds; and (B) second, if (i) if the cost of the repair, restoration or replacement is more than $250,000 or (ii) there is then existing a Default that is capable of being cured by the payment of money or an Event of Default, or (iii) in Lender's judgment, restoration, repair or replacement cannot be completed within twelve (12) months after such taking occurs or (iv) the Individual Property that is the subject of such proceedings is partially taken or diminished in value and, in the reasonable judgment of Borrower, need not be rebuilt, restored or repaired in any manner, or (v) all of the Property is taken pursuant to such proceedings, then in any such event, the remainder of said proceeds shall be applied to the payment of the Note; and (C) third, if none of the facts described in (i) through (v) of subsection (B) above exists (or if Lender waives the matters described in (ii) of subsection (B)), the remainder of such 35 proceeds shall be applied to the repair, restoration or replacement of the Individual Property that is the subject of such proceeding and any amounts not thus paid over shall be applied to the Note; provided, that any such proceeds held by Lender to be applied to the repair, restoration or replacement of the Property as provided above shall be held and disbursed in the same manner as provided in subsection (g) of this Section 5.1. Notwithstanding the foregoing, Lender shall have the option to apply any proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the Property or any judgments, decrees and awards for injury or damage to the Property, in whole or in part, to the repair, restoration or replacement of the Property rather than applying such proceeds to the payment of the Secured Indebtedness, without regard to the extent of the taking or the damage to the Property or the existence of a Default hereunder. (ii) Partial Release. If Lender elects to apply condemnation proceeds to the Secured Indebtedness and the condemnation proceeds are greater than or equal to the sum of the then current Allocated Loan Amount of the Individual Property to which such proceeds relate plus accrued interest thereon, other amounts advanced by Lender with respect thereto and all costs incurred by Lender relating to the proposed release then Lender shall release from the Lien of the Mortgage such Individual Property. If Lender elects to apply condemnation proceeds to the Secured Indebtedness and the condemnation proceeds are less than the then current Allocated Loan Amount of the Individual Property to which such proceeds relate, then at Borrower's option upon thirty (30) days' prior written notice to Lender, Borrower may obtain a release of such Individual Property from the Lien of the Mortgage upon payment to Lender of such amount as is necessary when added to such condemnation proceeds to pay the then current Allocated Loan Amount plus accrued interest thereon, other amounts advanced with respect to such Individual Property, and all costs incurred by Lender relating to the proposed release. Notwithstanding the foregoing, Lender shall have the option to apply any proceeds of condemnation awards or proceeds of sale in lieu of condemnation with respect to the Property or any judgments, decrees and awards for injury or damage to the Property, in whole or in part, to the repair, restoration or replacement of the Property rather than applying such proceeds to the payment of the Secured Indebtedness, without regard to the extent of the taking or the damage to the Property or the existence of a Default hereunder. (iii) Notice and Restoration. In any event the unpaid portion of the Secured Indebtedness shall remain in full force and effect and shall not be excused in the payment thereof. In the event any of the foregoing proceeds are applied to the repair, restoration or replacement of the Property, the Borrower shall promptly 36 commence and complete such repair, restoration or replacement of the Property as nearly as possible to its value, condition and character immediately prior to such damage or taking in accordance with plans and specification submitted to and approved by the Lender. (iv) Assignment to Lender. Borrower hereby assigns and transfers all such proceeds, judgments, decrees and awards to Lender and agrees to execute such further assignments of all such proceeds, judgments, decrees and awards as Lender may request. Lender is hereby authorized, in the name of Borrower, to execute and deliver valid aquittances for, and to appeal from, any such judgment, decree or award. Lender shall not be, in any event or circumstances, liable or responsible for failure to collect, or exercise diligence in the collection of, any such proceeds, judgments, decrees and/or awards. (i) Protection and Defense of Lien. If the validity or priority of any Security Document or of any rights, titles, Liens or security interests created or evidenced hereby with respect to the Property or any part thereof shall be endangered or questioned or shall be attacked directly or indirectly or if any legal proceedings are instituted against Borrower with respect thereto, Borrower will give prompt written notice thereof to Lender and at Borrower's own cost and expense will diligently endeavor to cure any defect that may be developed or claimed, and will take all necessary and proper steps for the defense of such legal proceedings, including but not limited to the employment of counsel, the prosecution or defense of litigation and the release or discharge of all adverse claims, and the Trustee and Lender, or either of them (whether or not named as parties to legal proceedings with respect thereto) are hereby authorized and empowered to take such additional steps as in its or their judgment and discretion may be necessary or proper for the defense of any such legal proceedings or the protection of the validity or priority of the Security Documents and the rights, titles, Liens and security interests created or evidenced hereby and shall be reimbursed for any expenses so incurred pursuant to subsection (r). (j) No Other Liens. Borrower will not, without the prior written consent of Lender, create, place or permit to be created or placed, or through any act or failure to act, acquiesce in the placing of, or allow to remain, any deed of trust, mortgage, voluntary or involuntary Lien, whether statutory, constitutional or contractual (except for the Permitted Second Lien and the Lien for ad valorem taxes on the Property which are not delinquent), security interest (except for the security interests included in the Permitted Second Lien), encumbrance or charge, or conditional sale or other title retention document, against or covering the Property, or any part thereof, other than the Permitted Encumbrances, regardless of whether the same are expressly or otherwise subordinate to the Lien or security interest created in the Security Documents, and should any of the foregoing become attached hereafter in any manner to any part of the Property without the prior written consent of Lender, Borrower will cause the same to be promptly discharged 37 and released. Borrower will own all parts of the Property and will not acquire any fixtures, equipment or other property forming a part of the Property pursuant to a lease, license or similar agreement, without the prior written consent of Lender. (k) Books and Records. Borrower will keep accurate books and records in accordance with GAAP in which full, true and correct entries shall be promptly made as to all operations on the Property, and will permit all such books and records (including without limitation all contracts, statements, invoices, bills and claims for labor, materials and services supplied for the construction and operation of the improvements forming a part of the Property) to be inspected and copied by Lender and its duly accredited representatives at all times during reasonable business hours. (l) Financial Information. (i) Annual Consolidated Financial Statements. Within ninety (90) days after the close of each fiscal year, Borrower shall furnish Lender with audited Consolidated financial statements, including balance sheets, income statements and statements of cash flows for the Borrower, prepared in accordance with GAAP and such other available information as the Lender shall request. (ii) Annual Reports Regarding Stores. Within ninety (90) days after the close of each fiscal year, Borrower shall furnish Lender with a report providing an analysis for each Store included in the Property of operating income and expenses. Lender agrees that such information is confidential and shall not be disclosed to any third party (except as required by law following prior notice to Borrower) without Borrower's written consent. (iii) Other Financial Information. Promptly upon their becoming available, copies of all financial statements, and proxy statements sent by Borrower to its stockholders and all registration statements, periodic reports, press releases, monthly sales reports (if publicly released), and other statements and schedules filed by Borrower with any securities exchange, the Securities and Exchange Commission or any similar governmental authority, including without limitation copies of all reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which Borrower shall have filed with the Securities and Exchange Commission. (m) Liability Insurance. Borrower shall maintain commercial general public liability insurance against claims for bodily injury or death and property damage occurring in or upon or resulting from the Property, in standard form and with such insurance company or companies as may be acceptable to Lender, such insurance to afford immediate protection, to the limit of not less than $5,000,000 in respect of any one accident or occurrence, and to the limit of not less than $5,000,000 for property damage, with not more than $500,000 deductible. Such Commercial General Public Liability 38 insurance shall include Blanket Contractual Liability coverage which insures contractual liability under the indemnifications of Lender and the Trustee by Borrower set forth in this Agreement (but such coverage or the amount thereof shall in no way limit such indemnifications). Borrower shall maintain with respect to each policy or agreement evidencing such Commercial General Public Liability insurance such endorsements as may be required by Lender and shall at all times deliver and maintain with Lender a certificate with respect to such insurance in form satisfactory to Lender. Not less than fifteen (15) days prior to the expiration date of each policy of insurance required of Borrower pursuant to this Section 5.1(m), Borrower shall deliver to Lender certificates or other evidence of payment satisfactory to Lender. In the event of a foreclosure of any Security Document, the purchaser of the Property covered thereby shall succeed to all the rights of Borrower, including any right to unearned premiums, in and to all policies of insurance assigned pursuant to the provisions of this subsection, and Borrower hereby authorize Lender to notify any or all insurance carriers of this assignment. (n) Proceeds of Collateral. Borrower shall account fully and faithfully for and, if Lender so elects, shall promptly pay or turn over to Lender the proceeds in whatever form received from disposition in any manner of any of the Collateral, except as otherwise specifically authorized herein. In the event Lender so elects and the proceeds from the disposition of such Collateral are paid over to Lender, Lender shall apply such proceeds to the Secured Indebtedness without prepayment penalty. Borrower shall at all times keep the Collateral and its proceeds separate and distinct from other property of Borrower and shall keep accurate and complete records of the Collateral and its proceeds. (o) Permitted Encumbrances. Borrower will comply with and will perform all of the covenants, agreements and obligations imposed upon them or the Property in the Permitted Encumbrances in accordance with their respective terms and provisions. Borrower will not modify or agree to any modification of any Permitted Encumbrance, which modification would adversely affect the interest of Lender in the Property, without the prior written consent of Lender which consent may be withheld by Lender in its sole discretion. (p) Environmental. (A) Borrower shall not (and it shall not permit any tenant, subtenant, contractor, agent or manager to) locate, produce, use, store, treat, transport, incorporate, discharge, emit, release, deposit or dispose of any Hazardous Substance in, upon, under, at, over or from the Property except that Borrower (its tenants, subtenants, manager, contractors or agents) may store, locate and use on the Property Hazardous Substances which are (1) customarily located or stored in retail or operations buildings similar to the Property or used in connection with Borrower's operations, or (2) unique to a tenant's business located at the Property, provided that such Hazardous Substances described in clauses (1) or (2) above are 39 at all times stored, located and used in compliance with all Environmental Laws other than any noncompliance which Borrower or tenant takes reasonably prompt action to address. Borrower shall not permit any Hazardous Substances to be located, produced, used, stored, treated, transported, incorporated, discharged, emitted, released, deposited, disposed of or to escape therein, thereupon, thereunder, thereover or therefrom in violation of any Environmental Law, and shall comply with all Environmental Laws which are applicable to the Property in each case, other than any violation or noncompliance which Borrower or tenant takes reasonably prompt action to address. Borrower shall not engage in any conduct in connection with the Property that may subject Borrower to Environmental Costs, or contribute to or aggravate a release of Hazardous Substances where such action or failure to act could reasonably be expected to result in a Materially Adverse Effect. In addition to the foregoing restrictions, Borrower agrees that no asbestos, ACM, materials containing urea-formaldehyde, or transformers, capacitors, ballasts or other equipment that contain PCBs are, or will at any time be, located about the Property in a manner that could reasonably be expected to result in a violation of applicable Environmental Laws. (B) Borrower shall promptly within the time permitted by Environmental Laws, initiate and diligently pursue to completion, any and all remedial action required pursuant to any applicable Environmental Laws in response to the presence of any Hazardous Substances at, on, under or affecting, or emanating from, the Property and shall take such remedial action as is required to minimize any impairment of Lender's Lien on, and security interest in, the Property. If Borrower undertakes any remedial action with respect to any Hazardous Substance affecting the Property, Borrower shall conduct and complete such remedial action in compliance with all applicable Environmental Laws. If any Hazardous Substance is removed or caused to be removed from the Property by Borrower, the generator number assigned by the Environmental Protection Agency to such Hazardous Substance shall not be in the name of Lender and Borrower shall assume any and all liability for such removed Hazardous Substance. (C) The representations and warranties contained in Section 4.1(k) and the covenants contained in this Section 5.1(p) shall be deemed continuing covenants for the benefit of Lender, and any successors and assigns of Lender including but not limited to any purchasers at a foreclosure sale, any transferee of the title of Lender and any subsequent owner of the Property, shall survive the termination of this Agreement, or the satisfaction or release of the Mortgage, any foreclosure of the Mortgage and/or any acquisition of title to the Property or any part thereof by Lender, or anyone claiming by, through or under Lender, by deed in lieu of foreclosure or otherwise. The rights and remedies of Lender under this Agreement shall not inure to the benefit of (i) any purchaser of the Property at a foreclosure sale, (ii) any Person taking title to the Property by deed in lieu of foreclosure or 40 (iii) any successor or assign of any Person described in clauses (i) and (ii) above, except that Lender's rights shall inure to the benefit of the parties in clauses (i), (ii) and (iii) hereof if such parties are Lender (including, for these purposes, Lender's successors and assigns as holder of the Loan Documents), any beneficiaries of any Loan Pool, any Participant of any of Lender's (or such successors', assigns', beneficiaries' or Participant's) Affiliates or nominees. (D) Borrower shall give prompt written notice to Lender of: (i) any proceeding or inquiry known to Borrower by any Governmental Authority with respect to the presence of any Hazardous Substance on the Property or the migration thereof from or to other property; (ii) all claims made or threatened by any third party against Borrower or the Property in each case known to Borrower relating to any loss or injury resulting from any Hazardous Substance; (iii) the storage, production, release, discharge or disposal of any Hazardous Substances on the Property other than in accordance with all applicable Environmental Laws; and (iv) Borrower's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property which could reasonably be expected to cause the Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of the Property under any Environmental Law or to be otherwise subject to any restrictions on the ownership, occupancy, transferability or use of the Property under any Environmental Law. (E) Borrower shall keep Lender apprised of the status of, and any material developments in, any governmental investigation relating to Environmental Matters at or about the Property, any and all enforcement, clean-up, removal or other governmental or regulatory actions instituted, completed or threatened pursuant to any Environmental Law with respect to the Property and any other claims, actions or proceedings with respect to the Property relating to Environmental Matters. Borrower shall provide Lender with copies of such communications with all Governmental Authorities relating to Hazardous Substances Claims as Lender may request. Without Lender's prior written consent, Borrower shall not enter into any settlement agreement, consent decree or other compromise with respect to any such governmental investigation or action, or other claim, action or proceeding relating to Hazardous Substances which 41 Borrower does not have the funds available to pay or which may materially adversely effect Lender's lien on, or the value of, the Property. (F) The foregoing rights and remedies in this Section 5.1(p) are cumulative with, and in addition to, any rights and remedies Lender may have against Borrower or any Significant Party under the other terms and provisions of this Agreement, under any other Loan Document or under any Environmental Law, including, without limitation, CERCLA. (q) Notice of Material Events and Change of Address. Borrower will promptly notify Lender (i) of any Material Adverse Change in Borrower's financial condition or Borrower's Consolidated financial condition, (ii) of the occurrence of any Default, (iii) of the acceleration of the maturity of any Debt owed by Borrower or of any default by Borrower under any indenture, mortgage, agreement, contract or other instrument to which it is a party or by which it or its properties is bound, if such acceleration or default might have a Material Adverse Effect upon Borrower's Consolidated financial condition, (iv) of any claim asserted which could result in a decline of $500,000 or more in the value of any Individual Property, (v) of the occurrence of any Termination Event, and (vi) of the filing of any suit or proceeding against Borrower in which there is a reasonable likelihood that an adverse decision would be rendered and if so rendered would have a Material Adverse Effect upon Borrower's financial condition, business or operations. (r) Payment of Expenses. Borrower will promptly upon written demand pay all expenses and reimburse Lender for any expenditures, including reasonable attorneys' fees, legal expenses, incurred or expended in connection with (i) the negotiation, preparation, execution and delivery of the Loan Documents, and any and all other documents or instruments relating thereto, including without limitation, fees and expenses incurred after the date of this Agreement, (ii) the filing, recording, refiling and re-recording of any Loan Documents and any other documents or instruments or further assurances required to be filed or recorded or refiled or re-recorded by the terms of any Loan Document, (iii) the breach by Borrower of any covenant in the Loan Documents, (iv) Lender's exercise of any of its rights and remedies under the Loan Documents or Lender's protection of the Property and its Lien on and security interest therein, (v) any amendments to the Mortgage, the Note or any other Loan Document or any matter requested by Borrower or any approval required under the Loan Documents, and (vi) any matter which requires the waiver, consent or approval of Lender. (s) Interest. Borrower hereby promises to pay interest to Lender at the Default Rate on all Secured Indebtedness which Borrower has in this Agreement promised to pay (including without limitation obligations to pay fees or to reimburse or indemnify Lender) and which is not paid when due. 42 (t) Taxes on Note and Other Taxes. Borrower will promptly pay all franchise, and other taxes owing by it if failure to pay would result in a Materially Adverse Effect and any stamp or other documentary taxes which may be required to be paid by it with respect to the Note or any other Loan Document. (u) Further Assurances. Borrower will, on request of Lender, (i) promptly correct any defect, error or omission which may be discovered in the execution or acknowledgment of this Agreement or any Loan Document or any other instrument now or hereafter executed in connection herewith; (ii) execute, acknowledge, deliver and record or file such further instruments (including without limitation further deeds of trust, security agreements, financing statements, continuation statements and assignments of rents or leases) and do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes and intentions of the parties to this Agreement, the Security Documents and such other instruments and to subject to the Liens and security interests of the Security Documents and thereof any property intended by the terms hereof and thereof to be covered hereby and thereby including specifically, but without limitation, any renewals, additions, substitutions, replacements, or appurtenances to the Property; (iii) execute, acknowledge, deliver, procure and record or file any document or instrument (including specifically any financing statement) deemed advisable by Lender to protect the Lien or the security interest hereunder against the rights or interests of third persons; and (iv) provide such certificates, documents, reports, information, affidavits and other instruments and do such further acts as may be necessary, desirable or proper in the reasonable determination of Lender to enable Lender to comply with the requirements or requests of any agency having jurisdiction over Lender or any examiners of such agencies with respect to the Secured Indebtedness, Borrower or the Property; and the Borrower will pay all costs connected with any of the foregoing except such matters provided pursuant to (iv) hereof which shall be at the cost of Lender. (v) Fees and Expenses; Indemnification. Borrower will pay all appraisal fees, Mortgage filing and recording fees, inspection fees, survey fees, taxes, brokerage fees and commissions, abstract fees, title policy fees, uniform commercial code search fees, escrow fees, reasonable attorney's fees, and all other costs and expenses of every character incurred by the Borrower or Lender in connection with the Loan, either at the closing thereof or otherwise required by this Agreement or any other Loan Document, and will reimburse Lender for all such costs and expenses incurred by it. Borrower shall pay all expenses and reimburse Lender for any expenditures, including reasonable attorney's fees and legal expenses, incurred or expended in connection with (i) the breach by Borrower of any covenant herein or in any other Loan Document, (ii) Lender's exercise of any of its rights and remedies hereunder or under the Note or any other Loan Document or Lender's protection of the Property and its Lien and security interest therein, or (iii) any amendments to this Agreement, the Note or any other Loan Document or any matter requested by Borrower or any approval required hereunder. Borrower will indemnify and hold harmless the Trustee and Lender (for purposes of this paragraph, the terms "the 43 Trustee" and "Lender" shall include the directors, officers, partners, employees and agents of the Trustee and Lender, respectively, and any persons or entities owned or controlled by, owning or controlling, or under common control or affiliated with the Trustee and Lender, respectively) from and against, and reimburse them for, all claims, demands, liabilities, losses, damages, causes of action, judgments, penalties, costs and expenses (including, without limitation, reasonable attorney's fees) which may be imposed upon, asserted against or incurred or paid by them by reason of, on account of or in connection with any bodily injury or death or property damage occurring in or upon or in the vicinity of the Property through any cause whatsoever or asserted against them on account of any act performed or omitted to be performed hereunder or on account of any transaction arising out of or in any way connected with the Property or with this Agreement, the Note or any other Loan Document. Without limitation, it is the intention of Borrower and Borrower agrees that the foregoing indemnities shall apply to each indemnified party with respect to claims, demands, liabilities, losses, damages, causes of action, judgments, penalties, costs and expenses (including without limitation, reasonable attorneys' fees and disbursements) which in whole or in part are caused by or arise out of the negligence of such (and/or any other) indemnified party. However, such indemnities shall not apply to any indemnified party to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of such indemnified party. The foregoing indemnities shall not terminate upon release, foreclosure or other termination of the Security Documents but will survive foreclosure of the Security Documents or conveyance in lieu of foreclosure and the repayment of the Secured Indebtedness and the discharge and release of the Security Documents and the other documents evidencing and/or securing the Secured Indebtedness. Any amount to be paid hereunder by Borrower to Lender and/or the Trustee shall be a demand obligation owing by Borrower to Lender and/or the Trustee and shall be subject to and governed by the provisions of Section 6.2 hereof. (w) Tax on Lien. In the event of the enactment after this date of any law of any state in which the Property is located or of any other governmental entity deducting from the value of property for the purpose of taxation any Lien or security interest thereon, or imposing upon Lender the payment of the whole or any part of the taxes or assessments or charges or Liens herein required to be paid by Borrower, or changing in any way the laws relating to the taxation of deeds of trust or mortgages or security agreements or debts secured by deeds of trust or mortgages or security agreements or the interest of the mortgagee or secured party in the property covered thereby, or the manner of collection of such taxes, so as to affect the Security Documents or the Secured Indebtedness or Lender, then, and in any such event, Borrower, upon demand by Lender, shall pay such taxes, assessments, charges or Liens, or reimburse Lender therefor; provided, however, that if in the opinion of counsel for Lender (i) it might be unlawful to require Borrower to make such payment or (ii) the making of such payment might result in the imposition of interest beyond the maximum amount permitted by law, then and in such event, Lender may elect, by notice in writing given to Borrower, to declare all of the Secured 44 Indebtedness to be and become due and payable sixty (60) days from the giving of such notice without prepayment penalty. (x) Change of Name, Identity or Structure. Borrower will not change its name, identity (including its trade name or names) or, if not an individual, its corporate, partnership or other structure without notifying Lender of such change in writing at least thirty (30) days prior to the effective date of such change. Borrower will execute and deliver to Lender, prior to or contemporaneously with the effective date of any such change by it, any financing statement or financing statement change required by Lender to establish or maintain the validity, perfection and priority of the security interest granted in the Security Documents. At the request of Lender, Borrower shall execute a certificate in form satisfactory to Lender listing the trade names under which the Borrower intend to operate the Property, and representing and warranting that the Borrower do business under no other trade name with respect to the Property. (y) Location and Use of Collateral. All tangible Collateral will be used in the business of Borrower and shall remain in Borrower's possession or control at all times at Borrower's risk of loss and shall be located on the real property described in the Security Document covering such Collateral save and except offsite repairs. (z) Estoppel Certificate. Borrower shall at any time and from time to time at its sole cost and expense furnish promptly upon request by Lender a written statement in such form as may be required by Lender stating that the Note and the other Loan Documents are valid and binding obligations of Borrower, enforceable against Borrower in accordance with their terms; the unpaid principal balance of the Note; the date to which interest on the Note is paid; that the Note and the other Loan Documents have not been released, subordinated or modified; and that there are no offsets or defenses against the enforcement of the Note or any other Loan Document, or if any of the foregoing statements are untrue, specifying the reasons therefor. (aa) Compliance with ERISA. Borrower will deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as requested by Lender in its sole discretion, that (a) Borrower is not an "employee benefit plan" or a "governmental plan" under ERISA; (b) it is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (c) one or more of the following circumstances is true: (i) Equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R.ss.2510.3-101(b)(2); or (ii) Less than twenty-five percent (25%) of all equity interests in Borrower are held by "benefit plan investors" within the meaning of 29 C.F.R.ss.2510.3-101(f)(2); or 45 (iii) Borrower qualifies as an "operating Company" or a "real estate operating company" within the meaning of 29 C.F.R.ss.2510.3-101(c) or (e). Borrower agrees to indemnify, defend and hold Lender free and harmless from and against any and all loss, costs (including reasonable attorney's fees and expenses) taxes, penalties, damages and expenses that Lender may suffer by reason of the investigation, defense and settlement of claims based upon a breach of the foregoing provisions. The foregoing indemnification shall survive repayment of the Note. (bb) Amendment of Contracts. Borrower will not amend or permit any amendment to any contract assigned to Lender which materially and adversely affects the rights and benefits of Lender under or acquired pursuant to any Security Documents. Section 5.2 Indemnification Regarding Environmental Matters, Etc. Borrower will defend, indemnify and hold harmless Lender and the Trustee and their respective employees, agents, officers and directors from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the presence of any Hazardous Materials in, on at, under or affecting the Property, the violation of, noncompliance with or liability under any Environmental Law relating to the operations of Borrower or the Property, or any orders, requirements or demands of any federal, state, local or other governmental or administrative body, department or agency related thereto, including, without limitation, reasonable attorneys and consultants fees, investigations and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect regardless of the termination of this Agreement. ARTICLE VI Security Section 6.1 Security. The Secured Indebtedness will be secured by the Security Documents listed in the Security Schedule and any additional Security Documents hereafter delivered by Borrower and accepted by Lender. Section 6.2 Right of Lender to Perform. Borrower agrees that, if Borrower fails to perform any act or to take any action which hereunder Borrower is required to perform or take, or to pay any money which hereunder Borrower is required to pay, or take any action prohibited hereby, Lender, in Borrower's name or in its own name, may, but shall not be obligated to, perform or cause to be performed such act or take such action or pay such money or remedy any action so taken, and any expenses so incurred by Lender, and any money paid by Lender in 46 connection therewith, shall be a demand obligation owing by Borrower to Lender and Lender, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment. Any amounts due and owing by Borrower to Lender pursuant to this Agreement shall bear interest from the date such amount becomes due until paid at the Default Rate and shall be a part of the Secured Indebtedness and shall be secured by the Mortgage and by any other Security Document. ARTICLE VII Events of Default and Remedies Section 7.1 Events of Default. Each of the following events constitutes an Event of Default under this Agreement: (a) Borrower fails to pay any principal, interest or premium on the Loan when due and payable. whether at a date for the payment of a fixed installment or contingent or other payment to Lender or as a result of acceleration or otherwise. (b) Borrower fails to pay any Secured Indebtedness (other than the payment obligations described in paragraph (a) of this Section) or Borrower fails to observe any covenant set forth herein and does not cure such failure within the applicable Grace Period provided, or any representation or warranty previously, presently or hereafter made in writing by or on behalf of Borrower in connection with any Loan Document shall prove to have been false or incorrect in any material respect on any date on or as of which made, and the represented or warranted state of affairs does not become true within the applicable Grace Period provided, however, any representation or warranty previously or presently or hereafter made in writing on behalf of Borrower shall be an Event of Default under this subsection 7.1(b) to the extent and only to the extent such representation or warranty was based on information provided by Borrower or made by an officer of Borrower in writing. (c) If Borrower shall fail to pay any Funded Debt (other than the payment obligations described in paragraphs (a) and (b) of this Section) when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) after the expiration of any applicable grace period. (d) Without the prior written consent of Lender, Borrower sells, leases, exchanges, assigns, transfers, conveys or otherwise disposes of all or any part of the Property or any interest therein or shall be divested of its title or any interest therein in any manner or way, whether voluntary or involuntary (except for the disposition of worn-out or obsolete personal property or fixtures or other disposition permitted under the circumstances described in subsection 5.1(f) hereof), or legal or equitable title to the Property, or any interest therein, is vested in any other party, in any manner whatsoever, by operation of law or otherwise. 