-----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, TovIRtHhoFdQ2bIfSskJYY3m1QG5704MghJ39TPXxVkartdFFF+i3lFrmJETQYpa sMnL+BZET7jmmepU60xtxg== 0000085149-96-000009.txt : 19960613 0000085149-96-000009.hdr.sgml : 19960613 ACCESSION NUMBER: 0000085149-96-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960427 FILED AS OF DATE: 19960611 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROSES STORES INC CENTRAL INDEX KEY: 0000085149 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 560382475 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00631 FILM NUMBER: 96579399 BUSINESS ADDRESS: STREET 1: PO DRAWER 947 STREET 2: 218 S GARNETT ST CITY: HENDERSON STATE: NC ZIP: 27536 BUSINESS PHONE: 9194302600 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 27, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-631 ROSE'S STORES, INC. Incorporated Under the Laws of Delaware I.R.S. Employer Identification No. 56-0382475 P. H. Rose Building 218 South Garnett Street Henderson, North Carolina 27536 Telephone No. 919/430-2600 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of May 30, 1996, of the 10,000,000 shares of common stock delivered to First Union National Bank of North Carolina as Escrow Agent pursuant to the Modified and Restated First Amended Joint Plan of Reorganization, 8,233,951 of such shares of common stock are outstanding. The remaining 789,139 shares held in escrow will be distributed by FUNB in satisfaction of disputed Class 3 claims as and when such claims are resolved. If all pending claims are resolved adversely to the Company, approximately 8,754,096 shares of common stock will be outstanding. If all pending claims are resolved in accordance with the Company's records, approximately 8,607,601 shares of common stock will be outstanding. The foregoing estimates do not include any additional shares that may be issued with respect to late-filed claims which the Bankruptcy Court may allow which have not been filed as of the date hereof or the effect of negotiated settlements made for amounts in excess of amounts shown in the Company's records. To the extent that escrowed shares of common stock are not used to satisfy claims, they will revert to the Company and will be retired or held in the treasury of the Company. PAGE ROSE'S STORES, INC. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Amounts in thousands except per share amounts) The following summary of financial information of Rose's Stores, Inc. (the "Company"), which is unaudited, reflects all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the information presented. Beginning in May 1995, the statements of operations and cash flows reflect the application of Fresh-Start accounting as described in the Company's annual report on Form 10-K, for the year ended January 27, 1996, and therefore are not comparable to the prior year. The balance sheet reflects the application of Fresh Start accounting beginning April 1995. ROSE'S STORES, INC. STATEMENTS OF OPERATIONS (Unaudited) (Amounts in Thousands Except Per Share Amounts)
For the Thirteen Weeks Ended Successor Predecessor April 27, 1996 April 29, 1995 Revenue: Gross sales $ 154,426 159,407 Leased department sales 4,281 5,117 Net sales 150,145 154,290 Leased department income 1,080 1,114 Total revenue 151,225 155,404 Costs and Expenses: Cost of sales 113,040 116,838 Selling, general and administrative 36,819 35,486 Depreciation and amortization (672) 1,812 Interest 1,386 726 Total costs and expenses 150,573 154,862 Earnings Before Reorganization Expense, Fresh-Start Revaluation, Income Taxes, and Extraordinary Item 652 542 Reorganization Expense - (3,847) Fresh-Start Revaluation - (17,432) Earnings (Loss) Before Extraordinary Item 652 (20,737) Extraordinary Item - Gain on Debt Discharge - 90,924 Net Earnings $ 652 70,187 Earnings (Loss) Per Share Before Extraordinary Item $ .07 (1.11) Net Earnings Per Share $ .07 3.74 Weighted Average Shares 8,754 18,758
See notes to financial statements PAGE ROSE'S STORES, INC. BALANCE SHEETS (Amounts in thousands)
April 27, January 27, April 29, 1996 1996 1995 (Unaudited) (Audited) (Unaudited) Assets Current Assets Cash and cash equivalents $ 578 593 622 Accounts receivable 8,679 7,209 9,235 Inventories 172,294 153,190 185,129 Other current assets 4,246 4,706 8,216 Total current assets 185,797 165,698 203,202 Property and Equipment, at cost, less accumulated depreciation and amortization 5,780 5,122 - Other Assets 961 424 - $ 192,538 171,244 203,202 Liabilities and Stockholders' Equity Current Liabilities Short-term debt $ 53,220 33,673 58,654 Bank drafts outstanding 3,926 9,530 5,762 Accounts payable 34,521 23,845 37,642 Accrued salaries and wages 4,620 7,456 5,262 Reserve for store closings 237 261 4,952 Pre-petition liabilities 4,597 4,632 4,352 Other current liabilities 11,260 11,135 12,462 Total current liabilities 112,381 90,532 129,086 Excess of Net Assets Over Reorganization Value, Net of Amortization 24,496 25,371 32,021 Reserve for Income Taxes 12,673 12,673 - Deferred Income 804 974 1,481 Other Liabilities 972 1,134 5,614 Stockholders' Equity Common stock, Authorized 50,000 shares; issued 8,234 at 4/27/96; 8,158 at 1/27/96 (Note 1) 35,000 35,000 35,000 Preferred stock, Authorized 10,000 shares; none issued - - - Paid-in capital 1,159 1,159 - Retained earnings 5,053 4,401 - Total stockholders' equity 41,212 40,560 35,000 $ 192,538 171,244 203,202
See notes to financial statements PAGE ROSE'S STORES, INC. STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
For the Thirteen Weeks Ended Successor Predecessor April 27, 1996 April 29, 1995 Cash flows from operating activities: Net earnings $ 652 70,187 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization (673) 1,812 (Gain) loss on disposal of property and equipment (2) (1) LIFO expense (credit) - (364) Fresh-Start revaluation and debt discharge - (73,492) Cash provided by (used in) assets and liabilities: (Increase) decrease in accounts receivable (1,470) (630) (Increase) decrease in inventories (19,104) (40,291) (Increase) decrease in other current and non-current assets (77) (3 620) Increase (decrease) in accounts payable 10,676 14,361 Increase (decrease) in other liabilities (2,667) (2,142) Increase (decrease) in reserve for store closings (24) (1,108) Increase (decrease) in deferred income (170) (201) Increase (decrease) in accumulated PBO (100) 7 Net cash provided by (used in) operating activities (12,959) (35,482) Cash flows from investing activities: Purchases of property and equipment (860) (510) Proceeds from disposal of property and equipment 2 5 Net cash used in investing activities (858) (505) Cash flows from financing activities: Net activity on line of credit 19,547 58,654 Net activity on debtor-in-possession facility - (600) Payments on pre-petition secured debt - (26,423) Payments of unsecured priority and administrative claims (35) (1,593) Principal payments on capital leases (106) (281) Increase (decrease) in bank drafts outstanding (5,604) 5,502 Net cash provided by (used in) financing activities 13,802 35,259 Net decrease in cash (15) (728) Cash and cash equivalents at beginning of period 593 1,350 Cash and cash equivalents at end of period $ 578 622 Supplemental disclosure of additional non-cash investing and financing activities: Retirement of net book value of assets in reserve for store closings $ - 623
See notes to financial statements PAGE Notes to Financial Statements: (1) On September 5, 1993, the Company filed a voluntary Petition for Relief under Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Eastern District of North Carolina (the "Bankruptcy Court"). The Company's Modified and Restated First Amended Joint Plan of Reorganization (the "Plan") was approved by order of the Bankruptcy Court on April 24, 1995. On April 28, 1995 (the "Effective Date"), the Plan became effective. The periods and dates prior to the Company's emergence from Chapter 11 are referred to as those of the predecessor company (the "Predecessor"), while the period and dates subsequent to its emergence are referred to as those of the successor company (the "Successor"). Since emergence, distributions of the common stock, no par value, of the Company (the "Common Stock") have been made to holders of Allowed Class 3 Unsecured Claims (as defined in the Plan) in accordance with the provisions of the Plan. As a result of distributions of the Common Stock pursuant to the Plan, as of May 30, 1996, the Company had 8,234 shares of Common Stock outstanding of the 10,000 shares of Common Stock which were delivered pursuant to the Plan on the Effective Date to First Union National Bank of North Carolina ("FUNB") as escrow agent. In addition, as of May 30, 1996, and pursuant to the provisions of the Plan, 977 shares have reverted to the Company from escrow to be retired. The remaining 789 shares held in escrow will be distributed by FUNB in satisfaction of disputed Class 3 claims as and when such claims are resolved. The disputed Class 3 claims which remained unresolved at May 30, 1996 were primarily claims of landlords with respect to leases which were rejected during the course of the Chapter 11 proceeding and general liability claims being resolved under an alternative dispute resolution program established by the Bankruptcy Court. If all pending claims are resolved adversely to the Company, approximately 520 additional shares of Common Stock will be issued and outstanding, and there will be a total of approximately 8,754 shares of Common Stock issued and outstanding. If all pending claims are resolved in accordance with the Company's records and/or position as to such claims, approximately 374 additional shares of Common Stock will be issued, and there will be a total of approximately 8,608 shares of Common Stock issued and outstanding. The foregoing estimates do not include any additional shares that may be issued with respect to late-filed claims which the Bankruptcy Court may allow which have not been filed as of the date hereof or the effect of negotiated settlements made for amounts in excess of amounts shown in the Company's records. To the extent that escrowed shares of Common Stock are not used to satisfy claims, they will revert to the Company and will be retired or held in the treasury of the Company. PAGE Notes to Financial Statements (Continued): (1) Continued On the Effective Date, all shares of the Company's pre-emergence Voting Common Stock and Non-Voting Class B Stock were cancelled and the record owners of such stock as of such date received warrants to purchase the new Common Stock of the Company. One warrant was issued for every 4.377 shares of pre-emergence Voting Common Stock or Non-Voting Class B Stock and allows the holder to purchase one share of the new Common Stock. The warrants may be exercised at any time until they expire on April 28,2002. The initial warrant exercise price of $14.45 was calculated pursuant to a formula set forth in the Plan. The exercise price was adjusted to $12.01 on April 28, 1996, the first anniversary of the Effective Date, and will be adjusted on the second and third anniversaries of the Effective Date to reflect adjustments to the total of allowed and disputed claims of the Company's unsecured creditors. The exercise price will be further adjusted on the fourth, fifth and sixth anniversaries to reflect 105%, 110% and 115%, respectively, of the total of the allowed and disputed claims of the unsecured creditors. Under the New Equity Compensation Plan, nonqualified stock options to purchase 350 shares of Common Stock were outstanding on April 27, 1996. The option price per share is $2.875 for one half of the shares and $5.750 for the remainder of the shares issuable upon the exercise of such options. The options vest over a three year period (unless earlier vested by reason of certain acceleration events, including a change of control of the Company). One half of the options expire five years from the date of issuance and the remainder seven years from the date of issuance. The exercise of outstanding stock options and warrants would not result in a dilution of earnings per share and are excluded from the calculation of earnings per share. (2) If the Company had emerged from Chapter 11 at the beginning of fiscal 1995, the application of Fresh Start accounting would have resulted in net earnings on a pro forma basis of approximately $556 for the thirteen weeks ended April 29, 1995. (3) Accounts receivable is net of an allowance for doubtful accounts of $298 as of April 27, 1996; $398 as of January 27, 1996 and $2,513 as of April 29, 1995. (4) The operating results presented herein are not necessarily indicative of the operating results for a full year due to seasonal factors, among other reasons. (5) The Fresh Start revaluation of $17,432 reflects the net expense to record assets at their fair values and liabilities at their present values in accordance with the provisions of SOP 90-7 and to reduce noncurrent assets below their fair values for the excess of the fair values of assets over the reorganization value. The extraordinary gain of $90,924 represents the Notes to Financial Statements (Continued): gain on debt discharge for liabilities subject to settlement under the Plan. (6) LIFO expense (credit) is included as an adjustment to reconcile net loss to net cash used in operating activities in the statements of cash flows because LIFO expense (credit) is a noncash item included in cost of sales to adjust inventories stated on a FIFO basis to a LIFO basis. (7) Certain information concerning benefits (expenses) resulting from the Company's reorganization are as follows:
Successor Predecessor Thirteen Thirteen Weeks Ended Weeks Ended April 27, 1996 April 29, 1995 DIP financing fees, amortization and expenses $ - (1,342) Estimated professional fees - (2,318) Other reorganization costs and expenses - (187) TOTAL REORGANIZATION EXPENSE $ - (3,847)
(8) Certain reclassifications were made to 1995 balances to conform to the 1996 presentation. These reclassifications have no effect on stockhold- ers' equity. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands) General On May 1, 1995, the Company announced that it had satisfied all conditions required under its plan of reorganization and had emerged from Chapter 11 of the United States Bankruptcy Code on April 28, 1995 (the "Effective Date"). In accordance with SOP 90-7, the Company adopted Fresh Start accounting. Under Fresh Start accounting, a new reporting entity was created, and the Company was required to adjust its assets and liabilities to reflect their estimated fair market value at the Effective Date, which reduced depreciation and amortization related to property and equipment; and created a deferred credit, excess of net assets over reorganization value, which is being amortized over 8 years. At the same time, the Company made certain reclassifications between gross mar- gin and expenses and changed the method of accruing certain expenses between periods. In addition, as a result of the Company's emergence, reorganization expense and income taxes recognized by the Company prior to April 28, 1995, are not comparable to amounts, if any, recognized subsequent to the Effective Date. To facilitate a better comparison of the Company's operating results for the periods presented, the following discussion of the results of operations is presented on a pro forma basis (as described below) for the thirteen weeks ended April 29, 1995. The historical statement of operations for the thirteen weeks ended April 29, 1995 (Predecessor) are not included in the discussion due to the lack of comparability caused by the adoption of Fresh Start accounting at the end of the first quarter of 1995. Certain items in the Successor's pro forma statement of operations are not affected by Fresh Start adjustments and are comparable to the historical results of the Predecessor. The pro forma statement of operations gives effect to the transactions occurring in conjunction with the Plan as if the Effective Date had occurred, and such transactions had been consummated, on January 29, 1995. The statement of operations has been adjusted to reflect: the reduction in depreciation and amortization expense due to the write-off of property and equipment and property under capital leases; reclassification of DIP interest from reorganization costs to interest expense; the elimination of all reorganization costs; amortization of excess net assets over reorganization value; the effects of changing to the accrual method for advertising; the reversal of LIFO credits; the accrual of additional shrinkage; and the recording of an appropriate income tax expense. Pro Forma Results of Operations (Unaudited) The following table sets forth the results of operations for the thirteen weeks ended April 27, 1996, and April 29, 1995: (Dollar amounts in thousands, except per share amounts.) Thirteen Weeks Ended April 27, April 29, 1996 1995 Historical Pro Forma Revenue: Gross sales $ 154,426 159,407(a) Leased department sales 4,281 5,117(a) Net sales 150,145 154,290(a) Leased department income 1,080 1,114(a) Total revenue 151,225 155,404(a) Costs and Expenses: Cost of sales 113,040 115,607 Selling, general and administrative 36,819 38,005 Depreciation and amortization (672) (800) Interest 1,386 1,696 Total costs and expenses 150,573 154,508 Earnings Before Income Taxes 652 896 Income taxes - 340 Net Earnings 652 556 Earnings Per Share 0.07(b) 0.06(b) Weighted Average Shares 8,754(b) 8,754(b) (a) The pro forma amounts represent the Predecessor's historical amounts. See statements of operations included in the historical financial statements. PAGE (b) The number of shares used in the earnings (loss) per share calculations is 8,754, the number of shares that will be issued and outstanding if all pending claims are resolved adversely to the Company. If all pending claims are resolved in accordance with the Company's records, 8,608 shares will be issued and outstanding. Currently, 8,234 shares are outstanding. The foregoing estimates do not include any additional shares that may be issued with respect to late-filed claims which the Bankruptcy Court may allow which have not been filed as of the date hereof or the effect of negotiated settlements made for amounts in excess of amounts shown in the Company's records. To the extent that escrowed shares of Common Stock are not used to satisfy claims, they will revert to the Company and will be retired or held in the treasury of the Company. Revenue The Company reported sales for the first quarter of 1996 of $154,426, a decrease of $4,981, or 3.1%, from the first quarter of 1995. The decline in sales was primarily attributable to a decline in sales on a comparable store basis of 2.2%, together with the decrease in the number of stores (105 in 1996 as compar- ed to 106 in 1995). Costs and Expenses Cost of sales as a percent of net sales was 75.3% for the first quarter and 74.9% (pro forma) for the comparable period of the prior year. Cost of sales increased .8% for the quarter due to an increase in markdowns, increased .1% for the quarter due to higher freight costs as a percent of sales, and increased .1% by a decrease in cash discounts. These increases were offset somewhat by an increase in the markon percent resulting in a decrease of .5% in cost of sales; and an increase in co-op income resulting in a decrease of .2% in cost of sales. Selling, general and administrative expenses (SG&A) as a percent of net sales for the first quarter were 24.5% in 1996 and 24.6% (pro forma) for the compara- ble quarter of the prior year. The decrease was due in part to additional realignment of corporate and administrative costs during the first quarter of 1996. On a pro forma basis, reorganization costs for 1995 would not have been incurr- ed. The actual reorganization costs in the first quarter of $3,847 included professional fees, DIP fees and expense amortizations, and other expenditures related to the Chapter 11 filing. No reorganization costs were incurred subsequent to the first quarter of 1995. The fresh start revaluation of $17,432 reflected the net expense to record assets at their fair values and liabilities at their present values in accord- ance with the provisions of SOP 90-7 and to reduce noncurrent assets below their fair values for the excess of the fair values of assets over the reorganization value. The extraordinary gain of $90,924 represents the gain on debt discharge for liabilities subject to settlement under reorganization proceedings. PAGE Liquidity and Capital Resources On May 23, 1996, the Company closed on a new financing loan with Foothill Capital, Inc. and PPM Finance, Inc. as co-agents. The financing is a $120,000 three-year revolving credit facility (the "Credit Facility") with a letter of credit sublimit in the aggregate principal amount of $40,000. The Credit Facility is secured by a perfected first priority lien and security interest in all of the assets of the Company and replaced the Company's former revolving credit agreement which would have expired in two years. As a result of closing the Credit Facility, approximately $915 of prepaid bank fees related to the former financing agreement will be written off in the second quarter of 1996. The interest rate on the direct borrowings under the Credit Facility is prime rate plus 1.375%, with a minimum rate of 7% payable monthly. The fee on outstanding letters of credit is 1.5% payable monthly. Although there are no compensating balances required, the Company is required to pay a fee of .375% per annum on the average unused portion of the Credit Facility. Borrowing availability is based upon certain eligible inventory times a borrowing base percentage that varies by month. Under the Credit Facility, the trade suppliers which extend credit to the Company will continue to be supported by a $5,000 letter of credit and subordinated lien of $15,000 in the real estate properties of the Company which expire April 29, 1997. The Credit Facility includes certain financial covenants and financial maintenance tests, including those related to minimum working capital and cur- rent ratios, capital expenditures limitations, maximum total liabilities to tangible net worth, and minimum tangible net worth which are measured quarterly. In addition, there is a requirement that cumulative net losses after May 31, 1996 shall not exceed $10,000. The Credit Facility also includes restrictions on the incurrence of additional liens and indebtedness, a prohibition on paying dividends, and, except under certain conditions, prepayment penalties. There are provisions which adapt the Credit Facility to the proposed merger with Fred's, Inc. described below. As of June 1, 1996, under the Credit Facility, the Company had $56,680 outstanding in short-term borrowings, $13,392 in outstanding letters of credit and unused availability of $22,758. The Company invested $860 in cash for property and equipment in the first quart- er of 1996 compared to $510 invested in the first quarter of 1995. The 1996 expenditures were primarily for store remodels and new computer software. The 1995 expenditures were primarily for store improvements, new softline fixturing, and new computer software. Cash used in operating activities, primarily to fund inventory levels, was $12,959 in the first quarter of 1996, and $35,482 in the comparable period last year. PAGE Subsequent Event On May 7, 1996, the Company and Fred's Inc. ("Fred's") executed a definitive merger agreement providing for the acquisition of the Company by Fred's (the "Merger"). Fred's is a publicly traded retailer that operates approximately 200 stores in the southeastern United States. The merger agreement provides that each share of the Company's Common Stock, issued and outstanding (including common stock held in escrow in accordance with the Plan) immediately prior to the effective time of the Merger (other than the shares held in the treasury of the Company, which will be canceled) will be converted into the "Conversion Num- ber" of shares of Fred's class A voting common stock ("Fred's Common Stock"). The "Conversion Number" will be determined by dividing $2.15 by the "Fred's Av- erage Price". The "Fred's Average Price" is an amount equal to the average price of a share of Fred's Common Stock for the 10 days immediately preceding the day before the printing of the joint proxy statement to be distributed to stockholders of Fred's and the Company in connection with the Merger. The Merger is subject to the approval of the stockholders of the Company and Fred's and to the satisfaction or, where permissible, the waiver of certain other conditions. PAGE PART II. OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K (a) 10.1 Agreement and Plan of Merger dated as of May 7, 1996, by and among Fred's Inc., FR Acquisition Corp. and the Registrant. 10.2 Loan and Security Agreement among the Registrant, as Borrower, the Financial Institutions as listed on the signature pages, as the Lenders, PPM Finance, Inc., as Co- Agent, and Foothill Capital Corporation, as Agent, dated as of May 21, 1996. 10.3 Deed of Trust, Assignment of Rents and Security Agreement for the headquarters property, dated as of May 21, 1996, by and among Registrant, Foothill Capital Corporation, and David L. Huffstetler, pursuant to the Loan and Security Agreement. 10.4 Deed of Trust, Assignment of Rents and Security Agreement for the warehouse property, dated as of May 21, 1996, by and among Registrant, Foothill Capital Corporation, and David L. Huffstetler, pursuant to the Loan and Security Agreement. 10.5 Subordination Agreement dated as of May 21, 1996, among Registrant, Foothill Capital Corporation, M.J. Sherman & Associates, Inc., and Alan H. Peterson. 10.6 Intellectual Property Security Agreement dated as of May 21, 1996, among Registrant and Foothill Capital Corporation, pursuant to the Loan and Security Agreement. (b) The Company filed the following reports on Form 8-K during the quarter covered by this report: (i) Report on Form 8-K dated December 30, 1995, reporting under Item 5 the monthly and year- to-date financial results and other financial data for the period ended December 30, 1995, together with projected financial information for similar periods as contained in the Company's revised plan for the year ended January 27, 1996. The financial results were included as an exhibit in Item 7. (ii) Report on Form 8-K dated March 1, 1996, reporting under Item 5 the agreement in principle regarding the acquisition by merger of Rose's by Fred's. (iii) Report on Form 8-K dated April 28, 1996, reporting under Item 5 the adjustment of the exercise price of the New Rose's Warrants. (iv) Report on Form 8-K dated May 8, 1996, reporting under Item 5 the definitive merger agreement regarding the acquisition of Rose's by Fred's. PAGE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROSE'S STORES, INC. Date: June 11, 1996 By /s/ R. Edward Anderson R. Edward Anderson President, Chief Executive Officer Date: June 11, 1996 By /s/ Jeanette R. Peters Jeanette R. Peters Senior Vice President, Chief Financial Officer EX-10.1 2 AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 7, 1996 BY AND AMONG FRED'S, INC., FR ACQUISITION CORP. AND ROSE'S STORES, INC. ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . .1 Section 1.1 The Merger . . . . . . . . . . . . . . . . . .1 Section 1.2 Effective Time . . . . . . . . . . . . . . . .1 Section 1.3 Effects of the Merger. . . . . . . . . . . . .1 Section 1.4 Charter and By-laws. . . . . . . . . . . . . .1 Section 1.5 Conversion of Securities . . . . . . . . . . .1 Section 1.6 Fred's to Make Certificates Available. . . . .3 Section 1.7 Dividends; Transfer Taxes; Withholding . . . .3 Section 1.8 No Fractional Securities . . . . . . . . . . .4 Section 1.9 Return of Exchange Fund. . . . . . . . . . . .4 Section 1.10 Adjustment of Conversion Number . . . . . . .5 Section 1.11 No Further Ownership Rights in Rose's Common Stock. . . . . . . . . . . . . . . . . . . . . . . . .5 Section 1.12 Closing of Rose's Transfer Books. . . . . . .5 Section 1.13 Lost Certificates . . . . . . . . . . . . . .5 Section 1.14 Affiliates. . . . . . . . . . . . . . . . . .5 Section 1.15 Dissenters' Rights. . . . . . . . . . . . . .5 Section 1.16 Further Assurances. . . . . . . . . . . . . .6 Section 1.17 Closing . . . . . . . . . . . . . . . . . . .6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF FRED'S AND SUB . . .6 Section 2.1 Organization, Standing and Power . . . . . . .6 Section 2.2 Capital Structure. . . . . . . . . . . . . . .7 Section 2.3 Authority. . . . . . . . . . . . . . . . . . .7 Section 2.4 Consents and Approvals; No Violation . . . . .8 Section 2.5 SEC Documents and Other Reports. . . . . . . .8 Section 2.6 Registration Statement and Joint Proxy Statement. . . . . . . . . . . . . . . . . . .9 Section 2.7 Absence of Certain Changes or Events . . . . .9 Section 2.8 Permits and Compliance . . . . . . . . . . . 10 Section 2.9 Tax Matters. . . . . . . . . . . . . . . . . 10 Section 2.10 Actions and Proceedings . . . . . . . . . . 10 Section 2.11 Certain Agreements. . . . . . . . . . . . . 11 Section 2.12 ERISA . . . . . . . . . . . . . . . . . . . 11 Section 2.13 Compliance with Certain Laws. . . . . . . . 12 Section 2.14 Liabilities . . . . . . . . . . . . . . . . 12 Section 2.15 Labor Matters . . . . . . . . . . . . . . . 12 Section 2.16 Intellectual Property . . . . . . . . . . . 12 Section 2.17 Reorganization. . . . . . . . . . . . . . . 13 Section 2.18 Required Vote of Fred's Stockholders. . . . 13 Section 2.19 Ownership of Shares . . . . . . . . . . . . 13 Section 2.20 Operations of Sub . . . . . . . . . . . . . 13 Section 2.21 Brokers . . . . . . . . . . . . . . . . . . 13 Section 2.22 Disclosure. . . . . . . . . . . . . . . . . 13 Section 2.23 Opinion of Investment banker. . . . . . . . 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ROSE'S . . . . . . 14 Section 3.1 Organization, Standing and Power . . . . . . 14 Section 3.2 Capital Structure. . . . . . . . . . . . . . 14 Section 3.3 Authority. . . . . . . . . . . . . . . . . . 14 Section 3.4 Consents and Approvals; No Violation . . . . 15 Section 3.5 SEC Documents and Other Reports. . . . . . . 