47 (e) Any "default" or "event of default" occurs under any Loan Document which defines either such term, and the same is not remedied within the applicable period of grace (if any) provided in such Loan Document, provided that the foregoing shall not impair the Grace Period provided for in Section 7.2 hereof and provided further, that all applicable periods of grace (if any) and the Grace Period provided in Section 7.2 hereof shall run concurrently, it being specifically acknowledged by the parties hereto that, notwithstanding anything to the contrary contained herein or in any Loan Document, no provision or provisions shall be construed to permit a tacking, doubling up or consecutive running of any Grace Period or periods of grace (if any). (f) Borrower: (i) suffers the entry against it of a judgment, decree or order for relief by a court of competent jurisdiction in an involuntary proceeding commenced under any applicable bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in effect, including the Federal Bankruptcy Code, as from time to time amended, or has any such proceeding commenced against it which remains undismissed for a period of ninety (90) days; or (ii) suffers the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for a substantial part of its assets or for any material part of the Property in a proceeding brought against or initiated by it, and such appointment is neither made ineffective nor discharged within ninety (90) days after the making thereof, or such appointment is consented to, requested by, or acquiesced to by it; or (iii) commences a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect, including the Federal Bankruptcy Code, as from time to time amended; or applies for or consents to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of any substantial part of its assets or any material part of the Property; or makes a general assignment for the benefit of creditors; or fails generally to pay (or admits in writing its inability to pay) its debts as such debts become due; or makes a transfer in fraud of creditors; or takes corporate or other action in furtherance of any of the foregoing. Section 7.2 Acceleration. Upon the occurrence of an Event of Default described in subsection (f)(i), (f)(ii) or (f)(iii) of Section 7.1 with respect to Borrower which shall result in the entry of an order for relief under the Federal Bankruptcy Code, all of the Secured Indebtedness shall thereupon be immediately due and payable, without presentment, demand, protest, notice of protest, declaration or notice of acceleration or intention to accelerate, or any other notice or declaration of any kind, all of which are hereby expressly waived by Borrower. Upon the 48 occurrence of any other Event of Default, Lender at any time and from time to time may without notice to Borrower declare any or all of the Secured Indebtedness immediately due and payable, and all such Secured Indebtedness shall thereupon be immediately due and payable, without presentment, demand, protest, notice of protest, notice of acceleration or of intention to accelerate, or any other notice or declaration of any kind, all of which are hereby expressly waived by Borrower. The term "Grace Period", as used herein with respect to an Event of Default under subsection (b) of Section 7.1 or an Event of Default for which a Grace Period is expressly provided under Section 7.1, means the period beginning on the date of the related Default and ending twenty (20) days after written notice to Borrower and the holder of the Permitted Second Lien of such Default and demand by the Lender for the performance of such covenant, agreement, warranty or condition, provided that in the event the Default in question is capable of cure but not reasonably capable of cure within said twenty (20) day period, Borrower shall not have committed an Event of Default hereunder if Borrower or the holder of the Permitted Second Lien commences such cure within said twenty (20) day period and diligently prosecute such cure to completion thereafter, provided that no more than one such notice to Borrower and to the holder of the Permitted Second Lien shall be required for any particular event or occurrence which results in a Default and provided further that in any event Borrower shall have committed an Event of Default hereunder if such failure is not cured on or before six (6) months after notice to Borrower and the holder of the Permitted Second Lien of the above described written demand for performance. Notwithstanding anything to the contrary stated herein or in any Loan Document, it is the intent of the parties hereto that all periods of grace (if any) and any Grace Periods provided for herein or in any Loan Document shall be deemed to run concurrently, it being the intent of the parties hereto that no tacking, doubling up or consecutive running of any periods of grace (if any) and any Grace Periods shall be permitted. If Borrower or the holder of the Permitted Second Lien diligently prosecute the cure of a Default pursuant to the foregoing provision (and are not otherwise in default under the Loan Documents) but are unable to complete such cure within the time periods specified above, Borrower or the holder of the Permitted Second Lien, as the case may be, shall have the right at any time within ten (10) days prior to the expiration of such six (6) months to elect (subject to Lender's right to waive such Default as hereinafter provided) to obtain a partial release of the Lien of the Mortgage with respect to the Individual Property or Properties that are the subject of such Default by delivering to Lender at any time within such ten (10) day period a written notice of their intent to obtain such partial release accompanied by the then current Allocated Loan Amount allocable to such Individual Property or Properties together with accrued interest thereon through the date of payment and the Prepayment Premium thereon, plus the other costs incurred by Lender or advances made by Lender with respect to such Individual Property or Properties. Unless Lender notifies Borrower and the holder of the Permitted Second Lien in writing within ten (10) days after such notice is received that it has waived the Default in question and returns to Borrower therewith the amounts so paid, Lender shall then release such Individual Property or Properties from the Lien of the Mortgage. Borrower shall pay all costs incurred by Lender in connection with such release, even if same is not completed, including without limitation, legal fees and expenses of outside counsel and title costs. 49 Section 7.4 Remedies. If any Event of Default shall occur and be continuing, Lender shall have the right but not the obligation to protect and enforce its rights under the Loan Documents by any appropriate proceedings, including, without limitation, proceedings for specific performance of any covenant or agreement contained in any Loan Document for which Lender has recourse, pursuant to Section 2.9, and Lender may enforce the payment of any Secured Indebtedness due or enforce any other legal or equitable right. All rights, remedies and powers conferred upon Lender under the Loan Documents shall be deemed cumulative and not exclusive of any other rights, remedies or powers available under the Loan Documents or at law or in equity. Section 7.4 Indemnity. Subject to the provisions of Section 2.9 hereof, Borrower promises to indemnify Lender, upon demand, from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Lender (whether or not caused by Lender's negligence) growing out of or resulting from the Loan Documents and the transactions and events at any time associated therewith (including without limitation the enforcement of the Loan Documents and the defense of Lender's actions and inactions in connection with the Loan), except to the limited extent such liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements are proximately caused by Lender's gross negligence or willful misconduct. If any Person (including without limitation Borrower or any of its Affiliates) ever alleges such gross negligence or willful misconduct by Lender, the indemnification provided for in this section shall nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a court of competent jurisdiction enters a final judgment as to the extent and effect of the alleged gross negligence or willful misconduct. ARTICLE VIII Miscellaneous Section 8.1 Waiver and Amendment. No failure or delay by Lender in exercising any right, power or remedy which Lender may have under any of the Loan Documents shall operate as a waiver thereof or of any other right, power or remedy, nor shall any single or partial exercise by Lender of any such right, power or remedy preclude any other or further exercise thereof or of any other right, power or remedy. No waiver of any provision of any Loan Document and no consent to any departure therefrom shall ever be effective unless it is in writing and signed by Lender, and then such waiver or consent shall be effective only in the specific instances and for the purposes for which given and to the extent specified in such writing. No notice to or demand on Borrower shall in any case of itself entitle Borrower to any other or further notice or demand in similar or other circumstances. This Agreement and the other Loan Documents set forth the entire understanding and agreement of the parties hereto and thereto with respect to the transactions contemplated herein and therein, and no modification amendment of or supplement 50 to this Agreement or the other Loan Documents shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. Section 8.2 Survival of Agreements: Cumulative Nature. All of Borrower's various representations, warranties, covenants and agreements in the Loan Documents shall survive the execution and delivery of this Agreement and the other Loan Documents and the performance hereof and thereof, including without limitation the making or granting of the Loan and the delivery of the Note and the other Loan Documents, and shall further survive until all of the Secured Indebtedness are paid in full to Lender and all of Lender's obligations to Borrower are terminated. The representations, warranties, and covenants made by Borrower in the Loan Documents, and the rights, powers, and privileges granted to Lender in the Loan Documents, are cumulative, and no Loan Document shall be construed in the context of another to implicitly diminish, nullify, or otherwise reduce the benefit to Lender of any such representation, warranty, covenant, right, power or privilege. In particular and without limitation, no exception set out in this Agreement to any representation, warranty or covenant herein contained shall be deemed to apply implicitly to any similar representation, warranty or covenant contained in any other Loan Document, and each such similar representation, warranty or covenant shall be subject only to those exceptions which are expressly made applicable to it by the terms of the various Loan Documents. Section 8.3 Notices. All notices, requests, consents, demands and other communications required or permitted under any Loan Document shall be in writing and, unless otherwise specifically provided in such Loan Document, shall be deemed sufficiently given or furnished if delivered by personal delivery, by telegram, telex or telecopy (provided such telegram, telex or telecopy is confirmed within 48 hours thereafter by expedited delivery service in the manner herein described), by expedited delivery service with proof of delivery, or by registered or certified United States mail, postage prepaid, at the addresses specified below (unless changed by similar notice in writing given by the particular Person whose address is to be changed). Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or, in the case of telegram, telex or telecopy, upon receipt: Borrower's address: Payless Cashways, Inc. 2300 Main, Suite 300 Kansas City, Missouri 64108 Attention: Stephen A. Lightstone Telecopy Number: (816) 234-6077 with a copy to: 51 Blackwell Sanders Matheny Weary & Lombardi LLP 2300 Main Street, Suite 1100 Kansas City, Missouri 64108 Attention: John K. Brungardt Telecopy Number: (816) 983-8080 Lender's address: UBS Mortgage Finance, Inc. 299 Park Avenue New York, New York 10017 Attention: John Ashley Telecopy Number: (212) 821-5566 with a copy to: Fried Frank Harris Shriver & Jacobson One New York Plaza New York, New York 10014 Attention: Robert J. Sorin, Esq. Telecopy Number: (212) 859-8582 Permitted Second Lien Holder's address: Canadian Imperial Bank of Commerce as Coordinating and Collateral Agent 425 Lexington Avenue New York, New York 10017 Attention: Robert N. Greer Telecopy Number: (212) 856-3763 with a copy to: Zalkin Rodin & Goodman LLP 750 Third Avenue New York, New York 10017-2771 Attention: Margot Schonholtz, Esq. Telecopy Number: (212) 682-6331 Section 8.4 GOVERNING LAW. THE LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF NEW 52 YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT (A) TO THE EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A LOAN DOCUMENT, AND (B) WITH RESPECT TO SPECIFIC LIENS, OR THE PERFECTION THEREOF, EVIDENCED BY SECURITY DOCUMENTS COVERING REAL OR PERSONAL PROPERTY WHICH BY THE LAWS APPLICABLE THERETO ARE REQUIRED TO BE CONSTRUED UNDER THE LAWS OF ANOTHER JURISDICTION. EACH RELATED PERSON HEREBY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF NEW YORK AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT AND THE RELATED PERSONS IN ANY LEGAL PROCEEDING RELATING TO THE LOAN DOCUMENTS OR THE OBLIGATIONS BY ANY MEANS ALLOWED UNDER NEW YORK OR FEDERAL LAW. Section 8.5 Severability. If any term or provision of any Loan Document shall be determined to be illegal or unenforceable all other terms and provisions of the Loan Documents shall nevertheless remain effective and shall be enforced to the fullest extent permitted by Applicable Laws. Section 8.6 Counterparts. This Agreement may be separately executed in any number of counterparts and by .different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Agreement. Section 8.7 NO ORAL AGREEMENTS. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE COMPLETE AND FINAL EXPRESSION OF AGREEMENT AMONG THE PARTIES HERETO RELATING TO THE LOAN. THE TERMS AND PROVISIONS HEREOF HAVE NOT BEEN NOR MAY THEY BE MODIFIED BY ANY ORAL AGREEMENT AMONG THE PARTIES, BUT ONLY BY AN INSTRUMENT IN WRITING EXECUTED BY BOTH BORROWER AND LENDER AND, ACCORDINGLY, SAID TERMS AND PROVISIONS MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR OR CONTEMPORANEOUS ORAL. Section 8.8 Effect of Amendment and Restatement of the Prior Loan Agreement; Confirmation of Security Documents. On the Effective Date, the Prior Loan Agreement shall be amended and restated to read as set forth . herein. Borrower acknowledges and agrees that (i) the liens and security interests securing payment of the Prior Notes are in all respects continuing and in full force and effect and secure the payment of the Prior Notes and that the Prior Notes are replaced by the Note issued hereunder, and (ii) the term "Loan Agreement" as used in the Security Documents shall hereafter mean this Agreement. Section 8.9 Usury. In the event that Lender, in enforcing its rights hereunder, determines that charges and fees incurred in connection with the Secured Indebtedness may, under the applicable usury laws, cause the interest rate herein to exceed the maximum allowed by law, 53 then such interest shall be recalculated and any excess over the maximum interest permitted by said laws shall be credited to the then principal outstanding balance to reduce said balance by that amount. It is the intent of the parties hereto that Borrower under no circumstances shall be required to pay, nor shall Lender be entitled to collect, any interest which is in excess of the maximum legal rate permitted under the applicable usury laws. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. PAYLESS CASHWAYS, INC. By: /s/ Stephen A. Lightstone ---------------------------------------- Name: Stephen A. Lightstone Title: Senior Vice-President-Finance UBS MORTGAGE FINANCE, INC. By: /s/ Jonathan Ashley ---------------------------------------- Name: Jonathan Ashley Title: Vice President By: /s/ Randy Nardone ----------------------------------------- Name: Randy Nardone Title: Managing Director i TABLE OF CONTENTS ARTICLE I Definitions and References...... ................................2 Section 1.1 Defined Terms. .....................................2 Section 1.2 Exhibits and Schedules. ...........................10 Section 1.3 Amendment of Defined Instruments. .................10 Section 1.4 References and Titles. ............................10 Section 1.5 Calculations and Determinations. ..................11 ARTICLE II The Loan........................................................11 Section 2.1 Acknowledgment of Existing Obligations.............11 Section 2.2 Exchange of Notes. ...............................11 Section 2.3 Interest. ........................................11 Section 2.4 Funding Losses; Change in Law, Etc.................12 Section 2.5 Mandatory Payments.................................14 Section 2.6 Optional Prepayment................................15 Section 2.7 Partial Releases...................................15 Section 2.8 Payments to Lender. ..............................18 Section 2.9 Limitation on Liability. .........................19 Section 2.10 Permitted Second Lien. ...........................20 ARTICLE III Conditions Precedent............................................21 Section 3.1 Documents to be Delivered..........................21 Section 3.2 Additional Conditions Precedent....................21 ARTICLE IV Representations and Warranties..................................22 Section 4.1 Borrower's Representations and Warranties..........22 Section 4.2 Placement of Loan..................................26 ARTICLE V Covenants of Borrower...........................................27 Section 5.1 Covenants..........................................27 Section 5.2 Indemnification Regarding Environmental Matters, Etc.......................44 ARTICLE VI Security........................................................44 Section 6.1 Security. ........................................44 Section 6.2 Right of Lender to Perform.........................44 ARTICLE VII Events of Default and Remedies..................................45 Section 7.1 Events of Default..................................45 Section 7.2 Acceleration.......................................46 Section 7.3 Remedies. ........................................48 Section 7.4 Indemnity. .......................................48 ii ARTICLE VIII Miscellaneous...................................................48 Section 8.1 Waiver and Amendment...............................48 Section 8.2 Survival of Agreements; Cumulative Nature..........49 Section 8.3 Notices............................................49 Section 8.4 GOVERNING LAW......................................51 Section 8.5 Severability.......................................51 Section 8.6 Counterparts.......................................51 Section 8.7 NO ORAL AGREEMENTS.................................51 Section 8.8 Effect of Amendment and Restatement of the Prior Loan Agreement; Confirmation of Security Documents...............................51 Section 8.9 Usury..............................................52 LIST OF EXHIBITS AND SCHEDULES Schedule 1 -- Disclosure Schedule Schedule 2 -- Security Schedule Schedule 3 -- Closing Item Schedule Schedule 4 -- Closing Condition Schedule Exhibit A -- Form of Promissory Note Exhibit B -- Form of Permitted Second Lien Exhibit C -- Individual Properties and Allocated Amounts Exhibit D -- Opinions EX-4 9 4.2B FORM OF DEED OF TRUST 1 FORM OF DEED OF TRUST, MORTGAGE AND SECURITY AGREEMENT MODIFICATION AGREEMENT between PAYLESS CASHWAYS, INC. and LASALLE NATIONAL BANK, AS TRUSTEE FOR UBS MORTGAGE FINANCE, INC. Dated: As of December 2, 1997 After recording, please return to: FRIED, FRANK, HARRIS, SHRIVER & JACOBSON One New York Plaza New York, New York 10004 Attention: Robert J. Sorin, Esq. 2 PREPARED BY, RECORDED AT THE ) REQUEST OF AND WHEN RECORDED ) RETURN TO: ) ) Joseph D'Angelo, Esq. ) Fried, Frank, Harris, Shriver & Jacobson ) One New York Plaza ) New York, New York 10004 ) ) - -----------------------------------------) SPACE ABOVE THIS LINE FOR RECORDER'S USE THIS DEED OF TRUST, MORTGAGE AND SECURITY AGREEMENT MODIFICATION AGREEMENT (this "Agreement") made as of the 2nd day of December, 1997 by and between PAYLESS CASHWAYS, INC., a Delaware corporation (successor by merger to Payless Cashways, Inc., an Iowa corporation ("Former Payless"), having an office at Two Pershing Square, 2300 Main Street, Kansas City, Missouri 64108 ("Grantor") and LASALLE NATIONAL BANK, AS TRUSTEE FOR UBS MORTGAGE FINANCE, INC., having an address at 135 South LaSalle Street, Chicago, Illinois 60603 ("Beneficiary"). R E C I T A L S: WHEREAS, Grantor is the owner of each of the premises described in Schedule I hereto (collectively, the "Premises"); WHEREAS, Ticor Title Insurance Company of California ("Trustee") is the holder of that certain Deed of Trust, Mortgage and Security Agreement (the "Mortgage"), dated June 15, 1989 (effective June 20, 1989) described in Schedule 2, made by Former Payless in favor of Trustee for the benefit of The Prudential Insurance Company of America, a New Jersey corporation (the "Original Beneficiary"), which Mortgage encumbers the Premises; WHEREAS, Beneficiary has become the beneficiary under the Mortgage pursuant to the terms of that certain Assignment of Security Documents and other Loan Documents dated as of August 29, 1997, whereby the Original Beneficiary assigned to Beneficiary all of its right, title and interest in and to, among other things, the Mortgage and the Prior Notes (as hereinafter defined); WHEREAS, Beneficiary is the holder of, and the Mortgage secures, certain promissory notes in the original aggregate principal amount of $230,242,500 (the "Prior Notes"), which Prior Notes evidence that certain loan made by Original Beneficiary to Former Payless (the "Loan"); 3 WHEREAS, simultaneously herewith Grantor is executing a Consolidated, Amended and Restated Promissory Note, dated the date hereof, in favor of Beneficiary in the aggregate principal amount of $100,809,000 (the "Note"), which Note modifies the terms of the Prior Notes so as to (i) consolidate into a single note the outstanding principal amount of the Prior Notes, together with accrued and unpaid interest thereon at the non-default rate, (ii) modify the rate of interest on the Loan, (iii) extend the maturity of the Loan, (iv) modify the amortization of principal of the Loan, and (v) otherwise restate in their entirety the terms of the Prior Notes. WHEREAS, Beneficiary and Grantor have agreed to modify and amend the Mortgage in the manner hereinafter set forth. The Mortgage, as modified hereby, the Note and the other documents evidencing and/or securing repayment of the Loan and other obligations evidenced by the Note shall be collectively referred to herein as the "Loan Documents." NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained, the parties hereto covenant and agree to modify and amend the Mortgage as follows: 1. Grantor agrees that the principal amount due under the Note is One Hundred Million Eight Hundred and Nine Thousand Dollars ($100,809,000) and agrees that such amount, plus interest thereon at the interest rate set forth in the Amended and Restated Loan Agreement, dated as of December 2, 1997 (the "Amended Loan Agreement") between Grantor and UBS Mortgage Finance, Inc., shall be paid pursuant to the terms of such Amended Loan Agreement and of the Note. 2. Grantor warrants, represents and covenants that as of the date hereof Grantor has no defenses, offsets, claims or deductions relating to the Note or any sums due under the Mortgage, as modified hereby, or the other Loan Documents, and the Note, the Mortgage, as modified hereby, and the other Loan Documents are in full force and effect and are hereby ratified, confirmed and approved. 3. All references in the Mortgage to "Late Payment Rate" shall mean Default Rate as such term is defined in the Amended Loan Agreement. 4. All references in the Mortgage to "Loan Agreement" shall mean the Amended and Restated Loan Agreement, dated December 2, 1997 between Payless Cashways, Inc. and UBS Mortgage Finance, Inc., as the same may hereafter be amended, modified, restated, extended, renewed or replaced. 5. All references in the Mortgage to "Prudential" shall mean UBS (as such term is defined therein). 4 6. Notwithstanding anything to the contrary contained in Section 2.1 of the Mortgage, Grantor shall not be prohibited from entering into an Assignment of Leases and Rents in connection with, and for the purpose of collaterally securing the `indebtedness secured by the Permitted Second Lien (as defined in the Loan Agreement). 7. The following Is hereby added to the end of the first full paragraph of the Mortgage following the words "set forth in Exhibit "A". ", it being understood that the foregoing property shall not include inventory, equipment, goods or other tangible personal property which is not attached or affixed to (or otherwise installed or intended to be installed the buildings or in the other improvements now erected or hereafter to be erected on said land or otherwise used in connection with the operation (i.e. servicing) of the real estate and the improvements" 8. The following is hereby inserted at the end of the third full paragraph of the Mortgage: "provided, however, that the term "Collateral" shall not include inventory, equipment, goods, or other tangible personal property which is not attached or affixed to (or otherwise installed or intended to be installed in) the Mortgaged Property, except as specifically stated herein with respect to all heating and air conditioning equipment, whether or not attached, affixed, or installed if used in connection with the operation (i.e. servicing) of the Mortgaged Property." 9. Paragraph 1.1 of the Mortgage is hereby deleted in its entirety and replaced with the following: "1.1 Secured Indebtedness. This Deed of Trust, Mortgage and Security Agreement (hereafter called this "Mortgage") is made to secure and enforce the payment of: (a) the obligations, indebtedness and liabilities evidenced by that certain consolidated, Amended and Restated Promissory Note, dated December 2, 1997 made by Grantor, and payable to the order of LaSalle National Bank, as Trustee for UBS Mortgage Finance, Inc. ("UBS"), with interest at the rate or rates therein provided, both principal and interest being payable as therein provided and all amounts remaining unpaid thereon being finally due and payable on December 2, 2004, such note containing a provision for the payment of a reasonable additional amount as attorney's fees, and all other notes given in substitution therefor or in modification, increase, renewal or extension thereof, in whole or in part, being hereinafter collectively called the "Note", and UBS and all subsequent holders of the Note or any part thereof or any interest therein or any of the "secured indebtedness" (as hereinafter defined) being hereinafter called the "Beneficiary"; and (b) all indebtedness incurred or arising pursuant to the provisions of this Mortgage, that certain Amended and Restated Loan Agreement (hereinafter called the "Loan Agreement") dated as of December 2, 1997 5 between UBS and Grantor, the Security Documents (as defined in the Loan Agreement) or any other instrument now or hereafter evidencing, governing or securing the above described indebtedness or any part thereof. The indebtedness referred to in this Paragraph -is hereinafter sometimes called the "secured indebtedness" or the "indebtedness secured hereby."" 10. The second sentence in Paragraph 3.3 of the Mortgage is hereby deleted and replaced with the following: "All such costs, expenses and liabilities incurred by the Beneficiary in collecting such rents and in managing, operating, maintaining, protecting or preserving the Property, if not paid out of rents as hereinabove provided, shall constitute a demand obligation owing by Grantor and shall bear interest from the date of expenditure until paid at the Default Rate as provided in the Loan Agreement, all of which shall constitute a portion of the secured indebtedness." 11. The last sentence in Paragraph 3.6 of the Mortgage is hereby deleted and replaced with the following: "Any money advanced by the Beneficiary in connection with any such receivership shall be a demand obligation owing by Grantor to the Beneficiary and shall bear interest from the date of making such advancement by the Beneficiary until paid at the Default Rate as provided in the Loan Agreement and shall be a part of the secured indebtedness and shall be secured by this Mortgage and by any other instrument securing the secured indebtedness." 12. The following is hereby inserted after the word "SECOND," and before the word "THIRD" in Paragraph 3.7 of the Mortgage: "to the payment in full of remaining secured indebtedness (including specifically without limitation the principal, interest and attorney's fees and all in other sums due and unpaid on the Note and the amounts due and unpaid and owed to the Beneficiary under this Mortgage or any other Loan Document) in such order as the Beneficiary may elect, and" 13. The address of the Beneficiary on the signature page of the Mortgage is hereby deleted in its entirety and replaced with the following: "LaSalle National Bank 135 South LaSalle Street Chicago, Illinois 60603 Attention: Telecopy Number: 6 UBS Mortgage Finance, Inc. 299 Park Avenue New York, New York 10171 Attention: Jonathan Ashley Telecopy Number: (212) 821-5566 with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Robert J. Sorin, Esq. Telecopy Number: (212) 859-8582" 14. All references in the Mortgage to "the note" or "the Note" shall mean the Note (as such term is defined in this Agreement). Unless indicated otherwise by the context thereof, all references in the Mortgage to "this Mortgage", "herein", "hereof' or terms of similar import shall mean the Mortgage as modified by this Agreement. 15. Mortgage, as modified hereby, secures the prompt payment in full and performance when due of all obligations of Grantor now or hereafter e `sting under the Note, the Mortgage, as modified hereby, and the other Loan Documents. 16. This Agreement shall be governed by the laws of the state in which the Property (as defined in the Mortgage) is located, without reference to the conflicts of law principles thereof. 17. GRANTOR AND BENEFICIARY HEREBY CERTIFY THAT THIS AGREEMENT SECURES THE SAME INDEBTEDNESS SECURED BY THE MORTGAGE AND NO FURTHER INDEBTEDNESS. THIS AGREEMENT SECURES (AND DOES NOT, AND MAY NOT, SECURE UNDER ANY CONTINGENCY IN EXCESS OF) THE OUTSTANDING PRINCIPAL BALANCE OF THE NOTE AS OF THE DATE HEREOF OF ONE HUNDRED MILLION EIGHT HUNDRED AND NINE THOUSAND DOLLARS ($100,809,000) TOGETHER WITH ANY INTEREST ACCRUED AND NOT PAM THEREON AND ANY MONIES ADVANCED BY BENEFICIARY (INCLUDING INTEREST AND ADDITIONAL INTEREST THEREON AS PROVIDED IN THIS AGREEMENT) TO PROTECT AND PRESERVE THE LIEN OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, (I) REAL ESTATE TAXES, (II) WATER AND SEWER ASSESSMENTS, (III) REASONABLE ATTORNEY'S FEES AND (IV) INSURANCE PREMIUMS. 7 18. The terms, conditions and agreements contained in this Agreement shall bind and inure to the benefit of Grantor, Beneficiary and their respective heirs, distributees, executors, administrators, successors and permitted assigns. 19. In the event of any inconsistency between the terms of the Mortgage and the terms of this Agreement, the terms of this Agreement shall be controlling to the extent of such inconsistency. 20. Except as otherwise modified or amended hereby, all of the other terms and conditions of the Mortgage shall remain in full force and effect. 21. This Agreement may be executed in one or more counterparts, each of which shall constitute an original of this Agreement, and which, when taken together, shall constitute but one instrument. 22. The terms of this Agreement may not be modified, amended, changed or terminated orally, but only by an agreement in writing signed by the parties against whom enforcement of such modification, amendment, change or termination is sought. 23. Notwithstanding anything to the contrary contained in this Agreement, the Mortgage, the Note or any other Loan Document, the collateral covered by any of the Loan Documents, and the term "Collateral" as defined in the Mortgage, shall not include inventory, equipment, goods or other tangible personal property which is not attached or affixed to (or otherwise installed or intended to be installed in) the Mortgaged Property (as defined in the Mortgage), except with respect to all heating and air conditioning equipment, whether or not attached, affixed, or installed if used in connection with the operation (i.e., servicing) of the Mortgaged Property. 8 IN WITNESS WHEREOF, this Agreement has been duly executed by Grantor and Beneficiary. GRANTOR: PAYLESS CASHWAYS, INC., a Delaware corporation (successor by merger to Payless Cashways, Inc. Iowa corporation) By: --------------------------------------- Name: Title: BENEFICIARY: LASALLE NATIONAL BANK, a Trustee for UBS Mortgage Finance, Inc., a New York corporation By: --------------------------------------- Name: Title: 9 SCHEDULE 1 Property Description EX-4 10 4.2C CONSOL, AMEND & RESTATE PROMISSORY NOTE 1 CONSOLIDATED AMENDED AND RESTATED PROMISSORY NOTE $100,809,000.00 December 2, 1997 FOR VALUE RECEIVED, the undersigned, PAYLESS CASHWAYS, INC., a Delaware corporation (the "Maker"), hereby promises to pay to the order of LASALLE NATIONAL BANK, as Trustee for UBS MORTGAGE FINANCE, INC. (the "Payee") the principal sum of One Hundred Million Eight Hundred Nine Thousand ($100,809,000.00), with interest on the unpaid balance thereof from the date hereof until maturity on the dates and at the rates specified in the Loan Agreement (as hereafter defined). Both principal and interest are payable as provided in the Loan Agreement in lawful money of the United States of America in immediately available funds at the offices of the Payee in New York, New York, or at such other place as from time to time may be designated by the holder of this Note. Borrower shall have no right to prepay all or any part of this Note except as provided in the Loan Agreement. This Note is given as an amendment, consolidation and restatement of the Prior Notes and the execution and delivery of this Note shall not be deemed or construed as a novation, accord and satisfaction, or payment of any of the Prior Notes, and all obligations of the Maker under the Loan Agreement and the Security Documents shall continue, as amended, and this Note shall be entitled to the benefits of the Security Documents. This Note has been executed and delivered pursuant to an Amended and Restated Loan Agreement of even date herewith (herein, as from time to time amended, supplemented or restated, called the "Loan Agreement") between the Maker and the Payee. Reference is hereby made to the Loan Agreement for a description of certain rights, obligations and duties of the Maker, for the meanings assigned to capitalized terms used and not defined herein, and for all other purposes. This Note is secured by the other Security Documents reference to which is made for a description of the property covered thereby and the nature and extent of the security and the rights and powers of the holder of this Note in respect of such security. Upon the occurrence of an Event of Default, upon the terms specified in the Loan Agreement, the holder of this Note or any part thereof shall have the option of declaring the principal balance hereof and the interest accrued hereon to be immediately due and payable. It is the intent of the Payee and the Maker in the execution of this Note and all other instruments now or hereafter securing this Note to contract in strict compliance with applicable usury law. In furtherance thereof, the Payee and the Maker stipulate and agree that none of 2 the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law. Neither the Maker nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be required to pay interest on this Note at a rate in excess of the maximum interest that may be lawfully charged under applicable law, and the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. The holder of this Note expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason or if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the loan evidenced by this Note exceeds the applicable maximum lawful rate, the holder of this Note shall refund to the Maker the amount of such excess or shall credit the amount of such excess against the principal balance of this Note then outstanding. In the event that Payee or any other holder of this Note shall collect monies which are deemed to constitute interest which would increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable law, all such sums deemed to constitute interest in excess of the lawful rate shall, upon such determination, at the option of the holder of this Note, be either immediately returned to the Maker or credited against the principal balance of this Note then outstanding (or any combination of the foregoing), without further penalty to such holder. By execution of this Note the Maker acknowledges that it believes the loan evidenced by this Note to be non-usurious and agrees that if, at any time, the Maker should have reason to believe that such loan is in fact usurious, it will give the holder of this Note notice of such condition and the Maker agrees that said holder shall have ninety (90) days in which to make appropriate refund or other adjustment in order to correct such condition if in fact such exists. Neither the Maker nor any other person required to pay any amounts with respect to the Loan shall have any right of action o remedy against the Payee for any damages, violation or any defense from enforcement of the Note, the Mortgage, or any of the other Loan Documents arising out of the payment or collection of any sums deemed to constitute interest in excess of the lawful note. The term "applicable law" as used in this Note shall mean the laws of the State of New York or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, the Maker and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon reasonable attorneys, and collection fees. 3 The Maker and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in part, with or without notice, before or after maturity. This Note and the rights and duties of the parties hereunder shall be governed for all purposes by the law of the State of New York and the law of the United States applicable to transactions within such State. Notwithstanding anything to the contrary contained herein, the holder hereof shall not seek or enforce any money judgment or deficiency judgment, or otherwise assert personal liability or responsibility, against the Maker with respect to any and all obligations hereunder or secured by the Security Documents or other obligations arising out of the Loan Documents in excess of the amount realized upon foreclosure against (or sale, pursuant to power of sale, of) all or, at the option of the holder hereof, a portion of the security therefor, it being agreed that, except as hereinafter provided, the sole remedy of the holder hereof shall be to proceed against the security for the Secured Indebtedness under the Loan Documents; provided, however, that nothing contained herein or in any other Loan Document shall (a) limit the rights and remedies of the holder hereof (other than its right to seek a money judgment or deficiency judgment which is limited as provided above) against the Maker hereunder or thereunder, either at law or in equity, or (b) relieve the Maker from personal liability and responsibility for the matters described in Section 2.9 of the Loan Agreement. Nothing contained herein shall impair the rights of the holder hereof under applicable law, including without limitation applicable bankruptcy law; nor shall anything contained herein impair such holder's status and rights as a holder of senior indebtedness pursuant to any instrument, under which such holder would be granted senior status. Executed as of the date first above written. PAYLESS CASHWAYS, INC. By: /s/ Stephen A. Lightstone --------------------------------- Name: Stephen A. Ligtstone Title: Senior Vice President-Finance EX-10 11 10.3B AMEND 1 TO STANLEY AGREEMENT 1 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and David Stanley (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated June 16, 1995 (the "Employment Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term of Employment. The last sentence of Paragraph 2 of the Employment Agreement is hereby deleted. 2. Severance Benefits. (a) Paragraph 6(e) of the Employment Agreement, and all references to Paragraph 6(e) in the Employment Agreement, are hereby deleted in their entirety. (b) A new sentence is hereby inserted at the end of Paragraph 6(g)(iii) of the Employment Agreement as follows: "Notwithstanding the foregoing, the Executive shall not be entitled to receive such benefits to the extent that the Executive obtains other employment that provides comparable benefits during the 12 months following termination of employment." (c) Paragraph 6(i) of the Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Definition of Severance Period. The term "Severance Period" shall mean the longer of (x) the period from the date of the termination of the Executive's employment through March 1, 1999, if such termination occurs prior to December 1, 1998, or from the date of the termination of the Executive's employment through March 1, 2000, if such termination occurs after November 30, 1998, or (y) the period from the date of the termination of the Executive's employment through one year after the date of such termination, and in any case regardless of the death or disability of the Executive subsequent to the date of termination of his employment." (d) A new Paragraph 6(j) is hereby inserted in the Employment Agreement as follows: "Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan." (e) A new Paragraph 6(k) is hereby inserted in the Employment Agreement as follows: 2 "Retention Payments Excluded From Severance. Any retention payments paid pursuant to Paragraph 6(j) above shall be excluded from the calculation of severance payments provided under other Paragraphs of this Agreement." (f) A new Paragraph 6(l) is hereby inserted in the Employment Agreement as follows: "Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Paragraph 15 is hereby inserted in the Employment Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Employment Agreement, as the Employment Agreement existed prior to this Amendment No.1, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Employment Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ Susan M. Stanton /s/ David Stanley By:--------------------------------- ---------------------------- President and Chief Operating Officer David Stanley Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and David Stanley (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated June 16, 1995 (the "Employment Agreement"); WHEREAS, the Company and the Executive have amended the Employment Agreement by entering into Amendment No. 1 to Employment Agreement dated as of August 20, 1997 ("Amendment No. 1"); WHEREAS, one of the terms and conditions of Amendment No. 1 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 1, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Employment Agreement, to the extent the Employment Agreement is inconsistent with the terms of Amendment No. 1. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Employment Agreement, to the extent not inconsistent with terms of Amendment No. 1. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 1, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ Susan M. Stanton /s/ David Stanley By:--------------------------------------- -------------------------- President and Chief Operating Officer David Stanley Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ EX-10 12 10.4D AMEND 3 TO STANTON AGREEMENT 1 AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Susan M. Stanton (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated February 8, 1993 (the "Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement dated October 17, 1996 ("Amendment No. 1"), and Amendment No. 2 to Employment Agreement dated June 30, 1997 ("Amendment No. 2") (the Employment Agreements as amended by Amendment No. 1 and Amendment No. 2) referred to herein as the "Amended Employment Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Paragraph 2 of the Amended Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Term of Employment. Unless sooner terminated as hereinafter provided, the term of this Agreement shall commence on the date hereof and continue through March 1, 1999." 2. Severance Benefits. (a) Paragraph 6(e) of the Amended Employment Agreement, and all references to Paragraph 6(e) in the Amended Employment Agreement, are hereby deleted in their entirety. (b) A new sentence is hereby inserted at the end of Paragraph 6(g)(iii) of the Amended Employment Agreement as follows: "Notwithstanding the foregoing, the Executive shall not be entitled to receive such benefits to the extent that the Executive obtains other employment that provides comparable benefits during the 12 months following termination of employment." (c) Section 6(j) of the Amended Employment Agreement is hereby deleted in its entirety, and the following is substituted in lieu thereof: "Definition of Severance Period. The term "Severance Period" shall mean the period from the date of the termination of the Executive's employment continuing for the longer of one year after the date of such termination or until March 1, 1999; provided, however, that the Severance Period shall continue regardless of the death or disability of the Executive subsequent to the date of termination of employment." (d) A new Paragraph 6(k) is hereby inserted in the Amended Employment Agreement as follows: "Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of 2 employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan." (e) A new Paragraph 6(l) is hereby inserted in the Amended Employment Agreement as follows: "Retention Payments Excluded From Severance. Any retention payments paid pursuant to Paragraph 6(k) above shall be excluded from the calculation of severance payments provided under other Paragraphs of this Agreement." (f) A new Paragraph 6(m) is hereby inserted in the Amended Employment Agreement as follows: "Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Paragraph 13 is hereby inserted in the Amended Employment Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Employment Agreement, as the Employment Agreement existed prior to this Amendment No. 3, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 3 to Employment Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Susan M. Stanton By:----------------------------------- --------------------------- Chairman and Chief Executive Officer Susan M. Stanton Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - -------------------------------- 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Susan M. Stanton (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated February 8, 1993 (the "Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement dated October 17, 1996 ("Amendment No. 1), and Amendment No. 2 dated June 30, 1997 "Amendment No. 2"); WHEREAS, the Company and the Executive have further amended the Employment Agreement, Amendment No. 1 and Amendment No. 2 by entering into Amendment No. 3 to Employment Agreement dated as of August 20, 1997 ("Amendment No. 3"); WHEREAS, one of the terms and conditions of Amendment No. 3 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 3, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Employment Agreement as amended by Amendment No. 1 and Amendment No. 2, to the extent the Employment Agreement as amended by Amendment No. 1 and Amendment No. 2, is inconsistent with the terms of Amendment No. 3. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Employment Agreement as amended by Amendment No. 1 and Amendment No. 2, to the extent not inconsistent with terms of Amendment No. 3. 3. The Executive expressly acknowledges that she was advised to consult with his attorney before signing this Waiver and that she has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that she has completely read and understands every provision of this Waiver and of Amendment No. 3, and that she has executed this Waiver voluntarily and of her own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Susan M. Stanton By:-------------------------------------- ---------------------------- Chairman and Chief Executive Officer Susan M. Stanton Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - --------------------------------- EX-10 13 10.5D AMEND 3 TO LIGHTSTONE AGREEMENT 1 AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Stephen A. Lightstone (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated February 8, 1993 (the "Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement dated October 17, 1996 ("Amendment No. 1"), and Amendment No. 2 to Employment Agreement dated June 30, 1997 ("Amendment No. 2") (the Employment Agreement, as amended by Amendment No. 1 and Amendment No. 2, is referred to herein as the "Amended Employment Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Paragraph 2 of the Amended Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Term of Employment. Unless sooner terminated as hereinafter provided, the term of this Agreement shall commence on the date hereof and shall continue through March 1, 1999." 2. Severance Benefits. (a) Paragraph 6(e) of the Amended Employment Agreement, and all references to Paragraph 6(e) in the Amended Employment Agreement, are hereby deleted in their entirety. (b) A new sentence is hereby inserted at the end of Paragraph 6(g)(iii) of the Amended Employment Agreement as follows: "Notwithstanding the foregoing, the Executive shall not be entitled to receive such benefits to the extent that the Executive obtains other employment that provides comparable benefits during the 12 months following termination of employment." (c) Paragraph 6(j) of the Amended Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Definition of Severance Period. The term "Severance Period" shall mean the period from the date of the termination of the Executive's employment continuing for the longer of one year after the date of such termination or until March 1, 1999; provided, however, that the Severance Period shall continue regardless of the death or disability of the Executive subsequent to the date of termination of employment." (d) A new Paragraph 6(k) is hereby inserted in the Amended Employment Agreement as follows: "Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of 2 employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan." (e) A new Paragraph 6(l) is hereby inserted in the Amended Employment Agreement as follows: "Retention Payments Excluded From Severance. Any retention payments paid pursuant to Paragraph 6(k) above shall be excluded from the calculation of severance payments provided under other Paragraphs of this Agreement." (f) A new Paragraph 6(m) is hereby inserted in the Amended Employment Agreement as follows: "Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Paragraph 13 is hereby inserted in the Amended Employment Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Employment Agreement, as the Employment Agreement existed prior to this Amendment No. 3, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 3 to Employment Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Stephen A. Lightstone By:------------------------------------ ----------------------------- Chairman and Chief Executive Office Stephen A. Lightstone Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - -------------------------------- 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Stephen A. Lightstone (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated February 8, 1993 (the "Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement dated October 17, 1996 ("Amendment No. 1), and Amendment No. 2 dated June 30, 1997 "Amendment No. 2"); WHEREAS, the Company and the Executive have further amended the Employment Agreement, Amendment No. 1 and Amendment No. 2 by entering into Amendment No. 3 to Employment Agreement dated as of August 20, 1997 ("Amendment No. 3"); WHEREAS, one of the terms and conditions of Amendment No. 3 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 3, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Employment Agreement as amended by Amendment No. 1 and Amendment No. 2, to the extent the Employment Agreement as amended by Amendment No. 1 and Amendment No. 2, is inconsistent with the terms of Amendment No. 3. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Employment Agreement as amended by Amendment No. 1 and Amendment No. 2, to the extent not inconsistent with terms of Amendment No. 3. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 3, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Stephen A. Lightstone By:------------------------------------- --------------------------------- Chairman and Chief Executive Officer Stephen A. Lightstone Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - --------------------------------- EX-10 14 10.6C AMEND 2 TO BUCHEN AGREEMENT 1 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and G. Michael Buchen (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated October 17, 1996 (the "Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement dated June 30, 1997 ("Amendment No. 1") (the Employment Agreement, as amended by Amendment No. 1, is referred to herein as the "Amended Employment Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Paragraph 2 of the Amended Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Term of Employment. Unless sooner terminated as herein after provided, the term of this Agreement shall commence on the date hereof and shall continue through March 1, 1999." 2. Severance Benefits. (a) Paragraph 6(e) of the Amended Employment Agreement, and all references to Paragraph 6(e) in the Amended Employment Agreement, are hereby deleted in their entirety. (b) A new sentence is hereby inserted at the end of Paragraph 6(g)(iii) of the Amended Employment Agreement as follows: "Notwithstanding the foregoing, the Executive shall not be entitled to receive such benefits to the extent that the Executive obtains other employment that provides comparable benefits during the 12 months following termination of employment." (c) Paragraph 6(i) of the Amended Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Definition of Severance Period. The term "Severance Period" shall mean the period from the date of the termination of the Executive's employment continuing for the longer of one year after the date of such termination or until March 1, 1999; provided, however, that the Severance Period shall continue regardless of the death or disability of the Executive subsequent to the date of termination of employment." (d) A new Paragraph 6(j) is hereby inserted in the Amended Employment Agreement as follows: "Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan." 2 (e) A new Paragraph 6(k) is hereby inserted in the Amended Employment Agreement as follows: "Retention Payments Excluded From Severance. Any retention payments paid pursuant to Paragraph 6(j) above shall be excluded from the calculation of severance payments provided under other Paragraphs of this Agreement." (f) A new Paragraph 6(l) is hereby inserted in the Amended Employment Agreement as follows: "Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Paragraph 13 is hereby inserted in the Amended Employment Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Employment Agreement, as the Employment Agreement existed prior to this Amendment No.2, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 to Employment Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ G. Michael Buchen By:------------------------------------- ---------------------------- Chairman and Chief Executive Officer G. Michael Buchen Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and G. Michael Buchen (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated October 17, 1996 (the "Employment Agreement"), as amended by Amendment No. 1 to Employment Agreement dated June 30, 1997 ("Amendment No. 1"); WHEREAS, the Company and the Executive have amended the Employment Agreement and Amendment No. 1 by entering into Amendment No. 2 to Employment Agreement dated as of August 20, 1997 ("Amendment No. 2"); WHEREAS, one of the terms and conditions of Amendment No. 2 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 2, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Employment Agreement as amended by Amendment No. 1, to the extent the Employment Agreement, as amended by Amendment No. 1, is inconsistent with the terms of Amendment No. 2. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Employment Agreement, as amended by Amendment No. 1, to the extent not inconsistent with terms of Amendment No. 2. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 2, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ G. Michael Buchen By:------------------------------------ ----------------------------- Chairman and Chief Executive Officer G. Michael Buchen Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - -------------------------------- EX-10 15 10.7B AMEND 1 BOYD AGREEMENT 1 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Stanley K. Boyd (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated May 8, 1997 (the "Employment Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Severance Benefits. (a) Paragraph 5(e) of the Employment Agreement, and all references to 5(e) in the Employment Agreement, are hereby deleted in their entirety. (b) A new sentence is hereby inserted at the end of Paragraph 5(g)(iii) of the Employment Agreement as follows: "Notwithstanding the foregoing, the Executive shall not be entitled to receive such benefits to the extent that the Executive obtains other employment that provides comparable benefits during the 12 months following termination of employment." (c) A new Paragraph 5(i) is hereby inserted in the Employment Agreement as follows: "Definition of Severance Period. The term "Severance Period" shall mean a period of one year after the date of the Executive's employment with the Company is terminated, as if the Executive continued to be employed during such period and regardless of the death or disability of the Executive subsequent to the date of termination." (d) A new Paragraph 5(j) is hereby inserted in the Employment Agreement as follows: "Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan." (e) A new Paragraph 5(k) is hereby inserted in the Employment Agreement as follows: "Retention Payments Excluded From Severance. Any retention payments paid pursuant to Paragraph 5(j) above shall be excluded from the calculation of severance payments provided under other Paragraphs of this Agreement." 2 (f) A new Paragraph 5(l) is hereby inserted in the Employment Agreement as follows: "Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 2. Waiver of Claims. A new Paragraph 14 is hereby inserted in the Employment Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Employment Agreement, as the Employment Agreement existed prior to this Amendment No.1, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Employment Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Stanley K. Boyd By:------------------------------------ ------------------------------ Chairman and Chief Executive Officer Stanley K. Boyd Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Stanley K. Boyd (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated May 8, 1997 (the "Employment Agreement"); WHEREAS, the Company and the Executive have amended the Employment Agreement by entering into Amendment No. 1 to Employment Agreement dated as of August 20, 1997 ("Amendment No. 1"); WHEREAS, one of the terms and conditions of Amendment No. 1 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 1, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Employment Agreement, to the extent the Employment Agreement is inconsistent with the terms of Amendment No. 1. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Employment Agreement, to the extent not inconsistent with terms of Amendment No. 1. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 1, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Stanley K. Boyd By:------------------------------------ ------------------------------- Chairman and Chief Executive Officer Stanley K. Boyd Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ EX-10 16 10.8B AMEND 1 HOLLAND AGREEMENT 1 AMENDMENT NO. 1 TO EXECUTIVE CHANGE-IN-CONTROL AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and E.J. Holland, Jr. (the "Executive"). WHEREAS, the Company and the Executive have entered into an executive change-in-control agreement dated June 26, 1997 (the "Change-in-Control Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term. Section 1 of the Change-in-Control Agreement is hereby amended by deleting the language in Section 1 beginning "provided, however," through the end of Section 1. 2. Severance Benefits. (a) Section 4(d), subparagraphs 2(i) and (ii) and 3 of the Change-in-Control Agreement are hereby deleted in their entirety and the following is substituted in lieu thereof: (i) one year's annual Base Salary. For purposes of this section, "Base Salary" shall mean the salary in effect on July 21, 1997. (3) the Corporation will arrange to provide you, at the Corporation's expense, with benefits under the Corporation's Hospital/Medical Plan, and all group Life Insurance Plans, and any other Welfare Plans then existing, or benefits substantially similar to the benefits you were receiving immediately prior to the Notice of Termination under the named plans, for a period of one year, such benefits specifically being in addition to any and all rights you may have under the plan and under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA); but benefits otherwise receivable by you pursuant to this Subsection (3) shall be reduced to the extent comparable benefits are actually received by you from a subsequent employer during the such period following your termination, and any such benefits actually received by you shall be reported to the Corporation. (b) A new Section 13 is hereby inserted in the Change-in-Control Agreement as follows: "(a) Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan. (b) Retention Payments Excluded From Severance. Any retention payments paid pursuant to Section 13(a) above shall be excluded from the calculation of severance payments provided under other Sections of this Agreement. 2 (c) Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Section 14 is hereby inserted in the Change-in-Control Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Change-in- Control Agreement, as the Change-in-Control Agreement existed prior to this Amendment No.1, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Change-in-Control Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ E.J. Holland, Jr. By:------------------------------------ ------------------------------- Chairman and Chief Executive Officer E.J. Holland, Jr. Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and E.J. Holland, Jr. (the "Executive"). WHEREAS, the Company and the Executive have entered into an executive change-in-control agreement dated June 26, 1997 (the "Change-in-Control Agreement"); WHEREAS, the Company and the Executive have amended the Change-in-Control Agreement by entering into Amendment No. 1 to Change-in-Control Agreement dated as of August 20, 1997 ("Amendment No. 1"); WHEREAS, one of the terms and conditions of Amendment No. 1 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 1, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Change-in-Control Agreement, to the extent the Change-in-Control Agreement is inconsistent with the terms of Amendment No. 1. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Change-in-Control Agreement, to the extent not inconsistent with terms of Amendment No. 1. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 1, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ E.J. Holland, Jr. By:------------------------------------ ------------------------------ Chairman and Chief Executive Officer E.J. Holland, Jr. Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ EX-10 17 10.9B AMEND 1 ISLINGER AGREEMENT 1 AMENDMENT NO. 1 TO EXECUTIVE CHANGE-IN-CONTROL AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Robert S. Islinger (the "Executive"). WHEREAS, the Company and the Executive have entered into an executive change-in-control agreement dated June 26, 1997 (the "Change-in-Control Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term. Section 1 of the Change-in-Control Agreement is hereby amended by deleting the language in Section 1 beginning "provided, however," through the end of Section 1. 2. Severance Benefits. (a) Section 4(d), subparagraphs 2(i) and (ii) and 3 of the Change-in-Control Agreement are hereby deleted in their entirety and the following is substituted in lieu thereof: (i) one year's annual Base Salary. For purposes of this section, "Base Salary" shall mean the salary in effect on July 21, 1997. (3) the Corporation will arrange to provide you, at the Corporation's expense, with benefits under the Corporation's Hospital/Medical Plan, and all group Life Insurance Plans, and any other Welfare Plans then existing, or benefits substantially similar to the benefits you were receiving immediately prior to the Notice of Termination under the named plans, for a period of one year, such benefits specifically being in addition to any and all rights you may have under the plan and under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA); but benefits otherwise receivable by you pursuant to this Subsection (3) shall be reduced to the extent comparable benefits are actually received by you from a subsequent employer during the such period following your termination, and any such benefits actually received by you shall be reported to the Corporation. (b) A new Section 13 is hereby inserted in the Change-in-Control Agreement as follows: "(a) Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan. (b) Retention Payments Excluded From Severance. Any retention payments paid pursuant to Section 13(a) above shall be excluded from the calculation of severance payments provided under other Sections of this Agreement. 2 (c) Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Section 14 is hereby inserted in the Change-in-Control Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Change-in- Control Agreement, as the Change-in-Control Agreement existed prior to this Amendment No.1, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Change-in-Control Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Robert S. Islinger By:------------------------------------ -------------------------------- Chairman and Chief Executive Officer Robert S. Islinger Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Robert S. Islinger (the "Executive"). WHEREAS, the Company and the Executive have entered into an executive change-in-control agreement dated June 26, 1997 (the "Change-in-Control Agreement"); WHEREAS, the Company and the Executive have amended the Change-in-Control Agreement by entering into Amendment No. 1 to Change-in-Control Agreement dated as of August 20, 1997 ("Amendment No. 1"); WHEREAS, one of the terms and conditions of Amendment No. 1 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 1, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Change-in-Control Agreement, to the extent the Change-in-Control Agreement is inconsistent with the terms of Amendment No. 1. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Change-in-Control Agreement, to the extent not inconsistent with terms of Amendment No. 1. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 1, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Robert S. Islinger By:------------------------------------ ----------------------------- Chairman and Chief Executive Officer Robert S. Islinger Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ EX-10 18 10.10B AMEND 1 NAWROT AGREEMENT 1 AMENDMENT NO. 1 TO EXECUTIVE CHANGE-IN-CONTROL AGREEMENT THIS AGREEMENT, made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Richard E. Nawrot (the "Executive"). WHEREAS, the Company and the Executive have entered into an executive change-in-control agreement dated June 26, 1997 (the "Change-in-Control Agreement"); NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term. Section 1 of the Change-in-Control Agreement is hereby amended by deleting the language in Section 1 beginning "provided, however," through the end of Section 1. 2. Severance Benefits. (a) Section 4(d), subparagraphs 2(i) and (ii) and 3 of the Change-in-Control Agreement are hereby deleted in their entirety and the following is substituted in lieu thereof: (i) one year's annual Base Salary. For purposes of this section, "Base Salary" shall mean the salary in effect on July 21, 1997. (3) the Corporation will arrange to provide you, at the Corporation's expense, with benefits under the Corporation's Hospital/Medical Plan, and all group Life Insurance Plans, and any other Welfare Plans then existing, or benefits substantially similar to the benefits you were receiving immediately prior to the Notice of Termination under the named plans, for a period of one year, such benefits specifically being in addition to any and all rights you may have under the plan and under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA); but benefits otherwise receivable by you pursuant to this Subsection (3) shall be reduced to the extent comparable benefits are actually received by you from a subsequent employer during the such period following your termination, and any such benefits actually received by you shall be reported to the Corporation. (b) A new Paragraph 13 is hereby inserted in the Change-in-Control Agreement as follows: "(a) Participation in Retention Plan. The Executive shall participate in the key employee retention plan adopted by the Company as of August 20, 1997, subject to the terms and conditions of such plan; provided, however, that if the Executive is entitled to receive a retention bonus for a fiscal year, the Executive shall be entitled to receive any unpaid portion of the bonus regardless of any termination of employment by the Company without Cause or by the Executive for Good Reason prior to the date the unpaid portion of the bonus would be payable under the retention plan. (b) Retention Payments Excluded From Severance. Any retention payments paid pursuant to Section 13(a) above shall be excluded from the calculation of severance payments provided under other Sections of this Agreement. 2 (c) Lump Sum Payment. Notwithstanding any other provision of this Agreement, any Base Salary, Incentive Compensation, or Retention Payment payable to the Executive upon termination of employment shall be paid in a lump sum within fifteen (15) days of the termination of employment." 3. Waiver of Claims. A new Section 14 is hereby inserted in the Change-in-Control Agreement as follows: "Waiver of Claims. The Executive shall execute a waiver of claims under the Change-in- Control Agreement, as the Change-in-Control Agreement existed prior to this Amendment No.1, in the form attached hereto as Exhibit A." IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Change-in-Control Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Richard E. Nawrot By:------------------------------------ ---------------------------- Chairman and Chief Executive Officer Richard E. Nawrot Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ 3 WAIVER OF CLAIMS THIS WAIVER OF CLAIMS ("Waiver") is made and entered into as of August 20, 1997, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Richard E. Nawrot (the "Executive"). WHEREAS, the Company and the Executive have entered into an executive change-in-control agreement dated June 26, 1997 (the "Change-in-Control Agreement"); WHEREAS, the Company and the Executive have amended the Change-in-Control Agreement by entering into Amendment No. 1 to Change-in-Control Agreement dated as of August 20, 1997 ("Amendment No. 1"); WHEREAS, one of the terms and conditions of Amendment No. 1 is that the Company and the Executive enter into this Waiver. NOW, THEREFORE, in consideration of these premises and in consideration of the Company and the Executive entering into Amendment No. 1, and other good and valuable consideration, the parties agree as follows: 1. The Executive, and anyone claiming through or on behalf of the Executive, waives any and all claims the Executive may have or may have had against the Company and the Company's affiliates, their successors and assigns, and the Company's past and present employees, officers, directors and agents, or any of them, under the Change-in-Control Agreement, to the extent the Change-in-Control Agreement is inconsistent with the terms of Amendment No. 1. 2. Nothing under this Agreement is intended to waive, terminate or otherwise affect the Executive's eligibility for or receipt of any rights or benefits the Executive may have under the Change-in-Control Agreement, to the extent not inconsistent with terms of Amendment No. 1. 3. The Executive expressly acknowledges that he was advised to consult with his attorney before signing this Waiver and that he has had the opportunity to be advised by independent legal counsel before signing. The Executive further acknowledges that he has completely read and understands every provision of this Waiver and of Amendment No. 1, and that he has executed this Waiver voluntarily and of his own free will. 4. This Waiver shall be interpreted and enforced under the laws of the State of Missouri. 4 IN WITNESS WHEREOF, the parties have executed this Waiver as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE /s/ David Stanley /s/ Richard E. Nawrot By:------------------------------------ ----------------------------- Chairman and Chief Executive Officer Richard E. Nawrot Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John H. Weitnauer, Jr. - ------------------------------ EX-13 19 11/29/97 ANNUAL REPORT 1 PAYLESS CASHWAYS, INC. 1997 ANNUAL REPORT ABOUT THE COMPANY Payless Cashways, Inc. is a full-line building materials specialty retailer concentrating on remodelers, residential and commercial contractors, property management and industrial firms, and project-oriented do-it-yourselfers. The Company is the fifth largest retailer in the industry as measured by sales. At the end of fiscal 1997, the Company operated 164 building materials stores in 20 states located in the Midwest, Southwest, Pacific Coast, and Rocky Mountain areas under the names of Payless Cashways, Furrow, Lumberjack, Hugh M. Woods, Knox Lumber, and Contractor Supply. Each full-line store is designed as a one-stop source to provide customers with a complete selection of quality products and services needed to build, improve, or maintain their home, business, farm or ranch properties. The merchandise assortment includes approximately 31,000 items in the following categories: lumber and building materials; doors, windows and trim; tools; hardware; electrical and plumbing products; paint; lighting; home decor; kitchens; decorative plumbing; heating/cooling/ventilation; and seasonal items. The Company employs approximately 12,800 people, most of whom work in the stores and have the opportunity to be trained and certified in a number of product categories. The Company's strategy is to serve the professional customer and project-oriented do-it-yourselfer with a full-line lumberyard, a broad product selection, a high level of customer assistance and competitive pricing. In July 1997, the Company filed for relief under Chapter 11 of the Bankruptcy Code. The Court confirmed the Company's First Amended Plan of Reorganization and the Company emerged from Chapter 11 on December 2, 1997. With this restructuring, the Company believes it has a more appropriate balance sheet for the highly competitive environment in which it operates. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Letter to Stockholders 2 Quarterly Statement of Operations 5 Management's Discussion and Analysis of the Financial Condition and Results of Operations 7 Statements of Operations 14 Balance Sheets 15 Statements of Cash Flows 17 Statements of Stockholders' Equity 18 Notes to Financial Statements 19 Independent Auditors' Report 34 Five-Year Financial Summary 35 Five-Year Operational Summary 36 Board of Directors and Officers 37 1997 Store Locations 38 Stockholder Information 39 2 Payless Cashways, Inc. LETTER TO STOCKHOLDERS To Our Stockholders: On July 21, 1997, Payless Cashways' struggle against the weight of its debt load culminated in a filing under Chapter 11 of the United States Bankruptcy Code. While not the preferred course of action, the Company determined that it could not withstand the competitive environment without a significant change in its balance sheet. After disappointing results in the first and second quarters of 1997, it became apparent to the Board of Directors and management in place at that time, as well as to the Company's secured lenders, that a deep restructuring would have to be considered. After evaluating the alternatives, the Company filed for protection under Chapter 11 and began a fast-track process of restructuring. On December 2, 1997, the Company's Plan of Reorganization was consummated, and Payless Cashways emerged from bankruptcy as a newly reorganized Delaware corporation with a new Board of Directors. The new Board of Directors is a group of strong and capable leaders with experience in the building materials industry, finance and marketing. Individually, the members of the Board have led large and successful businesses. By way of brief introduction, we are Peter G. Danis, President and Chief Executive Officer of Boise Cascade Office Products, serving as non-executive Chairman of the Board, and Donald E. Roller, former President/Chief Executive Officer of U.S. Gypsum Company, serving as Acting Chief Executive Officer. Other members of the Board include David M. Chamberlain, Chairman of Genesco, Inc.; H. D. (Harry) Cleberg, President/Chief Executive Officer of Farmland Industries, Inc.; David G. Gundling, President/Chief Executive Officer of Hagemeyer Foods N.A., Inc.; Max D. Hopper, Principal of Max D. Hopper Associates, Inc.; and Peter M. Wood, Former Managing Director of J.P. Morgan & Company, Inc. Our colleagues on the Board are dedicated individuals who have already demonstrated their willingness to make difficult decisions in order to move Payless Cashways toward profitability. We recognize the difficulty of the challenge, but we are committed to restore Payless to a position of strength in the industry. The new Board of Directors accepted long-time Chief Executive Officer David Stanley's decision to retire and determined to combine the positions of President and CEO. President Susan Stanton announced her resignation on January 5. A nationwide search is under way for a permanent President/CEO. In the interim, Donald E. Roller serves in that capacity. On January 19, working closely with the senior management team, we announced a 25% reduction in force at the headquarters and the regional offices including five additional officers. While the individuals who have left Payless Cashways have served with great energy and dedication, we are fortunate to have depth of management in the Company. Stanley K. Boyd, Louise R. Iennaccaro, Robert S. Islinger, Richard G. Luse and the four remaining regional vice presidents, all having been with the Company for some time, assumed the duties of the departing officers. In addition, changes have been made to place a dedicated store manager in every location to ensure execution of plans and excellent customer service. Stanley K. Boyd, Senior Vice President - Store Operations, and Robert S. Islinger, Senior Vice President - Marketing and Merchandising, are directing sales initiatives to regain sales momentum. The Board and senior management have assembled a team to review the Company's competitive 3 Payless Cashways, Inc. LETTER TO STOCKHOLDERS (cont'd.) strategy. While more time is needed for them to complete their work, progress is being made. The capital expenditure plan has been greatly reduced for 1998 and is targeted to maximize return. The financial results for the year reflect both continuing competitive pressure, and, particularly in the second half, the effects of the Chapter 11 filing. For the fourth quarter and the fiscal year, sales, EBITDA, and earnings decreased compared to the prior year. Losses for the quarter reflect the impact of both competition and the period spent in Chapter 11. Negative pressure on sales continued into December with same-store sales down 12.2% compared to last year. For the month of January, same-store sales comparisons improved. Net sales for the fourth quarter were $504.4 million, a total decrease of 23.8%, and 12.1% on a same-store sales basis compared to the same quarter of 1996 when presented on a thirteen-week basis. The total sales decrease reflects the closing of 29 stores during the quarter. For financial reporting purposes, the fourth quarter of 1996 was a fourteen-week sales period compared to a thirteen-week sales period for the fourth quarter of 1997. On that basis, total sales for the quarter decreased 29.0%. Earnings before interest, taxes, depreciation, and amortization (EBITDA), a measure of the Company's operating cash flow, decreased to $17.3 million compared to $43.4 million for the fourth quarter of last year. Fourth quarter 1997 EBITDA benefited from a $5.1 million LIFO credit compared to a $7.5 million LIFO credit in the same period of 1996. During the fourth quarter of fiscal 1997, the Company recorded non-routine charges in connection with its reorganization under Chapter 11. The Company incurred reorganization charges of $20.3 million ($12.5 million after tax) in the quarter ended November 29, 1997, which were primarily professional and administrative fees incurred in connection with the reorganization, as well as amounts accrued under an employee retention program. The Company adopted fresh-start accounting as of November 29, 1997, and recorded a $355.6 million ($312.1 million after tax) fresh-start revaluation charge and an extraordinary gain, net of tax, of $138.2 million related to the discharge of indebtedness in the case. The Company also recorded an extraordinary charge, net of tax, of $5.0 million related to the early extinguishment of the Amended Credit Agreement and a mortgage loan on December 2, 1997. Both of these debt instruments were replaced with new debt instruments. The Company reported fourth quarter pro forma net loss of $10.4 million compared to fourth quarter 1996 net income of $5.6 million. Pro forma net loss for fourth quarter 1997 excludes the reorganization items, fresh-start revaluation charges, and extraordinary items related to the Company's reorganization under Chapter 11. Including these non-routine charges recorded in the quarter, net loss for the fourth quarter of 1997 was $201.8 million. Net sales for the 1997 fiscal year were $2.3 billion, a decrease of 11.9% in total, and 6.6% on a same-store basis compared to fiscal 1996 when presented on a 52-week basis. Again, the total sales decrease reflects the closing of 29 stores during the fourth quarter of 1997. For financial reporting purposes, the 1996 fiscal year was a 53-week sales period compared to a 52-week sales period for the 1997 fiscal year. Without adjusting for the 53rd week of 1996, total sales for the 1997 fiscal year decreased 13.5%. Pro forma EBITDA decreased to $65.4 million compared to $134.6 million for last year. Pro forma EBITDA for 1997 excludes third quarter 1997 4 Payless Cashways, Inc. LETTER TO STOCKHOLDERS (cont'd.) inventory write-downs of $10.7 million related to the closing of 29 under-performing stores, and pro forma EBITDA for 1996 excludes third quarter 1996 inventory write-downs of $5.8 million related to the closing of nine under-performing stores. EBITDA for fiscal 1997 benefited from a $0.7 million LIFO credit compared to a $3.2 million LIFO credit in fiscal 1996. For the 1997 fiscal year, the Company reported a net loss of $288.6 million compared to a net loss of $19.1 million in the previous year. The net loss for the 1997 fiscal year reflects reorganization items, fresh-start revaluation charges, a store closing charge, an asset impairment charge, and extraordinary items recorded in the third and fourth quarters of 1997. Excluding the non-routine items recorded in these quarters of 1997 and the third quarter of 1996, pro forma net loss for the 1997 fiscal year would have been $35.5 million compared to net income for the 1996 fiscal year of $7.4 million. Payless Cashways still faces challenges. Early operating results for 1998 are tracking below Company expectations. Same-store sales for the month of December 1997, the first month of fiscal 1998, of $143.7 million, as mentioned earlier, were 12.2% below last year. The Company expected some improvement after exiting the Chapter 11 reorganization, but negative fourth quarter sales trends continued into the new fiscal year. The impact of the Chapter 11 reorganization has not yet dissipated. Soft sales in the early weeks of fiscal 1998 increase the need for a strong spring selling season and continued tight expense control. Payless Cashways is a company with a strong tradition of perseverance and commitment. It has struggled under a heavy load of debt, as the competitive landscape has become more and more challenging. We believe it has the potential to continue to be among the best building materials retailers in the industry, serving millions of customers each month. We have been impressed with the quality of both the people and the facilities at Payless Cashways. The challenge is to successfully attract and retain customers. This Board and management team are committed to that challenge. Peter G. Danis Donald E. Roller Non-executive Chairman of the Board Acting Chief Executive Officer 5 Payless Cashways, Inc. QUARTERLY STATEMENTS OF OPERATIONS (unaudited) In thousands, except per share amounts
Predecessor Company First Second Third Fourth Fiscal Year Ended November 29, 1997 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------- Income Net sales $ 487,550 $ 661,191 $ 632,107 $ 504,433 Other income 1,205 1,264 1,191 1,274 --------------------------------------------------------------- 488,755 662,455 633,298 505,707 Costs and expenses Cost of merchandise sold 348,247 483,093 478,038 367,280 Selling, general and administrative 138,407 151,147 148,166 121,097 Reorganization items -- -- 5,121 20,334 Fresh-start revaluation -- -- -- 355,559 Special charges -- -- 13,056 -- Asset impairment charges -- -- 60,483 -- Provision for depreciation and amortization 12,804 13,037 12,768 12,501 Interest expense 16,055 16,274 14,663 14,259 --------------------------------------------------------------- 515,513 663,551 732,295 891,030 --------------------------------------------------------------- LOSS BEFORE INCOME TAXES (26,758) (1,096) (98,997) (385,323) Federal and state income taxes (18,623) 12,133 (33,595) (50,321) ---------------------------------------------------------------- Loss before extraordinary items (8,135) (13,229) (65,402) (335,002) Extraordinary items, net of income taxes -- -- -- 133,176 --------------------------------------------------------------- NET LOSS $ (8,135) $ (13,229) $ (65,402) $ (201,826) ================================================================
In connection with its Chapter 11 filing on July 21, 1997, discussed at Note A to the Financial Statements, the Company recorded reorganization items in the third and fourth quarters ($3.2 million and $12.5 million after tax, respectively). The Company also adopted fresh-start accounting, discussed at Note B to the Financial Statements, as of November 29, 1997, as a result of its emergence from bankruptcy under its plan of reorganization effective date, December 2, 1997. Fresh-start revaluation charges, after tax, were $312.1 million. An extraordinary gain of $138.2 million after tax related to the discharge of debt pursuant to the consummation of the Plan was recorded in the fourth quarter. In addition, an extraordinary charge of $5.0 million after tax related to the early extinguishment of debt was also recorded in the fourth quarter. A lower-than-anticipated rate of inflation decreased the LIFO inventory provision, after tax, by $3.0 million in the fourth quarter. Special charges ($8.1 million after tax) reflected in the third quarter consist of costs associated with the closing of 29 stores. Third quarter cost of merchandise sold reflects an inventory write-down ($6.6 million after tax) in connection with these store closings. The Company also recorded an asset impairment charge ($43.9 million after tax) in the third quarter. 6 Payless Cashways, Inc. QUARTERLY STATEMENTS OF OPERATIONS (unaudited) (cont'd.) In thousands, except per share amounts
Predecessor Company First Second Third Fourth Fiscal Year Ended November 30, 1996 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------- Income Net sales $ 526,767 $ 682,252 $ 723,793 $ 710,017 Other income 1,597 1,521 1,481 3,477 --------------------------------------------------------------- 528,364 683,773 725,274 713,494 Costs and expenses Cost of merchandise sold 372,916 491,500 535,956 506,362 Selling, general and administrative 141,405 152,929 157,403 163,729 Special charges -- -- 8,184 -- Asset impairment charges -- -- 59,697 -- Provision for depreciation and amortization 13,184 13,586 14,007 14,239 Interest expense 15,352 14,606 14,438 16,092 Interest income -- -- (4,900) -- --------------------------------------------------------------- 542,857 672,621 784,785 700,422 --------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (14,493) 11,152 (59,511) 13,072 Federal and state income taxes (6,870) 5,286 (36,633) 7,515 --------------------------------------------------------------- NET INCOME (LOSS) $ (7,623) $ 5,866 $ (22,878) $ 5,557 ===============================================================