15 Section 3.6 Registration Statement and Joint Proxy Statement. . . . . . . . . . . . . . . . . . 16 Section 3.7 Absence of Certain Changes or Events . . . . 16 Section 3.8 Permits and Compliance . . . . . . . . . . . 17 Section 3.9 Tax Matters. . . . . . . . . . . . . . . . . 18 Section 3.10 Actions and Proceedings . . . . . . . . . . 18 Section 3.11 Certain Agreements. . . . . . . . . . . . . 18 Section 3.12 ERISA . . . . . . . . . . . . . . . . . . . 18 Section 3.13 Compliance with Certain Laws. . . . . . . . 19 Section 3.14 Liabilities . . . . . . . . . . . . . . . . 19 Section 3.15 Labor Matters . . . . . . . . . . . . . . . 20 Section 3.16 Intellectual Property . . . . . . . . . . . 20 Section 3.17 State Takeover Statutes . . . . . . . . . . 20 Section 3.18 Required Vote of Rose's Stockholders. . . . 20 Section 3.19 Reorganization. . . . . . . . . . . . . . . 20 Section 3.20 Brokers . . . . . . . . . . . . . . . . . . 20 Section 3.21 Disclosure. . . . . . . . . . . . . . . . . 20 Section 3.22 Opinion of Investment Banker. . . . . . . . 21 ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS . . . . . . 21 Section 4.1 Conduct of Business Pending the Merger . . . 21 Section 4.2 No Solicitation. . . . . . . . . . . . . . . 24 Section 4.3 Third Party Standstill Agreements. . . . . . 25 Section 4.4 Reorganization . . . . . . . . . . . . . . . 25 ARTICLE V ADDITIONAL AGREEMENT'S . . . . . . . . . . . . . . . . 25 Section 5.1 Stockholder Meetings . . . . . . . . . . . . 25 Section 5.2 Preparation of the Registration Statement and the Joint Proxy Statement. . . . . . . . . . . . . . . . 25 Section 5.3 Access to Information. . . . . . . . . . . . 26 Section 5.4 Compliance with the Securities Act . . . . . 27 Section 5.5 NASDAQ Listing . . . . . . . . . . . . . . . 27 Section 5.6 Fees and Expenses. . . . . . . . . . . . . . 27 Section 5.7 Rose's Stock Options; Rose's Warrants. . . . 29 Section 5.8 Reasonable Best Efforts. . . . . . . . . . . 29 Section 5.9 Public Announcements . . . . . . . . . . . . 30 Section 5.10 Real Estate Transfer and Gains Tax. . . . . 30 Section 5.11 State Takeover Laws . . . . . . . . . . . . 30 Section 5.12 Notification of Certain Matters . . . . . . 30 Section 5.13 Directors and Officers. . . . . . . . . . . 31 Section 5.14 Executive and Employee Agreements . . . . . 31 Section 5.15 Designation of Director. . . . . . . . . . . . . 31 Section 5.16 Indemnification . . . . . . . . . . . . . . 31 Section 5.17 Lending and Credit Arrangements . . . . . . 31 Section 5.18 Tax Representations . . . . . . . . . . . . 32 Section 5.19 Reverse Stock Split . . . . . . . . . . . . 32 ARTICLE VI CONDITIONS PRECEDENT TO THE MERGER . . . . . . . . . 32 Section 6.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . . . . . . . . . . . . . . . . . 32 Section 6.2 Conditions to Obligation of Rose's to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . 33 Section 6.3 Conditions to Obligations of Fred's and Sub to Effect the Merger. . . . . . . . . . . . . . . . . . 34 ARTICLE VII TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . 36 Section 7.1 Termination. . . . . . . . . . . . . . . . . 36 Section 7.2 Effect of Termination. . . . . . . . . . . . 37 ARTICLE VIII GENERAL PROVISIONS . . . . . . . . . . . . . . . . 37 Section 8.1 Non-Survival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . 37 Section 8.2 Notices. . . . . . . . . . . . . . . . . . . 38 Section 8.3 Interpretation . . . . . . . . . . . . . . . 38 Section 8.4 Counterparts . . . . . . . . . . . . . . . . 38 Section 8.5 Entire Agreement; No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . . 38 Section 8.6 Governing Law. . . . . . . . . . . . . . . . 39 Section 8.7 Assignment . . . . . . . . . . . . . . . . . 39 Section 8.8 Severability . . . . . . . . . . . . . . . . 39 Section 8.9 Enforcement of this Agreement. . . . . . . . 39 Section 8.10 Amendment . . . . . . . . . . . . . . . . . 39 Section 8.11 Waiver. . . . . . . . . . . . . . . . . . . 39 TABLE OF DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 39 PAGE AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of May 7, 1996 (this "Agreement"), among FRED'S, INC., a Tennessee corporation ("Fred's"), FR ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of Fred's ("Sub"), and ROSE'S, INC., a Delaware corporation ("Rose's") (Sub and Rose's being hereinafter collectively referred to as the "Constituent Corporations"). RECITALS A. The respective Boards of Directors of Fred's, Sub and Rose's have approved and declared advisable the merger of Sub and Rose's (the "Merger"), upon the terms and subject to the conditions set forth herein, whereby each issued and outstanding share of Common Stock, no par value, of Rose's ("Rose's Common Stock") not owned directly or indirectly by Fred's or Rose's will be converted into shares of Class A Voting Common Stock, no par value, of Fred's ("Fred's Common Stock"); B. The respective Boards of Directors of Fred's and Rose's have determined that the Merger is in the best interests of their respective stockholders (the holders of Rose's Common Stock, the "Rose's Stockholders"); and C. For federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the premises, representations, warranties and agreements herein contained, the parties agree as follows: ARTICLE I THE MERGER Section 1.1 The Merger. Upon the terms and subject to the conditions hereof and in accordance with the Delaware General Corporation Law (the "Del.C."), Sub shall be merged with and into Rose's at the Effective Time (as defined herein). Following the Merger, the separate corporate existence of Sub shall cease and Rose's shall continue as the surviving corporation (the "Surviving Corporation") and shall succeed to and assume all the rights and obligations of Sub in accordance with the Del.C. Section 1.2 Effective Time. The Merger shall become effective when a Certificate of Merger (the "Certificate of Merger"), executed in accordance with the relevant provisions of the Del.C., is filed with the Secretary of State of the State of Delaware; provided, however, that, upon mutual consent of the Constituent Corporations, the Certificate of Merger may provide for a later date of effectiveness of the Merger not more than 30 days after the date the Certificate of Merger is filed. When used in this Agreement, the term "Effective Time" shall mean the later of the date and time at which the Certificate of Merger is filed or such later time established by the Certificate of Merger. The filing of the Certificate of Merger shall be made on the date of the Closing (as defined in Section 1.17), or as promptly thereafter as practicable. Section 1.3 Effects of the Merger. The Merger shall have the effects set forth in the Del.C. Section 1.4 Charter and By-laws. At the Effective Time, the Certificate of Incorporation and Bylaws of Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation and Bylaws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. Section 1.5 Conversion of Securities. As of the Effective Time, by virtue of the Merger and without any action on the part of Sub, Rose's or the holders of any securities of the Constituent Corporations: (a) Each issued and outstanding share of common stock, no par value per share, of Sub shall be converted into one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. (b) (i) Subject to the provisions of Sections 1.10 and 5.19 hereof, each whole share of Rose's Common Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance with Section 1.5(c) and other than Dissenting Shares (as defined herein)) shall be converted into and become, by virtue of the Merger, automatically and without any action on the part of Rose's Stockholders, the Conversion Number (as defined herein) of validly issued, fully paid and nonassessable shares of Fred's Common Stock. All shares of Rose's Common Stock, when so converted into shares of Fred's Common Stock pursuant to this Section 1.5(b)(i) or the right to receive cash pursuant to Section 1.8 or 5.19, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a certificate formerly representing any such shares shall cease to have any rights with respect thereto, except (x) in the case of the shares converted into Fred's Common Stock pursuant to this Section 1(b)(i), the right to receive any dividends and other distributions in accordance with Section 1.7, and certificates representing the shares of Fred's Common Stock into which such shares are converted, (y) any cash, without interest, in lieu of fractional shares of Fred's Common Stock to be issued or paid in consideration therefor pursuant to Section 1.8, and (z), in the case of the fractional shares of Rose's Common Stock, the right to receive cash pursuant to Section 5.19, in each case, upon the surrender of such certificate in accordance with Section 1.6. Each certificate shall, from and after the Effective Time until surrendered in exchange for Fred's Common Stock, for all purposes be deemed to represent (A) the number of shares of Fred's Common Stock calculated by taking the number of shares represented by the certificate times the Conversion Number (in the case of whole shares of Rose's Common Stock so converted pursuant to this Section 1(b)(i)) or (B) the right to receive cash to which the holder is entitled pursuant to Section 1.8 or 5.19. No Dissenting Shares shall be converted into or represent a right to receive Fred's Common Stock under this Section 1.5 or cash pursuant to Section 1.8 or 5.19, but such Dissenting Shares shall be subject to the provisions of Section 1.15. (ii) The shares of Rose's Common Stock (the "Escrow Shares") held in escrow at the Effective Date by First Union National Bank of North Carolina ("FUNB") as Escrow Agent pursuant to the Modified and First Restated Amended Joint Plan of Reorganization confirmed by order of the United States Bankruptcy Court for the Eastern District of North Carolina dated December 14, 1994 and April 24, 1995 (the "Plan of Reorganization"), shall be converted into shares of Fred's Common Stock as provided in Section 1(b)(i) or the right to receive cash as provided in Section 1.8 or 5.19, and shall be subject to (x) distribution in accordance with the Plan of Reorganization or (y) return to the Surviving Corporation also in accordance with the Plan of Reorganization. (iii) The "Conversion Number" shall be determined by dividing $2.15 by the Fred's Average Price (as defined herein). The "Fred's Average Price" shall mean an amount equal to the average of the daily high and low prices for a share of Fred's Stock on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), as printed in The Wall Street Journal, for the 10 days during which Fred's Common Stock was actually traded immediately preceding the day before the printing of the Joint Proxy Statement (as defined herein). (c) All shares of Rose's Common Stock that are held in the treasury of Rose's or by any Subsidiary (as defined herein) of Rose's shall be canceled at the Effective Time, and no capital stock of Fred's or other consideration shall be delivered in exchange therefor. (d) Without any further action on the part of the holders thereof, each unexpired and unexercised right to purchase shares of Rose's Common Stock under any (i) option (a "Rose's Stock Option") under Rose's Stock Option Plan (as defined herein) and (ii) warrant (a "Rose's Warrant") issued pursuant to the Plan of Reorganization, will be assumed by Fred's as hereinafter provided. At the Effective Time, by virtue of the Merger and without any further action on the part of Fred's, Sub, Rose's or the holder thereof, each Rose's Stock Option and each Rose's Warrant will be automatically converted into an option (a "Fred's Stock Option") or a warrant (a "Fred's Warrant"), respectively, to purchase a number of shares of Fred's Common Stock equal to the number of shares of Rose's Common Stock that could have been purchased under such Rose's Stock Option or Rose's Warrant multiplied by the Conversion Number, at a price per share of Fred's Common Stock equal to the per share exercise price specified in the Rose's Stock Option or Rose's Warrant, divided by the Conversion Number. Such Fred's Stock Option and Fred's Warrant shall otherwise be subject to the same terms and conditions as such Rose's Stock Option or Rose's Warrant, except that at the Effective Time, (i) all references in the Rose's Stock Option Plan (as defined herein), the applicable stock option or other awards agreements issued thereunder and in any other Rose's Stock Options and in all Rose's Warrants and documents relating thereto to Rose's shall be deemed to refer to Fred's; (ii) Fred's shall assume the Rose's Stock Options Plans and all of Rose's obligations with respect to the Rose's Stock Options; (iii) Fred's shall assume all of Rose's obligations with respect to the Rose's Warrants under the agreements relating thereto; and (iv) Fred's shall issue to each holder of any outstanding Rose's Stock Option or Rose' Warrant a document evidencing the foregoing assumption by Fred's. It is the intention of the parties that, subject to applicable law, the Rose's Stock Options assumed by Fred's qualify, following the Effective Time, as incentive stock options, as defined in Section 422 of the Code, to the extent that the Rose's Stock Options qualified as incentive stock options prior to the Effective Time, and the adjustments referred to in this Section 1.5(d) shall be effected in a manner which is consistent with Section 424(a) of the Code. Section 1.6 Fred's to Make Certificates Available. (a) Exchange of Certificates. Fred's shall authorize Union Planters National Bank, N.A., Memphis, or some other commercial bank reasonably acceptable to Rose's (or such other person or persons as shall be acceptable to Fred's and Rose's), to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable after the Effective Time, Fred's shall deposit with the Exchange Agent in trust for the holders of shares of Rose's Common Stock converted in the Merger, certificates representing the shares of Fred's Common Stock issued pursuant to Section 1.5(b) in exchange for outstanding certificates representing shares of Rose's Common Stock and cash, as required to make payments in lieu of any fractional shares pursuant to Section 1.8 or cash payable pursuant to Section 5.19 (such cash and shares of Fred's Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions, deliver the certificates representing the Fred's Common Stock contemplated to be delivered pursuant to Section 1.5(b) out of the Exchange Fund. Except as contemplated by this Section 1.6 and Sections 1.8, 1.9 and 5.19, the Exchange Fund shall not be used for any other purpose. (b) Exchange Procedures. As soon as practicable after the Effective Time, Fred's shall cause the Exchange Agent to mail to each record holder of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Rose's Common Stock converted in the Merger (the "Certificates") a letter of transmittal (which shall be in customary form, shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon actual delivery of the Certificates to the Exchange Agent, and shall contain instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Fred's Common Stock and cash in lieu of fractional shares or cash payable pursuant to Section 5.19). Upon surrender for cancellation to the Exchange Agent of a Certificate, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Fred's Common Stock into which the shares represented by the surrendered Certificate shall have been converted at the Effective Time pursuant to this Article I, cash in lieu of any fractional share in accordance with Section 1.8, cash payable pursuant to Section 5.19 and certain dividends and other distributions in accordance with Section 1.7, and any Certificate so surrendered shall forthwith be canceled. Section 1.7 Dividends; Transfer Taxes; Withholding. No dividends or other distributions that are declared on or after the Effective Time on Fred's Common Stock, or are payable to the holders of record thereof on or after the Effective Time, will be paid to any person entitled by reason of the Merger to receive, a certificate representing Fred's Common Stock and no cash payment in lieu of fractional shares will be paid to any such person pursuant to Section 1.8 or cash payable pursuant to Section 5.19 until such person surrenders the related Certificate or Certificates, as provided in Section 1.6. Subject to the effect of applicable law, there shall be paid to each record holder of a new certificate representing such Fred's Common Stock: (i) at the time of such surrender or as promptly as practicable thereafter, the amount of any dividends or other distributions theretofore paid with respect to the shares of Fred's Common Stock represented by such new certificate and having a record date on or after the Effective Time and a payment date prior to such surrender; (ii) at the appropriate payment date or as promptly as practicable thereafter, the amount of any dividends or other distributions payable with respect to such shares of Fred's Common Stock and having a record date on or after the Effective Time but prior to such surrender and a payment date on or subsequent to such surrender; and (iii) at the time of such surrender or as promptly as practicable thereafter, the amount of any cash payable with respect to a fractional share of Fred's Common Stock to which such holder is entitled pursuant to Section 1.8. In no event shall the person entitled to receive such dividends or other distributions be entitled to receive interest on such dividends or other distributions. If any cash or certificate representing shares of Fred's Common Stock is to be paid to or issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of such exchange that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of the issuance of certificates for such shares of Fred's Common Stock in a name other than that of the registered holder of the Certificate surrendered, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Fred's or the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Rose's Common Stock such amounts as Fred's or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code or under any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Fred's or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Rose's Common Stock in respect of which such deduction and withholding was made by Fred's or the Exchange Agent. Section 1.8 No Fractional Securities. No certificates or scrip representing fractional shares of Fred's Common Stock shall be issued upon the surrender for exchange of Certificates pursuant to this Article I, and no Fred's dividend or other distribution or stock split shall relate to any fractional share, and no fractional share shall entitle the owner thereof to vote or to any other rights of a security holder of Fred's. In lieu of any such fractional share, each holder of Rose's Common Stock who otherwise would have been entitled to a fraction of a share of Fred's Common Stock upon surrender of Certificates for exchange pursuant to this Article I will be paid an amount in cash (without interest), rounded to the nearest cent determined by multiplying (i) the average of the high and low prices for a share of Fred's Common Stock on NASDAQ on the date of the Effective Time (or, if the shares of Fred's Common Stock do not trade on NASDAQ on such date, the first date of trading of shares of Fred's Common Stock on NASDAQ after the Effective Time) by (ii) the fractional interest to which such holder otherwise would be entitled. As promptly as practicable after the determination of the amount of cash, if any, to be paid to holders of fractional share interests, the Exchange Agent shall so notify Fred's, and Fred's shall deposit such amount with the Exchange Agent and shall cause the Exchange Agent to forward payments to such holders of fractional share interests subject to and in accordance with the terms of Section 1.7 and this Section 1.8. Section 1.9 Return of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the former Rose's Stockholders for one year after the Effective Time (unless required otherwise by law with respect to the Escrow Shares; in which case, until such requirement lapses or is terminated) shall be delivered to Fred's, upon demand of Fred's, and any such former stockholders who have not theretofore complied with this Article I shall thereafter look only to Fred's for payment of their claim for Fred's Common Stock, any cash in lieu of fractional shares of Fred's Common Stock and any dividends or distributions with respect to Fred's Common Stock. Neither Fred's nor the Surviving Corporation shall be liable to any former holder of Rose's Common Stock for any such shares of Fred's Common Stock, cash and dividends and distributions held in the Exchange Fund which is delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Section 1.10 Adjustment of Conversion Number. In the event of any reclassification, stock split or stock dividend with respect to Fred's Common Stock, any change or conversion of Fred's Common Stock into other securities, or any other dividend or distribution with respect to the Fred's Common Stock other than normal quarterly cash dividends as the same may be adjusted from time to time pursuant to the terms of this Agreement (or if a record date with respect to any of the foregoing should occur), and upon the Reverse Split (as herein defined), prior to the Effective Time, appropriate and proportionate adjustments, if any, shall be made to the Conversion Number, and all references to the Conversion Number in this Agreement shall be deemed to be to the Conversion Number as so adjusted. Section 1.11 No Further Ownership Rights in Rose's Common Stock. All shares of Fred's Common Stock issued pursuant to the terms hereof (including any cash paid pursuant to Section 1.8) shall be deemed to have been issued, and cash paid pursuant to Section 5.19 shall be deemed to have been paid, in full satisfaction of all rights pertaining to the shares of Rose's Common Stock represented by such Certificates. Section 1.12 Closing of Rose's Transfer Books. At the Effective Time, the stock transfer books of Rose's shall be closed and no transfer of shares of Rose's Common Stock shall thereafter be made on the records of Rose's. If, after the Effective Time, Certificates are presented to the Surviving Corporation, the Exchange Agent or Fred's, such Certificates shall be canceled and exchanged as provided in this Article I. Section 1.13 Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond, in such reasonable amount as the Surviving Corporation may direct (but consistent with the practices Fred's applies to its own stockholders), as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent (at the stockholder's expense) will issue in exchange for such lost stolen or destroyed Certificate the shares of Fred's Common Stock, any cash in lieu of fractional shares of Fred's Common Stock to which the holders thereof are entitled pursuant to Section 1.8 and any dividends or other distributions to which the holders thereof are entitled pursuant to Section 1.7 or cash payable pursuant to Section 5.19. Section 1.14 Affiliates. Certificates surrendered for exchange by any "affiliate" (as determined pursuant to Section 5.4) of Rose's for purposes of Rule 145(c) under the Securities Act of 1933, as amended (together with the rules and regulations thereunder, the "Securities Act"), shall not be exchanged until Fred's has received a written agreement from such Person as provided in Section 5.4 hereof. Section 1.15 Dissenters' Rights. (a) In accordance with Section 262 of the Del.C. ("Section 262"), no appraisal rights shall be available to holders of Rose's Common Stock converted into Fred's Common Stock in accordance with Section 1.5(b). (b) Holders of shares of Rose's Common Stock entitled to receive cash pursuant to Section 5.19 shall be entitled to appraisal rights in accordance with Section 262, and each such outstanding share of Rose's Common Stock the holder of which has timely filed with the Company a written demand for appraisal pursuant to Section 262 is herein called a "Dissenting Share". Each Dissenting Share the holder of which, at the Effective Time, has not effectively withdrawn with the consent of Rose's, if required, or become ineligible for (through failure to perfect or otherwise) his dissenter's rights under Section 262 shall not be converted into or represent the right to receive cash pursuant to Section 5.19, but the holder thereof shall be entitled only to such rights as are granted by Section 262. Each holder of Dissenting Shares who becomes entitled, pursuant to the provisions of Section 262, to receive payment for his Rose's Common Stock shall receive payment therefor from the Surviving Corporation (but only after the amount thereof shall have been agreed upon or finally determined pursuant to such provisions). (c) If any holder of Dissenting Shares shall effectively withdraw with the consent of Rose's, if required, or become ineligible for his dissenter's rights under Section 262, such Dissenting Shares shall be deemed to have been converted into and represent the right to receive, as of the later of the Effective Time or the occurrence of such event, cash in accordance with the provisions of Section 5.19 hereof. (d) Rose's shall give Fred's (i) prompt notice of any written demands for appraisal, withdrawals of demands for appraisal, and any other instruments served pursuant to Section 262 and received by Rose's and (ii) the opportunity to direct all negotiations and proceedings with respect to holders of Dissenting Shares. Rose's will not voluntarily make any payment with respect to any demands for appraisal for shares under Section 262 and will not, except with the prior written consent of Fred's, settle or offer to settle any such demands. Each holder of Dissenting Shares shall have only such rights and remedies as are granted to such a holder under Section 262. Section 1.16 Further Assurances. If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations, or (b) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either of the Constituent Corporations, all such deeds, bills of sale, assignments and assurances and to do, in the name and on the behalf of either Constituent Corporation, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation's right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of such Constituent Corporation and otherwise to carry out the purposes of this Agreement. Section 1.17 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") and all actions specified in this agreement to occur at the Closing shall take place at the offices of Waring Cox PLC, 50 north Front Street, Memphis, Tennessee, at 9:00 a.m., local time, no later than the second business day following the day on which the last of the conditions set forth in Article VI shall have been fulfilled or waived or at such other time and place as Fred's and Rose's shall agree. ARTICLE II REPRESENTATIONS AND WARRANTIES OF FRED'S AND SUB Fred's and Sub jointly and severally represent and warrant to Rose's as follows: Section 2.1 Organization, Standing and Power. Fred's is a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee, and has the requisite corporate power and authority to carry on its business as now being conducted. Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Each Subsidiary of Fred's is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has the requisite corporate power and authority to carry on its business as now being conducted, except where the failure to be so organized, existing or in good standing or to have such power or authority would not, individually or in the aggregate, have a Material Adverse Effect (as defined herein) on Fred's. Fred's and each of its Subsidiaries are duly qualified to do business, and are in good standing, in each jurisdiction where the character of their properties owned or held under lease or the nature of their activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Fred's. For purposes of this Agreement (a) "Material Adverse Change" or "Material Adverse Effect" means, when used with respect to Fred's or Rose's, as the case may be, any change or effect that is materially adverse to the business, assets, liabilities, results of operation, financial condition or prospects of Fred's and its Subsidiaries, taken as a whole, or Rose's and its Subsidiaries, taken as a whole, as the case may be, and (b) "Subsidiary" means any corporation, partnership, joint venture or other legal entity of which Fred's or Rose's, as the case may be (either alone or through or together with any other Subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation, partnership, joint venture or other legal entity. Section 2.2 Capital Structure. The authorized capital stock of Fred's consists of 30,000,000 shares of Fred's Class A Voting Common Stock, 11,500,000 shares of Class B Nonvoting Common Stock, and 10,000,000 shares of Preferred Stock (the "Fred's Preferred Stock"). There are at the date hereof (i) 9,335,239 shares of Fred's Common Stock issued and outstanding, all of which are validly issued, fully paid and nonassessable and free of preemptive rights (28,000 shares of which were issued as restricted stock awards pursuant to Fred's 1993 Long-Term Incentive Plan and are subject to certain restrictions), and (ii) 500,000 shares of Fred's Common Stock are reserved for future issuance pursuant to Fred's 1993 Long-Term Incentive Plan. No shares of Fred's Class B Nonvoting Common Stock or Preferred Stock are issued and outstanding. All of the shares of Fred's Common Stock issuable in exchange for Rose's Common Stock at the Effective Time in accordance with this Agreement will be, when so issued, duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights. As of the date of this Agreement, except for (a) this Agreement, (b) stock options covering 311,595 shares of Fred's Common Stock, and (c) restricted stock awards pursuant to Fred's 1993 Long-Term Incentive Plan for 14,000 shares of Fred's Common Stock, which shares of restricted stock have not yet been issued, there are no options, warrants, calls, rights or agreements to which Fred's or any of its Subsidiaries is a party or by which any of them is bound obligating Fred's or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Fred's or any of its Subsidiaries or obligating Fred's or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, right or agreement. Each outstanding share of capital stock of each Subsidiary of Fred's is duly authorized, validly issued, fully paid and nonassessable and, except as disclosed in the Fred's SEC Documents (as defined herein), each such share is owned by Fred's or another Subsidiary of Fred's, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on voting rights, charges and other encumbrances of any nature whatsoever. Section 2.3 Authority. The respective Boards of Directors of Fred's and Sub have on or prior to the date of this Agreement declared the Merger advisable (subject to the satisfaction of the conditions to Closing contained herein, including receipt by Fred's of the fairness opinion of its investment banker) and approved this Agreement in accordance with applicable law. Each of Fred's and Sub has all requisite corporate power and authority to enter into this Agreement and, subject to approval by the stockholders of Fred's (the "Fred's Stockholders") of this Agreement, the issuance of Fred's Common Stock in connection with the Merger (the "Share Issuance"), and the amendment of Fred's 1993 Long-Term Incentive Plan to increase the number of authorized shares (collectively, the "Fred's Stockholders' Approvals"), to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Fred's and Sub and the consummation by Fred's and Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Fred's and Sub, subject to (x) approval by the Fred's Stockholders and (y) the filing of a Certificate of Merger as required by the Del.C. This Agreement has been duly executed and delivered by Fred's and Sub and (assuming the valid authorization, execution and delivery of this Agreement by Rose's) this Agreement constitutes the valid and binding obligation of Fred's and Sub enforceable against each of them in accordance with its terms. The Share Issuance and the filing of a registration statement on Form S-4 (or other appropriate form) with the Securities and Exchange Commission (the "SEC") by Fred's under the Securities Act, for the purpose of registering the shares of Fred's Common Stock to be issued in the Merger (including the Anderson Shares, as defined herein, and the shares issuable upon exercise of the Rose's Warrants and the Rose's Stock Options to be assumed by Fred's pursuant to Section 1.5) (together with any amendments or supplements thereto, whether prior to or after the effective date thereof, the "Registration Statement") have been duly authorized by Fred's Board of Directors. The Fred's Common Stock to be issued in the Merger (including the Anderson Shares, and the shares issuable upon exercise of the Rose's Warrants and the Rose's Stock Options to be assumed by Fred's pursuant to Section 1.5), when issued, will be registered under the Securities Act and the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act") and registered or exempt from registration under any applicable state securities or "blue sky" laws ("Blue Sky Laws"). Section 2.4 Consents and Approvals; No Violation. Assuming that all consents, approvals, authorizations and other actions described in the second sentence of this Section 2.4 have been obtained and all filings and obligations described in this Section 2.4 have been made, and subject to Section 5.17, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, result in any violation of, or default (with or without notice or lapse of time, or both) under, or give to others a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Fred's or any of its Subsidiaries under, any provision of (i) the Charter or By-laws of Fred's, (ii) any provision of the comparable charter or organization documents of any of Fred's Subsidiaries, (iii) any loan or credit agreement note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Fred's or any of its Subsidiaries or (iv) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Fred's or any of its Subsidiaries or any of their respective properties or assets, other than, in the case of clauses (ii), (iii) or (iv), any such violations, defaults, rights, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on Fred's, or prevent or materially delay the consummation of any of the transactions contemplated hereby. No filing or registration with, or authorization, consent or approval of, any domestic (federal and state), foreign or supranational court, commission, governmental body, regulatory agency, authority or tribunal (a "Governmental Entity") is required by or with respect to Fred's or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Fred's or Sub or is necessary for the consummation of the Merger and the other transactions contemplated by this Agreement, except for (i) in connection, or in compliance, with the provisions of the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act and the Exchange Act, (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which Rose's or any of its Subsidiaries is qualified to do business, (iii) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Merger or by the transactions contemplated by this Agreement, (iv) such filings, authorizations, orders and approvals as may be required by state takeover laws (the "State Takeover Approvals"), (v) such filings as may be required in connection with the taxes described in Section 5.10, (vi) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the laws of any foreign country in which Rose's or any of its Subsidiaries conducts any business or owns any property or assets, (vii) such filings and consents as may be required under any state or foreign laws pertaining to debt collection, the issuance of payment instruments or money transmission, (viii) applicable requirements, if any, of Blue Sky Laws and NASDAQ, and (ix) such other consents, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on Fred's, or prevent or materially delay the consummation of any of the transactions contemplated hereby. Section 2.5 SEC Documents and Other Reports. Fred's has filed all required documents with the SEC since January 1, 1993 (including the Fred's Annual Report, as defined herein, the "Fred's SEC Documents"). As of their respective dates, the Fred's SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be and, at the respective times they were filed, none of the Fred's SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements (including, in each case, any notes thereto) of Fred's included in the Fred's SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles ("GAAP") (except, in the case of the unaudited statements, as permitted by the Securities Act or the Exchange Act) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly presented in all material respects the consolidated financial position of Fred's and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of their operations and their consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to any other adjustments described therein and normal year-end audit adjustments). Except as disclosed in the Fred's SEC Documents or as required by GAAP, Fred's has not since January 28, 1995, made any change in the accounting practices or policies applied in the preparation of financial statements. As used herein, the term "Fred's Annual Report" refers to Fred's Annual Report on Form 10-K most recently filed with the SEC. As to Fred's SEC Documents and financial statements filed or to be filed with the SEC, all representations and warranties of Fred's in this Agreement relating to such as have been filed prior to the date hereof (i.e., as to periods already ended) are hereby made by Fred's as to all such SEC Documents to be filed on or after the date hereof (i.e., as to periods subsequent to the periods reflected in the documents already filed) as of the date such documents are filed in the future. Section 2.6 Registration Statement and Joint Proxy Statement. None of the information to be supplied by Fred's or Sub for inclusion or incorporation by reference in the Registration Statement or the joint proxy statement/prospectus included therein (together with any amendments or supplements thereto, the "Joint Proxy Statement") relating to the Stockholder Meetings (as defined in Section 5.1) will (i) in the case of the Registration Statement, at the time it becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) in the case of the Joint Proxy Statement, at the time of the mailing of the Joint Proxy Statement, the time of each of the Stockholder Meetings and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event with respect to Fred's, its officers and directors or any of its Subsidiaries shall occur which is required to be described in the Joint Proxy Statement or the Registration Statement, such event shall be so described, and an appropriate amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the Fred's Stockholders and Rose's. The Registration Statement will comply (with respect to Fred's) as to form in all material respects with the provisions of the Securities Act, and the Joint Proxy Statement will comply (with respect to Fred's) as to form in all material respects with the provisions of the Exchange Act. Section 2.7 Absence of Certain Changes or Events. Except as disclosed in Fred's SEC Documents filed with the SEC prior to the date of this Agreement, since January 28, 1995, (A) Fred's and its Subsidiaries have not incurred any material liability or obligation (indirect, direct or contingent), or entered into any material oral or written agreement or other transaction, that is not in the ordinary course of business or that would reasonably be foreseen to result in a Material Adverse Effect on Fred's, excluding any changes and effects resulting from changes in economic, regulatory or political conditions or changes in conditions generally applicable to the industries in which Fred's and Subsidiaries of Fred's are involved and except for any such changes or effects resulting from this Agreement the transactions contemplated hereby or the announcement thereof; (B) Fred's and its Subsidiaries have not sustained any loss or interference with their business or properties from fire, flood, windstorm, accident or other calamity (whether or not covered by insurance) that has had a Material Adverse Effect on Fred's; (C) other than any indebtedness incurred by Fred's after the date hereof as permitted by Section 4.1(a)(vi), there has been no material change in the consolidated indebtedness of Fred's and its Subsidiaries, and no dividend or distribution of any kind declared, paid or made by Fred's on any class of its stock, except for regular quarterly dividends of not more than $0.05 per share of Fred's Common Stock; and (D) there has been no event having a Material Adverse Effect on Fred's, excluding any changes and effects resulting from changes in economic, regulatory or political conditions or changes in conditions generally applicable to the industries in which Fred's and Subsidiaries of Fred's are involved and except for any such changes or effects resulting from this Agreement, the transactions contemplated hereby or the announcement thereof. Fred's has not amended since June 30, 1995 its Charter or Bylaws with respect to the indemnification of its officers and directors. Section 2.8 Permits and Compliance. Each of Fred's and its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for Fred's or any of its Subsidiaries to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Fred's Permits"), except where the failure to have any of the Fred's Permits would not, individually or in the aggregate, have a Material Adverse Effect on Fred's and, as of the date of this Agreement, no suspension or cancellation of any of the Fred's Permits is pending or, to the Knowledge of Fred's (as defined herein), threatened, except where the suspension or cancellation of any of the Fred's Permits would not, individually or in the aggregate, have a Material Adverse Effect on Fred's. Neither Fred's nor any of its Subsidiaries is in violation of (A) its charter, by-laws or other organizational documents, (B) any applicable law, ordinance, administrative or governmental rule or regulation or (C) any order, decree or judgment of any Governmental Entity having jurisdiction over Fred's or any of its Subsidiaries, except in the case of clauses (A), (B) and (C), for any violations that, individually or in the aggregate, would not have a Material Adverse Effect on Fred's. Except as disclosed in the Fred's SEC Documents filed prior to the date of this Agreement, there is no contract or agreement that is material to the business, financial condition or results of operations of Fred's and its Subsidiaries, taken as a whole. Except as set forth in the Fred's SEC Documents, prior to the date of this Agreement no event of default or event that, but for the giving of notice or the lapse of time or both, would constitute an event of default exists or, upon the consummation by Fred's of the transactions contemplated by this Agreement, will exist under any indenture, mortgage, loan agreement, note or other agreement or instrument for borrowed money, any guarantee of any agreement or instrument for borrowed money or any lease, contractual license or other agreement or instrument to which Fred's or any of its Subsidiaries is a party or by which Fred's or any such Subsidiary is bound or to which any of the properties, assets or operations of Fred's or any such Subsidiary is subject, other than any defaults that, individually or in the aggregate, would not have a Material Adverse Effect on Fred's. "Knowledge of Fred's" means the actual knowledge of the Chief Executive Officer and Chief Financial Officer of Fred's. Section 2.9 Tax Matters. Each of Fred's and its Subsidiaries has filed all Tax Returns required to have been filed (or extensions have been duly obtained) and has paid all Taxes required to have been paid by it, except where failure to file such Tax Returns or pay such Taxes would not, in the aggregate, have a Material Adverse Effect on Fred's. For purposes of this Agreement: (i) "Tax" (and, with correlative meaning, "Taxes") means any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or added minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any governmental authority and (ii) "Tax Return" means any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax. Section 2.10 Actions and Proceedings. Except as set forth in the Fred's SEC Documents, there are no outstanding orders, judgments, injunctions, awards or decrees of any Governmental Entity against or involving Fred's or any of its Subsidiaries, or against or involving any of the present or former directors, officers, employees, consultants, agents or Fred's Stockholders or any of its Subsidiaries, as such, any of its or their properties, assets or business or any Fred's Plan (as defined herein) that, individually or in the aggregate, would have a Material Adverse Effect on Fred's. As of the date of this Agreement, there are no actions, suits or claims or legal, administrative or arbitrative proceedings or investigations pending or, to the Knowledge of Fred's, threatened against or involving Fred's or any of its Subsidiaries or any of its or their present or former directors, officers, employees, consultants, agents or stockholders, as such, any of its or their properties, assets or business or any Fred's Plan that, individually or in the aggregate, are reasonably likely to have a Material Adverse Effect on Fred's. As of the date hereof there are no actions, suits, labor disputes or other litigation, legal or administrative proceedings or governmental investigations pending or, to the Knowledge of Fred's, threatened against or affecting Fred's or any of its Subsidiaries or any of its or their present or former officers, directors, employees, consultants, agents or stockholders, as such, or any of its or their properties, assets or business relating to the transactions contemplated by this Agreement. Section 2.11 Certain Agreements. As of the date of this Agreement, neither Fred's nor any of its Subsidiaries is a party to any oral or written benefits agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. Section 2.12 ERISA. (a) With respect to each Fred's Plan (as defined herein), Fred's has made (or as soon as practicable will make) available to Rose's a true and correct copy (to the extent applicable) of (i) the three most recent annual reports (Form 5500) filed with the Internal Revenue Service (the "IRS"), (ii) such Fred's Plan, (iii) each trust agreement, insurance contract or administration agreement relating to such Fred's Plan, (iv) the most recent summary plan description of each Fred's Plan for which a summary plan description is required and (v) the most recent determination letter, if any, issued by the IRS with respect to any Fred's Plan intended to be qualified under section 401(a) of the Code. Except as would not have a Material Adverse Effect on Fred's and except as set forth on Schedule 2.12(a), each Fred's Plan complies in all material respects with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code and all other applicable statutes and governmental rules and regulations, including but not limited to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and (i) neither Fred's nor any of its ERISA Affiliates is or, within the past six years has been, a contributing employer to a Fred's Multiemployer Plan (as defined herein), (ii) no Fred's Plan is, or has ever been, subject to Title IV of ERISA, and (iii) Fred's and its ERISA Affiliates have complied in all material respects with the continued medical coverage requirements of COBRA. (b) With respect to Fred's Plans, no event has occurred in connection with which Fred's or any of its ERISA Affiliates would be subject to any liability under the terms of such Fred's Plans, ERISA, the Code or any other applicable law which would have a Material Adverse Effect on Fred's. All Fred's Plans that are intended to be qualified under Section 401(a) of the Code have been determined by the Internal Revenue Service to be so qualified, or a timely application (under Revenue Procedure 93-39 or any subsequent Revenue Procedure with respect to ruling and determination letters) for such determination is now pending, and to the Knowledge of Fred's, no event has occurred and no fact exists that would adversely affect such determination. Except as set forth on Schedule 2.12(b) or as disclosed in Fred's SEC Documents, neither Fred's nor any of its ERISA Affiliates has any liability or obligation under any welfare plan to provide benefits after termination of employment to any employee or dependent other than as required by ERISA or as disclosed in Fred's Annual Report. As used herein, (i) "Fred's Plan" means a "pension plan" (as defined in Section 3(2) of ERISA (other than a Fred's Multiemployer Plan)) or a "welfare plan" (as defined in Section 3(1) of ERISA) established or maintained by Fred's or any of its ERISA Affiliates or as to which Fred's or any of its ERISA Affiliates has contributed or otherwise may have any liability, (ii) "Fred's Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Fred's or any of its ERISA Affiliates is or has been obligated to contribute or otherwise may have any liability, and (iii) with respect to any person, "ERISA Affiliate" means any trade or business (whether or not incorporated) which is under common control or would be considered a single employer with such person pursuant to Section 414(b), (c), (m) or (o) of the Code and the regulations promulgated under those sections or pursuant to Section 4001(b) of ERISA and the regulations promulgated thereunder. (c) A copy of each bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, employment, termination, severance, compensation, medical, health or other plan, agreement, policy or arrangement that covers employees, directors, former employees or former directors of Fred's and its Subsidiaries (the "Compensation and Benefit Plans") and any trust agreements or insurance contracts forming a part of such Compensation and Benefit Plans has been provided or made available to Rose's prior to the date hereof. Fred's has no current plans to modify or terminate any of the Compensation and Benefit Plans, except as set forth on Schedule 2.12(c); the effect of any such modification or termination is also set forth on Schedule 2.12(c). Section 2.13 Compliance with Certain Laws. The properties, assets and operations of Fred's and its Subsidiaries are in compliance in all material respects with all applicable federal, state, local and foreign laws, rules and regulations, orders, decrees, judgments, permits and licenses relating to public and worker health and safety (collectively, "Worker Safety Laws") and the protection and clean-up of the environment and activities or conditions related thereto, including, without limitation, those relating to the generation, handling, disposal, transportation or release of hazardous materials (collectively, "Environmental laws"), except for any violations that, individually or in the aggregate, would not have a Material Adverse Effect on Fred's. With respect to such properties, assets and operations, including any previously owned, leased or operated properties, assets or operations, there are no past, present or reasonably anticipated future events, conditions, circumstances, activities, practices, incidents, actions or plans of Fred's or any of its Subsidiaries that may interfere with or prevent compliance or continued compliance in all material respects with applicable Worker Safety Laws and Environmental Laws, other than any such interference or prevention as would not, individually or in the aggregate with any such other interference or prevention, have a Material Adverse Effect on Fred's. The term "hazardous materials" shall mean those substances that are regulated by or form the basis for liability under any applicable Environmental Laws. Section 2.14 Liabilities. Except as fully reflected or reserved against in the financial statements included in the Fred's Annual Report, Fred's most recent report to the SEC on Form 10-Q , or disclosed in the footnotes thereto, Fred's and its Subsidiaries had no liabilities (including, without limitation, tax liabilities) at the date of such financial statements, absolute or contingent, liquidated or unliquidated, other than liabilities that, individually or in the aggregate, would not have a Material Adverse Effect on Fred's, and had no liabilities (including, without limitation, tax liabilities) that were not incurred in the ordinary course of business. Except as so reflected, reserved or disclosed, Fred's and its Subsidiaries have no commitments, other than any commitments which, individually or in the aggregate, would not have a Material Adverse Effect on Fred's. Section 2.15 Labor Matters. Neither Fred's nor any of its Subsidiaries is a party to any collective bargaining agreement or labor contract. Neither Fred's nor any of its Subsidiaries has engaged in any unfair labor practice with respect to any persons employed by or otherwise performing services primarily for Fred's or any of its Subsidiaries (the "Fred's Business Personnel"), and there is no unfair labor practice complaint or grievance against Fred's or any of its Subsidiaries by the National Labor Relations Board or any comparable state agency pending or threatened in writing with respect to the Fred's Business Personnel, except where such unfair labor practice, complaint or grievance would not have a Material Adverse Effect on Fred's. There is no labor strike, dispute, slowdown or stoppage pending or, to the Knowledge of Fred's, threatened against or affecting Fred's or any of its Subsidiaries which may interfere with the respective business activities of Fred's or any of its Subsidiaries, except where such dispute, strike or work stoppage would not have a Material Adverse Effect on Fred's. Section 2.16 Intellectual Property. Fred's and its Subsidiaries have all patents, trademarks, trade names, service marks, trade secrets, copyrights and other proprietary intellectual property rights (collectively, "Intellectual Property Rights") as are necessary in connection with the business of Fred's and its Subsidiaries, taken as a whole, except where the failure to have such Intellectual Property Rights would not have a Material Adverse Effect on Fred's. Neither Fred's nor any of its Subsidiaries has infringed any Intellectual Property Rights of any third party other than any infringements that, individually or in the aggregate, would not have a Material Adverse Effect on Fred's. Section 2.17 Reorganization. To the Knowledge of Fred's, neither Fred's nor any of its Subsidiaries has taken, or will have taken, any action or failed to take any action which action or failure would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. Section 2.18 Required Vote of Fred's Stockholders. The affirmative vote of a majority of the votes eligible to be cast on the approval of this Agreement is required to approve this Agreement. The affirmative vote of a majority of the votes cast on the Share Issuance is required to approve the Share Issuance and to amend Fred's 1993 Long-Term Incentive Plan, provided that the total votes cast on each proposal represents a majority of the outstanding shares of Fred's Common Stock. No other vote of the Fred's Stockholders is required by law, the Charter or By-laws of Fred's or otherwise in order for Fred's to consummate the Merger and the transactions contemplated hereby. Section 2.19 Ownership of Shares. Neither Fred's nor any of its Subsidiaries (i) "beneficially owns" or is the "beneficial owner" of (as such terms are defined by reference to Section 13(d) of the Exchange Act), or (ii) "owns", as such term is defined in Section 203 of the Del.C., any shares of Rose's Common Stock. Section 2.20 Operations of Sub. Sub is a direct, wholly-owned subsidiary of Fred's, was formed solely for the purpose of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. Section 2.21 Brokers. No broker, investment banker or other person, is entitled to any brokers, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Fred's. Section 2.22 Disclosure. No representation or warranty by Fred's contained in this Agreement and no written statement, certificate, or document furnished by or on behalf of Fred's to Rose's in connection with this Agreement or any transaction contemplated hereby, contains, as of the date on which made or reaffirmed, any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which such statements were made, not misleading, or necessary in order to provide Rose's with full information as to Fred's and its affairs. None of this Agreement, the financial statements or any schedule, exhibit, or certificate delivered in accordance with the terms hereof or any document or statement in writing which has been supplied by or on behalf of Fred's, or by any of Fred's directors or officers, in connection with the transactions contemplated hereby, contains, or will contain, any untrue statement of a material fact, or omits, or will omit, any statement of a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to Fred's which materially and adversely affects the business, prospects, working capital or financial condition of Fred's or its properties or assets, which has not been set forth in this Agreement or in the schedules, exhibits or certificates or statements in writing furnished in connection with the transactions contemplated by this Agreement. Section 2.23 Opinion of Investment banker. Fred's has engaged Morgan Keegan & Co., Inc. as its investment banker to render a written opinion, as of the day before the printing of the Joint Proxy Statement, to the effect that the Conversion Number is fair to Fred's Stockholders from a financial point of view, a copy of which opinion will be delivered to Rose's promptly upon receipt by Fred's. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ROSE'S Rose's represents and warrants to Fred's and Sub as follows: Section 3.1 Organization, Standing and Power. Rose's is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Each Subsidiary of Rose's is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has the requisite corporate (in the case of a Subsidiary that is a corporation) or other power and authority to carry on its business as now being conducted, except where the failure to be so organized, existing or in good standing or to have such power or authority would not, individually or in the aggregate, have a Material Adverse Effect on Rose's. Rose's and each of its Subsidiaries are duly qualified to do business, and are in good standing, in each jurisdiction where the character of their properties owned or held under lease or the nature of their activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Rose's. Section 3.2 Capital Structure. The authorized capital stock of Rose's consists of 50,000,000 shares of Rose's Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par value. At the date hereof (i) 8,233,951 shares of Rose's Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable and free of preemptive rights, (ii) 976,910 shares of Rose's Common Stock are held in the treasury of Rose's, (iii) the Escrow Shares (789,139 shares) are held by the FUNB, (iv) not more than 700,000 shares of Rose's Common Stock are reserved for future issuance pursuant to Rose's New Equity Compensation Plan (the "Rose's Stock Option Plan"), and (v) 4,285,714 shares are issuable pursuant to the Rose's Warrants. No shares of Rose's Preferred Stock are outstanding. As of the date of this Agreement, except for Rose's Stock Options granted under Rose's Stock Option Plan for the issuance upon exercise of 388,000 shares of Rose's Common Stock, and Rose's Warrants for the issuance upon exercise of 4,285,714 shares of Rose's Common Stock, there are no options, warrants, calls, rights or agreements to which Rose's or any of its Subsidiaries is a party or by which any of them is bound obligating Rose's or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Rose's or any of its Subsidiaries or obligating Rose's or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, right or agreement. Rose's has furnished to Fred's a specimen copy of every form of Rose's Stock Option and Rose's Warrant granted and in effect at the date hereof or to become effective after the date hereof, together with a list of the grantees and of the actual variable terms and conditions (e.g., date of grant, number of shares as to which granted, exercise price, etc.) contained in the Rose's Stock Options and Rose's Warrants so granted and effective. Schedule 3.2 lists the holders, date of grant and exercise price of all Rose's Stock Options. Each outstanding share of capital stock of each Subsidiary of Rose's that is a corporation is duly authorized, validly issued, fully paid and nonassessable and, except as disclosed in Rose's SEC Documents (as defined herein), each such share is owned by Rose's or another Subsidiary of Rose's, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on voting rights, charges and other encumbrances of any nature whatsoever. Section 3.3 Authority. The Board of Directors of Rose's has on or prior to the date of this Agreement (a) declared the Merger advisable and fair to and in the best interest of Rose's and Rose's Stockholders (subject to the satisfaction of the conditions to Closing contained herein, including receipt by Rose's of the fairness opinion of its investment banker), (b) approved this Agreement in accordance with the Del.C., (c) resolved to recommend the approval of this Agreement by Rose's Stockholders and (d) directed that this Agreement be submitted to Rose's Stockholders for approval. Rose's has all requisite corporate power and authority to enter into this Agreement and, subject to approval by the Rose's Stockholders of this Agreement (which, for all purposes in this Agreement, shall be deemed to include any necessary approval of amendments to Rose's stock plans), to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Rose's and the consummation by Rose's of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Rose's, subject to (x) approval of this Agreement by Rose's Stockholders and (y) the filing of a Certificate of Merger as required by the Del.C. This Agreement has been duly executed and delivered by Rose's and (assuming the valid authorization, execution and delivery of this Agreement by Fred's and Sub) constitutes the valid and binding obligation of Rose's enforceable against Rose's in accordance with its terms. The filing of the Joint Proxy Statement with the SEC has been duly authorized by Rose's Board of Directors. Section 3.4 Consents and Approvals; No Violation. Assuming that all consents, approvals, authorizations and other actions described in this Section 3.4 have been obtained and all filings and obligations described in this Section 3.4 have been made, and subject to Section 5.17, the execution and delivery of this Agreement do not and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, result in any violation of, or default (with or without notice or lapse of time, or both) under, or give to others a right of termination, cancellation or acceleration of any obligation or the loss of a material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Rose's or any of its Subsidiaries under, any provision of (i) the Certificate of Incorporation or By-laws of Rose's, (ii) any provision of the comparable charter or organization documents of any of Rose's Subsidiaries, (iii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Rose's or any of its Subsidiaries or (iv) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Rose's or any of its Subsidiaries or any of their respective properties or assets, other than, in the case of clauses (ii), (iii) or (iv), any such violations, defaults, rights, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on Rose's, or prevent the consummation of any of the transactions contemplated hereby. No filing or registration with, or authorization, consent or approval of, any Governmental Entity is required by or with respect to Rose's or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Rose's or is necessary for the consummation of the Merger and the other transactions contemplated by this Agreement, except for (i) in connection, or in compliance, with the provisions of the HSR Act, the Securities Act and the Exchange Act, (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which Rose's or any of its Subsidiaries is qualified to do business, (iii) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval triggered by the Merger or by the transactions contemplated by this Agreement, (iv) such filings, authorizations, orders and approvals as may be required to obtain the State Takeover Approvals, (v) such filings as may be required in connection with the taxes described in Section 5.10, (vi) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the laws of any foreign country in which Rose's or any of its Subsidiaries conducts any business or owns any property or assets, (vii) such filings and consents as may be required under any state or foreign laws pertaining to debt collection, the issuance of payment instruments or money transmission, (viii) applicable requirements, if any, of Blue Sky Laws and NASDAQ, and (ix) such other consents, orders, authorizations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on Rose's or prevent the consummation of any of the transactions contemplated hereby. Section 3.5 SEC Documents and Other Reports. (a) SEC Documents. Rose's has filed all required documents with the SEC since January 28, 1995 (the "Rose's SEC Documents"). As of their respective dates, Rose's SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the regulations promulgated thereunder, and, at the respective times they were filed, none of Rose's SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Other Reports. Rose's has furnished to Fred's unaudited balance sheets, and related unaudited statements of income and retained earnings and cash flows for each month and year-to-date period subsequent to the last month and period most recently reflected in a Rose's SEC Document (the "Period Reports"). (c) Compliance, Presentation, Absence of Changes in Preparation. The consolidated financial statements (including, in each case, any notes thereto) of Rose's included in Rose's SEC Documents and in the Period Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP (except, in the case of the unaudited statements, as permitted by the Securities Act or the Exchange Act) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly presented in all material respects the consolidated financial position of Rose's and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of their operations and their consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein). Except as disclosed in Rose's SEC Documents or as required by GAAP, Rose's has not, since January 28, 1995, made any change in the accounting practices or policies applied in the preparation of financial statements. As used herein, the term "Rose's Annual Report" refers to Rose's Annual Report on Form 10-K most recently filed with the SEC. As to Rose's SEC Documents, Audited Financial Statements (as defined herein), Period Reports and Management Correspondence (as defined herein) and financial statements which have been or are to be filed with the SEC, prepared by Rose's, or delivered to Fred's by Rose's, all representations and warranties of Rose's in this Agreement relating to such as have been filed, prepared or delivered prior to the date hereof (i.e., as to periods already ended) are hereby made by Rose's as to all such SEC Documents to be filed on or after the date hereof (i.e., as to periods subsequent to the periods reflected in the documents already filed, prepared or delivered) as of the date such documents are filed, prepared or delivered in the future. (d) Management Correspondence. Rose's has furnished to Fred's the letters of KPMG Peat Marwick, LLP ("Rose's Auditors") to the management of Rose's relating to the audited financial statements certified by Rose's Auditors contained in Rose's SEC Documents for the fiscal years ended January 29, 1994 and January 28, 1995 (the "Audited Financial Statements") and Rose's written responses thereto (collectively, the "Management Correspondence"). All Management Correspondence delivered and to be delivered to Fred's reflects and will reflect that there is no adjustment to any Audited Financial Statements delivered to Fred's that Rose's Auditors waived. Section 3.6 Registration Statement and Joint Proxy Statement. None of the information to be supplied by Rose's for inclusion or incorporation by reference in the Registration Statement or the Joint Proxy Statement will (i) in the case of the Registration Statement, at the time it becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) in the case of the Joint Proxy Statement, at the time of the mailing of the Joint Proxy Statement, the time of each of the Stockholder Meetings and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event with respect to Rose's, its officers and directors or any of its Subsidiaries shall occur which is required to be described in the Joint Proxy Statement or the Registration Statement, such event shall be so described, and an appropriate amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the Fred's Stockholders and Rose's. The Joint Proxy Statement will comply (with respect to Rose's) as to form in all material respects with the Exchange Act. Section 3.7 Absence of Certain Changes or Events. Except as disclosed in Rose's SEC Documents filed with the SEC prior to the date of this Agreement or in Schedule 3.7, since January 28, 1995, (A) Rose's and its Subsidiaries have not incurred any material liability or obligation (indirect, direct or contingent), or entered into any material oral or written agreement or other transaction, that is not in the ordinary course of business or that would reasonably be foreseen to result in a Material Adverse Effect on Rose's, excluding any changes and effects resulting from changes in economic, regulatory or political conditions or changes in conditions generally applicable to the industries in which Rose's and Subsidiaries of Rose's are involved and except for any such changes or effects resulting from this Agreement, the transactions contemplated hereby or the announcement thereof, (B) Rose's and its Subsidiaries have not sustained any loss or interference with their business or properties from fire, flood, windstorm, accident or other calamity (whether or not covered by insurance) that has had a Material Adverse Effect on Rose's; (C) other than any indebtedness incurred by Rose's after the date hereof as permitted by Section 4.1(b)(vi), there has been no material change in the consolidated indebtedness of Rose's and its Subsidiaries, and no dividend or distribution of any kind declared, paid or made by Rose's on any class of its stock; and (D) there has been no event causing a Material Adverse Effect on Rose's, excluding any changes and effects resulting from changes in economic, regulatory or political conditions or changes in conditions generally applicable to the industries in which Rose's and Subsidiaries of Rose's are involved and except for any such changes or effects resulting from this Agreement, the transactions contemplated hereby or the announcement thereof. Rose's has not amended since prior to June 30, 1995 its Certificate of Incorporation or Bylaws with respect to the indemnification of its officers and directors. Section 3.8 Permits and Compliance. Each of Rose's and its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for Rose's or any of its Subsidiaries to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Rose's Permits"), except where the failure to have any of Rose's Permits would not, individually or in the aggregate, have a Material Adverse Effect on Rose's, and, as of the date of this Agreement, no suspension or cancellation of any of Rose's Permits is pending or, to the knowledge of Rose's (as defined herein), threatened, except where the suspension or cancellation of any of Rose's Permits would not, individually or in the aggregate, have a Material Adverse Effect on Rose's. Neither Rose's nor any of its Subsidiaries is in violation of (A) its charter, by-laws or other organizational documents, (B) any applicable law, ordinance, administrative or governmental rule or regulation or (C) any order, decree or judgment of any Governmental Entity having jurisdiction over Rose's or any of its Subsidiaries, except, in the case of clauses (A), (B) and (C), for any violations that, individually or in the aggregate, would not have a Material Adverse Effect on Rose's. Except as disclosed in Rose's SEC Documents filed with the SEC prior to the date of this Agreement, as of the date hereof there is no contract or agreement that is material to the business, financial condition or results of operations of Rose's and its Subsidiaries, taken as a whole. Except as set forth in Rose's SEC Documents filed with the SEC prior to the date of this Agreement, no event of default or event that, but for the giving of notice or the lapse of time or both, would constitute an event of default exists or, upon the consummation by Rose's of the transactions contemplated by this Agreement, will exist under any indenture, mortgage, loan agreement, note or other agreement or instrument for borrowed money, any guarantee of any agreement or instrument for borrowed money or any lease, contractual license or other agreement or instrument to which Rose's or any of its Subsidiaries is a party or by which Rose's or any such Subsidiary is bound or to which any of the properties, assets or operations of Rose's or any such Subsidiary is subject, other than any defaults that, individually or in the aggregate, would not have a Material Adverse Effect on Rose's. Set forth in Schedule 3.8 to this Agreement is a description of (i) all material leases to which Rose's or any of its Subsidiaries is a party or by which Rose's or any such Subsidiary is bound or to which any of the properties, assets or operations of Rose's or any such Subsidiary is subject and all amendments thereto (including, as to real property leased, its location by street address, city or township, county and state), (ii) all material contracts, licenses or other agreements or instruments (including, but not limited to, security agreements and evidences of indebtedness) to which Rose's or any of its Subsidiaries is a party or by which Rose's or any such Subsidiary is bound or to which any of the properties, assets or operations of Rose's or any such Subsidiary is bound or to which any of the properties, assets or operations of Rose's or any such Subsidiary is subject and all amendments thereto, and (iii) any material changes to the amount and terms of the indebtedness for borrowed money of Rose's and its Subsidiaries as described in Rose's Annual Report. "Knowledge of Rose's" means the actual knowledge of the Chief Executive Officer and the Chief Financial Officer. Section 3.9 Tax Matters. Each of Rose's and its Subsidiaries has filed all Tax Returns required to have been filed (or extensions have been duly obtained) and has paid all Taxes required to have been paid by it, except where failure to file such Tax Returns or pay such Taxes would not, in the aggregate, have a Material Adverse Effect on Rose's or as set forth on Schedule 3.9. Section 3.10 Actions and Proceedings. Except as set forth in Rose's SEC Documents or in Schedule 3.10, there are no outstanding orders, judgments, injunctions, awards or decrees of any Governmental Entity against or involving Rose's or any of its Subsidiaries, or against or involving any of the present or former directors, officers, employees, consultants, agents or Rose's Stockholders or any of its Subsidiaries, as such, any of its or their properties, assets or business or any Rose's Plan (as defined herein) that, individually or in the aggregate, would have a Material Adverse Effect on Rose's. Except as set forth in Rose's SEC Documents, as of the date of this Agreement, there are no actions, suits or claims or legal, administrative or arbitrative proceedings or investigations pending or, to the Knowledge of Rose's, threatened against or involving Rose's or any of its Subsidiaries or any of its or their present or former directors, officers, employees, consultants, agents or stockholders, as such, or any of its or their properties, assets or business or any Rose's Plan that, individually or in the aggregate, would have a Material Adverse Effect on Rose's. As of the date hereof, there are no actions, suits, labor disputes or other litigation, legal or administrative proceedings or governmental investigations pending or, to the Knowledge of Rose's, threatened against or affecting Rose's of any of its Subsidiaries or any of its or their present or former officers, directors, employees, consultants, agents or stockholders, as such, or any of its or their properties, assets or business relating to the transactions contemplated by this Agreement. Section 3.11 Certain Agreements. As of the date of this Agreement, except as set forth on Schedule 3.11, neither Rose's nor any of its Subsidiaries is a party to any oral or written benefits agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan (other than pursuant to the New Equity Compensation Plan), any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. No holder of any option to purchase shares of Rose's Common Stock, or shares of Rose's Common Stock granted in connection with the performance of services for Rose's or its Subsidiaries, is or will be entitled to receive cash from Rose's or any Subsidiary in lieu of or in exchange for such option or shares as a result of the transactions contemplated by this Agreement (provided that a cashless exercise currently permitted with no other authorization under the terms of a Rose's Stock Option shall not be considered such a prohibited cash payment). Neither Rose's nor any Subsidiary is a party to any termination benefits agreement or severance agreement or employment agreement one trigger of which would be the consummation of the transactions contemplated by this Agreement, except as set forth in Schedule 3.11. Section 3.12 ERISA. (a) With respect to each Rose's Plan (as defined herein), Rose's has made (or as soon as practicable will make) available to Fred's a true and correct copy (to the extent applicable) of (i) the three most recent annual reports (Form 5500) filed with the Internal Revenue Service (the "IRS"), (ii) such Rose's Plan, (iii) each trust agreement, insurance contract or administration agreement relating to such Rose's Plan, (iv) the most recent summary plan description of each Rose's Plan for which a summary plan description is required and (v) the most recent determination letter, if any, issued by the IRS with respect to any Rose's Plan intended to be qualified under section 401(a) of the Code. Except as would not have a Material Adverse Effect on Rose's and except as set forth on Schedule 3.12(a), each Rose's Plan complies in all material respects with ERISA, the Code and all other applicable statutes and governmental rules and regulations, including but not limited to COBRA, and (i) neither Rose's nor any of its ERISA Affiliates is or, within the past six years has been, a contributing employer to a Rose's Multiemployer Plan (as defined herein), (ii) no Rose's Plan is, or has ever been, subject to Title IV of ERISA, and (iii) Rose's and its ERISA Affiliates have complied in all material respects with the continued medical coverage requirements of COBRA. (b) With respect to Rose's Plans, except as set forth on Schedule 3.12(b)no event has occurred in connection with which Rose's or any of its ERISA Affiliates would be subject to any liability under the terms of such Rose's Plans, ERISA, the Code or any other applicable law which would have a Material Adverse Effect on Rose's. All Rose's Plans that are intended to be qualified under Section 401(a) of the Code have been determined by the Internal Revenue Service to be so qualified, or a timely application (under Revenue Procedure 93-39 or any subsequent Revenue Procedure with respect to ruling and determination letters) for such determination is now pending, and to the Knowledge of Rose's, no event has occurred and no fact exists that would adversely affect such determination. Except as set forth on Schedule 3.12(b) or as disclosed in Rose's SEC Documents, neither Rose's nor any of its ERISA Affiliates has any liability or obligation under any welfare plan to provide benefits after termination of employment to any employee or dependent other than as required by ERISA or as disclosed in Rose's Annual Report. As used herein, (i) "Rose's Plan" means a "pension plan" (as defined in Section 3(2) of ERISA (other than a Rose's Multiemployer Plan)) or a "welfare plan" (as defined in Section 3(1) of ERISA) established or maintained by Rose's or any of its ERISA Affiliates or as to which Rose's or any of its ERISA Affiliates has contributed or otherwise may have any liability, and (ii) "Rose's Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Rose's or any of its ERISA Affiliates is or has been obligated to contribute or otherwise may have any liability. (c) A copy of each bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, employment, termination, severance, compensation, medical, health or other plan, agreement, policy or arrangement that covers employees, directors, former employees or former directors of Rose's and its Subsidiaries (the "Compensation and Benefit Plans") and any trust agreements or insurance contracts forming a part of such Compensation and Benefit Plans has been provided or made available to Fred's prior to the date hereof. Rose's has no current plans to modify or terminate any of the Compensation and Benefit Plans, except as set forth on Schedule 3.12(c); the effect of any such modification or termination is also set forth on Schedule 3.12(c). Section 3.13 Compliance with Certain Laws. The properties, assets and operations of Rose's and its Subsidiaries are in compliance in all material respects with all applicable Worker Safety Laws, Environmental Laws and consumer credit laws, except for any violations that, individually or in the aggregate, would not have a Material Adverse Effect on Rose's or as set forth on Schedule 3.13. With respect to such properties, assets and operations, including any previously owned, leased or operated properties, assets or operations, there are no past, present or reasonably anticipated future events, conditions, circumstances, activities, practices, incidents, actions or plans of Rose's or any of its Subsidiaries that may interfere with or prevent compliance or continued compliance in all material respects with applicable Worker Safety Laws and Environmental Laws, other than any such interference or prevention as would not, individually or in the aggregate with any such other interference or prevention, have a Material Adverse Effect on Rose's. Rose's will provide such certificates and environmental studies as Fred's may reasonably request. Section 3.14 Liabilities. Except as fully reflected or reserved against in the financial statements included in Rose's Annual Report, Rose's most recent report to the SEC on Form 10-Q and in the most recent Period Report, or disclosed in the footnotes thereto, and except as set forth on Schedule 3.14, Rose's and its Subsidiaries had no liabilities (including, without limitation, tax liabilities and workmen's compensation liabilities) at the date of such financial statements, absolute or contingent, liquidated or unliquidated, other than liabilities that, individually or in the aggregate, would not have a Material Adverse Effect on Rose's, and had no liabilities (including, without limitation, tax liabilities) that were not incurred in the ordinary course of business. Except as so reflected, reserved or disclosed, Rose's and its Subsidiaries have no commitments, other than any commitments which, individually or in the aggregate, would not have a Material Adverse Effect on Rose's. Section 3.15 Labor Matters. Neither Rose's nor any of its Subsidiaries is a party to any collective bargaining agreement or labor contract, except as set forth in Schedule 3.15. Neither Rose's nor any of its Subsidiaries has engaged in any unfair labor practice with respect to any persons employed by or otherwise performing services primarily for Rose's or any of its Subsidiaries (the "Rose's Business Personnel"), and there is no unfair labor practice complaint or grievance against Rose's or any of its Subsidiaries by the National Labor Relations Board or any comparable state agency pending or threatened in writing with respect to Rose's Business Personnel, except where such unfair labor practice, complaint or grievance would not have a Material Adverse Effect on Rose's. There is no labor strike, dispute, slowdown or stoppage pending or, to the Knowledge of Rose's, threatened against or affecting Rose's or any of its Subsidiaries which may interfere with the respective business activities of Rose's or any of its Subsidiaries, except where such dispute, strike or work stoppage would not have a Material Adverse Effect on Rose's. Section 3.16 Intellectual Property. Rose's and its Subsidiaries have all Intellectual Property Rights as are necessary in connection with the business of Rose's and its Subsidiaries, taken as a whole, except where the failure to have such Intellectual Property Rights would not have a Material Adverse Effect on Rose's. Neither Rose's nor any of its Subsidiaries has infringed any Intellectual Property Rights of any third party other than any infringements that, individually or in the aggregate, would not have a Material Adverse Effect on Rose's. Section 3.17 State Takeover Statutes. As of the date hereof, assuming the accuracy of Fred's representations and warranties contained in Section 2.19 (Ownership of Shares), the Board of Directors of Rose's has taken all action so that prior to the execution hereof, the Board of Directors has approved the Merger pursuant to Section 203(a)(1) of the Del.C. Section 3.18 Required Vote of Rose's Stockholders. The affirmative vote of the holders of not less than a majority of the outstanding shares of Rose's Common Stock is required to approve the transactions contemplated by this Agreement. No other vote of the Rose's Stockholders is required by law, the Certificate of Incorporation or Bylaws of Rose's or otherwise in order for Rose's to consummate the Merger and the transactions contemplated hereby. Section 3.19 Reorganization. To the Knowledge of Rose's, neither it nor any of its Subsidiaries or Affiliates has, or will have, taken any action or failed to take any action which action or failure would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. Section 3.20 Brokers. No broker, investment banker or other person, other than Peter J. Solomon Company Limited, the fees and expenses of which will be paid by Rose's (and are reflected in an agreement between Peter J. Solomon Company Limited and Rose's, a copy of which has been furnished to Fred's), is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Rose's. Section 3.21 Disclosure. No representation or warranty by Rose's contained in this Agreement and no written statement, certificate, or document furnished by or on behalf of Rose's to Fred's in connection with this Agreement or any transaction contemplated hereby, contains, as of the date on which made or reaffirmed, any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which such statements were made, not misleading, or necessary in order to provide Fred's with full information as to Rose's and its affairs. None of this Agreement, the financial statements or any schedule, exhibit, or certificate delivered in accordance with the terms hereof or any document or statement in writing which has been supplied by or on behalf of Rose's, or by any of Rose's directors or officers, in connection with the transactions contemplated hereby, contains, or will contain, any untrue statement of a material fact, or omits, or will omit, any statement of a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to Rose's which materially and adversely affects the business, prospects, working capital or financial condition of Rose's or its properties or assets, which has not been set forth in this Agreement or in the schedules, exhibits or certificates or statements in writing furnished in connection with the transactions contemplated by this Agreement. Section 3.22 Opinion of Investment Banker. Rose's has engaged Peter J. Solomon Company Limited, as its investment banker, which investment banker (x) has advised Rose's and (y) will render a written opinion as of the day before the printing of the Joint Proxy Statement (a copy of which opinion which will be delivered to Fred's promptly upon receipt by Rose's), to the effect that the Merger is fair to Rose's Stockholders from a financial point of view. Rose's has entered into a written agreement with its investment banker, and has delivered a copy thereof to Fred's, to limit such investment banker's compensation relating to the Merger (including the delivery of a fairness opinion to Rose's) to not more than $900,000, payable by Rose's $150,000 prior to Closing and $750,000 at the Closing. ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS Section 4.1 Conduct of Business Pending the Merger. (a) Actions by Fred's. Except as expressly permitted by clauses (i) through (xii) of this Section 4.1(a), during the period from the date of this Agreement through the Effective Time, Fred's shall, and shall cause each of its Subsidiaries to, in all material respects carry on its business in the ordinary course of its business as currently conducted and, to the extent consistent therewith, use reasonable best efforts to preserve intact its current business organizations, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall be unimpaired at the Effective Time. Without limiting the generality of the foregoing, and except as otherwise expressly contemplated by this Agreement, Fred's shall not and shall not permit any of its Subsidiaries to, without the prior written consent of Rose's: (i) (w) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to its stockholders in their capacity as such (other than (A) regular quarterly dividends on Fred's Common Stock declared and paid on dates consistent with past practice and (B) dividends and other distributions by Subsidiaries), (x) other than in the case of any Subsidiary, split (except for the Reverse Split referred to herein), combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (y) purchase, redeem or otherwise acquire any shares of capital stock of Fred's or any other securities thereof or those of any Subsidiary or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock, any other voting securities or equity equivalent or any securities convertible into, or any rights, warrants or options to acquire any such shares, voting securities, equity equivalent or convertible securities, other than (A) the issuance of stock options and shares of Fred's Common Stock to employees of Fred's or any of its Subsidiaries in the ordinary course of business consistent with past practice, and (B) the issuance by any wholly-owned Subsidiary of Fred's of its capital stock to Fred's or another wholly-owned Subsidiary of Fred's; (iii) amend its charter or by-laws; provided, however, that Fred's may amend its Charter to increase its authorized capital stock; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets, unless the entering into a definitive agreement relating to or the consummation of such acquisition, merger, consolidation or purchase would not (A) impose any material delay in the obtaining of, or significantly increase the risk of not obtaining, any authorizations, consents, orders, declarations or approvals of any Governmental Entity necessary to consummate the Merger or the expiration or termination of any applicable waiting period, (B) significantly increase the risk of any Governmental Entity entering an order prohibiting the consummation of the Merger or (C) significantly increase the risk of not being able to remove any such order on appeal or otherwise; (v) sell, lease or otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of its assets, other than (A) transactions that are in the ordinary course of business consistent with past practice and not material to Fred's and its Subsidiaries taken as a whole, (B) as may be required by any Governmental Entity and (C) dispositions to non-related parties involving fair consideration; (vi) incur any indebtedness for borrowed money, guarantee any such indebtedness or make any loans, advances or capital contributions to, or other investments in, any other person, other than (A) in the ordinary course of business consistent with past practice, and (B) indebtedness, loans, advances, capital contributions and investments between Fred's and any of its wholly-owned Subsidiaries or between any of such wholly-owned Subsidiaries; (vii) knowingly violate or knowingly fail to perform any material obligation or duty imposed upon it or any Subsidiary by any applicable material federal, state or local law, rule, regulation, guideline or ordinance; (viii) take any action, other than reasonable and usual actions in the ordinary course of business consistent with past practice, with respect to accounting policies or procedures (other than actions required to be taken by GAAP); (ix) materially increase the annual level of compensation of any employee, or increase at all the annual level of compensation of any person whose compensation in the last preceding fiscal year exceeded $100,000, or grant any unusual or extraordinary bonuses, benefits or other forms of direct or indirect compensation to any employee, officer, director or consultant, except in amounts in keeping with past practices by formulas or otherwise; (x) increase, terminate, amend or otherwise modify any plan for the benefit of employees, except for the termination of post-retirement welfare benefits; (xi) engage in any related party transactions; or (xii) authorize, recommend or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. (b) Actions by Rose's. Except as expressly permitted by clauses (i) through (xv) of this Section 4.1(b), during the period from the date of this Agreement through the Effective Time, Rose's, subject to Section 4.2 hereof, shall, and shall cause each of its Subsidiaries to, in all material respects, carry on its business in the ordinary course of its business as currently conducted and, to the extent consistent therewith, use reasonable best efforts to preserve intact its current business organizations, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall be unimpaired at the Effective Time. Without limiting the generality of the foregoing, and except as otherwise expressly contemplated by this Agreement, Rose's, subject to Sections 4.1(c) and 4.2 hereof, shall not and shall not permit any of its Subsidiaries to, without the prior written consent of Fred's: (i) (w) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to its stockholders in their capacity as such, (x) other than in the case of any Subsidiary, split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (y) purchase, redeem or otherwise acquire any shares of capital stock of Rose's or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock, any other voting securities or equity equivalent or any securities convertible into, or any rights, warrants or options to acquire any such shares, voting securities, equity equivalent or convertible securities, other than the issuance of shares of Rose's Common Stock upon the exercise of Rose's Stock Options or Rose's Warrants outstanding on the date of this Agreement in accordance with their current terms or the delivery of Escrow Shares pursuant to the Plan of Reorganization; (iii) amend its charter or by-laws; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets other than transactions that are in the ordinary course of business consistent with past practice and that are not material; (v) sell, lease or otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of its assets, other than (A) transactions that are in the ordinary course of business consistent with past practice and not material to Rose's and its Subsidiaries taken as a whole or (B) as may be required by any Governmental Entity; (vi) incur any indebtedness for borrowed money, guarantee any such indebtedness or make any loans, advances or capital contributions to, or other investments in, any other person, other than (A) indebtedness for borrowed money incurred in the ordinary course of business, consistent with (1) past practice (or in accordance with Rose's 1996 Proforma Balance Sheet dated January 13, 1996 furnished by Rose's to Fred's) or (2) the provisions of Section 5.17 of this Agreement, and (B) indebtedness, loans, advances, capital contributions and investments between Rose's and any of its wholly-owned Subsidiaries or between any of such wholly-owned Subsidiaries, or make any payment to any lender to Rose's other than regularly scheduled payments of principal and interest or enter into any instrument of waiver or forebearance with any lender to Rose's; (vii) alter (through merger, liquidation, reorganization, restructuring or in any other fashion) the corporate structure or ownership of Rose's or any Subsidiary (except for the Reverse Split referred to herein); (viii) enter into or adopt or amend any existing severance plan, agreement or arrangement or enter into or amend any Rose's Plan or employment or consulting agreement, other than as required by law, this Agreement or as set forth on Schedule 4.1(b)(viii); (ix) increase the compensation payable or to become payable to its officers or employees, except for increases in the ordinary course of business consistent with past practice in salaries or wages of employees of Rose's or any of its Subsidiaries who are not officers of Rose's or any of its Subsidiaries (or increase at all the annual level of compensation of any person whose compensation in the last preceding fiscal year exceeded $100,000), or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director or officer of Rose's or any of its Subsidiaries, or establish, adopt, enter into, or, except as may be required to comply with applicable law, amend or take action to enhance or accelerate any rights or benefits under, any labor, collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee (except for the agreements attached hereto pursuant to Section 5.14); (x) increase, terminate, amend or otherwise modify any plan for the benefit of employees generally, except for the termination of post-retirement welfare benefits or as otherwise required by this Agreement or by law; (xi) knowingly violate or knowingly fail to perform any material obligation or duty imposed upon it or any Subsidiary by any applicable material federal, state or local law, rule, regulation, guideline or ordinance; (xii) take any action, other than reasonable and usual actions in the ordinary course of business consistent with past practice, with respect to accounting policies or procedures (other than actions required to be taken by GAAP); (xiii) make any tax election or settle or compromise any material federal state, local or foreign income tax liability except as required in connection with the Plan of Reorganization; (xiv) engage in any related party transactions; (vv) amend any agreement with its investment banker to increase such investment banker's compensation relating to the Merger; or (xvi) authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract agreement, commitment or arrangement to do any of the foregoing. (c) Interim Reporting Committee. Upon the execution and delivery of this Agreement by each of the parties, the parties jointly shall establish a committee (the "Interim Reporting Committee") for the purpose of being notified, as and to the extent provided in Schedule 4.1(c) [Certain Rose's Actions Requiring Notice], of certain actions by Rose's and its Subsidiaries after the date hereof and prior to the Effective Time or the earlier termination of this Agreement in accordance with Article VII. The members of the Interim Reporting Committee shall be Michael J. Hayes, Bruce D. Smith (or such other natural Person as may hereafter be designated to replace Mr. Hayes or Mr. Smith [or their successors] from time to time by Fred's Board of Directors), R. Edward Anderson and Jeanette R. Peters (or such other natural Person as may hereafter be designated to replace Mr. Anderson or Ms. Peters [or their successors] from time to time by Rose's Board of Directors). Section 4.2 No Solicitation. From and after the date hereof, Rose's will not, and will use its best efforts to cause its officers, directors, employees, attorneys, investment bankers, agents or other representatives or those of any of its Subsidiaries not to, directly or indirectly, solicit, initiate or encourage (including by way of furnishing information) any Takeover Proposal (as defined herein) from any person, or engage in or continue discussions or negotiations relating thereto, or recommend, or fail to recommend against, the same to Rose's Stockholders; provided, however, that Rose's may engage in discussions or negotiations with, or furnish information concerning itself and its Subsidiaries, business, properties or assets to, any third party which makes a Takeover Proposal if the Board of Directors of Rose's concludes in good faith on the basis of the advice of its outside counsel that the failure to take such action would violate the fiduciary obligations of such Board under applicable law. Rose's will promptly (but in no case later than 24 hours) notify Fred's of any Takeover Proposal, including the material terms and conditions thereof. As used in this Agreement, "Takeover Proposal" shall mean any proposal or offer, or any expression of interest by any third party relating to Rose's willingness or ability to receive or discuss a proposal or offer (other than a proposal or offer by Fred's or any of its Subsidiaries or as permitted under this Agreement) for a tender or exchange offer, a merger, consolidation or other business combination involving Rose's or any of its Subsidiaries or any proposal to acquire in any manner a substantial equity interest in, or a substantial portion of the assets of, Rose's or any of its Subsidiaries. Section 4.3 Third Party Standstill Agreements. During the period from the date of this Agreement through the Effective Time, Rose's shall not terminate, amend, modify or waive any provision of any confidentiality or standstill agreement to which Rose's or any of its Subsidiaries is a party (other than any involving Fred's), unless the Board of Directors of Rose's concludes in good faith on the basis of the advice of its outside counsel, that the failure to terminate, amend, modify or waive any such confidentiality or standstill agreement would violate the fiduciary obligations of the Board under applicable law. Subject to such fiduciary duties, during such period, Rose's agrees to enforce, to the fullest extent permitted under applicable law, the provisions of any such agreements, including, but not limited to, obtaining injunctions to prevent any breaches of such agreements and to enforce specifically the terms and provisions thereof in any court of the United States or any state thereof having jurisdiction. Section 4.4 Reorganization. During the period from the date of this Agreement through the Effective Time, unless the other party shall otherwise agree in writing, none of Fred's, Rose's or any of their respective Subsidiaries or Affiliates shall knowingly take or fail to take any action which action or failure would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. ARTICLE V ADDITIONAL AGREEMENT'S Section 5.1 Stockholder Meetings. Except to the extent legally required for the discharge by the board of directors of its fiduciary duties as advised by counsel, Rose's and Fred's each shall call a meeting of its stockholders (respectively, the "Rose's Stockholder Meeting" and the "Fred's Stockholder Meeting" and, collectively, the "Stockholder Meetings") to be held as promptly as practicable for the purpose of considering the approval of this Agreement (in the case of Rose's) and the Fred's Stockholders' Approvals (in the case of Fred's). Rose's, Fred's and Sub will, through their respective Boards of Directors, recommend to their respective stockholders approval of such matters and shall not withdraw such recommendation; provided, however, that a Board of Directors shall not be required to make, and shall be entitled to withdraw, such recommendation if such Board concludes in good faith on the basis of the advice of Proskauer Rose Goetz & Mendelsohn LLP ("Rose's Counsel"), in the case of Rose's, and Waring Cox PLC ("Fred's Counsel"), in the case of Fred's, that the making of, or the failure to withdraw, such recommendation would violate the fiduciary obligations of such Board under applicable law. The Boards of Directors of Rose's, Fred's and Sub will not rescind their respective declarations that the Merger is advisable, fair to and in the best interest of such company and its stockholders unless, in any such case, any such Board concludes in good faith on the basis of the advice of Rose's Counsel in the case of Rose's and Fred's Counsel in the case of Fred's that the failure to rescind such determination would violate the fiduciary obligations of such Board under applicable law. Rose's and Fred's shall coordinate and cooperate with respect to the timing of such meetings and shall use their reasonable best efforts to hold such meetings on the same day and coinciding with the Fred's annual meeting of its stockholders. Section 5.2 Preparation of the Registration Statement and the Joint Proxy Statement. Rose's and Fred's shall promptly prepare and file with the SEC the Joint Proxy Statement and Fred's shall prepare and file with the SEC the Registration Statement, in which the Joint Proxy Statement will be included as a prospectus. Fred's shall use its reasonable best efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing, and Rose's shall provide its and Rose's Auditors' full cooperation and assistance to Fred's in obtaining such declaration. Fred's and Rose's shall cause their respective investment bankers to deliver copies of their written opinions to Fred's for inclusion in the Joint Proxy Statement, which opinions shall be dated as of the day before the printing of the Joint Proxy Statement, to the effect that the Merger is fair to the Fred's Stockholders and to the Rose's Stockholders, respectively. As promptly as practicable after the Registration Statement shall have become effective, each of Fred's and Rose's shall mail the Joint Proxy Statement to its respective stockholders. Fred's shall also take any action (other than qualifying to do business in any jurisdiction in which it is now not so qualified) required to be taken under any applicable state securities laws in connection with the issuance of Fred's Common Stock in the Merger, and Rose's shall furnish all information concerning Rose's and the holders of Rose's Common Stock as may be reasonably requested in connection with any such action. No amendment or supplement to the Joint Proxy Statement or the Registration Statement will be made by Fred's or Rose's without the prior approval of the other party. Fred's and Rose's each will advise the other, promptly after it receives notice thereof of the time when the Registration Statement has become effective or any supplement or amendment has been filed, of the issuance of any stop order, of the suspension of the qualification of the Fred's Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or of any request by the SEC for amendment of the Joint Proxy Statement or the Registration Statement or comments thereon and responses thereto or requests by the SEC for additional information. Section 5.3 Access to Information. (a) Subject to currently existing contractual and legal restrictions applicable to Fred's or to Rose's or any of their Subsidiaries, each of Fred's and Rose's shall, and shall cause each of its Subsidiaries to, afford to the accountants, counsel, investment bankers and other representatives of the other party hereto reasonable access to key members of management of the other party and to, and permit them to make such inspections as they may reasonably require of, during normal business hours during the period from the date of this Agreement through the Effective Time, all their respective properties, books, contracts, commitments and records (including, without limitation, the work papers of independent accountants, if available and subject to the consent of such independent accountants) and, during such period, Fred's and Rose's shall, and shall cause each of its Subsidiaries to, furnish promptly to the other (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws and (ii) all other information concerning its business, properties and personnel as the other may reasonably request. No investigation pursuant to this Section 5.3 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. (b) With respect to the preparation of the respective Audited Financial Statements of Fred's and of Rose's for inclusion in their respective Annual Reports for their respective most recently ended fiscal years, each party shall cause its auditors: (i) to comply with all reasonable requests from the other party or its auditors for access to the other party's auditor's work papers so as to permit such other auditors to make copies of the work papers and to assess the progress of the audit of the respective Audited Financial Statements; and (ii) meet with representatives of the other party and its auditors from time to time during the course of the audit to discuss audit plans, scope, principles and procedures. Additionally, each party's auditors will have reasonable access to the books and records of the other party to perform such other procedures as such party may request. (c) Each party shall also furnish to the other party all Period Reports for all months during the period from the date of this Agreement until the Effective Time, as well as all Management Correspondence generated during such period. (d) (i) Except as and to the extent required by law, each of Fred's and Rose's shall not disclose or use, and it shall cause its representatives not to disclose or use, any Confidential Information (as defined herein) with respect to the other furnished, or to be furnished, by the other or its representatives to it or its representatives in connection therewith at any time or in any manner other than in connection with its evaluation of the Merger. For purposes of this paragraph, "Confidential Information" means any information about either signatory entity stamped "confidential" or identified in writing as such to the other by the affected entity; provided that it does not include information which the entity which seeks non-confidential treatment shall demonstrate (i) is generally available to or known by the public other than as a result of improper disclosure by such entity or (ii) is obtained by such entity from a source other than the other entity, provided that such source was not bound by a duty of confidentiality to the other entity or another party with respect to such information. If this Agreement is terminated, each of Fred's and Rose's shall promptly return to the other any Confidential Information in its possession concerning the other entity. (ii) For a period of one year from and after any termination of this Agreement, neither Fred's or Rose's shall solicit or hire any employee of the other whose salary at the termination of employment with the other was in excess of $80,000. Section 5.4 Compliance with the Securities Act. Not later than 10 days prior to the Rose's Stockholder's Meeting, Rose's shall deliver to Fred's a list of names and addresses of those persons who, in the opinion of Rose's, at the time of Rose's Stockholder Meeting would be "affiliates" of Rose's within the meaning of Rule 145 under the Securities Act. Rose's also shall provide to Fred's such information and documents as Fred's shall reasonably request for purposes of reviewing such list. There shall be added to such list the names and addresses of any other person (within the meaning of Rule 145) which Fred's reasonably identifies (by written notice to Rose's not later than the time of the Rose's Stockholder Meeting) as being a person who may be deemed to be an affiliate of Rose's within the meaning of Rule 145; provided, however, that no such person identified by Fred's shall be added to the list of affiliates of Rose's if Fred's shall receive from Rose's, on or before the Effective Time, an opinion of counsel reasonably satisfactory to Fred's to the effect that such person is not an affiliate. Fred's shall not be required to maintain the effectiveness of the Registration Statement or any other registration statement under the Securities Act for the purposes of resale of Fred's Common Stock by such affiliates, and the certificates representing Fred's Common Stock received in the Merger by such affiliates shall bear a customary legend regarding applicable Securities Act restrictions. Such legend shall be removed from such certificates upon request by the holders thereof to Fred's transfer agent and the subsequent delivery to such transfer agent of an opinion of Fred's counsel (or of counsel satisfactory to Fred's counsel) to the effect that registration is not required under the Securities Act or that the proposed transfer is to be made in compliance with the requirements of Rule 145 promulgated under the Securities Act or some other specified exemption from registration under the Securities Act. Rose's shall use its best efforts to cause each affiliate to enter into an agreement with Fred's in the form attached hereto as Schedule 5.4. Section 5.5 NASDAQ Listing. Fred's shall use its reasonable best efforts to list on NASDAQ, upon official notice of issuance, the shares of Fred's Common Stock to be issued in connection with the Merger. Section 5.6 Fees and Expenses. (a) Except as provided in this Section 5.6 and Section 5.10, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby including, without limitation, the fees and disbursements of counsel, investment bankers and accountants, as well as printing expenses, shall be paid by the party incurring such costs and expenses, provided that all filing fees (e.g., SEC, HSR Act, state qualifications, etc.) shall be divided equally between Fred's and Rose's. (b) (i) If this Agreement is terminated: (A) by Fred's pursuant to Section 7.1(b) or (c); (B) by Rose's or Fred's pursuant to Section 7.1(d); (C) by Rose's or Fred's pursuant to Section 7.1(e); (D) by Rose's or Fred's pursuant to Section 7.1(g); or (E) by Rose's or Fred's pursuant to Section 7.1(h); then, in each case, Rose's shall pay to Fred's a Termination Fee (as defined below) in cash.. (c) (i) A "Termination Fee" consists of (x) a "reimbursement amount" equal to Fred's actual expenses in connection with the Merger (i.e., the actual out-of-pocket expenses Fred's incurs in connection with negotiating, preparing and presenting the Letter of Intent dated March 1, 1996 between Fred's and Rose's (the "Letter of Intent"), this Agreement and related documents, conducting Fred's due diligence of Rose's, preparing for the Closing, and resolving issues relating to same, which expenses shall be documented by the submission by Fred's to Rose's of the vendors'invoices therefor) up to a maximum amount of $250,000, plus (y) if, prior to the first anniversary of such breach, termination or event, either Rose's or Rose's Stockholders close a Superior Rose's Acquisition Transaction (as defined herein), a "topping payment", equal to the sum of 25% of the excess of any consideration in the Superior Rose's Acquisition Transaction over the sum of the consideration to be paid by Fred's to the Rose's Stockholders in connection with the proposed Merger Consideration (the "Merger Consideration"). A Termination Fee thus shall be increased in amount if a breach, termination or event requiring payment of the reimbursement amount portion of a Termination Fee is later followed, prior to the first anniversary thereof, by a Superior Rose's Acquisition Transaction. Payment of any Termination Fee shall be made promptly, but in no event later than, in the case of the reimbursement amount, the second business day following the termination giving rise to such payment and the submission by Fred's to Rose's of the aforesaid invoices, or, in the case of a topping payment, the closing of the Superior Rose's Transaction. (ii) A "Superior Rose's Acquisition Transaction" means Rose's entering into, or announcing that it proposes to enter into, an agreement, including, without limitation, an agreement in principle, providing for a merger or other business combination involving Rose's or the acquisition of a substantial interest in, or a substantial portion of the assets, business or operations of, Rose's (other than the transactions contemplated by this Agreement), provided that the value of the consideration to be received by Rose's Stockholders in the transaction referred to therein, when considered in the aggregate, is reasonably determined by Rose's Board of Directors (in the good faith exercise of its fiduciary responsibilities) to be greater than the value of the Merger Consideration; provided further, however, that in making such determination Rose's (if Fred's so elects) shall credit to the value of the Merger Consideration the Termination Fee that Rose's would be required to pay Fred's pursuant to this Section 5.6 (and there will be no minimum bid increment required of Fred's by Rose's in excess of such credit in comparing the terms of the Merger with any other proposed transaction). (iii) Notwithstanding the foregoing, no topping payment shall be payable in the event that (x) the Merger is not consummated by August 31, 1996 because Fred's has failed to perform as required by Section 5.27 of this Agreement and (y) between the date hereof and such date Rose's shall not have received or entertained a bona fide offer to engage in negotiations by a third party that could result in a Superior Rose's Acquisition Transaction. If Rose's determines that it is not required to make any topping payment based on this provision, it shall represent to Fred's in writing that the events recited in (y) have not occurred. (d) Rose's acknowledges that the agreements contained in Section 5.6(b) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Fred's and Sub would not enter into this Agreement. Accordingly, if Rose's fails promptly to pay the amount due pursuant to Section 5.6(b), and, to obtain such payment, Fred's or Sub commences a suit which results in a judgment for the fee set forth in Section 5.6(b), Rose's shall pay to Fred's or Sub its costs and expenses (including attorneys' fees) in connection with such suit together with interest on the amount of the fee at the prime rate of Union Planters National Bank, N.A., Memphis in effect on the date such payment was required to be made. (e) The payments herein contained in this Section 5.6 are the exclusive remedies of the parties hereto in the event of a breach hereof except for a breach of Section 5.3(d). Section 5.7 Rose's Stock Options; Rose's Warrants. (a) In respect of each Rose's Stock Option as converted into a Fred's Stock Option pursuant to Section 1.5(d) and assumed by Fred's, and the shares of Fred's Stock underlying such option, Fred's shall file as soon as practicable after the Effective Time with the SEC, and keep current the effectiveness of, a registration statement on Form S-8 or other appropriate form for as long as such options remain outstanding (and maintain the current status of the prospectus with respect thereto). (b) Rose's agrees that it will not grant any stock options, restricted stock, stock appreciation rights, limited stock appreciation rights, warrants, or similar instruments or rights, and will not permit cash payments to holders of Rose's Stock Options or Rose's Warrants in lieu of the substitution therefor of Fred's Stock Options and Fred's Warrants, respectively, as described in Section 1.5(d) (provided