Special charges ($5.0 million after tax) reflected in the third quarter consist of costs associated with the closing of nine stores, eight of which had been closed at November 30, 1996. Third quarter cost of merchandise sold reflects an inventory write-down ($3.5 million after tax) in connection with these store closings. The Company recorded an asset impairment charge ($44.6 million after tax) in the third quarter as well as a federal income tax benefit ($23.7 million) and related interest income ($2.9 million after tax) pursuant to legislation and a settlement with the Internal Revenue Service. A liquidation of LIFO inventories and a lower-than-anticipated rate of inflation decreased the LIFO inventory provision, after tax, by $4.0 million in the fourth quarter. 7 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Petition For Relief Under Chapter 11 - ------------------------------------ While the Company had sufficient liquidity to fund its current operations, the operating performance of the Company during the second quarter of fiscal 1997, which was well below the Company's expectations, led management to conclude that it was unlikely that the Company would be able to comply with the covenants contained in its principal credit agreements at the end of the 1997 fiscal year. In the course of the Company's subsequent negotiations with its senior lenders to restructure its debt and after considering with its financial adviser, Houlihan Lokey Howard & Zukin, all other alternatives, including the sale of the Company and liquidation, the Company concluded that a Chapter 11 proceeding provided the best approach for a comprehensive financial restructuring of the Company. This action was intended to improve the Company's competitive position by establishing a more appropriate capital structure to operate the business in this period of unprecedented competitive pressure after a decade of dealing with a highly leveraged balance sheet, which had limited capital expenditures. On July 21, 1997, the Company filed a voluntary petition to reorganize under Chapter 11 and filed a plan of reorganization for its emergence from Chapter 11 (the "Plan" or "Plan of Reorganization") as well as a Disclosure Statement. The Company operated its business as a debtor-in-possession, subject to the jurisdiction of the Court, while pursuing its reorganization plan to restructure the Company's capitalization. The Chapter 11 filing resulted in an automatic stay of the commencement or prosecution of claims against the Company that arose before the petition date. The Disclosure Statement and Plan were subsequently amended on September 5, 1997, and modified on October 9, 1997. On October 10, 1997, the Court determined that the Disclosure Statement contained adequate information to permit a creditor to make an informed decision about the Plan. The Company's impaired creditors and equity security holders accepted the Plan, the Court confirmed the Plan on November 19, 1997, and, after the satisfaction of a number of conditions, the Plan became effective December 2, 1997 (the "Effective Date"). For a summary description of the Plan, see Note A to Notes to Financial Statements. Results of Operations - --------------------- The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Annual Report to Stockholders. The Company has implemented the required accounting for entities emerging from Chapter 11 in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("fresh-start reporting") and reflected the effects of such adoption in the balance sheet as of November 29, 1997. Under fresh-start reporting, the balance sheet of November 29, 1997, became the opening balance sheet of the Reorganized Company. The financial statements of the Predecessor Company as of November 29, 1997 and prior are not comparable in material respects to the financial statements of the Successor Company. Operating Data
Predecessor Company -------------------------------------------- Fiscal Year Ended -------------------------------------------- percent of net sales Nov. 29, Nov. 30, Nov 25, 1997 1996 1995 --------- ---------- -------- Net sales....................................................... 100.0 % 100.0 % 100.0 % Other income.................................................... .2 .3 .2 Cost of merchandise sold........................................ 73.4 72.1 71.4 Selling, general and administrative............................. 24.4 23.3 23.1 Reorganization items............................................ 1.1 -- -- Fresh-start revaluation......................................... 15.6 -- -- Special charges................................................. .6 .3 5.7 Asset impairment charges........................................ 2.6 2.3 -- Provision for depreciation and amortization..................... 2.2 2.1 2.3 Interest expense................................................ 2.7 2.3 2.3 Interest income................................................. -- (.2) -- -------------------------------------------- Income (loss) before income taxes............................... (22.4) (1.9) (4.6) Federal and state income taxes.................................. (4.0) (1.2) (.2) Equity in loss of joint venture................................. -- -- (.4) -------------------------------------------- Income (loss) before extraordinary items........................ (18.4) (.7) (4.8) Extraordinary items............................................. 5.8 -- -- -------------------------------------------- Net income (loss)............................................... (12.6)% (.7)% (4.8)% ============================================
8 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) Sales Net sales for fiscal 1997, a 52-week year, decreased 13.5% from fiscal 1996, a 53-week year, and fiscal 1996 net sales decreased 1.4% from fiscal 1995, a 52-week year. On a 52-week basis, net sales for fiscal year 1997 decreased 11.9% compared to fiscal 1996 and net sales for 1996 decreased 3.0% compared to fiscal 1995. Same-store sales (sales from stores that have been open one full year), on a 52-week basis, decreased by 6.6% for fiscal 1997, and decreased 2.5% for fiscal 1996. Net sales for 1997 reflect continuing competitive pressure and, in the second half, the disruption in the supply of product and the erosion of customer confidence caused by the Chapter 11 filing. On a same-store basis, sales from professional customers increased 0.2%, while sales from the consumer side of the business decreased 11.9% in fiscal 1997. Twenty-four stores were closed during the third quarter of 1997 (one closing of which had been announced in fiscal 1996), and an additional six stores were closed in the fourth quarter. The Company closed six stores in early fiscal 1996 and another eight stores in the fourth quarter of 1996. Net sales for 1996 reflect increasing competitive pressure on the Company's consumer business, although there was strong growth in the professional business aided by improved external conditions such as housing activity and consumer sentiment. On a same-store basis, sales from professional customers increased 7.7%, while sales from the consumer side of the business decreased 8.1% in fiscal 1996. The stores closed in fiscal 1996 and 1997 accounted for $213.3 million and $388.7 million sales in 1996 and 1997, respectively. Gains of $2.3 million, before tax, related to insurance settlement proceeds in excess of net book value for buildings and equipment destroyed in a 1995 fire loss, are included in other income for fiscal 1996. Costs and Expenses The cost of merchandise sold, as a percent of sales, was 73.4% in fiscal 1997, 72.1% in fiscal 1996, and 71.4% in fiscal 1995. A third quarter 1997 inventory write-down of $10.7 million, related to the closing of 29 underperforming stores, was 0.5% of sales for fiscal 1997. Likewise, a third quarter inventory write-down of $5.8 million, related to the closing of nine underperforming stores, was 0.2% of sales for fiscal 1996. Excluding the effect of both the 1997 and 1996 inventory write-downs, the decrease in gross margins during 1997 was primarily due to competitive pressure and the growth in sales to the professional customer whose merchandise purchases include a higher percentage of commodity goods at margin rates somewhat lower than the Company's average. The disruption in the supply of product resulting from the Chapter 11 filing caused some increase in cost of goods sold due to purchasing product from secondary sources at higher costs. The decrease in 1996 gross margins was also due, in part, to the growth in sales to the professional customer and to the Company's pricing initiatives. Cost of merchandise sold in fiscal 1997 and 1996 benefited from a $0.7 million and a $3.2 million LIFO credit, respectively, related to liquidations of LIFO inventories and deflation, compared to a $4.2 million LIFO charge in fiscal 1995. Selling, general and administrative expenses, as a percent of sales, were 24.4%, 23.3%, and 23.1% for fiscal 1997, 1996 and 1995, respectively. The increases as a percent of sales for fiscal 1997 and 1996 were due primarily to lower sales. The 1997 and 1996 decrease in dollars was due primarily to savings from the store closings discussed above. Interest expense increased $0.8 million to $61.3 million in fiscal 1997 compared to fiscal 1996 due primarily to higher interest rates. Interest expense for fiscal 1997 would have increased an additional $5.7 million had certain debt not been compromised by the Chapter 11 filing. Interest expense decreased $0.6 million in fiscal 1996 compared to fiscal 1995 due primarily to retirement of long-term debt, some of which was replaced with lower interest-bearing debt. The Company also recorded interest income of $4.9 million ($2.9 million after tax) in the third quarter of 1996, related to a pending tax refund arising out of recent legislation and a settlement with the Internal Revenue Service ("IRS"). In connection with its Chapter 11 filing, the Company recorded reorganization items of $25.5 million during fiscal 1997. Additional details on the reorganization items are set forth in Note J to the Financial Statements. The Company also recorded fresh-start revaluation charges of $355.6 million in fiscal 1997. See Note B to the Financial Statements for more details on fresh-start reporting and these related charges. 9 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) A special charge of $13.0 million ($8.1 million after tax), primarily a cash charge, was recorded in the third quarter of fiscal 1997 to reflect real estate disposal and severance costs related to the closing of twenty-nine underperforming stores as part of the Company's reorganization under Chapter 11. A special charge of $8.2 million ($5.0 million after tax), primarily a cash charge, was recorded in the third quarter of fiscal 1996 to reflect future store rentals and real estate disposal costs related to the closing of nine underperforming stores. A special charge of $153.7 million ($133.1 million after tax) was recorded in the fourth quarter of fiscal 1995 to reflect costs associated with a restructuring which included the closing of six underperforming stores on December 30, 1995, the sale of an underutilized distribution center on December 22, 1995, and, during the first quarter of fiscal 1996, the reorientation of several stores to concentrate on the professional customer. Additional details on the special charges are set forth in Note L to the Financial Statements. The Company recorded an asset impairment charge of $60.5 million ($43.9 million after tax) and $59.7 million ($44.6 million after tax) in the third quarters of 1997 and 1996, respectively. Primarily because the environment for building materials retailing has continued to be increasingly competitive, the Company first conducted its review in the third quarter of 1996 and determined certain assets were impaired. In the third quarter of 1997, the Company again conducted a review of underperforming stores and determined that certain additional assets were impaired, including assets related to twenty-nine stores, which the Company closed. The asset impairment charges were recorded after considering current and expected future operating cash flows for certain stores together with the proceeds the Company could expect to receive upon the sale of these assets. Additional details on the asset impairment charges are set forth in Note K to the Financial Statements. The Company will continue to review assets for impairment, particularly given the ongoing competitive environment for building materials retailing. The effective tax rates for fiscal 1997, 1996, and 1995 were different from the 35% statutory rate primarily due to the effect of goodwill amortization and the write-off of goodwill, both of which are non-deductible for income tax purposes. In addition, for fiscal 1996, the effective tax rate was significantly affected by the tax benefit related to income tax legislation and an IRS settlement. On August 20, 1996, the Small Business Job Protection Act of 1996 was signed into law. Certain provisions of this legislation clarified the Tax Reform Act of 1986 and made retroactively tax deductible certain costs and expenses previously recorded by the Company without any related tax benefit. In addition, during 1996, the Company settled with the IRS regarding several tax issues. As a result, the Company recorded a tax benefit of $23.7 million and related interest income, discussed earlier. Net Income (Loss) The Company had a loss before extraordinary item of $421.8 million in 1997 compared to $19.1 million in 1996 and $128.5 million in 1995. The 1997 loss before extraordinary item reflects reorganization items, fresh-start revaluation charges, store closing charges, and an asset impairment charge, all discussed above. The 1996 loss before extraordinary item reflects store closing charges, an asset impairment charge, a federal income tax benefit and related interest income, all discussed above. The 1995 loss before extraordinary item reflects the special charge in connection with the restructuring, discussed above, as well as the Company's share in its Mexican joint venture's operating loss prior to the sale of this investment in October 1995. The 1995 equity in the loss of joint venture also includes an $8.0 million, pretax, loss on the sale of this investment. Excluding the non-routine items recorded during fiscal 1997, 1996 and 1995, net loss for 1997, would have been $35.5 million and net income for 1996 and 1995 would have been $7.4 million and $12.5 million, respectively. 10 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) Comparative Operating Data
Predecessor Company ----------------------------------------- Fiscal Year Ended November 29, 1997 ----------------------------------------- In thousands, except per share amounts Pro Forma Historical (Excluding (Including Non-Routine Items) Non-Routine Items) ------------------- ------------------- Net sales and other income $ 2,290,215 $ 2,290,215 Income from operations before interest, depreciation and amortization $ 65,433 $ (399,813) Net income (loss) $ (35,451) $ (288,592)
Fiscal Year Ended November 30, 1996 ----------------------------------------- Pro Forma Historical (Excluding (Including Non-Routine Items) Non-Routine Items) ------------------- ------------------- Net sales and other income $ 2,650,905 $ 2,650,905 Income from operations before interest, depreciation and amortization $ 134,552 $ 60,824 Net income (loss) $ 7,428 $ (19,078)
Fiscal Year Ended November 25, 1995 ----------------------------------------- Pro Forma Historical (Excluding (Including Non-Routine Items) Non-Routine Items) ------------------- ------------------- Net sales and other income $ 2,685,670 $ 2,685,670 Income from operations before interest, depreciation and amortization $ 153,461 $ (206) Net income (loss) $ 12,499 $ (128,549)
Future Operating Results - ------------------------ The Company expects that openings by warehouse-format competitors will continue. The negative sales trends of fiscal 1997 continued into the first two months of fiscal 1998 causing the new board of directors and senior management of the Company to implement changes designed to have an immediate impact on the Company's financial results. These changes included the elimination of approximately 25% of the staff at the Company's headquarters and regional administrative centers, including senior management, and the assignment of a dedicated store manager in each retail location. It is anticipated that a special charge of approximately $5.6 million will be recorded in the first quarter of fiscal 1998 to reflect severance costs related to these changes. The CEO and President positions are being consolidated and the Company is conducting a national search for a candidate to fill this position. In addition, new merchandising and sales initiatives are being implemented. Effects of Inflation - -------------------- The Company experienced slight deflation in its non-lumber inventories during fiscal 1997 and fiscal 1996. Approximately 82% of the Company's inventory is valued using the LIFO inventory accounting method; therefore, current costs are reflected in the cost of merchandise sold, rather than in inventory balances. During 1995, the Company experienced price deflation in its lumber inventory which is valued using the FIFO inventory accounting method. The Company estimates that this price deflation had a negative 1.6% impact on same-store sales. 11 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) Financing Activities - -------------------- As a result of the Chapter 11 filing on July 21, 1997, borrowings under the revolving credit facility of the Amended Credit Agreement, defined below, were no longer available to the Company. During the period from July 21, 1997 through December 2, 1997, the Company utilized debtor-in-possession financing which consisted of a $125 million revolving credit facility (the "DIP Agreement"). On or prior to the Effective Date, the Company paid all amounts outstanding under the DIP Agreement and the Amended Credit Agreement with cash, New Common Stock and new notes under the Exit Financing Agreement. The Exit Financing Agreement includes term loans of $283.1 million and a $150 million revolving credit facility with a $40 million letters of credit sublimit. In accordance with the Plan of Reorganization, on the Effective Date the Company's mortgage loan, secured by certain real estate, was retired and replaced with a new mortgage loan secured by the same real estate and the Company's senior subordinated notes were terminated and canceled. Holders of these subordinated notes now hold general unsecured claims under the Plan. On the Effective Date, the Company also issued a note for $16 million, secured by three store facilities, in settlement of the secured portion of the claims arising from a lease agreement involving five store facilities. At the Effective Date the Company obtained a commitment from the mortgage lender to borrow an additional $13 million under the mortgage loan described above, and the Company intends to prepay this note in full. Although this transaction has not been completed, it is expected to be consummated in the first half of fiscal 1998. On October 3, 1996, the Company amended its $408 million credit agreement to include two tranches of term loans in the aggregate amount of $273 million, a revolving credit facility of $135 million and a $60 million working capital facility (the "Amended Credit Agreement"). As part of the amendment, permitted levels of capital expenditures were increased, additional collateral (including substantially all merchandise inventories) was added, various covenants were modified or eliminated and interest rates were increased. The Amended Credit Agreement was designed to give the Company additional flexibility and liquidity and provide the banks with additional security. On December 22, 1995, the Company made a $16.5 million mortgage loan prepayment in connection with the sale of a distribution center described below and in Note L to the Financial Statements. In November 1995, the Company amended and restated its five-year credit agreement to include a $40.0 million term loan and to reduce the revolving credit facility to $380.0 million. As part of the amendment, various covenants were modified and interest rates were increased. In addition, in 1995, the Company entered into an interest rate cap limiting the interest rates on $100 million of its floating rate debt to 8% LIBOR through January 20, 1998. Also, during 1995, the Company entered into an interest rate swap agreement under which it agreed to pay quarterly a 6-9/16% fixed rate of interest effective December 1, 1995, through December 1, 1999, in exchange for quarterly receipt of LIBOR on $36.0 million. At the Effective Date of its Plan of Reorganization, the Company had approximately $433.4 million of indebtedness. The Company expects from time to time to incur additional seasonal indebtedness. The Year 2000 Issue - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations. The Company has completed an assessment of the impact of the year 2000 on its computer systems, both hardware and software, and has developed a plan to timely address the Year 2000 issue. The Company is executing that plan and currently believes that it will complete all phases of the plan without any material adverse consequences to its business, operations, or financial condition. The Company estimates that expenditures related to executing the Year 2000 plan will range from $5 million to $8 million over the next two years. Such expenditures are being charged to expense as incurred. The Company has not communicated with all of its significant suppliers to determine the extent to which the Company is vulnerable to the failure of those third parties to remediate their own Year 2000 issues. The Company does not anticipate the cost of Year 2000 compliance by suppliers to be passed on to the Company. However, there can be no assurances that failure to address the Year 2000 issue by a third party on whom the Company's systems rely would not have a material adverse effect on the Company. 12 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) Liquidity and Capital Resources - ------------------------------- The Company's principal source of cash is from operations. Cash provided by operating activities was $32.0 million for fiscal 1997, compared to $32.4 million for fiscal 1996 and $108.4 million for fiscal 1995. Cash provided by operating activities in 1997 benefited from the compromise and extinguishment of general unsecured claims, including trade accounts payable, pursuant to the Plan of Reorganization that would have otherwise required cash. The 1996 decrease in cash provided by operating activities was primarily due to a decrease in accounts payable and an increase in merchandise inventories, as well as decreased operating income. The 1996 decrease in accounts payable levels compared to year-ago levels is primarily due to slower inventory turns and a shift in the mix of purchases between commodity products (shorter payment terms) and non-commodity products (longer payment terms). Borrowings are available under the Exit Financing Agreement to supplement cash generated by operations. At December 2, 1997, $106.8 million was available for borrowing. Working capital was $258.4 million and $131.0 million at the end of fiscal 1997 and fiscal 1996, respectively. The current ratio was 2.15 to 1 and 1.41 to 1 at the end of fiscal 1997 and fiscal 1996, respectively. The primary reasons for the increase in working capital and the current ratio was the restructuring under Chapter 11 that took place during 1997. The Company's inventory levels are at the lowest levels during the seasonally low sales months of December through February and are at the highest levels during the peak selling months of May through September. During the peak period, inventory is financed by cash from operations and trade accounts payable. During the winter months, inventory is financed by cash from operations, trade accounts payable and borrowings under the Exit Financing Agreement, as needed. The Company believes that cash generated from operations and borrowings under the Exit Financing Agreement will adequately meet its working capital needs, debt service and other obligations that will become due in fiscal 1998. During fiscal 1997, the Company's primary investing activities were capital expenditures principally for strategic initiatives, renovation of existing stores and additional equipment. The Exit Financing Agreement governs the amount of capital expenditures that can be made and the permitted levels of capital expenditures in the future are as follows: $59.6 million in 1998; $52.1 million in 1999; $41.2 million in 2000; $51.3 million in 2001; and $52.3 million in 2002. The Company spent approximately $62.9 million, $41.7 million and $67.3 million in fiscal 1997, 1996 and 1995, respectively, for strategic initiatives, including the acquisition of a door and trim manufacturer in Phoenix, AZ, during January 1996, renovation of existing stores, additional equipment and, in fiscal 1995, new stores. For fiscal 1997 and 1996, the Company shifted its emphasis from new store openings to initiatives that further address the needs of the professional and do-it-yourself customers. Several stores were reoriented to concentrate on the professional customer and merchandise assortment was added to many stores to address do-it-yourself customer demand for more choices of price, quality and style. During fiscal 1996, in support of the professional customer, the Company completed the acquisition of the manufacturer mentioned above and expanded the manufacturing capability of one of its existing door plants. During 1997, the Company sold eight real estate properties related to the closing of 14 stores in 1996 for approximately $14.3 million of cash proceeds. Sale of closed store properties will continue in fiscal 1998. During the first quarter of 1996, the Company sold a distribution center in connection with the 1995 restructuring plan, providing approximately $11.9 million of cash proceeds. The Company leased one new store in 1996, which it opened in 1997. In addition, the Company purchased and opened an existing store facility during 1997. During 1995, six new stores were opened and two stores were sold. The Company's new Board of Directors is currently analyzing the Company's competitive positioning in the market and the related capital investments. Until such evaluation is complete, budgeted capital expenditures for 1998 will be limited to normal renovation of existing stores and routine equipment purchases, which will be financed with funds generated from operations and borrowings under the Exit Financing Agreement. During fiscal 1995, the Company also invested $9.3 million in its joint venture, Total Home de Mexico, S.A. de C.V., prior to the sale of this investment in October 1995. Significant changes in the Mexican economy caused the Company to reassess its position and sell its Mexican investment to an affiliate of its former joint venture partner. 13 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) The Company's most significant financing activity is and will continue to be the retirement of indebtedness. As a result of the Company's reorganization under Chapter 11, the indebtedness of the Company was reduced significantly in fiscal 1997 as described above in "Financing Activities" and in Notes A, B, and D to the Financial Statements. Although the Company's consolidated indebtedness is and will continue to be substantial, management believes that, based upon its analysis of the Company's financial condition, the cash flow generated from operations during the past 12 months and the expected results of operations in the future, cash flow from operations and borrowing availability under the Exit Financing Agreement should provide sufficient liquidity to meet all cash requirements for the next 12 months without additional financing. As a result of the Chapter 11 filing, trade creditors have significantly shortened credit terms. The Company believes that progress with regard to lengthening terms and reestablishing trade credit is continuing, but availability of trade credit cannot be assured. The Exit Financing Agreement contains a number of financial covenants with which the Company must comply. Certain of these covenants are detailed in Note D to the Financial Statements. First quarter 1998 results are likely to be below results for the same quarter of the prior year. Management currently expects that it will achieve compliance with these covenants throughout 1998; however, factors beyond management's control, including competitive conditions, economic conditions, supplier support, lumber prices, and weather, could cause noncompliance. If compliance with these covenants is not achieved, the Company may be required to renegotiate its existing covenants with lenders or to refinance borrowings. Success in achieving any such renegotiations or refinancing, or the specific terms thereof, including interest rates, capital expenditure limits or borrowing capacity, cannot be assured. If the Company fails to achieve compliance with these covenants or, in the absence of such compliance, if the Company fails to amend such financial covenants on terms favorable to the Company, the Company may be in default under such covenants. If such default occurred, it would permit acceleration of its debt under the Exit Financing Agreement which, in turn, would permit acceleration of substantially all of the Company's other long-term debt. Forward-Looking Statements - -------------------------- Statements above in the subsections entitled "Costs and Expenses," "Future Operating Results," and "The Year 2000 Issue," and in this subsection of this Annual Report such as "unlikely", "intend", "estimated", "believe", "expect", "anticipate" and similar expressions which are not historical are forward-looking statements that involve risks and uncertainties. Such statements include, without limitation, the Company's expectation as to future performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by the forward-looking statements made above. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially are the following: sales levels; competitor activities; stability of the sales force; supplier support; consumer spending and debt levels; interest rates; housing activity, including existing home turnover and new home construction; lumber prices; product mix; growth of certain market segments; and an excess of retail space devoted to the sale of building materials. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings, including but not limited to the Form 10-K, copies of which are available from the Company without charge or on the Company's web site, payless.cashways.com. 14 Payless Cashways, Inc. STATEMENTS OF OPERATIONS
Predecessor Company -------------------------------------------------------- Fiscal Year Ended -------------------------------------------------------- November 29, November 30, November 25, In thousands, except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Income Net sales $ 2,285,281 $ 2,642,829 $ 2,680,186 Other income--Note C 4,934 8,076 5,484 -------------------------------------------------------- 2,290,215 2,650,905 2,685,670 Costs and expenses Cost of merchandise sold 1,676,658 1,906,734 1,912,620 Selling, general and administrative--Notes G, H and I 558,817 615,466 619,589 Reorganization items--Note J 25,455 -- -- Fresh-start revaluation--Note B 355,559 -- -- Special charges--Note L 13,056 8,184 153,667 Asset impairment charges--Note K 60,483 59,697 -- Provision for depreciation and amortization 51,110 55,016 60,356 Interest expense (contractual interest of $66,973 in 1997)--Note D 61,251 60,488 61,067 Interest income--Note F -- (4,900) -- -------------------------------------------------------- 2,802,389 2,700,685 2,807,299 -------------------------------------------------------- LOSS BEFORE INCOME TAXES (512,174) (49,780) (121,629) Federal and state income taxes--Note F (90,406) (30,702) (4,911) --------------------------------------------------------- Loss before equity in loss of joint venture and extraordinary items (421,768) (19,078) (116,718) Equity in loss of joint venture--Note C -- -- (11,831) -------------------------------------------------------- Loss before extraordinary item (421,768) (19,078) (128,549) Extraordinary items, net of income taxes--Notes B and D 133,176 -- -- -------------------------------------------------------- NET LOSS $ (288,592) $ (19,078) $ (128,549) ========================================================= See notes to financial statements
15 Payless Cashways, Inc. BALANCE SHEETS
Reorganized | Predecessor Company | Company --------------- | ------------- November 29, | November 30, In thousands 1997 | 1996 - ------------------------------------------------------------------------------------------------------------------------- ASSETS | | CURRENT ASSETS | Cash and cash equivalents $ 11,961 | $ 425 Merchandise inventories--Notes C and D 414,882 | 399,010 Prepaid expenses and other current assets 14,705 | 22,281 Income taxes receivable--Note F 32,232 | 15,200 Deferred income taxes--Note F 8,665 | 13,681 ----------------------------------- TOTAL CURRENT ASSETS 482,445 | 450,597 | | OTHER ASSETS | Real estate held for sale--Note K 48,562 | 18,529 Cost in excess of net assets acquired, | less accumulated amortization of | $105,198 in 1996--Notes C, K and L -- | 292,946 Deferred financing costs--Notes C and D 2,600 | 12,837 Other 14,316 | 12,917 | | LAND, BUILDINGS AND EQUIPMENT--Notes C and D | Land and land improvements 98,390 | 179,633 Buildings 219,244 | 476,144 Equipment 35,048 | 98,304 Automobiles and trucks 2,196 | 24,264 Construction in progress 8,540 | 4,590 Allowance for depreciation and amortization -- | (277,643) ----------------------------------- TOTAL LAND, BUILDINGS AND EQUIPMENT 363,418 | 505,292 ----------------------------------- $ 911,341 | $ 1,293,118 =================================== See notes to financial statements