that a cashless exercise currently permitted with no other authorization under the terms of a Rose's Stock Option shall not be considered such a prohibited cash payment). (c) Rose's agrees that it will not amend, or alter or adjust the number of shares of Rose's Common Stock issuable under, or the exercise price, the term or the vesting schedule of, any Rose's Stock Option or of any Rose's Warrant, except to the extent required by the terms thereof or as contemplated hereby. Section 5.8 Reasonable Best Efforts. (a) Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including, but not limited to: (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from all Governmental Entities and the making of all necessary registrations and filings (including filings with Governmental Entities) and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Entity (including those in connection with the HSR Act and State Takeover Approvals), (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed, and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement. No party to this Agreement shall consent to any voluntary delay of the consummation of the Merger at the behest of any Governmental Entity without the consent of the other parties to this Agreement, which consent shall not be unreasonably withheld. (b) Each party shall use all reasonable best efforts to not take any action, or enter into any transaction, which would cause any of its representations or warranties contained in this Agreement to be untrue or result in a breach of any covenant made by it in this Agreement. (c) Notwithstanding anything to the contrary contained in this Agreement, (i) neither Fred's nor Rose's shall be obligated to use its reasonable best efforts or to take any action pursuant to this Section 5.8 if the Board of Directors of Fred's or Rose's, as the case may be, shall conclude in good faith on the basis of the advice of Rose's Counsel in the case of Rose's and Fred's Counsel in the case of Fred's that such action would violate the fiduciary obligations of such Board under applicable law, and (ii) in connection with any filing or submission required or action to be taken by either Fred's or Rose's to effect the Merger and to consummate the other transactions contemplated hereby, Rose's shall not, without Fred's prior written consent, commit to any material divestiture transaction, and neither Fred's nor any of its Affiliates shall be required to divest or hold separate or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, Rose's or any of the material businesses, or assets of Fred's or any of its Affiliates or that otherwise would have a Material Adverse Effect on Fred's. Section 5.9 Public Announcements. The initial press release relating to the Merger dated March 1, 1996 was a joint press release, and thereafter Rose's and Fred's each shall consult with the other prior to issuing any press releases or otherwise making public announcements with respect to the Merger and the other transactions contemplated by this Agreement and prior to making any filings with any third party and/or any Governmental Entity (including any national securities interdealer quotation service) with respect thereto, except as may be required by law or by obligations pursuant to any listing agreement with or rules of NASDAQ. Section 5.10 Real Estate Transfer and Gains Tax. The portion of the consideration allocable to the real property of Rose's and its Subsidiaries shall be determined by Fred's in its reasonable discretion. Rose's Stockholders shall be deemed to have agreed to be bound by the allocation established pursuant to this Section 5.10 in the preparation of any return with respect to any state or local tax which is attributable to the transfer of the beneficial ownership of Rose's or its Subsidiaries' real property. Section 5.11 State Takeover Laws. If any "fair price", "business combination" or "control share acquisition" statute or other similar statute or regulation shall become applicable to the transactions contemplated hereby, Fred's and Rose's and their respective Boards of Directors shall use their reasonable best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to minimize the effects of any such statute or regulation on the transactions contemplated hereby. Section 5.12 Notification of Certain Matters. Fred's shall use its reasonable best efforts to give prompt notice to Rose's, and Rose's shall use its reasonable best efforts to give prompt notice to Fred's, of (i) the occurrence, or non-occurrence, of any event the occurrence, or nonoccurrence, of which it is aware and which would be reasonably likely to cause (x) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect or (y) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied in all material respects, (ii) any failure of Fred's or Rose's, as the case may be, to comply in a timely manner with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder or (iii) any change or event which would be reasonably likely to have a Material Adverse Effect on Fred's or Rose's, as the case may be; provided, however, that the delivery of any notice pursuant to this Section 5.12 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. Section 5.13 Directors and Officers. The directors and officers of Sub at the Effective Time shall, from and after the Effective Time, be the directors and officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and By-laws. Section 5.14 Executive and Employee Agreements. On or before the Closing, Mr. Anderson and Fred's shall enter into written agreements in the forms attached hereto as Schedule 5.14, providing for a limitation of compensation payable to him as a result of the Merger and any termination of his employment, a consulting arrangement, and the issuance to him of a number of shares of Fred's Common Stock (the "Anderson Shares") as provided therein. Section 5.15 Designation of Director. Fred's shall cause a member of Rose's current Board of Directors (such person to be designated by the present Rose's Board of Directors, subject to the reasonable approval of such designee by the Fred's Board of Directors) to be appointed at the Effective Time to Fred's Board of Directors, which appointee shall serve with all other current directors of Fred's until the next annual meeting of Fred's at which directors are elected or until a successor director has been duly elected or appointed and qualified or until such person's earlier death, resignation or removal in accordance with Fred's Charter and By-laws. Further, Fred's shall use reasonable efforts to cause such appointee to be nominated as a director of Fred's for three years from Closing unless the nominating committee of Fred's Board of Directors determines in good faith that such nomination is not in the best interest of Fred's Stockholders. Section 5.16 Indemnification. From and after the Effective Time, Fred's and the Surviving Corporation shall indemnify the past and present directors and officers (the "Indemnified Parties") of Rose's and of its Subsidiaries (including without limitation, against all losses, expenses (including reasonable attorneys' fees), claims damages and liabilities, as and when incurred, arising out of the actions or omissions occurring at or prior to the Effective Time that are in whole or in part based upon or arising out of the fact that such person is or was a director or officer of Rose's and arising out of or pertaining to the transactions contemplated by this Agreement),to the fullest extent permitted by Rose's Certificate of Incorporation and Bylaws in effect at the time of the Merger (in the case of the Surviving Corporation) and to the fullest extent permitted by Fred's Charter and Bylaws at the time of the Merger (in the case of Fred's), provided that such indemnification is permitted by applicable law. In the event of any such loss, expense, claim, damage, or liability (whether arising before or after the Effective Time), (i) Fred's or the Surviving Corporation shall pay the reasonable fees and expenses of counsel selected by it, which counsel shall be reasonably satisfactory to the Indemnified Parties, promptly after statements therefor are received, and (ii) Fred's or the Surviving Corporation will cooperate in the defense of any such matter; provided, however, that Fred's or the Surviving Corporation shall not be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld). (b) If Fred's, the Surviving Corporation, or any of their respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving person of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in each such case, proper provision shall be made so that such successors or assigns of Fred's or the Surviving Corporation, as the case may be, shall assume the obligations set forth in this Section 5.16. Section 5.17 Lending and Credit Arrangements. Fred's (i) hereby ratifies and reaffirms its prior consent to the execution and delivery by Rose's of a financing commitment letter having substantially the same form and the same substance as that certain commitment letter draft attached hereto as Schedule 5.17(a) (the "Financing Commitment") issued by Foothill Capital Corporation and Jackson National Life Insurance Company (collectively, the "Prospective Lenders") and incorporating the related list of loan covenants attached hereto as Schedule 5.17(b) that would be acceptable to Fred's (provided, however, that Fred's acknowledges that the attached list of covenants is not necessarily exclusive, and Rose's acknowledges that Fred's does not agree to accept loan covenants not listed which are not customary and reasonable), and to Rose's performance thereunder, and (ii) hereby acknowledges that the Prospective Lenders have agreed therein to continue to finance the Surviving Corporation after the Merger (subject to there being no events of default under the relevant loan and security documentation), without requiring Fred's to guarantee or otherwise be liable for the Surviving Corporation's loan obligations. Rose's and Fred's each hereby consent to, and agree to use reasonable best efforts in accordance with Section 5.8 of this Agreement to enter into and consummate, a financing transaction as to Rose's and the Surviving Corporation with the Prospective Lenders, upon terms and conditions no less favorable in all material respects to Rose's and the Surviving Corporation, respectively, than those contained in the Financing Commitment (a "Financing Transaction"), provided, however, and without in any way limiting the foregoing, that Rose's, Fred's, Sub and the Surviving Corporation, as applicable, each shall use such reasonable best efforts to negotiate, execute, deliver and perform such agreements, financing statements and instruments reasonably required by the Prospective Lenders to consummate a Financing Transaction, such that (i) the closing of the Financing Transaction as to Rose's shall occur no later than May 31, 1996, and (ii) the closing of the Financing Transaction as to the Surviving Corporation shall occur simultaneously with the Closing. Rose's shall notify Fred's in advance of Rose's seeking or needing to seek waivers from its lenders or the payment of any material banking fees. Rose's, on or before the Closing, shall cause (i) repayment of all related party debt and (ii) Rose's third-party debt to not be deemed in default or accelerated or, except as contemplated by the Financing Commitment, be made more costly by virtue of the Merger. Nothing contained herein shall preclude Rose's from proceeding with the Financing Transaction without the consent of Fred's. Section 5.18 Tax Representations. Fred's and Rose's shall cause their respective chief executive officers and chief financial officers to execute representations in the respective forms set forth on Schedule 5.18 hereto with respect to various matters relating to the tax treatment of the Merger. Section 5.19 Reverse Stock Split. Rose's shall take all steps necessary or appropriate to effectuate (including presenting to Rose's Stockholders for their approval if Rose's counsel shall advise such is required under applicable law) a one-for-100 combination of the outstanding shares of Rose's Common Stock (the "Reverse Split") to be effected immediately prior to the Effective Time, so that each holder of a fractional share of Rose's Common Stock after the Reverse Split will be paid an amount of cash (without interest), rounded to the nearest cent, determined by multiplying (i) the average of the high and low prices for a share of Fred's Common Stock on NASDAQ on the date of the Effective Time (or, if Fred's Common Stock does not trade on NASDAQ on such date, the first date of trading of Fred's Common Stock on NASDAQ after the Effective Time) by (ii) the number of shares of Fred's Common Stock into which such holder's fractional share of Rose's Common Stock would have been converted at the Effective Time pursuant to Section 1.5(b)(i) if the Reverse Split had not occurred. Upon the Reverse Split, the Conversion Number shall be adjusted as set forth in Section 1.10. ARTICLE VI CONDITIONS PRECEDENT TO THE MERGER Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions: (a) Stockholder Approval. This Agreement shall have been duly approved by the requisite vote of Rose's Stockholders in accordance with applicable law and the Restated Certificate of Incorporation and By-laws of Rose's, and the Fred's Stockholders' Approvals shall have been obtained by the requisite vote of the Fred's Stockholders in accordance with applicable rules of NASDAQ, applicable law (including the Exchange Act and the regulations promulgated thereunder) and the Charter and By-laws of Fred's. (b) Listing on NASDAQ. The Fred's Common Stock issuable in the Merger shall have been authorized for listing on NASDAQ, subject to official notice of issuance. (c) HSR and Other Approvals. The following shall have transpired: (i) The waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (ii) All authorizations, consents, orders, declarations or approvals of, or filings with, or terminations or expirations of waiting periods imposed by, any Governmental Entity, which the failure to obtain, make or occur would have the effect of making the Merger or any of the transactions contemplated hereby illegal or would have a Material Adverse Effect on Fred's (assuming the Merger had taken place), shall have been obtained, shall have been made or shall have occurred. (d) Registration Statement. The Registration Statement shall have become effective in accordance with the provisions of the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or, to the Knowledge of Fred's or Rose's, threatened by the SEC. All necessary state securities or blue sky authorizations (including State Takeover Approvals) shall have been received. The shares of Fred's Stock to be issued to the Rose's Stockholders as Merger Consideration and the Anderson Shares may be immediately resold publicly by the Rose's Stockholders and by Mr. Anderson upon issuance and delivery of the shares to them, subject to compliance with applicable securities laws and regulations. (e) No Order. No court or other Governmental Entity having jurisdiction over Rose's or Fred's, or any of their respective Subsidiaries, shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the Merger or any of the transactions contemplated hereby illegal. Section 6.2 Conditions to Obligation of Rose's to Effect the Merger. The obligation of Rose's to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions: (a) Performance of Obligations; Representations and Warranties. Each of Fred's and Sub shall have performed in all material respects each of its agreements contained in this Agreement required to be performed on or prior to the Effective Time, each of the representations and warranties of Fred's and Sub contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date, which shall be true and correct as of such certain date) and each of the representations and warranties that is not so qualified shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date, which shall be true and correct in all material respects as of such certain date), in each case except as contemplated or permitted by this Agreement, and Rose's shall have received a certificate signed on behalf of each of Fred's and Sub by its Chief Executive Officer and its Chief Financial Officer to such effect. (b) Legal Opinions. Rose's shall have received an opinion, in form and substance reasonably satisfactory to Rose's, dated the Closing, of Fred's Counsel as to the matters set forth on Schedule 6.2(b). (c) Certain Executive and Employee Agreements. The agreements required to have been entered into by Fred's or the Surviving Corporation with Mr. Anderson on or before the Closing shall have been entered into and remained in full force and effect without breach thereof. (d) Fairness Opinion. Rose's shall have received a fairness opinion of its investment banker dated the day before the printing of the Joint Proxy Statement to the effect that the consideration to be received by the Rose's Stockholders in the Merger is fair to the Rose's Stockholders from a financial point of view. (e) Designation of Director. Fred's shall have caused the appointment, effective at the Effective Time, of a designated Rose's director to the Board of Directors of Fred's as required by Section 5.15. (f) Material Adverse Change. There shall not have occurred any Material Adverse Change as to Fred's since February 3, 1996. (h) Other. Fred's shall have provided Rose's and its counsel such other information and documents and assurances as they may reasonably request. (i) Tax Representations and Opinion. Rose's shall have received the representations of Fred's in form satisfactory to Rose's and of the substance set forth in Schedule 5.18 as to the tax-free nature of the Merger for federal income tax purposes. Rose's shall have received an opinion of counsel or auditors per Section 6.3(e) in form and substance reasonably satisfactory to Rose's, dated the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing as of the Effective Time, for federal income tax purposes: (i) the Merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code, and Rose's, Sub and Fred's will each be a party to that reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by Fred's or Rose's as a result of the Merger; (iii) no gain or loss will be recognized by the Rose's Stockholders upon the conversion of their shares of Rose's Common Stock into shares of Fred's Common Stock pursuant to the Merger, except with respect to cash, if any, received in lieu of fractional shares of Rose's Common Stock or Fred's Common Stock or for Dissenting Shares; (iv) the aggregate tax basis of the shares of Fred's Common Stock received in exchange for shares of Rose's Common Stock pursuant to the Merger (including fractional shares of Fred's Common Stock for which cash is received) will be the same as the aggregate tax basis of such shares of Rose's Common Stock; (v) the holding period for shares of Fred's Common Stock received in exchange for shares of Rose's Common Stock pursuant to the Merger will include the holder's holding period for such shares of Rose's Common Stock, provided such shares of Rose's Common Stock were held as capital assets by the holder at the Effective Time; and (vi) a stockholder of Rose's who receives cash in lieu of a fractional share of Rose's Common Stock or Fred's Common Stock or for Dissenting Shares will recognize gain or loss equal to the difference, if any, between such stockholder's basis in the fractional share or the Dissenting Shares (as described in clause (iv) above) and the amount of cash received. In rendering such opinion, the opining counsel or auditors may receive and rely upon representations from Fred's, Rose's, and others, and the opinion shall state that Fred's may also rely on such opinion. Section 6.3 Conditions to Obligations of Fred's and Sub to Effect the Merger. The obligations of Fred's and Sub to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions: (a) Performance of Obligations; Representations and Warranties. Rose's shall have performed in all material respects each of its agreements contained in this Agreement required to be performed on or prior to the Effective Time, each of the representations and warranties of Rose's contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date, which shall be true and correct as of such certain date) and each of the representations and warranties that is not so qualified shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date, which shall be true and correct in all material respects as of such certain date), in each case except as contemplated or permitted by this Agreement and Fred's shall have received a certificate signed on behalf of Rose's by its Chief Executive Officer and its Chief Financial Officer to such effect. (b) Legal Opinion. Fred's shall have received an opinion of Rose's Counsel, in form and substance reasonably satisfactory to Fred's and to Fred's lenders, dated the Closing, as to the matters set forth on Schedule 6.3(b). (c) Certain Executive and Employee Agreements. The agreements required to have been entered into by Fred's with Mr. Anderson on or before the date of the Closing shall have been entered into and remained in full force and effect without breach thereof and Mr. Anderson shall have resigned all offices he may hold with Rose's, unless the failure to satisfy this condition is due to failure, refusal or breach by Fred's to execute the forms of agreement set forth on Schedule 5.14. (d) Fairness Opinion. Fred's shall have received a fairness opinion of its investment banker dated the day before the printing of the Joint Proxy Statement to the effect that the Merger is fair to the Fred's Stockholders. (e) Tax Representations and Opinion. Fred's shall have received the representations of Rose's in form satisfactory to Fred's and of the substance set forth in Schedule 5.18 as to the tax-free nature of the Merger for federal income tax purposes. Fred's shall have received the opinion of counsel or auditors satisfactory to Fred's in form satisfactory to Fred's and of the substance set forth in Section 6.2(i) as to the tax-free nature of the Merger for federal income tax purposes. (f) Investment Banker Fees. The agreement of Rose's investment banker to limit its compensation relating to the Merger (including the delivery of a fairness opinion to Rose's) to not more than $900,000 in the aggregate shall have been remained in full force and effect without breach thereof by such investment banker. (g) Indebtedness. There shall be in effect at the Closing (and to be effective from and after the Closing as to the Surviving Corporation) either (i) financing with Rose's present lenders with terms and covenants reasonably satisfactory to Fred's or (ii) the Financing Transaction contemplated by the Financing Commitment. The payments required to be made to lenders and creditors of Rose's pursuant to (i) the applicable agreements relating thereto and (ii) those required to be made pursuant to Section 5.17, shall have been made, Rose's shall not be in default and there shall not have occurred an event of default under any covenants or agreements with the Prospective Lenders, and no fees shall have been paid by Rose's to the Prospective Lenders except as contemplated in the Financing Commitment. In addition, Rose's shall not pay any fees or penalties of any sort to Rose's existing lenders in connection with the termination of Rose's existing financing arrangements, except for fees presently outlined in the existing financing arrangements. (h) Material Adverse Change. There shall not have occurred any Material Adverse Change as to Rose's since January 27, 1996. (i) Other. Rose's shall have provided Fred's and its counsel such other information and documents and assurances as they may reasonably request. All steps necessary to effectuate the Reverse Split shall have been taken, including any affirmative vote of the Rose's Stockholders which Rose's counsel may advise is required under applicable law. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER Section 7.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after any approval of the matters presented in connection with the Merger by the Rose's Stockholders or Fred's Stockholders: (a) by mutual written consent of Fred's and Rose's; (b) by either Fred's or Rose's if the other party shall have failed to comply in any material respect with any of its covenants or agreements contained in this Agreement required to be complied with prior to the date of such termination, which failure to comply has not been cured within five business days following receipt by such other party of written notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's best efforts and for so long as the breaching party shall be so using its best efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; (c) by either Fred's or Rose's if there has been (i) a breach by the other party (in the case of Fred's including any material breach by Sub) of any representation or warranty that is not qualified as to materiality which has the effect of making such representation or warranty not true and correct in all material respects or (ii) a breach by the other party (in the case of Fred's, including any material breach by Sub) of any representation or warranty that is qualified as to materiality, in each case which breach has not been cured within five business days following receipt by the breaching party of written notice of the breach; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's best efforts and for so long as the breaching party shall be so using its best efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; (d) by Fred's or Rose's if the Merger has not been effected on or prior to the close of business on August 31, 1996 (the "Termination Date"); provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(d) shall not be available to any party whose failure to fulfill any of its obligations contained in this Agreement has been the cause of, or resulted in, the failure of the Merger to have occurred on or prior to the aforesaid date; (e) by Fred's or Rose's if the Rose's Stockholders do not approve this Agreement at Rose's Stockholder Meeting or any adjournment or postponement thereof; (f) by Fred's or Rose's if the Fred's Stockholders' Approvals are not obtained at the Fred's Stockholder Meeting or any adjournment or postponement thereof; (g) by Fred's or Rose's if the Board of Directors of Rose's reasonably determines that a Takeover Proposal, if consummated, would constitute a Superior Rose's Acquisition Transaction; provided, however, that Rose's may not terminate this Agreement pursuant to this Section 7.1(g) unless and until three business days have elapsed following delivery to Fred's of a written notice of such determination by the Board of Directors of Rose's (which written notice shall inform Fred's of all material terms and conditions of the Takeover Proposal, including the identity of such third party); (h) by Fred's if (i) the Board of Directors of Rose's shall not have recommended, or shall have resolved not to recommend, or shall have modified or withdrawn its recommendation of the Merger or declaration that the Merger is advisable and fair to and in the best interest of Rose's and its stockholders, or shall have resolved to do so, (ii) the Board of Directors of Rose's shall have recommended to the Rose's Stockholders any Takeover Proposal or shall have resolved to do so, or (iii) a tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of Rose's is commenced, and, after ten (10) business days, the Board of Directors of Rose's fails to recommend against acceptance of such tender offer or exchange offer by its stockholders (including by taking no position with respect to the acceptance of such tender offer or exchange offer by its stockholders); (i) by Rose's if (i) the Board of Directors of Fred's shall not have recommended, or shall have resolved not to recommend or shall have modified or withdrawn its recommendation of the Fred's Stockholders' Approvals or declaration that the Merger is advisable and fair to and in the best interests of Fred's and its stockholders, or shall have resolved to do so, (ii) Fred's shall have entered into, or announced that it proposes to enter into, an agreement, including, without limitation, an agreement in principle, providing for a merger or other business combination involving Fred's or the acquisition of a substantial interest in, or a substantial portion of the assets, business or operations of, Fred's (other than the transactions contemplated by this Agreement), or (iii) any Person shall have commenced a tender or exchange offer for 20% or more of the then outstanding shares of Fred's Common Stock or publicly proposed any bona fide merger, consolidation or acquisition of all or substantially all the assets of Fred's, or other similar business combination, and after ten (10) business days, the Board of Directors of Fred's fails to recommend against acceptance of such offer by its stockholders (including taking no position with respect to the acceptance of such offer by its stockholders); or (j) by Rose's prior to the mailing of the Joint Proxy Statement if the Fred's Average Price is less than $5.00. The right of any party hereto to terminate this Agreement pursuant to this Section 7.1 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective officers or directors, whether prior to or after this Agreement. Section 7.2 Effect of Termination. In the event of termination of this Agreement by either Fred's or Rose's, as provided in Section 7.1, this Agreement shall forthwith terminate and there shall be no liability hereunder on the part of Rose's, Fred's, Sub or their respective officers or directors (except for the last sentence of Section 5.3 and the entirety of Section 5.6, which shall survive the termination); provided, however, that nothing contained in this Section 7.2 shall relieve any party hereto from any liability for any willful breach of a representation or warranty contained in this Agreement or the breach of any covenant contained in this Agreement. ARTICLE VIII GENERAL PROVISIONS Section 8.1 Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 7.1, as the case may be, except that the agreements set forth in Article I and Sections 4.4 and 5.12 and this Article VIII shall survive the Effective Time, and those set forth in Sections 5.6 and 7.2 and this Article VIII and the Letter of Intent shall survive termination. Section 8.