16 Payless Cashways, Inc. BALANCE SHEETS (cont'd.)
Reorganized | Predecessor Company | Company -------------- | -------------- November 29, | November 30, In thousands 1997 | 1996 - -------------------------------------------------------------------------------------------------------------------------- | LIABILITIES AND STOCKHOLDERS' EQUITY | | CURRENT LIABILITIES | Current portion of long-term debt--Note D $ 9,354 | $ 18,340 Trade accounts payable 75,583 | 121,891 Salaries, wages and bonuses 29,051 | 31,052 Accrued interest 213 | 3,193 Insurance reserves 1,500 | 25,713 Future store lease payments--Note K -- | 17,460 Other accrued expense--Notes G, K and L 84,978 | 71,182 Taxes, other than income taxes 20,999 | 24,318 Income taxes payable--Note F 2,362 | 6,444 ----------------------------------- TOTAL CURRENT LIABILITIES 224,040 | 319,593 | | LONG-TERM DEBT, less portion classified as current | liability--Note D 424,031 | 618,667 | NON-CURRENT LIABILITIES | Deferred income taxes--Note F 58,788 | 41,665 Other--Note H 20,682 | 23,462 | STOCKHOLDERS' EQUITY--Notes A, C, D and E | Common Stock, $.01 par value, 50,000,000 shares authorized, | 20,000,000 shares issued in 1997 200 | -- Preferred Stock, $1.00 par value, 25,000,000 | shares authorized: | Cumulative Preferred Stock, 406,000 shares issued | and $78,563 aggregate liquidation preference in 1996 -- | 40,600 Common Stock, $.01 par value: | Voting, 150,000,000 shares authorized, | 37,709,028 shares issued in 1996 -- | 377 Non-Voting Class A, 5,000,000 shares authorized, | 2,250,000 shares issued in 1996 -- | 23 Additional paid-in capital 183,600 | 487,728 Accumulated deficit -- | (238,997) ----------------------------------- TOTAL STOCKHOLDERS' EQUITY 183,800 | 289,731 ----------------------------------- COMMITMENTS AND CONTINGENCIES--Notes G, H, I and M | $ 911,341 | $ 1,293,118 =================================== See notes to financial statements
17 Payless Cashways, Inc. STATEMENTS OF CASH FLOWS
Predecessor Company ------------------------------------------------------- Fiscal Year Ended ------------------------------------------------------- November 29, November 30, November 25, In thousands 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net loss $ (288,592) $ (19,078) $ (128,549) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 51,110 55,016 60,356 Asset impairment charges--Note K 60,483 59,697 -- Deferred income taxes (72,237) (12,270) (22,326) Non-cash reorganization items--Note J 2,481 -- -- Non-cash interest 5,031 2,534 2,351 Non-cash extraordinary items--Notes B and D (133,176) -- -- Fresh-start revaluation--Notes A and B 355,559 -- -- Equity in loss of joint venture--Note C -- -- 11,831 Special charges--Note L 13,056 8,184 153,667 Other (1,467) 1,337 927 Changes in assets and liabilities: Decrease in trade receivables -- -- 5,858 Decrease (increase) in merchandise inventories 7,462 (6,406) 4,062 Decrease (increase) in prepaid expenses and other current assets 6,926 (4,763) 9,532 Increase in income taxes receivable (14,505) (15,200) -- (Decrease) increase in trade accounts payable 44,252 (37,953) 8,785 Increase in other current liabilities (4,359) 1,349 1,934 ------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 32,024 32,447 108,428 Cash Flows from Investing Activities Additions to land, buildings and equipment (61,925) (40,117) (67,281) Proceeds from sale of land, buildings and equipment 18,775 14,709 467 Acquisition of business, excluding working capital: Land, buildings and equipment -- (193) -- Purchase price in excess of net assets acquired (1,015) (1,360) -- Investment in joint venture--Note C -- -- (9,254) Decrease (increase) in other assets (1,745) 1,435 3,049 ------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (45,910) (25,526) (73,019) Cash Flows from Financing Activities Net proceeds from revolving credit facility--Note D 62,386 28,000 -- Principal payments on long-term debt--Note D (32,795) (31,092) (34,301) Fees and financing costs paid in connection with debt refinancing--Note D (3,365) (3,670) (1,267) Sale of Common Stock under stock option plan -- 94 16 Other (804) (788) (1,577) ------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25,422 (7,456) (37,129) ------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 11,536 (535) (1,720) Cash and cash equivalents, beginning of period 425 960 2,680 ------------------------------------------------------- Cash and cash equivalents, end of period $ 11,961 $ 425 $ 960 ======================================================= See notes to financial statements
18 Payless Cashways, Inc. STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Common Additional Foreign Adjustment for Stock Stock Paid-in Currency Minimum Pension Accumulated In thousands $1.00 Par Value $.01 Par Value Capital Translation Liability Deficit Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at November 26, 1994 $ 40,600 $ 399 $ 486,326 $ (90) $ -- $ (91,370) $ 435,865 Net loss for the year (128,549) (128,549) Sale of Voting Common Stock under stock option plan -- 77 77 Tax benefit from stock option exercises--Note F 325 325 Restricted Stock--Note E -- 355 355 Foreign currency translation adjustment (2,499) (2,499) Sale of joint venture stock 2,589 2,589 --------------------------------------------------------------------------------------- Balance at November 25, 1995 $ 40,600 $ 399 $ 487,083 $ -- $ -- $ (219,919) $ 308,163 Net loss for the year (19,078) (19,078) Sale of Voting Common Stock under stock option plan 1 463 464 Tax benefit from stock option exercises--Note F (24) (24) Restricted Stock--Note E -- 206 206 --------------------------------------------------------------------------------------- Balance at November 30, 1996 $ 40,600 $ 400 $ 487,728 $ -- $ -- $ (238,997) $ 289,731 Net loss for the year (288,592) (288,592) Restricted Stock--Note E -- 131 131 Issuance of Voting Common Stock under Director Deferred Compensation Plan -- 17 17 Conversion of Non-Voting Class A Common Stock to Voting Common Stock--Note E -- -- Minimum pension liability adjustment--Note G (1,287) (1,287) Eliminate predecessor equity accounts in connection with fresh start reporting--Note B (40,600) (400) (487,876) 1,287 527,589 -- Issuance of New Common Stock pursuant to Plan of Reorganization--Notes A, B and E 200 183,600 183,800 --------------------------------------------------------------------------------------- Balance at November 29, 1997 $ -- $ 200 $ 183,600 $ -- $ -- $ -- $ 183,800 See notes to financial statements
19 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS Note A-Reorganization and Emergence From Chapter 11 On July 21, 1997 (the "Petition Date"), the Company commenced a reorganization case (the "Case") by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Code ("Chapter 11") in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City (the "Court"). While the Company had sufficient liquidity to fund its current operations, the operating performance of the Company during the second quarter of fiscal 1997, which was well below the Company's expectations, led management to conclude that it was unlikely that the Company would be able to comply with the covenants contained in its principal credit agreements at the end of fiscal 1997. In the course of the Company's subsequent negotiations with its senior lenders to restructure its debt, and after considering all other alternatives with its financial adviser, Houlihan Lokey Howard & Zukin, including the sale of the Company and liquidation, the Company concluded that a Chapter 11 proceeding provided the best approach for a comprehensive financial restructuring of the Company. On the Petition Date, the Company filed a Disclosure Statement and a Plan of Reorganization with the Court. The Disclosure Statement and the Plan were subsequently amended on September 5, 1997, and modified on October 9, 1997. The Plan of Reorganization, as amended and modified, is referred to herein as the "Plan" or "Plan of Reorganization." The following summary of the Plan omits certain information set forth in the Plan. Any statements contained herein concerning the Plan are not necessarily complete, and in each such instance reference is made to the Plan. On November 19, 1997, the Court confirmed the Plan and after the satisfaction of a number of conditions, the Plan became effective December 2, 1997 (the "Effective Date"). Under the Plan, the Company reincorporated as a Delaware corporation and canceled outstanding shares of common and preferred stock and issued approximately 20,000,000 shares of newly reorganized Payless Cashways, Inc. (the "Reorganized Company") common stock (the "New Common Stock"), as described below. The Plan generally provided for the following: (I) The secured bank group under the existing credit agreement (the "Amended Credit Agreement"), on or prior to the Effective Date, received (a) payment of accrued interest, fees and expenses, (b) Net Cash Proceeds (as defined in the Plan) from the sale of certain collateral securing the Amended Credit Agreement and the collection of certain promissory notes pledged to the secured bank group, (c) their allocable portion of $283.1 million of new term loans and (d) 10,730,671 shares of New Common Stock (approximately 54% of the shares of the newly reorganized Company), of which 460,000 shares were distributed to the lenders providing a $150 million revolving credit facility to supply post-emergence working capital financing in consideration for their commitment to provide such facility. See Note D for a description of the term loans and the revolving credit facility (together, the "Exit Financing Agreement"). (II) On the Effective Date, UBS Mortgage Finance, Inc. ("UBS"), the holders of notes under an existing mortgage loan, received new notes pursuant to a new mortgage loan. See Note D for a description of the new mortgage loan. (III) Unsecured claims against the Company by vendors and suppliers for goods delivered and services rendered prior to the Petition Date, claims in respect of the 9-1/8% senior subordinated notes, contingent unliquidated claims and claims for damage arising from the rejection by the Company pursuant to Section 365 of the Bankruptcy Code of executory contracts and unexpired leases (collectively, "General Unsecured Claims") will receive their pro rata share of 8,269,329 shares of New Common Stock or approximately 41% of the shares of the newly reorganized Company. Holders of General Unsecured Claims began receiving their first distribution of shares in partial satisfaction and discharge of their allowed claims on or about December 15, 1997. The remaining shares of New Common Stock are held for future distributions to holders of General Unsecured Claims, pending the final resolution of disputed claims. (IV) The holder of issued and outstanding shares of existing preferred stock ("Old Preferred Stock") received 600,000 shares of New Common Stock (approximately 3% of the shares of the newly reorganized Company). (V) Holders of issued and outstanding shares of existing common stock ("Old Common Stock") will receive their pro rata share of 400,000 shares of New Common Stock (approximately 2% of the shares of the newly reorganized Company) upon surrender of their Old Common Stock. In addition, any stock options relating to outstanding Old Preferred Stock and Old Common Stock were canceled on the Effective Date. Fractional shares of New Common Stock will not be issued to creditors or stockholders in connection with the Plan. In addition, no distribution of less than $5.00 will be made for fractional share interests. As a result of these provisions, many holders of Old Common Stock will receive no distribution of stock or cash under the Plan. On July 21, 1997, the Company also announced its plan to close 29 stores and to eliminate approximately 15% of the staff at the Company's headquarters and regional administrative centers. The Court subsequently approved such plan on August 6, 1997. See Notes J, K, and L for a description of related charges recorded in the third quarter of 1997. 20 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Note B-Fresh Start Reporting On December 2, 1997, the Company emerged from bankruptcy. In accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company adopted fresh-start reporting. For accounting purposes, the Effective Date was deemed to be November 29, 1997. In fresh-start reporting, an aggregate value of $183.8 million was assigned to the Company's New Common Stock. Management established this value with the assistance of its financial advisors. This valuation considered the Company's expected future performance, relevant industry and economic conditions, and analyses and comparisons with comparable companies. The reorganization value of the Company has been allocated to the Reorganized Company's assets and liabilities in a manner similar to the purchase method of accounting for a business combination. Management obtained valuations from independent third parties which, along with other market and related information and analyses, were utilized in assigning fair values to assets and liabilities. A summary of the impact of the Plan and the related fresh-start adjustments is presented below:
November 29, 1997 ------------------------------------------------------------------------------------------ Predecessor Discharge of Fresh-Start Other Reorganized Company Indebtedness (a) Adjustments (b) Adjustments (c) Company ----------------- ---------------- ------------------ ----------------- -------------- Current Assets: Cash and cash equivalents $ 11,961 $ $ $ $ 11,961 Merchandise inventories 391,548 23,334 414,882 Prepaid expenses and other current assets 15,702 (997) 14,705 Income taxes receivable 29,705 2,527 32,232 Deferred income taxes 24,070 (9,448) (5,957) 8,665 ----------------- ---------------- ------------------ ----------------- -------------- Total Current Assets 472,986 (6,921) 16,380 -- 482,445 Other Assets: Real estate held for sale 37,078 11,484 48,562 Cost in excess of net assets acquired 265,949 (265,949) -- Deferred financing costs 8,690 (7,590) 1,500 2,600 Other 14,663 (347) 14,316 Land, Buildings and Equipment, net 456,736 (93,318) 363,418 ----------------- ---------------- ------------------ ----------------- -------------- TOTAL ASSETS $ 1,256,102 $ (14,511) $ (330,250) $ -- $ 911,341 ================= ================ ================== ================= ==============
21 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.)
November 29, 1997 -------------------------------------------------------------------------------------------- Predecessor Discharge of Fresh-Start Other Reorganized Company Indebtedness (a) Adjustments (b) Adjustments (c) Company ------------------- ---------------- ------------------ ----------------- -------------- Current Liabilities: Current portion of long-term debt $ 492,930 $ $ (483,576) $ $ 9,354 Trade accounts payable 54,203 21,380 75,583 Other current liabilities 128,755 7,986 136,741 Income taxes payable 8,711 (6,349) 2,362 ------------------- ---------------- ------------------ ----------------- -------------- Total Current Liabilities 684,599 21,380 (481,939) -- 224,040 Long-Term Debt -- 424,031 424,031 Non-Current Liabilities: Deferred income taxes 16,961 84,928 (43,101) 58,788 Other 24,272 (3,590) 20,682 ------------------- ---------------- ------------------ ----------------- -------------- Total Non-Current Liabilities 41,233 84,928 (46,691) -- 79,470 Liabilities Subject to Compromise 351,381 (329,990) (21,391) -- Stockholders' Equity: Old Preferred Stock 40,600 (40,600) -- Old Common Stock 400 (400) -- New Common Stock -- 83 117 200 Additional paid-in capital 487,876 75,912 107,688 (487,876) 183,600 Adjustment for minimum pension liability (1,287) 1,287 -- Accumulated deficit (348,700) 133,176 (312,065) 527,589 -- ------------------- ---------------- ------------------ ----------------- -------------- Total Stockholders' Equity 178,889 209,171 (204,260) -- 183,800 ------------------- ---------------- ------------------ ----------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,256,102 $ (14,511) $ (330,250) $ -- $ 911,341 =================== ================ ================== ================= ==============
(a) To record the discharge of indebtedness pursuant to the Plan and to write-off deferred financing costs related to the early extinguishment of certain predecessor company debt; see Note D. The discharge of indebtedness relates to all general unsecured claims, as described in Note A. It includes the elimination and, in certain cases, the reclassification of the liabilities subject to compromise related to these claims, the issuance of New Common Stock in settlement of unsecured claims, and the related tax effect of these transactions. The excess of indebtedness eliminated over the estimated fair value of securities issued in settlement of claims is reflected as an extraordinary gain of $232.6 million ($138.2 million after tax) in the accompanying 1997 statement of operations. (b) To record transactions with the secured creditors and holders of Old Common Stock and Old Preferred Stock, as described at Note A, and to adjust assets and liabilities to fair values. Transactions include the extinguishment of old debt; the issuance of new debt and New Common Stock; the reclassification of accrued interest to principal and the reclassification of debt between current and non-current, based upon debt agreement terms. Significant elements of the fair value adjustments to assets and liabilities are summarized below: --Adjustment to reflect inventories at current market value --Adjustments to write-up real estate held for sale to fair market value --Adjustment to eliminate cost in excess of net assets acquired --Adjustments to eliminate accumulated depreciation and to write-down land, buildings, and equipment to fair market value Adjustments to reflect liabilities at fair market value including: the reversal of unrecognized prior service costs and unrecognized gains and losses on the Company's pension and post-retirement benefit plans (see also Notes G and H); the write-off of deferred rent liabilities due to lease amendments and terminations; and the elimination of insurance accruals covered by bank letters of credit --Adjustments to deferred and currently payable tax accounts to record the tax effect of all fresh-start reporting adjustments 22 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Fresh-start adjustments of $355.6 million ($312.1 million net of tax) are reflected as fresh-start revaluation charges in the accompanying 1997 statement of operations. (c) To record the elimination of the Old Preferred Stock, Old Common Stock, and predecessor company additional paid-in-capital and accumulated deficit after reflecting the adjustments at (a) and (b) above. Note C-Summary of Significant Accounting Policies Fresh-Start Reporting: The Company has implemented the required accounting for entities emerging from Chapter 11 in accordance with SOP 90-7 and reflected the effects of such adoption in the balance sheet as of November 29, 1997. Under fresh-start reporting, the balance sheet of November 29, 1997, became the opening balance sheet of the Reorganized Company. The financial statements of the Predecessor Company are not comparable in material respects to the financial statements of the Reorganized Company. Accordingly, a vertical line is shown to separate financial information of the Predecessor Company and the Reorganized Company. Principles of Consolidation: During fiscal 1996, Payless Cashways, Inc. (the "Company") merged its wholly owned subsidiary into the Company. The financial statements prior to fiscal 1996 include the accounts of Payless Cashways, Inc. and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated in the accompanying financial statements prior to fiscal 1996. The Company was a 49% investor in Total Home de Mexico, S.A. de C.V., a joint venture with a Mexican company, Alfa, S.A. de C.V. ("Alfa"), until October 24, 1995. At that time, the Company sold its ownership interest to an affiliate of Alfa and an $8.0 million loss on the sale has been reflected in the accompanying 1995 statements of operations as equity in loss of joint venture. The Company had accounted for this investment on the equity method. Description of Business: The Company is engaged in only one line of business--the retail sale of building materials and supplies. At November 29, 1997, the Company operated 164 stores in 20 states located in the Midwest, Southwest, Pacific Coast, Rocky Mountain and New England areas. The Company's primary customers include professionals and project-oriented do-it-yourselfers. In recent years, the building materials retailing industry has experienced increased levels of competition as several national chains have expanded their operations. Use of Estimates and Other Uncertainties: In preparing the financial statements in conformity with generally accepted accounting principles, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's future results could be adversely affected by a number of factors, including: competitive pressure on sales and pricing from well-capitalized warehouse-format home centers; the Company's ability to effectively execute its business strategy; weather conditions; consumer spending and debt levels; interest rates; housing activity, including existing-home turnover and new-home construction; lumber prices; product mix; sales of real estate held for sale; and growth of certain market segments. Merchandise Inventories: Inventories are stated at the lower of cost (approximately 80% at last-in, first-out method, and the remainder at first-in, first-out method) or market. Had the first-in, first-out method been used for all inventories, the carrying value of these inventories would have increased approximately $24.3 million at November 30, 1996. At November 29, 1997, inventories were reflected using the first-in, first-out method due to revaluation to fair market value related to fresh-start accounting as described at Note B. During fiscal 1997 and 1996, the liquidation of LIFO inventories decreased cost of merchandise sold and, therefore, decreased the loss before income taxes by $0.9 million and $1.2 million, respectively. Property and Depreciation: Provisions for depreciation of land improvements, buildings and equipment are computed primarily by the straight-line method over the estimated useful lives of the assets or the terms of the related leases, which range from three to 39 years. The accompanying 1996 statements of operations reflect $2.3 million as other income related to an insurance reimbursement for lost profits and settlement proceeds in excess of net book value for buildings and equipment destroyed in a fire loss. 23 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Deferred Financing Costs: Deferred financing costs are being amortized over the respective borrowing terms using the interest method. Foreign Currency Translation: Prior to the sale of the investment on October 24, 1995, adjustments resulting from the currency translation of the Mexican joint venture financial statements into U.S. dollars as of the balance sheet date were reflected as a separate component of stockholders' equity. Cost in Excess of Net Assets Acquired: Prior to fresh-start reporting at November 29, 1997, the cost in excess of the fair value of net assets acquired (goodwill) was amortized using the straight-line method over 40 years. When facts and circumstances indicates potential impairment, the Company evaluates the recoverability of asset carrying values, including associated goodwill, using estimates of undiscounted future cash flows over remaining asset lives. When impairment is indicated, any impairment loss is measured by the excess of carrying values over fair values. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in the third quarter of fiscal 1996. See Note K. Net Loss Per Common Share: Net loss per common share has not been computed for the Predecessor Company because, as described at Note A, Old Preferred Stock and Old Common Stock were canceled on the Plan Effective Date. Presentation of net loss per common share based on Predecessor Company average shares outstanding would therefore not be meaningful. New Common Stock was not outstanding during fiscal years 1997, 1996 and 1995. Income Taxes: The Company accounts for income taxes based on Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Statement of Cash Flows: For purposes of the statement of cash flows, the Company considers investments in debt instruments with original maturities of three months or less to be cash equivalents. During fiscal 1997 and 1996, federal and state income tax refunds, net of payments, were $0.6 million and $8.8 million, respectively, and during fiscal 1995 federal and state income taxes paid, net of refunds, were $21.0 million. Cash paid for interest, net of interest capitalized, was $55.4 million, $62.2 million, and $60.0 million during fiscal 1997, 1996, and 1995, respectively. Sale of Receivables: The Company sells its commercial credit accounts to a third-party administrator pursuant to an agreement. A substantial portion of the Company's commercial credit sales are to remodelers and contractors. Under the agreement, the Company pays a servicing fee and assumes the credit risk. At November 29, 1997, and November 30, 1996, the outstanding balance of commercial credit accounts sold to the third-party administrator was approximately $87.5 million and $104.7 million, respectively. The Company has provided a reserve of $5.9 million at November 29, 1997, and $5.7 million at November 30, 1996, which is believed to adequately cover its credit risk related to these accounts. Under a third-party administrative servicing agreement for the Company's private-label charge card program, charge card accounts are sold to the administrator and the Company assumes no credit risk. Real Estate Held for Sale: Real estate held for sale, consisting primarily of closed store facilities, is reflected at the lower of cost less accumulated depreciation or estimated fair value less cost to sell. Advertising Costs: Advertising costs, which are expensed as incurred, aggregated $27.5 million, $26.0 million and $31.6 million for fiscal 1997, 1996 and 1995, respectively. 24 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Fair Value of Financial Instruments: Based on the borrowing rates currently available to the Company for debt issuances with similar terms and maturities, the fair value of long-term debt including the current portion is approximately $433.4 million and $564 million at November 29, 1997 and November 30, 1996, respectively. The Company believes the carrying amounts of cash and cash equivalents, trade receivables, trade accounts payable and accrued expenses are a reasonable estimate of their fair value. Derivative Financial Instruments: Premiums paid for purchased interest rate cap agreements are amortized to interest expense over the term of the agreement. Unamortized premiums are included in deferred financing costs in the balance sheets. If amounts were received under the cap agreement, they would be reflected as a reduction of interest expense. Amounts received or paid under the interest rate swap agreement discussed at Note I have been reflected as a reduction or increase of rent expense prior to fresh-start accounting. At November 29, 1997, the premiums paid for purchased interest rate cap agreements were fully amortized. The estimated amount the Company would have had to pay at November 29, 1997, to cancel or transfer the agreements to other parties, was approximately $0.7 million. Accounting Period: The Company's fiscal year ends on the last Saturday in November. Fiscal years 1997 and 1995 consisted of 52 weeks each and fiscal year 1996 consisted of 53 weeks. Note D--Long-Term Debt Long-term debt consisted of the following:
In thousands 1997 1996 ------------------------------- Exit Financing Agreement, secured by inventory, certain real estate, and equipment, variable interest rate, payable in varying amounts through 2002 $ 317,133 $ -- Mortgage loan, secured by certain real estate, variable interest rate, payable in varying amounts through 2004 102,010 -- Note payable, secured by certain real estate, variable interest rate, payable in 2002 13,000 -- Amended Credit Agreement, secured by inventory, certain real estate, and equipment, variable interest rate, payable in varying amounts through 2000 -- 354,000 Mortgage loan, secured by certain real estate, 11.04% to 11.21%, payable in varying amounts through 2003 -- 108,000 Senior subordinated notes, 9-1/8%, due 2003 -- 173,655 Other senior debt, 11% to 12%, payable in varying amounts through 2004 1,242 1,352 ------------------------------- 433,385 637,007 Less portion classified as current liability (9,354) (18,340) ------------------------------- $ 424,031 $ 618,667 ==============================
As a result of the Chapter 11 filing on July 21, 1997, borrowings under the revolving credit facility of the Amended Credit Agreement were no longer available to the Company. During the period from July 21, 1997 through December 2, 1997, the Company utilized debtor-in-possession financing which consisted of a $125 million revolving credit facility (the "DIP Agreement"). As described at Note A, on or prior to the Effective Date, December 2, 1997, the Company paid all amounts outstanding under the DIP Agreement and the Amended Credit Agreement with cash, New Common Stock and new notes under the Exit Financing Agreement. The Exit Financing Agreement includes term loans of $283.1 million and a $150 million revolving credit facility with 25 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) a $40 million letters of credit sublimit. At December 2, 1997, there were combined borrowings under the agreement of $317.1 million as well as outstanding standby letters of credit of $2.6 million and outstanding documentary letters of credit of $6.6 million. The Company had $106.8 million available for borrowing under this agreement at December 2, 1997. The term loans require annual principal payments of $3 million beginning September 15, 1998, with final maturity on November 30, 2002. The revolving credit facility matures on May 31, 2002. In addition, the Company will be required to repay borrowings under the Exit Financing Agreement with proceeds of certain collateral sales and certain other transactions and with 65% of excess cash flow, as defined. The effect of these provisions is generally to require that substantially all cash flows not applied to the repayment of other indebtedness or permitted capital expenditures are to be applied to the repayment of borrowings under the Exit Financing Agreement. The loans bear interest at fluctuating rates of either the alternate base rate (8-1/2% at November 29, 1997) plus 1-1/2% per annum or LIBOR (5-11/16% at December 2, 1997) plus 2-1/2% per annum. The Exit Financing Agreement is secured by substantially all merchandise inventories, certain real estate including second priority liens on all real estate pledged to other creditors, and substantially all the equipment of the Company. The Exit Financing Agreement contains a number of covenants, including, but not limited to, minimum cash flow (defined as earnings before interest, taxes, depreciation, and amortization, "EBITDA"), a maximum debt to EBITDA ratio, and limitations on capital expenditures and capitalized leases. The Company is also prohibited from incurring additional indebtedness, with certain limited exceptions, and making dividend, redemption and certain other payments on its capital stock. The Exit Financing Agreement also contains certain customary financial covenants and events of default for financing of this type, including a change of control covenant. Compliance with the minimum cash flow and the maximum debt to EBITDA covenants is determined on a rolling-four-quarter basis. For the fiscal year ended November 29, 1997, actual EBITDA was $65.4 million and the ratio of debt to EBITDA was 6.6 to 1. The measurements for those covenants, over the term of the Exit Financing Agreement, are as follows:
Minimum Cash Flow Maximum Debt to Fiscal Quarter Ending (EBITDA) EBITDA ---------------------- ----------------- --------------- February 1998 49,000,000 11.9 to 1 May 1998 39,400,000 15.0 to 1 August 1998 45,000,000 11.9 to 1 November 1998 59,300,000 7.2 to 1 February 1999 62,400,000 7.3 to 1 May 1999 66,500,000 6.9 to 1 August 1999 70,600,000 6.1 to 1 November 1999 74,500,000 5.6 to 1 February 2000 78,800,000 5.6 to 1 May 2000 87,000,000 4.9 to 1 August 2000 95,700,000 4.2 to 1 November 2000 101,000,000 3.7 to 1 February 2001 103,000,000 4.0 to 1 May 2001 106,200,000 3.9 to 1 August 2001 109,100,000 3.6 to 1 November 2001 113,400,000 3.3 to 1 February 2002 113,700,000 3.7 to 1 May 2002 113,100,000 3.7 to 1 August 2002 115,800,000 3.4 to 1
Also described at Note A, the Company's mortgage loan and interest thereon accrued through December 2, 1997, secured by certain real estate, was retired on the Effective Date and replaced with a new mortgage loan secured by the same real estate. This real estate had a net book value of approximately $227.3 million at November 29, 1997. The new mortgage loan bears interest at LIBOR plus 4% per annum and interest is paid monthly. Annual principal payments of $4 million are required beginning December 2, 1998, with final maturity on December 2, 2004. Prepayments are required when collateral is sold and such prepayments are applied as a credit toward the scheduled annual payment. On December 22, 1995, the Company made a $16.5 million prepayment on the previous mortgage loan in connection with the sale of a distribution center described at Note L. The early extinguishment of the Amended Credit Agreement and the old mortgage loan, both described above, resulted in an extraordinary charge of approximately $5.0 million, net of tax, in the accompanying 1997 statement of operations. On the Effective Date, in settlement of the secured portion of the claims arising from a lease agreement involving five store facilities, described at Note I, the Company issued a note for $16 million. This note bears interest at LIBOR plus 3-1/2% per annum, is secured by three of the formerly leased store facilities having a net book value of approximately $13.7 million at November 29, 1997, and matures on June 2, 2002. The note contains prepayment provisions that allow the Company to prepay the note by certain dates at various discounts. At the Effective Date the Company obtained a commitment from the mortgage lender to borrow an additional 26 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) $13 million under the mortgage loan described above, and the Company intends to prepay this note in full. Although this transaction has not been completed, it is expected to be consummated in the first half of fiscal 1998. On April 20, 1993, the Company issued senior subordinated notes. These notes were unsecured obligations, subordinated to substantially all indebtedness of the Company. As described at Note A, on the Effective Date, these notes were terminated and canceled and holders of these notes received treatment under the Plan as unsecured creditors. To reduce the impact of changes in interest rates with regard to the Amended Credit Agreement, during 1995 the Company entered into an interest rate cap with an affiliate of an investment banking firm, limiting to 8% LIBOR the interest rates on $100 million of its floating rate debt through January 20, 1998. Under the agreement, semiannual payments, if any, would be received, although no amounts were received by the Company during fiscal years 1996 or 1997. The Company defeased certain industrial revenue bonds during fiscal 1988 by placing government securities in an irrevocable trust. Such industrial revenue bond debt is considered to be extinguished and does not appear as a liability in the accompanying balance sheets. Bonds in the amount of $6.0 million are outstanding as of November 29, 1997. Scheduled maturities of long-term debt, including sinking fund requirements, are: In thousands 1998 $ 9,354 1999 11,433 2000 11,451 2001 10,613 2002 309,340 Thereafter 81,194 ------------ $ 433,385 ============ Note E--Stockholders' Equity As discussed at Note A, the Company canceled existing shares of Old Preferred Stock and Old Common Stock and issued approximately 20,000,000 shares of New Common Stock on or about the Effective Date. The Company has the authority to issue 50,000,000 shares of New Common Stock, $.01 par value. Each outstanding share of New Common Stock is entitled to one vote on each matter on which stockholders are entitled to vote. All classes of Old Common Stock were substantially identical except for voting rights. Shares of Non-Voting Class A Common Stock were convertible at the option of the holder, subject to certain restrictions, into a like number of shares of Voting Common Stock. During fiscal 1997, 2,250,000 outstanding shares of Non-Voting Class A Common Stock were converted into a like number of shares of Voting Common Stock under this right of conversion. As described at Note A, holders of Old Common Stock received approximately 2% of the shares of New Common Stock issued under the Plan. The Old Preferred Stock was 100% owned by Masco Capital Corporation, an affiliate of one of the Company's suppliers. As described at Note A, holders of Old Preferred Stock received approximately 3% of the shares of New Common Stock issued under the Plan. The terms of the Old Preferred Stock provided for dividends at an annual rate of 8% until 2008 (at which time the rate increased) on a cumulative basis, whether or not declared. At November 30, 1996, cumulative undeclared dividends on the Preferred Stock were $38.0 million ($93.50 per share). Each share of Preferred Stock was generally entitled to 5.9994 votes on all matters on which holders of Common Stock were entitled to vote. For the benefit of non-employee directors, the Company had adopted a deferred compensation plan (the "Director Deferred Comp Plan") and an option plan (the "Director Option Plan"). The Director Deferred Comp Plan was terminated effective as of the Petition Date and options outstanding and unexercised under the Director Option Plan were canceled on the Effective Date. In order to attract and retain outstanding individuals in certain key positions, the Company had established the Payless Cashways 1992 Incentive Stock Program (the "Stock Program") and the 1988 Payless Cashways, Inc. Employee Stock Plan (the "Stock Plan"). Options outstanding and unexercised under both the Stock Program and the Stock Plan were canceled on the Effective Date. Approximately 40,000 shares of Restricted Stock outstanding and unvested under the Stock Program vested on the Effective Date. 27 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Note F-Income Taxes Income taxes for the year ended November 29, 1997, were allocated to loss before extraordinary items, and to extraordinary items related to the discharge of debt pursuant to the consummation of the Plan and for the early extinguishment of debt; see Note D. The income tax benefit allocated to the loss before extraordinary items was $90.4 million; the income tax expense allocated to the extraordinary items was $91.8 million. Included in the income tax benefit allocated to the loss before extraordinary items are income tax benefits of $43.5 million resulting from the fresh-start revaluation; see Note B. The income tax expense allocated to the extraordinary items of $91.8 million was comprised of $2.5 million current tax benefit related to the early extinguishment of debt and $94.3 million tax expense related to the discharge of debt which resulted in deferred tax balance changes from the write-down of the tax basis of fixed assets in accordance with the Internal Revenue Code of 1986, as amended. At November 29, 1997, the Company has state income tax net operating loss carryforwards totaling $11.4 million available over varying periods from 5 to 15 years; net operating loss carryforwards for federal income tax purposes totaling $6.1 million expiring in 15 years; and tax credit carryforwards for federal income tax purposes totaling $13.0 million available over an indefinite period. For the year ended November 30, 1996, an income tax benefit of $30.7 million was recorded. On August 20, 1996, the Small Business Job Protection Act of 1996 was signed into law. Certain provisions of this Act clarify the Tax Reform Act of 1986 and make retroactively tax deductible certain costs and expenses previously recorded by the Company without any related tax benefit. In addition, the Company settled with the Internal Revenue Service regarding several tax issues. As a result, the Company has recorded a tax benefit of $23.7 million and related interest income of $4.9 million ($2.9 million after tax) in the third quarter of 1996. This tax benefit includes recoverable income taxes of $10.0 million and non-cash tax benefits of $13.7 million. A debit of $24,000 to additional paid-in capital reflected the tax effect of excess expense recognized for financial reporting purposes over the tax deduction for employee stock options. For the year ended November 25, 1995, an income tax benefit of $4.9 million was allocated to the loss before equity in loss of joint venture. No income tax benefit was recorded for the equity in loss of the joint venture. A credit of $325,000 to additional paid-in capital reflected the tax effect of the excess tax deduction for employee stock options over the expense recognized for financial reporting purposes. Income tax expense (benefit) attributable to the income (loss) before equity in loss of joint venture and extraordinary item consisted of the following:
In thousands 1997 1996 1995 ------------------------------------------------------- Currently payable (receivable) Federal $ (17,169) $ (18,901) $ 14,915 State (1,000) 469 2,500 ------------------------------------------------------- (18,169) (18,432) 17,415 Deferred Federal $ (63,129) $ (11,534) $ (20,986) State (9,108) (736) (1,340) ------------------------------------------------------- (72,237) (12,270) (22,326) ------------------------------------------------------- $ (90,406) $ (30,702) $ (4,911) =======================================================
28 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) The differences between actual income tax expense and the amount computed by applying the statutory federal income tax rate to the income (loss) before income taxes, equity in loss of joint venture and extraordinary item were as follows:
1997 1996 1995 ------------------------------------------------------- Federal statutory rate (35.0)% (35.0)% (35.0)% State income taxes, net of federal tax benefit (2.0) (1.5) (1.5) Amortization and write-off of goodwill 20.1 22.7 32.9 Benefit from new law and tax settlements (1.8) (47.6) -- Permanent tax differences .7 .4 (.1) Difference between statutory and carry-back tax rates .3 -- -- Tax credits -- (.7) (.3) ------------------------------------------------------- (17.7)% (61.7)% (4.0)% =======================================================
The tax effects of temporary differences and tax credits that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
In thousands 1997 1996 ------------------------------------- Deferred tax assets: Tax credit and net operating loss carry-forwards $ 23,000 $ 1,127 Insurance reserves 10,322 13,026 Retirement, deferred compensation, restricted stock and stock option plans 8,651 6,101 Post-retirement benefits 6,656 5,706 Vacation reserves 3,968 4,981 Reserves for bad debts 2,800 3,056 Lease liability 2,615 7,159 Other 8,971 6,582 ------------------------------------- Total deferred tax assets 66,983 47,738 Less valuation allowance -- -- ------------------------------------- Net deferred tax assets 66,983 47,738 ------------------------------------- Deferred tax liabilities: Land, buildings and equipment (90,835) (54,763) Inventory basis difference (19,441) (11,221) Other (6,830) (9,738) ------------------------------------- Total deferred tax liabilities (117,106) (75,722) ------------------------------------- Net deferred tax liability $ (50,123) $ (27,984) =====================================
Note G--Pension Plans The Company has a non-contributory defined benefit pension plan covering substantially all full-time employees. Benefits under the plan are based on years of service and an employee's average compensation. Prior to January 1995, the Company had two defined benefit pension plans that were merged into a single plan on January 1, 1995. The Company's funding policy is to contribute annually the amount actuarially determined to provide the plan with sufficient assets to meet future benefit payment requirements. Assets of the pension plan are maintained in trust funds. Effective July 21, 1997, the Company terminated a supplemental pension plan covering certain of its officers. The plan was an unfunded, non-contributory defined benefit pension plan. Benefits under the plan were based on years of service, age and the 29 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) employees' average compensation. The supplemental pension plan was terminated as part of the Plan of Reorganization. Net pension costs for the supplemental pension plan were $0.9 million in 1997 and $1.3 million in each of 1996 and 1995. Net pension cost, excluding the terminated supplemental pension plan, was comprised of the following components:
In thousands 1997 1996 1995 ------------------------------------------------ Service cost - benefits earned during the period $ 4,280 $ 4,548 $ 4,098 Interest cost on projected benefit obligation 4,256 3,983 3,421 Actual return on plan assets (7,042) (8,167) (6,741) Net amortization and deferral 2,932 5,074 4,334 ------------------------------------------------ Net periodic pension cost $ 4,426 $ 5,438 $ 5,112 ================================================
A curtailment gain of $0.2 million was recorded in the year ended November 29, 1997. This gain was recorded as a result of the closing of 29 stores and is included in special charges in the accompanying 1997 statements of operations; see Note L. The Company wrote off $15.9 million of unrecognized prior service cost and unrecognized net loss from past experience different from that assumed as part of the fresh-start revaluation in the accompanying 1997 statement of operations; see Note B. Significant assumptions used in accounting for defined benefit plans were as follows:
1997 1996 1995 --------------------------------------------- Weighted average discount rate 7.0% 7.5% 7.5% Rate of increase in future compensation levels 6.0% 5.0% 5.0% Expected long-term rate of return on plan assets 8.5% 8.5% 8.5%
The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
In thousands 1997 1996 ------------------------------------------- Supplemental Pension Pension Pension Plan Plan Plan ------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation Vested $ 57,065 $ 41,707 $ 6,262 Non-vested 5,371 4,403 1,505 ------------------------------------------- Total 62,436 46,110 7,767 Increase in benefits due to estimated future compensation increases 14,257 10,988 1,989 ------------------------------------------- Projected benefit obligation for service rendered to date 76,693 57,098 9,756 Plan assets at fair value, primarily publicly traded stocks and U.S. Government obligations 54,260 48,993 -- ------------------------------------------- Projected benefit obligation in excess of plan assets 22,433 8,105 9,756 Unrecognized net loss from past experience different from that assumed -- (1,118) (1,591) Unrecognized prior service cost -- (1,237) (785) ------------------------------------------- Accrued pension cost included in other accrued expenses $ 22,433 $ 5,750 $ 7,380 ===========================================
30 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) At November 29, 1997, an additional minimum liability of $1.6 million was recorded to reflect the excess of the unfunded accumulated benefit obligation over accrued pension costs. This amount, along with a corresponding asset of $0.3 million and a charge to additional paid-in-capital of $1.3 million were eliminated in applying fresh-start reporting; see Note B. In addition, the Company has sponsored several defined contribution plans. Under the Payless Cashways, Inc. Employee Savings Plan, which covers substantially all employees, the Company contributed an amount equal to a percentage of the amount contributed by employees into the plan. In fiscal year 1994, the employees of Somerville Lumber and Supply Co., Inc. were covered by a profit sharing plan for which contributions were made at the discretion of the Somerville Board of Directors and approval of the Company's Compensation Committee. On October 23, 1995, the profit sharing plan was merged into the Payless Cashways, Inc. Employee Savings Plan. The aggregate contributions to all defined contribution plans were $2.8 million, $3.1 million, and $2.9 million in 1997, 1996, and 1995, respectively. Note H--Post-Retirement Benefit Plans The Company has certain unfunded post-retirement defined benefit plans that provide health and life insurance benefits for retirees and eligible dependents. The health plan is contributory and contains cost-sharing features such as deductibles and coinsurance. In fiscal 1997, 1996, and 1995, the health-care cost trend rate was assumed to decrease gradually to 5.9% by the year 2001 and remain at that level thereafter. The effect of a 1.0% annual increase in these assumed health-care cost trend rates would increase the November 29, 1997, accumulated post-retirement benefit obligation by $879,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the fiscal year ended November 29, 1997, by $46,000. Net post-retirement benefit cost included the following components:
In thousands 1997 1996 1995 ----------------------------------------------- Service cost - benefits earned during the period $ 636 $ 642 $ 1,098 Interest cost on accumulated post-retirement benefit obligation 1,019 1,084 1,309 Amortization of prior service cost 37 47 47 Amortization of unrecognized (gain) loss (99) -- 93 ----------------------------------------------- Net periodic post-retirement benefit cost $ 1,593 $ 1,773 $ 2,547 ===============================================
A curtailment gain of $37,000 was recorded in the year ended November 29, 1997. This gain was recorded as a result of the closing of 29 stores and is included in special charges in the accompanying 1997 statements of operations; see Note L. The Company recognized a net $531,000 gain related to the write-off of unrecognized prior service cost and unrecognized net gain from past experience different from that assumed as part of the fresh-start revaluation in the accompanying 1997 statement of operations; see Note B. The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
In thousands 1997 1996 1995 ------------------------------------------------ Accumulated post-retirement benefit obligation: Retirees and beneficiaries $ 9,860 $ 8,111 $ 12,144 Fully eligible active plan participants 2,219 1,965 781 Other active plan participants 4,610 3,893 3,939 ------------------------------------------------ Total 16,689 13,969 16,864 Plan assets at fair value -- -- -- ------------------------------------------------ Accumulated post-retirement benefit obligation in excess of plan assets 16,689 13,969 16,864 Unrecognized net gain (loss) from past experience different from that assumed -- 3,197 (749) Unrecognized prior service cost -- (838) (885) ------------------------------------------------ Accrued post-retirement benefit cost included in other non-current liabilities $ 16,689 $ 16,328 $ 15,230 ================================================
31 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Significant assumptions used in accounting for post-retirement benefit plans were as follows:
1997 1996 1995 ------------------------------------------------ Weighted average discount rate 7.0% 7.5% 7.5% Rate of increase in future compensation levels 6.0% 5.0% 5.0% Health-care cost trend rate 7.1% 7.6% 8.1%
Note I--Leases The Company leases certain stores and other facilities under non-cancelable operating leases. Aggregate minimum future rentals under non-cancelable operating leases for the next five years are: 1998 -- $20,867,000; 1999 -- $20,065,000; 2000 -- $18,422,000; 2001 -- $16,354,000; 2002 -- $12,769,000; thereafter -- $19,797,000. Rental expense under operating leases was $29.3 million, $30.6 million and $27.2 million for 1997, 1996, and 1995,respectively. During 1995, the Company entered into an agreement providing for the operating lease of five stores, including a new store that opened in 1997. Under the Plan of Reorganization, the Company acquired three of the stores and issued a note payable to the lessor as described at Note D. Rental payments under this lease varied with the level of interest rates. To reduce the impact of changes in the interest rates related to this lease, the Company during 1995 entered into an interest rate swap agreement under which it pays a 6-9/16% fixed rate of interest quarterly through December 1, 1999, in exchange for quarterly receipt of LIBOR on $36 million. The Company's liability with respect to the remaining term of this interest rate swap agreement, estimated to be $0.7 million at November 29, 1997, was accrued in fresh-start accounting. Note J--Reorganization Items In connection with its Chapter 11 filing on July 21, 1997, discussed at Note A, reorganization items of $25.5 million are reflected in the 1997 statement of operations. Reorganization items for this period consisted of professional fees and case administrative expenses of $17.6 million, the write-off of deferred financing costs of $2.5 million, retention bonuses of $5.7 million, and interest income of $0.3 million. Note K--Asset Impairment Charges The Company recorded an asset impairment charge of $60.5 million ($43.9 million after tax) and $59.7 million ($44.6 million after tax) in the third quarters of 1997 and 1996, respectively. The asset impairment charges were recorded after considering current and expected future operating cash flows for certain stores together with the proceeds the Company could expect to receive upon the sale of these assets. The Company adopted Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," in 1996. Primarily because the environment for building materials retailing has continued to be increasingly competitive, the Company first conducted its review in the third quarter of 1996 and determined certain assets were impaired. In the third quarter of 1997, the Company again conducted a review of underperforming stores and determined that certain additional assets were impaired, including assets related to twenty-nine stores which the Company determined to close (see Note L). These assets included certain real estate, including future store lease obligations, and associated goodwill which is attributable to those assets and which was established in 1988 as part of the Company's leveraged buyout. In 1997 as a result of the impairment charge, certain real estate carrying values were reduced $28.8 million, goodwill was reduced $18.7 million and a $13.0 million liability for future store lease payments was recorded. In 1996 as a result of the impairment charge, goodwill was reduced $22.4 million, certain real estate carrying values were reduced $25.7 million and a $11.6 million liability for future store lease payments, net of $6.0 million in amounts the Company estimated to be recoverable, was recorded. The Company will continue to review assets for impairment, particularly given the ongoing competitive environment for building materials retailing. 32 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) Note L--Special Charges A special charge of $13.1 million ($8.1 million after tax), primarily a cash charge, was recorded in the third quarter of fiscal 1997 in connection with the closing of 29 stores as part of the Company's reorganization under Chapter 11. All 29 stores were closed prior to November 29, 1997. In addition, the Company recorded an inventory write-down of $10.7 million ($6.6 million after tax), included in cost of merchandise sold, in connection with the store closings. The fiscal 1997 special charge includes:
Amount Amount Reclass From Charged Utilized Through 1995 & 1996 Reserve at In millions 1997 Nov. 29, 1997 Reserve Nov. 29, 1997 ---------------------------------------------------------------------- Real estate disposal costs $ 6.8 $ 4.1 $ 3.4 $ 6.1 Severance costs 6.3 5.5 -- .8 --------------------------------------------------------------------- $ 13.1 $ 9.6 $ 3.4 $ 6.9 =====================================================================
Historical financial data for the closing of the 29 stores is as follows for the for the fiscal years presented:
In thousands 1997 1996 1995 ---------------------------------------------------------------- Net sales $ 209,898 $ 328,541 $ 319,354 Net operating income (loss) $ (9,153) $ 5,990 $ 8,990
A special charge of $8.2 million ($5.0 million after tax), primarily a cash charge, was recorded in the third quarter of fiscal 1996 in connection with the closing of nine underperforming stores. Eight of the nine stores were closed at November 30, 1996, and the remaining store was closed in fiscal 1997. The Company also recorded an inventory write-down of $5.8 million ($3.5 million after tax), included in cost of merchandise sold, in connection with the store closings. The fiscal 1996 special charge includes:
Discharge of Amount Amount Reclass Indebtedness Charged Utilized Through 1996 Reserve in Fresh-Start Reserve at In millions 1996 Nov. 29, 1997 to 1997 Reserve Accounting Nov. 29, 1997 --------------------------------------------------------------------------------------- Future store rentals $ 3.7 $ 1.3 $ -- $ (2.4) $ -- Real estate disposal costs 4.5 3.3 (1.2) -- -- --------------------------------------------------------------------------------------- $ 8.2 $ 4.6 $ (1.2) $ (2.4) $ -- =======================================================================================
Historical financial data for the closing of the nine stores is as follows for the fiscal years presented:
In thousands 1996 1995 -------------------------------------- Net sales $ 63,088 $ 70,284 Net operating income (loss) $ (7,636) $ (1,720)
Costs of $153.7 million associated with a restructuring plan which included the closing of six stores on December 30, 1995, the sale of a distribution center on December 22, 1995, and the reorientation of several stores to concentrate on the professional customer during the first two quarters of fiscal 1996, are contained in the accompanying statement of operations for fiscal 1995 as special charges. 33 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) The fiscal 1995 special charge includes:
Amount Amount Reclass Charged Utilized Through Changes In 1995 Reserve Reserve at In millions 1995 Nov. 29, 1997 Estimate to 1997 Reserve Nov. 29, 1997 -------------------------------------------------------------------------------- Write-off of allocable cost in excess of assets acquired (goodwill) $ 101.5 $ 101.5 $ -- $ -- $ -- Real estate write-down and disposal costs 31.2 31.8 1.9 (1.3) -- Inventory liquidation and store closing costs 15.3 13.7 (1.6) -- -- Severance and other employment costs 3.9 3.6 (.3) -- -- Other 1.8 .9 -- (.9) -- ---------------------------------------------------------------------------- $ 153.7 $ 151.5 $ -- $ (2.2) $ -- ============================================================================
Historical financial data for the six closed stores is as follows for fiscal 1995: In thousands Net sales $ 61,969 Net operating loss $ (4,023) Note M--Litigation The Company is a defendant in a lawsuit brought in connection with a reduction in force pursuant to a January 1994 restructuring. The suit asserted a variety of claims including federal and state securities fraud claims, alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), federal and state claims of age discrimination, alleged violations of the Employment Retirement Income Security Act of 1974, and various state law claims including, but not limited to, fraudulent misrepresentation allegations. A ruling has been entered on the Company's motion to dismiss the majority of pending claims, substantially narrowing plaintiff's legal claims by dismissing some age discrimination counts, all federal securities counts and RICO counts except one each, and all state law counts related to an alleged partnership. The plaintiff's motion for class certification has been denied on all claims except the age discrimination claims. The court has recently granted the plaintiff's motion for class certification of certain age discrimination claims. As a result of this ruling, approximately 20 additional individuals may choose to participate in the age claims asserted in this suit. Each of the parties has conducted discovery pursuant to the court's scheduling order and discovery plan. The lawsuit was formally stayed pursuant to the automatic stay issued by the Bankruptcy Court following the voluntary Chapter 11 reorganization filing on July 21, 1997. During the Chapter 11 reorganization, plaintiffs timely filed proofs of claim, including a purported claim on behalf of the potential Age Discrimination in Employment Act opt-in class, for an aggregate of $37 million. The case has been returned to the United States District Court for the Southern District of Iowa for resolution. Any recovery for the plaintiffs against the Company would be treated as a general unsecured claim entitling the plaintiffs to their pro rata share of 8,269,329 shares of New Common Stock reserved for such claims. The Company denies any and all claimed liability and is vigorously defending this litigation, but is unable to estimate a potential range of monetary exposure, if any, to the Company or to predict the likely outcome of this matter. 34 Payless Cashways, Inc. INDEPENDENT AUDITORS' REPORT The Board of Directors Payless Cashways, Inc.: We have audited the accompanying balance sheets of Payless Cashways, Inc. as of November 29, 1997, and November 30, 1996, and the related statements of operations, stockholders' equity and cash flows for each of the fiscal years in the three-year period ended November 29, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Payless Cashways, Inc. as of November 29, 1997 and November 30, 1996, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended November 29, 1997 in conformity with generally accepted accounting principles. As discussed in Note A to the financial statements, the November 29, 1997 balance sheet reflects the application of fresh-start reporting as of that date and, therefore, is not comparable in all respects to the balance sheets of the Company prior to November 29, 1997. As discussed in Note H to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal 1996. /S/ KPMG Peat Marwick LLP Kansas City, Missouri January 19, 1998 35 Payless Cashways, Inc. FIVE-YEAR FINANCIAL SUMMARY
Reorganized | In thousands, except per share Company | Predecessor Company ----------- | ------------------------------------------------------------------------ amounts, percentages and ratios 1997 | 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Net sales and other income (a) N/A | $ 2,290,215 $2,650,905 $ 2,685,670 $ 2,733,182 $ 2,605,978 Cost of merchandise sold N/A | 1,676,658 1,906,734 1,912,620 1,918,674 1,824,663 Selling, general and administrative N/A | 558,817 615,466 619,589 594,024 570,016 Reorganization items (b) N/A | 25,455 -- -- -- -- Fresh-start revaluation (b) N/A | 355,559 -- -- -- -- Special charges (c) N/A | 13,056 8,184 153,667 -- 4,000 Asset impairment charges (d) N/A | 60,483 59,967 -- -- -- Depreciation and amortization N/A | 51,110 55,016 60,356 58,692 56,213 Interest expense N/A | 61,251 60,488 61,067 65,571 125,247 Interest income (e) N/A | -- 4,900 -- -- -- ----------------------------------------------------------------------------------------- Income (loss) before income taxes N/A | (512,174) (49,780) (121,629) 96,221 25,839 Federal and state income taxes (e) N/A | (90,406) (30,702) (4,911) 41,808 16,170 ----------------------------------------------------------------------------------------- Income (loss) before equity in loss of | joint venture and extraordinary item N/A | (421,768) (19,078) (116,718) 54,413 9,669 Equity in loss of joint venture (f) N/A | -- -- (11,831) (2,281) -- Extraordinary item (g) N/A | 133,176 -- -- (7,243) (45,828) ----------------------------------------------------------------------------------------- Net income (loss) N/A | $ (288,592) $ (19,078) $ (128,549) $ 44,889 $ (36,159) ========================================================================================= | Current ratio 2.15 | N/A 1.41 1.29 1.45 1.25 Working capital $ 258,405 | N/A $ 131,004 $ 98,400 $ 139,128 $ 85,142 Total assets $ 911,341 | N/A $1,293,118 $ 1,344,436 $ 1,495,882 $ 1,458,481 Long-term debt $ 424,031 | N/A $ 618,667 $ 608,627 $ 654,131 $ 640,127 Stockholders' equity $ 183,800 | N/A $ 289,731 $ 308,163 $ 435,865 $ 387,311 Capital expenditures N/A | $ 62,940 $ 41,670 $ 67,281 $ 81,906 $ 49,982 Income from operations before | depreciation and amortization (h) N/A | $ 65,433 $ 134,552 $ 153,461 $ 220,484 $ 211,299 (a) Net sales and other income include gains of $2.3 million in 1996 related to settlements of 1995 fire losses and gains of $5.9 million in 1994 related to settlements of 1993 flood losses. (b) In connection with its Chapter 11 filing on July 21, 1997, discussed at Note A, the Company recorded reorganization items in 1997. The Company also adopted fresh-start accounting, discussed at Note B, as of November 29, 1997, as a result of its emergence from bankruptcy under its plan of reorganization effective date, December 2, 1997. (c) Special charges for 1997 and 1996 consisted of costs associated with the closing of 29 stores and nine stores, respectively. Special charges for 1995 consisted of restructure costs associated with the closing of six stores, the sale of a distribution center and the reorientation of several stores to concentrate on the professional customer. Special charges for 1993 consisted of costs associated with the elimination of a layer from the Company's field management organization. (d) Asset impairment charges for 1997 and 1996 consist of a reduction of goodwill and certain real estate carrying values, net of amounts estimated to be recoverable, and the recording of a liabilities for future store lease payments. The Company adopted of SFAS 121 in 1996. (e) During 1996, the Company recorded a federal income tax benefit of $23.7 million and related interest income of $4.9 million pursuant to legislation and a settlement with the Internal Revenue Service. (f) During 1995, the Company recorded an $8.0 million loss on the sale of its Mexican joint venture investment. (g) During 1997, the Company recorded a $5.0 million charge, after tax, related to the early extinguishment of debt and a $138.2 million extraordinary gain, after tax, related to debts discharged in its Chapter 11 reorganization. During 1993 and 1994, the extraordinary items also represent losses on early extinguishment of debt. (h) Income from operations before depreciation and amortization is utilized by the Company as a measure for managing cash flow in its day-to-day operations. The amounts are before the reorganization items, fresh-start revaluation, special charges and asset impairment charges. Inventory write-downs in 1997 and 1996 of $10.7 million and $5.8 million, respectively, related to the closing of 29 and nine underperforming stores, respectively, are also excluded.
36 Payless Cashways, Inc. FIVE-YEAR OPERATIONAL SUMMARY
Average sales per facility, number Predecessor Company of customers, gross square feet and -------------------------------------------------------------------------------- retail square feet are in thousands 1997 1996 (a) 1995 (b) 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Number of retail facilities 164 192 206 202 196 Average same-store sales per facility $ 12,600 $ 13,107 $ 13,114 $ 13,716 $ 13,284 Number of customers 50,743 56,736 59,685 60,812 60,678 Average sales per customer $ 45.04 $ 45.81 $ 44.91 $ 44.77 $ 42.87 Number of employees 12,782 16,664 18,122 18,406 18,093 Average sales per employee $ 162,099 $ 152,228 $ 147,894 $ 147,778 $ 143,757 Gross square feet (total) 15,550 17,578 19,453 18,730 18,095 Retail square feet (inside) 5,334 6,209 6,740 6,468 6,200 Sales per retail square foot $ 388.44 $ 408.56 $ 397.65 $ 420.53 $ 419.52 Percent increase (decrease) in same- store sales (6.6)% (2.5)% (4.5)% 3.3% 4.1% (a) Fiscal 1996 was a 53-week year. All 1996 data has been computed on a 52-week basis. (b) Includes six retail stores closed in December 1995.
- -------------------------------------------------------------------------------- Payless Cashways, Inc. RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Payless Cashways, Inc. have been prepared by management in accordance with generally accepted accounting principles and necessarily include amounts based on management's judgment and best estimates. The presentation, integrity and consistency of the financial statements are the responsibility of management. The financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. Their responsibility is to audit the Company's financial statements in accordance with generally accepted auditing standards and to express their opinion on these statements with respect to fairness of presentation of the Company's financial position, results of operations and cash flows. To fulfill its responsibilities, management has developed a system of internal controls designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorizations and financial records provide a reliable basis for preparing financial statements and other data. Management believes the controls in place are sufficient to provide this reasonable assurance. The controls include careful selection and training of qualified personnel, appropriate division of responsibilities, communication of written policies and procedures throughout the Company and a program of internal audits. The Board of Directors, through its Audit Committee composed of Directors who are neither officers nor employees of the Company, is responsible for the maintenance of a strong control environment and quality financial reporting. The Board, on the recommendation of the Audit Committee, selects and engages the independent auditors. The Audit Committee meets periodically with management, the independent auditors and internal auditors to discuss the results of both independent and internal audits, the adequacy of internal controls and financial reporting matters. The independent auditors and the internal auditors have direct access to the Audit Committee without the presence of management, when deemed appropriate. /S/ Donald E. Roller /S/ Richard G. Luse Donald E. Roller Richard G. Luse Acting Chief Executive Officer Senior Vice President-Finance and Chief Financial Officer 37 Payless Cashways, Inc. Board of Directors Peter G. Danis + Non-executive Chairman of the Board Payless Cashways, Inc. Chief Executive Officer Boise Cascade Office Products Corporation Donald E. Roller # Acting Chief Executive Officer Payless Cashways, Inc. David M. Chamberlain * + Chairman Genesco, Inc. Harold D. Cleberg * @ President and Chief Executive Officer Farmland Industries, Inc. David G. Gundling + # President and Chief Executive Officer Hagemeyer Foods N.A., Inc. Max D. Hopper @ # Principal Max D. Hopper Associates, Inc. Peter M. Wood * @ Former Managing Director J. P. Morgan & Co., Incorporated * Member of Audit Committee + Member of Compensation Committee @ Member of Corporate Governance and Nominating Committee # Member of Finance Committee Officers Donald E. Roller Acting Chief Executive Officer Payless Cashways, Inc. Stanley K. Boyd Senior Vice President - Store Operations Robert S. Islinger Senior Vice President - Marketing and Merchandising Richard G. Luse Senior Vice President - Finance and Chief Financial Officer Donald R. Bowman Regional Vice President Kenneth G. Frank, Jr. Regional Vice President David J. Krumbholz Regional Vice President David L. Wenman Regional Vice President Kelly R. Abney Vice President - Distribution and Transportation Louise R. Iennaccaro Vice President - Human Resources Ronald D. Long Vice President - Merchandising/Building Materials John W. Zalonis Vice President - Merchandising/Finishing Products 38 Payless Cashways, Inc. 1997 STORE LOCATIONS ARIZONA PHOENIX 5, TUCSON 3 CALIFORNIA BAKERSFIELD 2, FRESNO 2, MODESTO 1, REDDING 1, SACRAMENTO 6, VISALIA 1 COLORADO BOULDER 1, COLORADO SPRINGS 3, DENVER 13, GREELEY 1 ILLINOIS QUINCY 1, SILVIS 1, SPRINGFIELD 1 INDIANA ANDERSON 1, BLOOMINGTON 1, CLARKSVILLE 1, INDIANAPOLIS 5, KOKOMO 1, LAFAYETTE 1, MUNCIE 1 IOWA ALTOONA 1, CEDAR RAPIDS 1, CORALVILLE 1, DAVENPORT 2, DES MOINES 2, FORT DODGE 1, SIOUX CITY 1, WATERLOO 1 KANSAS ELWOOD 1, KANSAS CITY 5, LAWRENCE 1, SALINA 1, TOPEKA 1, WICHITA 2 KENTUCKY FLORENCE 1, LEXINGTON 1, LOUISVILLE 3 LOUISIANA BATON ROUGE 1 MINNESOTA MINNEAPOLIS/ST. PAUL 8 MISSOURI COLUMBIA 1, KANSAS CITY 5, SPRINGFIELD 1, ST. JOSEPH 1 MONTANA BILLINGS 1 NEBRASKA LINCOLN 2, OMAHA 3 NEVADA LAS VEGAS 4, RENO 1, SPARKS 1 NEW MEXICO ALBUQUERQUE 1, SANTA FE 1 OHIO DAYTON 2, CINCINNATI 7, FINDLAY 1, HUBER HEIGHTS 1, LIMA 1, SPRINGFIELD 1 OKLAHOMA NORMAN 1, OKLAHOMA CITY 3, TULSA 2 OREGON EUGENE 1, SALEM 1 TENNESSEE MEMPHIS 3 TEXAS ABILENE 1, AMARILLO 1, AUSTIN 3, COLLEGE STATION 1, CONROE 1, DALLAS/FT. WORTH 16, LONGVIEW 1, LUBBOCK 2, SHERMAN 1, TEXARKANA 1, TYLER 1, WACO 1 1997 DISTRIBUTION CENTERS CHANDLER, ARIZONA SACRAMENTO, CALIFORNIA DENVER, COLORADO INDIANAPOLIS, INDIANA KANSAS CITY, MISSOURI SEDALIA, MISSOURI LAKE DALLAS, TEXAS 39 Payless Cashways, Inc. STOCKHOLDER INFORMATION As of the July 21, 1997, the Chapter 11 filing date, Payless Cashways Old Common Stock ceased trading on the New York Stock Exchange (ticker symbol PCS), was subsequently delisted and began trading over-the-counter (ticker symbol PYLSQ). On December 2, 1997, the Effective Date for the Company's Plan of Reorganization, the Company canceled Old Common Stock and Old Preferred Stock and began issuing shares of New Common Stock (ticker symbol PCSH) which is trading on the over-the-counter bulletin board. Therefore, the required information presented below with respect to the Old Common Stock for fiscal 1997 and 1996 is not meaningful and has not been converted to the current trading price of the New Common Stock. The number of registered holders of the Company's Old Common Stock at November 29, 1997, was 1,797. No cash dividends have been declared on either Old or New Common Stock since 1988. Certain of the Company's debt instruments contain restrictions on the declaration and payment of dividends on, or the making of any distribution to the holders of, or the acquisition of, any shares of Common Stock.
1997 1996 --------------------------------------- -------------------------- ------------------------ Price range of Old Common Stock High Low High Low --------------------------------------- ------------- ------------ ------------ ----------- First quarter 2.500 1.125 4.750 3.625 Second quarter 2.125 1.375 5.125 3.750 Third quarter 1.750 0.130 5.000 1.375 Fourth quarter 0.360 0.053 2.250 1.500
Copies of the Payless Cashways, Inc. Form 10-K for fiscal 1997, filed with the Securities and Exchange Commission, are available without charge. To obtain a copy, please write to: Payless Cashways, Inc. Investor Relations P.O. Box 419466 Kansas City, MO 64141-0466 (Web site: payless.cashways.com) Annual Meeting - April 15, 1998, 10:00 a.m. Independent Auditors Two Pershing Square, 2300 Main Street KPMG Peat Marwick LLP Kansas City, MO 64108 Kansas City, MO Registrar and Transfer Agent Telephone Number of UMB Bank, n.a. Payless Cashways, Inc. is Kansas City, MO (816) 234-6000 (816) 860-7786 EX-27 20 27.1 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the November 29, 1997, financial statements and is qualified in its entirety by reference to such financial statements. 1000 YEAR NOV-29-1997 NOV-29-1997 11961 0 0 0 414882 482445 363418 0 911341 224040 424031 0 0 200 183600 911341 2285281 2290215 1676658 1676658 0 0 61251 (512174) (90406) (421768) 0 133176 0 (288592) 0 0
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