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally, one day after being delivered to an overnight courier or when telecopied (with a confirmatory copy sent by overnight courier) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Rose's to: R. Edward Anderson Rose's Stores, Inc. P.H. Rose Building 218 South Garnett Street Henderson, North Carolina 27536 Facsimile: 919/430-2600 with a copy to: Henry O. Smith III, Esq. Proskauer Rose Goetz & Mendelsohn LLP 1585 Broadway New York, New York 10036 Facsimile: 212/969-2900 if to Fred's to: Michael J. Hayes Fred's, Inc. 4300 New Getwell Road Memphis, Tennessee 38118 Facsimile: 901/362-3733 ext. 3777 with a copy to: Sam D. Chafetz, Esq. Waring Cox, PLC 50 N. Front Street, Suite 1300 Memphis, Tennessee 38103 Facsimile: 901/543-8036 Section 8.3 Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents, headings and list of defined terms contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." Section 8.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. Section 8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 8.6 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Tennessee, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF FRED'S, ROSE'S, OR SUB IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF. Section 8.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Section 8.8 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement may be consummated as originally contemplated to the fullest extent possible. Section 8.9 Enforcement of this Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, such remedy being in addition to any other remedy to which any party is entitled at law or in equity. Each party hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the United States District Court located in the Western District of the State of Tennessee (unless such courts assert no jurisdiction, in which case Rose's consents to the exclusive jurisdiction of the courts of the State of Tennessee) for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby (and each party hereto agrees not to commence any action, suit or proceeding relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to the addresses set forth herein shall be effective service of process for any such action, suit or proceeding brought against the each party in such court. Each party hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby, in the United States District Courts located in the Western District of the State of Tennessee (unless such courts assert no jurisdiction, in which case each party consents to the exclusive jurisdiction of the courts of the State of Tennessee). Each party hereby further irrevocably and unconditionally waives and agrees not to plead or to claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Section 8.10 Amendment. This Agreement may be amended by the parties hereto, by or pursuant to action taken by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the Fred's Stockholders and Rose's Stockholders, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 8.11 Waiver. At any time prior to the Effective Time, the parties hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein which may legally be waived. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. IN WITNESS WHEREOF, Fred's, Sub and Rose's have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first above written. FRED'S, INC. and FR ACQUISITION CORP. By:/s/ Michael J. Hayes Michael J. Hayes, President and Chief Executive Officer ROSE'S STORES, INC. By:/s/ R. Edward Anderson R. Edward Anderson, Chairman, President and Chief Executive Officer EX-10.2 3 LOAN AND SECURITY AGREEMENT among ROSE'S STORES, INC., as Borrower THE FINANCIAL INSTITUTIONS NAMED HEREIN, as the Lenders, PPM FINANCE, INC., as Co-Agent and FOOTHILL CAPITAL CORPORATION, as Agent Dated as of May 21, 1996 PAGE TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . 15 1.3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.5 Schedules and Exhibits . . . . . . . . . . . . . . . . . . . . 15 2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . . . . 16 2.1 Revolving Advances . . . . . . . . . . . . . . . . . . . . . . 16 2.2 Letters of Credit. . . . . . . . . . . . . . . . . . . . . . . 23 2.3 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.4 [intentionally omitted]. . . . . . . . . . . . . . . . . . . . 27 2.5 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.6 Interest: Rates, Payments, and Calculations . . . . . . . . . 27 2.7 Collection of Accounts . . . . . . . . . . . . . . . . . . . . 28 2.8 Crediting Payments; Application of Collections.. . . . . . . . 29 2.9 Borrower's Designated Account. . . . . . . . . . . . . . . . . 29 2.10 Maintenance of Loan Account; Statements of Obligations . . . . 30 2.11 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 3. CONDITIONS; TERM OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . 31 3.1 Conditions Precedent to the Initial Advance and Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.2 Conditions Precedent to all Advances and all Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.3 Condition Subsequent . . . . . . . . . . . . . . . . . . . . . 33 3.4 Term; Automatic Renewal. . . . . . . . . . . . . . . . . . . . 33 3.5 Effect of Termination. . . . . . . . . . . . . . . . . . . . . 34 3.6 Early Termination by Borrower. . . . . . . . . . . . . . . . . 34 3.7 Termination Upon Event of Default. . . . . . . . . . . . . . . 34 3.8 Voluntary Reduction of Maximum Amount. . . . . . . . . . . . . 34 4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . 35 4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . 35 4.2 Negotiable Collateral. . . . . . . . . . . . . . . . . . . . . 35 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.4 Delivery of Additional Documentation Required. . . . . . . . . 35 4.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . 36 4.6 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . 36 5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 36 5.1 No Prior Encumbrances. . . . . . . . . . . . . . . . . . . . . 36 5.2 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . 37 5.3 Eligible Inventory . . . . . . . . . . . . . . . . . . . . . . 37 5.4 Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 5.5 Location of Inventory and Equipment. . . . . . . . . . . . . . 37 5.6 Inventory Records. . . . . . . . . . . . . . . . . . . . . . . 37 5.7 Location of Chief Executive Office; FEIN . . . . . . . . . . . 37 5.8 Due Organization and Qualification; Subsidiaries . . . . . . . 37 5.9 Due Authorization; No Conflict . . . . . . . . . . . . . . . . 37 5.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 38 5.11 No Material Adverse Change . . . . . . . . . . . . . . . . . . 38 5.12 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 5.13 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . 39 5.14 Environmental Condition. . . . . . . . . . . . . . . . . . . . 39 5.15 Reliance by the Lender Group; Cumulative . . . . . . . . . . . 40 6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 40 6.1 Accounting System. . . . . . . . . . . . . . . . . . . . . . . 40 6.2 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . 40 6.3 Financial Statements, Reports, Certificates. . . . . . . . . . 41 6.4 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.5 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . 42 6.6 Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.7 Title to Equipment . . . . . . . . . . . . . . . . . . . . . . 42 6.8 Maintenance of Equipment . . . . . . . . . . . . . . . . . . . 42 6.9 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.10 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 43 6.11 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . 43 6.12 No Setoffs or Counterclaims. . . . . . . . . . . . . . . . . . 44 6.13 Location of Inventory and Equipment. . . . . . . . . . . . . . 44 6.14 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . 44 6.15 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . 44 6.16 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.17 Collateral Access Agreements . . . . . . . . . . . . . . . . . 45 7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 46 7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 46 7.2 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 7.3 Restrictions on Fundamental Changes. . . . . . . . . . . . . . 46 7.4 Extraordinary Transactions and Disposal of Assets. . . . . . . 47 7.5 Change Name. . . . . . . . . . . . . . . . . . . . . . . . . . 47 7.6 Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . . 47 7.7 Restructure. . . . . . . . . . . . . . . . . . . . . . . . . . 47 7.8 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . 47 7.9 Change of Control. . . . . . . . . . . . . . . . . . . . . . . 47 7.10 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . 48 7.11 Consignments . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.12 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 48 7.13 Accounting Methods . . . . . . . . . . . . . . . . . . . . . . 48 7.14 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.15 Transactions with Affiliates . . . . . . . . . . . . . . . . . 48 7.16 Suspension . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.17 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . 48 7.18 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . 49 7.19 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees . . . . . . . . . . . . . . . . . . . . 49 7.20 No Prohibited Transactions Under ERISA . . . . . . . . . . . . 49 7.21 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 50 9. THE LENDER GROUP'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . 52 9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . 52 9.2 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . 54 10. TAXES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 54 11. WAIVERS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 55 11.1 Demand; Protest; etc. . . . . . . . . . . . . . . . . . . . . . 55 11.2 The Lender Group's Liability for Collateral . . . . . . . . . . 55 11.3 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 55 12. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . 57 14. DESTRUCTION OF BORROWER'S DOCUMENTS. . . . . . . . . . . . . . . . . . 58 15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS . . . . . . . . . . . . . . 58 15.1 Assignments and Participations. . . . . . . . . . . . . . . . . 58 15.2 Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . 61 16. AMENDMENTS; WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . 61 16.1 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . 61 16.2 No Waivers; Cumulative Remedies . . . . . . . . . . . . . . . . 62 17. AGENT; THE LENDER GROUP . . . . . . . . . . . . . . . . . . . . . . . 62 17.1 Appointment and Authorization of Agent. . . . . . . . . . . . . 62 17.2 Delegation of Duties. . . . . . . . . . . . . . . . . . . . . . 63 17.3 Liability of Agent-Related Persons. . . . . . . . . . . . . . . 64 17.4 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . 64 17.5 Notice of Default or Event of Default . . . . . . . . . . . . . 64 17.6 Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . 65 17.7 Costs and Expenses; Indemnification . . . . . . . . . . . . . . 66 17.8 Agent and Jackson in Individual Capacity. . . . . . . . . . . . 66 17.9 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . 67 17.10 Withholding Tax . . . . . . . . . . . . . . . . . . . . . . . . 67 17.11 Collateral Matters. . . . . . . . . . . . . . . . . . . . . . . 69 17.12 Restrictions on Actions by Lenders; Sharing of Payments . . . . 70 17.13 Agency for Perfection . . . . . . . . . . . . . . . . . . . . . 70 17.14 Payments by Agent to the Lenders. . . . . . . . . . . . . . . . 70 17.15 Concerning the Collateral and Related Loan Documents. . . . . . 71 17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information . . . . . 71 17.17 Several Obligations; No Liability . . . . . . . . . . . . . . . 72 18. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 73 18.1 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . 73 18.2 Section Headings. . . . . . . . . . . . . . . . . . . . . . . . 73 18.3 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . 73 18.4 Severability of Provisions. . . . . . . . . . . . . . . . . . . 73 18.5 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . 73 18.6 Counterparts; Telefacsimile Execution . . . . . . . . . . . . . 73 18.7 Revival and Reinstatement of Obligations. . . . . . . . . . . . 73 18.8 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . 74 18.9 Fred's Not Liable . . . . . . . . . . . . . . . . . . . . . . . 74 PAGE SCHEDULES AND EXHIBITS Schedule C-1 Commitments Schedule E-1 Eligible Inventory Locations Schedule P-1 Permitted Liens Schedule R-1 Real Property Schedule 5.10 Litigation Schedule 5.13 ERISA Benefit Plans Schedule 5.14 Environmental Condition Exhibit 6.3 Form of Chief Financial Officer's Certificate Exhibit 15.1 Form of Assignment and Acceptance PAGE LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into as of May 21, 1996, among ROSE'S STORES, INC., a Delaware corporation ("Borrower"), with its chief executive office located at 218 South Garnett Street, Henderson, North Carolina 27536, on the one hand, and the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to herein- after each individually as a "Lender" and collectively as the "Lenders"), PPM FINANCE, INC., a Delaware corporation, as co-agent for the Lenders ("Co- Agent"), and FOOTHILL CAPITAL CORPORATION, a California corporation, as agent and collateral agent for the Lenders ("Agent"), on the other hand. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account. "Accounts" means all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to a Person arising out of the sale or lease of goods or the rendition of services by such Person, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Advances" has the meaning set forth in Section 2.1(a). "Affiliate" means, as applied to any Person, any other Person who directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person. "Agent" means Foothill, solely in its capacity as agent and collateral agent for the Lenders, and shall include any successor agent. "Agent's Account" has the meaning set forth in Section 2.7. "Agent Advance" has the meaning set forth in Section 2.1(g). "Agent Loan" has the meaning set forth in Section 2.1(f). "Agent-Related Persons" means Agent and Co-Agent, together with their respective Affiliates, and the officers, directors, employees, counsel, agents, and attorneys-in-fact of such Persons and Affiliates. "Agreement" has the meaning set forth in the preamble hereto. "Applicable Advance Rate" means fifty percent (50%) during the fiscal month of January, fifty five percent (55%) during the fiscal months of February, March, April and December, sixty percent (60%) during the fiscal months of May, June and July, and sixty five percent (65%) during the fiscal months of August, September, October and November. "Assignee" has the meaning set forth in Section 15.1. "Assignment and Acceptance" has the meaning set forth in Section 15.1(a) and shall be in the form of Exhibit A-1. "Authorized Officer" means any officer or other employee of Borrower. "Availability" means, as of the date of determination, the result (so long as such result is a positive number) of (a) the lesser of the Borrowing Base or the Maximum Amount, minus (b) the outstanding Obligations that arise under Sections 2.1 and 2.2. "Average Unused Portion of Maximum Amount" means, as of any date of determination, (a) the Maximum Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that were outstanding during the immediately preceding month. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended or supplemented from time to time, and any successor statute. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years, other than a Multiemployer Plan. "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower's Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrower's Designated Account" means account number 503-20422 of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account (located within the United States) of Borrower designated, in writing and from time to time, by Borrower to Agent prior to the date of the establishment of such other deposit account. "Borrower's Designated Account Bank" means, as of the Closing Date, The First National Bank of Boston, whose office is located at 100 Federal Street, Boston, Massachusetts 02110, and whose ABA number is 011-00039, or such other financial institution (located within the United States) that Borrower shall designate to Agent, in writing from time to time. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders to Borrower, or by Agent in the case of an Agent Loan or an Agent Advance. "Borrowing Base" has the meaning set forth in Section 2.1(a). "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Change of Control" shall be deemed to have occurred at such time as: a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Fred's becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than thirty percent (30%) of the total voting power of all classes of stock then outstanding of Borrower normally entitled to vote in the election of directors. "Closing Date" means the date of the first to occur of the making of the initial Advance or the issuance of the initial Letter of Credit. "Co-Agent" means PPM Finance, Inc., a Delaware corporation, solely in its capacity as co-agent for the Lenders, and shall include any successor co-agent. "Code" means the California Uniform Commercial Code, as amended and supplemented from time to time, and any successor statute. "Collateral" means any of Borrower's rights, title and interest in and to each of the following: (a) Accounts, (b) Borrower's Books, (c) Equipment, (d) General Intangibles, (e) Inventory, (f) Negotiable Collateral, (g) the Real Property, (h) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of the Lender Group, and (i) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intang- ibles, Inventory, Negotiable Collateral, real property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, mortgagee waiver, bailee letter, or a similar acknowledgement agreement from any warehouseman, processor, lessor, or other Person (including Fred's) in posses- sion of, or having a Lien on or other interest in, any property or assets of Borrower, in each case in form and substance reasonably satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Commitment" means, at any time with respect to a Lender, the principal amount set forth beside such Lender's name under the heading "Commitment" on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 15.1, as such Commitment may be adjusted from time to time in accordance with the provisions of Section 15.1, and "Commitments" means, collectively, the aggregate amount of the commitments of all of the Lenders. "Consolidated Current Assets" means, as of any date of determination, the aggregate amount of all current assets of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Consolidated Current Liabilities" means, as of any date of determination, the aggregate amount of all current liabilities of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. For purposes of this definition, all Advances outstanding under this Agreement shall be deemed to be current liabilities without regard to whether they would be deemed to be so under GAAP. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Defaulting Lender" has the meaning set forth in Section 2.1(e)(ii). "Defaulting Lenders Rate" means the Reference Rate for the first three (3) days from and after the date the relevant payment is due and thereafter at the interest rate then applicable to Advances. "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall reasonably be satisfac- tory to Agent. "Dollars or $" means United States dollars. "Early Termination Premium" has the meaning set forth in Section 3.6. "Eligible Inventory" means Borrower's Inventory consisting of finished goods held for sale in the ordinary course of Borrower's business that are lo- cated at Borrower's premises identified on Schedule E-1 or are in transit from one location on Schedule E-1 to another location on such schedule, that strictly comply with each and all of the representations and warranties respecting Inven- tory made by Borrower in the Loan Documents, and that are and at all times con- tinue to be reasonably acceptable to Agent in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Agent in Agent's reasonable credit judgment. In determining the amount to be so included, Inventory shall be valued at first-in, first-out cost according to (i) the Borrower's general ledger for all Inventory located in the Borrower's retail stores and (ii) the perpetual inventory report for all Inventory located in warehouses, on a basis consistent with Borrower's current and historical accounting practices. An item of Inventory shall not be included in Eligible Inventory if: (i) it is not owned solely by Borrower or Borrower does not have good, valid, and marketable title thereto; (ii) it is not located either (x) on property owned or leased by Borrow- er, or (y) in a contract warehouse subject to a Collateral Access Agreement executed by the warehouseman and segregated or otherwise separately identifiable from goods of others, if any, stored at the contract warehouse; (iii) it is not subject to a valid and perfected first priority security interest in favor of Agent for the benefit of the Lender Group; and (iv) it consists of goods in transit other than from one location on Schedule E-1 to another location on such schedule. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in ex- cess of $5,000,000,000, or the asset based lending Affiliate of such bank, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a politi- cal subdivision of any such country, and having total assets in excess of $5,000,000,000, or the asset based lending Affiliate of such bank; provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having total assets in excess of $500,000,000, (d) any Affiliate (other than individuals) of an existing Lender, and (e) any other Person approved by Agent and Borrower. "Equipment" means all of a Person's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any assets acquired by such Person with the proceeds of any Advance, (b) any interest of such Person in any of the foregoing, and (c) all attachments, acces- sories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which such Person was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the insti- tution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Sec- tion 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of its ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Existing Agent" The First National Bank of Boston, as administrative agent under that certain Revolving Credit Agreement with Borrower dated as of April 28, 1995, as amended. "FEIN" means Federal Employer Identification Number. "Foothill" means Foothill Capital Corporation, a California corporation. "Fred's" means Fred's Inc., a Tennessee corporation. "Fred's Transactions" means each of the following, but in each case subject to the prior delivery to Agent and Co-Agent of the form of documentation that will govern such transaction, which documentation shall be acceptable to Agent and Co-Agent in their reasonable credit judgment: (i) the purchase by Fred's of new Inventory from foreign suppliers pursuant to letters of credit for the account of Fred's, which Inventory would then be resold by Fred's to Borrow- er at Fred's cost, without markups; (ii) Fred's combination of orders with Bor- rower for new Inventory to be purchased from vendors in the United States, with Borrower responsible for paying that portion of the Inventory acquired by it in accordance with the terms and conditions provided by the vendors, provided that Borrower's portion of such Inventory is shipped by such vendors directly to Bor- rower; (iii) the sale by Fred's (at Fred's cost, without markup) of Inventory to Borrower, which Inventory would be located at Borrower's Henderson, North Caro- lina distribution center, and which would in turn be resold (at Borrower's cost, without markup) to Fred's for distribution to certain retail outlets of Fred's; and (iv) the sale by Borrower (at Borrower's cost, without markup) of Inventory to Fred's, which Inventory would be located at the Memphis, Tennessee distribu- tion center of Fred's, and which would in turn be resold (at Fred's cost, with- out markup) to Borrower upon distribution to certain of Borrower's retail outlets. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of a Person's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty, franchise, or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means the certificates or articles of incorporation, by-laws, or other organizational or governing documents of any Person. "Governmental Authority" means any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Hazardous Materials" or "Hazardous Substances" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applica- ble laws or regulations as "hazardous substances," "hazardous materials," "ha- zardous wastes," "toxic substances," or any other formulation intended to de- fine, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, or reproductive toxici- ty, (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other regulat- ed wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or ex- plosives or any radioactive materials, and (d) asbestos in any form or electri- cal equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million. "Indebtedness" means: (a) all obligations of a Person for borrowed money, (b) all obligations of a Person evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of a Person in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of a Person under capital leases (but excluding operating leases), (d) all obligations or liabilities of others secured by a lien or security interest on any property or asset of a Person, irrespective of whether such obligation or liability is assumed, and (e) any obligation of a Person guaranteeing or intended to guarantee (whether guarante- ed, endorsed, co-made, discounted, or sold with recourse to such Person) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangi- bles under GAAP. "Inventory" means all present and future inventory in which a Person has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of such Person's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located, and any documents of title representing any of the above. "Inventory Letter of Credit" means a documentary Letter of Credit issued to support the purchase by Borrower of Inventory prior to transit to a location set forth on Schedule E-1, that satisfy the following conditions: (a) all draws thereunder must require presentation of customary documentation (including, if applicable, commercial invoices, packing list, certificate of origin, bill of lading or airwaybill, customs clearance documents, quota state- ment, inspection certificate, beneficiaries statement, and bill of exchange, bills of lading, dock warrants, dock receipts, warehouse receipts, or other documents of title) in form and substance reasonably satisfactory to Agent and reflecting the passage to Borrower of title to Inventory conforming to Borrow- er's contract with the seller thereof, (b) the Inventory covered by such Letter of Credit would, but for its not being located at a location set forth on Sched- ule E-1, be Eligible Inventory, and (c) such Letter of Credit shall cease to be an "Inventory Letter of Credit" at such time, if any, as the goods purchased thereunder become Eligible Inventory. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Jackson" means The Jackson National Life Insurance Company, a Michigan life insurance company. "L/C" has the meaning set forth in Section 2.2(a). "L/C Guaranty" has the meaning set forth in Section 2.2(a). "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 15.1. "Lender Group" means, individually and collectively, each of the individual Lenders, Agent, and Co-Agent. "Lender Group Expenses" means all: reasonable out-of-pocket costs or expenses (including taxes, and insurance premiums) required to be paid by Bor- rower under any of the Loan Documents that are paid or incurred by the Lender Group; fees or charges paid or incurred by the Lender Group in connection with the Lender Group's transactions with Borrower, including, fees or charges for photocopying, notarization, telecommunication, public record searches (including tax lien, litigation, title and UCC searches), filing, recording, publication, and appraisal (including periodic Collateral appraisals); title insurance premi- ums paid; costs and expenses incurred by Agent in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Agent re- sulting from the dishonor of checks; reasonable out-of-pocket costs and expenses paid or incurred by the Lender Group to correct any default or enforce any pro- vision of the Loan Documents, or in gaining possession of, maintaining, han- dling, preserving, storing, shipping, selling, preparing for sale, or advertis- ing to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; reasonable costs and expenses paid or incurred by the Lender Group in examining Borrower's Books; costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower; and the reasonable attorneys fees and expenses incurred by the Lender Group in advising, structuring, drafting, reviewing, administering, amending, terminating, enforc- ing (including attorneys fees and expenses incurred in connection with a "work- out," a "restructuring," or an Insolvency Proceeding concerning Borrower), de- fending, or concerning the Loan Documents, irrespective of whether suit is brought. "Letter of Credit" means an L/C or an L/C Guaranty, as the context requires. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute or contract, whether such interest shall be recorded or perfected and whether such interest shall be con- tingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, and including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypotheca- tion, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment or bail- ment for security purposes. The term "Lien" also shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property. For the purposes of this Agreement, a Person shall be deemed to be the owner of any property that such Person shall have acquired or shall hold subject to a conditional sale agreement or other arrangement (including a leasing arrangement) pursuant to which title to the property shall have been retained by or vested in some other Person for security purposes. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Security Agreement, the Mortgages, the Disbursement Letter, the Letters of Credit, the Lockbox Agree- ments, the Collateral Access Agreements, any note or notes executed by Borrower and payable to the Lender Group, and any other agreement entered into, now or in the future, in connection with this Agreement. "Lockbox Account" shall mean a depositary account established pursuant to one of the Lockbox Agreements. "Lockbox Agreements" means those certain Lockbox Operating Procedural Agreements, those certain Depository Account Agreements, and those certain letter agreements authorizing transfers to Agent's designated blocked account, in each case in form and substance satisfactory to Agent, each of which is among Borrower, Agent, and one of the Lockbox Banks. "Lockbox Banks" means, as of the Closing Date, The First National Bank of Boston, Centura Bank, and First Union Bank, and such other financial institutions as may replace one or more of the foregoing, or be added to the foregoing, in each case upon the direction of Borrower and with the consent of Agent (which, prior to an Event of Default, shall not be unreasonably withheld). "Lockboxes" has the meaning set forth in Section 2.7. "Material Adverse Change" means (a) a material adverse change in the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, (b) the material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of the Lender Group to enforce the Obligations or realize upon the Col- lateral, (c) a material adverse effect on the value of the whole or any material part of the Collateral or the amount that the Lender Group would be likely to receive (after giving consideration to delays in payment and costs of enforce- ment) in the liquidation of such Collateral, or (d) a material impairment of the priority of the Lender Group's liens or security interests in the Collateral. "Maximum Amount" means, as of the date any determination thereof is to be made, $120,000,000. "Merger" means the merger of FR Acquisition Corp. into Borrower pursuant to the Merger Agreement. "Merger Agreement" means that certain Agreement and Plan of Merger dated as of May 7, 1996 among Fred's, FR Acquisition Corp. and Borrower. "Mortgages" means one or more mortgages, deeds of trust, or deeds to secure debt, executed by Borrower in favor of Agent, for the benefit of the Lender Group, the form and substance of which shall be reasonably satisfactory to Agent, that encumber the Real Property and the related improvements thereto. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of a Person's present and future letters of credit, notes, drafts, instruments, certificated securities (includ- ing the shares of stock of Subsidiaries of such Person), documents, personal property leases (wherein a Person is the lessor), chattel paper, and Borrower's Books relating to any of the foregoing. "Non Cash Losses" means any losses of Borrower arising out of its write downs of Inventory or fixed assets. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations owing to the Lender Group under any outstanding Letters of Credit, premiums (including Early Termi- nation Premiums), liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees or Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued) lease payments, guaranties, covenants, and duties owing by Borrow- er to the Lender Group of any kind and description (whether pursuant to or evi- denced by the Loan Documents or pursuant to any other agreement between the Lender Group and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that the Lender Group may have obtained by assignment or otherwise, and further including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Originating Lender" has the meaning set forth in Section 15.1(e). "Overadvance" has the meaning set forth in Section 2.5. "Participant" has the meaning set forth in Section 15.1(e). "Pay-Off Letter" means a letter, in form and substance reasonably satisfactory to Agent, from Existing Lender respecting the amount necessary to satisfy in full all of the obligations of Borrower owing to Existing Lender, ex- cept as provided in Schedule P-1 and obtain a termination or release of all of the security interests or liens existing in favor of Existing Lender in and to the properties or assets of Borrower. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Liens" means (a) Liens held by Agent for the benefit of the Lender Group, (b) Liens for unpaid taxes, assessments, or other governmental charges that are not yet due and payable, (c) Liens set forth on Schedule P-1 attached hereto, (d) purchase money Liens and Liens of lessors under capital leases to the extent that the acquisition or lease of the underlying asset was permitted under Section 7.10, and so long as the Lien only secures the purchase price of the asset, (e) easements, rights of way, reservations, covenants, con- ditions, restrictions, zoning variances, and other similar encumbrances that do not materially interfere with the use or value of the property subject thereto, (f) obligations and duties as lessee under any lease existing on the date of this Agreement, and (g) mechanics', materialmen's, warehousemen's, or similar Liens that arise by operation of law. "Permitted Protest" means the right of a Person to protest any Lien, tax, rental payment, or other charge, other than any such Lien or charge that secures the Obligations, provided that (a) a reserve with respect to such obli- gation is established on the books of such Person in an amount that is reason- ably satisfactory to Agent, (b) any such protest is instituted and diligently prosecuted by such Person in good faith, and (c) Agent is reasonably satisfied that, while any such protest is pending, there will be no impairment of the en- forceability, validity, or priority of any of the Liens of Agent for the benefit of the Lender Group in and to the Collateral. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited lia- bility partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means any employee benefit plan, program, or arrangement within the meaning of Section 3(3) of ERISA, maintained or contributed to by Borrower or with respect to which it may incur liability. "Pro Rata Share" means, with respect to a Lender, a fraction (expressed as a percentage), the numerator of which is the amount of such Lender's Commitment and the denominator of which is the aggregate amount of the Commitments. "Real Property" means the parcel or parcels of real property and the related improvements thereto identified on Schedule R-1, and any parcels of real property hereafter acquired by Borrower. "Reference Rate" means the variable rate of interest, per annum, most recently announced by Norwest Bank Minnesota, National Association, or any successor thereto, as its "base rate," "prime rate" or "reference rate," ir- respective of whether such announced rate is the best rate available from such financial institution. "Renewal Date" has the meaning set forth in Section 3.4. "Report" has the meaning set forth in Section 17.16(a). "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of thirty (30) days notice to the PBGC is waived under applicable regulations. "Required Lenders" means, at any time, Lenders whose Pro Rata Shares aggregate sixty six and two thirds percent (66.67%) or more of the Commitments. "Reserve" means a reserve established by Agent for Inventory from past seasons, Inventory shrinkage, or Inventory that is obsolete or slow moving, a restrictive or custom item, live plants, food or other perishable items (other than soft drinks or packaged candies), work-in-process, a component that is not part of finished goods, Inventory that constitutes spare parts, packaging and shipping materials, supplies used or consumed in a Borrower's business, Inven- tory subject to a security interest or lien in favor of any third Person, bill and hold goods, samples or demonstration items, defective goods, "seconds," or Inventory acquired on consignment and the proceeds of the sales thereof to the extent owed to the consignor. "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Revolving Facility Usage" means, as of any date of determination, the aggregate amount of Advances and undrawn or unreimbursed Letters of Credit outstanding. "Security Agreement" means the Intellectual Property Security Agreement, dated as of even date herewith, between Borrower, on the one hand, and Agent for the benefit of the Lender Group, on the other hand. "Settlement" has the meaning set forth in Section 2.1(f). "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commit- ments as they mature in the normal course of business, and (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature. In computing the amount of con- tingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances exist- ing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordi- nary voting power to elect a majority of the board of directors or appoint other managers of such corporation, partnership, limited liability company, or other entity. "Tangible Net Worth" means, as of the date any determination thereof is to be made, the difference of (a) Borrower's total stockholder's equity, minus (b) the sum of: (i) all Intangible Assets of Borrower, (ii) all of Bor- rower's prepaid expenses, and (iii) all amounts due to Borrower and its Subsid- iaries from Affiliates. "Voidable Transfer" has the meaning set forth in Section 15.8. "Unfunded Benefit Liability" has the meaning set forth in Section 5.13. "Working Capital" means the result obtained from subtracting Consolidated Current Liabilities from Consolidated Current Assets. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean the Borrower, and if Borrower has a Subsidiary in the future, on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agree- ment as a whole and not to any particular provision of this Agreement. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by the requisite members of the Lender Group. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replace- ments, substitutions, and supplements, thereto and thereof, as applicable. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Advances. (a) Amount. Subject to the terms and conditions of this Agreement, each Lender agrees to make advances ("Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the difference of: (i) the lesser of: (A) the Maximum Amount, and (B) the Borrowing Base, minus (ii) the sum of (A) the aggregate amount of all undrawn or unreimbursed Letters of Credit (other than Inventory Letters of Credit) plus (B) fifty percent (50%) of the aggregate amount of all undrawn or unreimbursed Inventory Letters of Credit. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the difference of: (y) the product of (1) Applicable Advance Rate times (2) the amount of Eligible Inventory, subject to the Reserve which shall initially be eight and one half percent (8.5%) of Borrow- er's gross Inventory (which Reserve shall be subject to review and adjustment from time to time in the reasonable discretion of Agent, based upon the seasonal composition of Borrower's Inven- tory and such other factors as Agent reasonably determines affect Borrower's Inventory or its value). minus (z) the aggregate amount of reserves, if any, established by Agent under Sections 2.1(b), 6.16, 10 or for the net amount owed by Borrower to JBI Holding Company, Inc. from time to time, if any. The Lenders shall have no obligation to make Advances hereunder to the extent they would cause the outstanding Obligations to exceed the Maximum Amount. Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. (b) Advance Rate Adjustments and Reserves. Anything to the contrary in Section 2.1(a) above notwithstanding, Agent may create reserves against or reduce its advance rates based upon Eligible Inventory upon three (3) Business Days advance notice to Borrower that Agent intends to do so because Agent has reasonably determined that there has occurred a Material Adverse Change. (c) Procedure for Borrowing. Each Borrowing shall be made upon Borrower's irrevocable request therefor delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (California time) on the Funding Date if such advance is for $10,000,000 or less or no later than 10:00 a.m. (California time) on the Business Day immediately preceding the requested Funding Date if such advance is for more than $10,000,000) specifying (i) the amount of the Borrowing; and (ii) the requested Funding Date, which shall be a Business Day. Agent is authorized to make Advances under this Agreement based upon telephonic or other instructions received from anyone pur- porting to be an Authorized Officer, or without instructions if pursuant to Section 2.6(d). Borrower agrees to establish and maintain Borrower's Designated Account with Borrower's Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested by Borrower and made by Agent hereunder shall be made to Borrower's Designated Account. (d) Agent's Election. Promptly after receipt of a request for a Borrowing pursuant to Section 2.1(c), the Agent shall elect, in its dis- cretion, (i) to have the terms of Section 2.1(e) apply to such requested Borrow- ing, or (ii) to make an Agent Loan pursuant to the terms of Section 2.1(f) in the amount of the requested Borrowing. (e) Making of Advances. (i) In the event that the Agent shall elect to have the terms of this Section 2.1(e) apply to a requested Borrowing as described in Section 2.1(d), then promptly after receipt of a request for a Borrowing pur- suant to Section 2.1(c), the Agent shall notify the Lenders, not later than 1:00 p.m. on the Business Day immediately preceding the Funding Date applicable thereto, by telephone and promptly followed by telecopy, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata Share of the requested Borrowing available to the Agent in same day funds, to such account of the Agent as the Agent may desig- nate, not later than 12:00 p.m. (California time) on the Funding Date applicable thereto. After the Agent's receipt of the proceeds of such Advances, upon sat- isfaction of the applicable conditions precedent set forth in Sections 3.1 and 3.2, the Agent shall make the proceeds of such Advances available to Borrower on the applicable Funding Date by transferring same day funds equal to the proceeds of such Advances received by the Agent to the Borrower's Designated Deposit Account; provided, however, that, subject to the provisions of Section 2.1(k), the Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if the Agent shall have received written notice from any Lender, or otherwise has actual knowledge, that (i) one or more of the applicable conditions precedent set forth in Sections 3.1 or 3.2 will not be satisfied on the requested Funding Date for the applicable Borrowing, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. (ii) Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one (1) Business Day prior to the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrower the amount of that Lender's Pro Rata Share of the Bor- rowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrower such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lenders Rate for each day during such period. A notice of Agent submitted to any Lender with respect to amounts owing under this subsection shall be conclu- sive, absent manifest error. If such amount is paid to Agent such payment to Agent shall constitute such Lender's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not paid to Agent on the Business Day following the Funding Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applic- able at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date. Any Lender that fails to make any Advance that it is required to make hereunder on any Funding Date and that has not cured such failure by making such Advance within one (1) Business Day after written demand upon it by Agent to do so, shall constitute a "Defaulting Lender" for purposes of this Agreement until such Advance is made. (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrower to Agent for the Defaulting Lender's benefit; nor shall a Defaulting Lender be entitled to the sharing of any payments hereunder. Amounts payable to a Defaulting Lender shall instead be paid to or retained by Agent. Agent may hold and, in its discretion, re-lend to Borrower the amount of all such payments received or retained by it for the account of such Defaulting Lender. Solely for the purposes of voting or con- senting to matters with respect to the Loan Documents and determining Pro Rata Shares, such Defaulting Lender shall be deemed not to be a "Lender" and such Defaulting Lender's Commitment shall be deemed to be zero (-0-). This section shall remain effective with respect to such Defaulting Lender until (x) the Ob- ligations under this Agreement shall have been declared or shall have become immediately due and payable or (y) the requisite non-Defaulting Lenders, Agent, and Borrower shall have waived such Defaulting Lender's default in writing. The operation of this section shall not be construed to increase or otherwise affect the Commitment of any non-Defaulting Lender, or relieve or excuse the perform- ance by Borrower of its duties and obligations hereunder. (f) Making of Agent Loans. (i) In the event the Agent shall elect to have the terms of this Section 2.1(f) apply to a requested Borrowing as described in Sec- tion 2.1(d), Agent shall make an Advance in the amount of such Borrowing (any such Advance made solely by Agent pursuant to this Section 2.1(f) being referred to as an "Agent Loan" and such Advances being referred to collectively as "Agent Loans") available to Borrower on the Funding Date applicable thereto by trans- ferring same day funds to Borrower's Designated Deposit Account. Each Agent Loan is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that all payments thereon shall be payable to Agent solely for its own account (and for the ac- count of the holder of any participation interest with respect to such Advance). Subject to the provisions of Section 2.1(k), the Agent shall not make any Agent Loan if the Agent shall have received written notice from any Lender, or other- wise has actual knowledge, that (i) one or more of the applicable conditions precedent set forth in Sections 3.1 or 3.2 will not be satisfied on the request- ed Funding Date for the applicable Borrowing, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. Agent shall not otherwise be required to determine whether the applicable conditions precedent set forth in Sections 3.1 or 3.2 have been satisfied on the Funding Date applicable there- to prior to making, in its sole discretion, any Agent Loan. (ii) The Agent Loans shall be secured by the Col- lateral and shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Obligations pursuant to Section 2.6 hereof. (g) Agent Advances. (i) Agent hereby is authorized by Borrower and the Lenders, from time to time in Agent's sole discretion, (1) after the occurrence of a Default or an Event of Default (but without constituting a waiver of such Default or Event of Default), or (2) at any time that any of the other applic- able conditions precedent set forth in Section 3.1 or 3.2 have not been satis- fied, to make Advances to Borrower on behalf of the Lenders which Agent, in its reasonable business judgment, deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of, or maximize the amount of, repayment of the Obligations, or (C) to pay any other amount chargeable to Borrower pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 10 (any of the Advances described in this Section 2.1(g) being herein- after referred to as "Agent Advances"); provided, that Agent shall not make any Agent Advances to Borrower without the consent of the Required Lenders if the amount thereof would exceed $500,000 in the aggregate at any one time. (ii) Agent Advances shall be repayable on demand and secured by the Collateral, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to the Obliga- tions pursuant to Section 2.6. (h) Settlement. It is agreed that each Lender's funded portion of the Advances is intended by the Lenders to be equal at all times to such Lender's Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, the Agent, and the Lenders agree (which agreement shall not be for the benefit of or enforceable by Borrower) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among them as to the Advances, the Agent Loans, and the Agent Advances shall take place on a periodic basis in accordance with the following provisions: (i) The Agent shall request settlement ("Settlement") with the Lenders on a weekly basis, or on a more frequent basis if so determined by the Agent, (1) for itself, with respect to each Agent Loan and Agent Advance, and (2) with respect to Collections received, as to each by notifying the Lenders by telephone and promptly followed by telecopy, or other similar form of transmission, of such requested Settlement, no later than 1:00 p.m. (California time) on the Business Date immediately preceding the date of such requested Settlement (the "Settlement Date"). Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Agent Loans, and Agent Advances for the period since the prior Settlement Date, the amount of repayments received in such period, and the amounts allocated to each Lender of the interest, fees, and other charges for such period. Subject to the terms and conditions contained herein (including Section 2.1(h)(ii)): (y) if a Lender's balance of the Advances, Agent Loans, and Agent Advances exceeds such Lender's Pro Rata Share of the Advances, Agent Loans, and Agent Advances as of a Settle- ment Date, then Agent shall by no later than 1:00 p.m (California time) on the Settlement Date transfer in same day funds to the account of such Lender as Lender may designate, an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Ad- vances, Agent Loans, and Agent Advances; and (z) if a Lender's balance of the Advances Agent Loans, and Agent Advances is less than such Lender's Pro Rata Share of the Advances Agent Loans, and Agent Advances as of a Settlement Date, such Lender shall no later than 1:00 p.m. (California time) on the Settlement Date transfer in same day funds to such account of the Agent as the Agent may designate, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Agent Loans, and Agent Advances. Such amounts made available to the Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Agent Loan or Agent Advance and, together with the portion of such Agent Loan or Agent Advance representing Foothill's Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to the Agent by any Lender on the Settlement Date applica- ble thereto to the extent required by the terms hereof, the Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lenders Rate. (ii) In determining whether a Lender's balance of the Advances, Agent Loans, and Agent Advances is less than, equal to, or greater than such Lender's Pro Rata Share of the Advances, Agent Loans, and Agent Ad- vances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received by Agent with respect to principal, interest, fees payable by Borrower and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be dis- tributed by Agent to that Lender as part of such Settlement; provided, however, that the arrangement fee payable by Borrower under Section 2.11(a) shall be dis- tributed to the Lenders within one (1) Business Day following the Closing Date without regard to the netting of amounts owing to or owed by any Lender as part of a Settlement. (iii) Between Settlement Dates, the Agent, to the extent no Agent Advances or Agent Loans are outstanding, may pay over to Foothill any payments received by the Agent, which in accordance with the terms of the Agreement would be applied to the reduction of the Advances, for application to Foothill's Pro Rata Share of the Advances. If, as of any Settlement Date, Collections received since the then immediately preceding Settlement Date have been applied to Foothill's Pro Rata Share of the Advances other than to Agent Loans or Agent Advances, as provided for in the previous sentence, Foothill shall pay to the Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, the Agent with respect to Agent Loans and Agent Ad- vances, and each Lender with respect to the Advances other than Agent Loans and Agent Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by the Agent or the Lenders, as applicable. (i) Notation. The Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Agent Loans and Agent Advances owing to the Agent, and the interests therein of each Lender, from time to time. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records, such books and records constituting rebuttably presumptive evidence, absent manifest error, of the accuracy of the information contained therein. (j) Lenders' Failure to Perform. All Advances (other than Agent Loans and Agent Advances) shall be made by the Lenders simultaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obliga- tion to make any Advances hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligation to make any Advances hereunder, and (ii) no failure by any Lender to perform its obligation to make any Advances hereunder shall excuse any other Lender from its obligation to make any Advances hereunder. (k) Overadvances. Agent shall not make any voluntary Overadvances without the written consent of the Required Lenders except for amounts charged to the Loan Account for interest, fees or Lender Group Expenses pursuant to Section 2.1(g)(i). If the condition for borrowing under Section 3.2(d) cannot be fulfilled, the Agent may, but is not obligated to, knowingly and intentionally continue to make Advances (including Agent Loans) to Borrower such failure of condition notwithstanding, so long as, at any time, (i) the out- standing Revolving Facility Usage does not exceed the Borrowing Base by more than the amount proposed by Agent and agreed to by the Required Lenders, (ii) such Advances are made pursuant to a plan (proposed by Agent and agreed to by the Required Lenders) for the elimination of the outstanding Revolving Facility Usage in excess of the Borrowing Base, and (iii) the outstanding Revolving Facility Usage (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) does not exceed the Maximum Amount. The foregoing pro- visions are for the sole and exclusive benefit of the Agent and the Lenders and are not intended to benefit Borrower in any way. The Advances and Agent Loans, as applicable, that are made pursuant to this Section 2.1(k) shall be subject to the same terms and conditions as any other Agent Advance or Agent Loan, as applicable, except that the rate of interest applicable thereto shall be the rates set forth in Section 2.6(b) without regard to the presence or absence of a Default or Event of Default; provided, that the Required Lenders may, at any time, revoke Agent's authorization contained in this Section 2.1(k) to make Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses), any such revocation to be in writing and to become effective upon Agent's receipt thereof; provided further, however, that the making of such Overadvances shall not constitute a waiver of such Event of Default arising therefrom. In the event Agent obtains actual knowledge that Revolving Facility Usage exceeds the amount permitted by the preceding para- graph, regardless of the amount of or reason for such excess, Agent shall notify Lenders as soon as practicable (and prior to making any (or any further) inten- tional Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) unless Agent determines that prior notice would result in imminent harm to the Collateral or its value), and Lenders thereupon shall, together with Agent, jointly determine the terms of arrangements that shall be implemented with Borrower intended to reduce, within a reasonable time, the outstanding principal amount of the Advances to Borrower to an amount permitted by the preceding paragraph. In the event any Lender dis- agrees over the terms of reduction and/or repayment of any Overadvance, the terms of reduction and/or repayment thereof shall be implemented according to the determination of the Required Lenders. Each Lender shall be obligated to settle with Agent as provided in Section 2.1(h) for the amount of such Lender's Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.1(k), and any Overadvances resulting from the charging to the Loan Account of interest, fees, or Lender Group Expenses. (l) Effect of Bankruptcy. If a case is commenced by or against Borrower under the Bankruptcy Code, or other statute providing for debtor relief, then, unless otherwise agreed by all Lenders, the Lender Group shall not make additional loans or provide additional financial accommodations under the Loan Documents to Borrower as debtor or debtor-in-possession, or to any trustee for Borrower, nor consent to the use of cash collateral (provided that the Loan Account shall continue to be charged, to the fullest extent permitted by law, for accruing interest, fees, and Lender Group Expenses). 2.2 Letters of Credit. (a) Agreement to Cause Issuance; Amounts; Outside Expiration Date. Subject to the terms and conditions of this Agreement, Agent agrees to take reasonable steps to cause to be issued for the account of Bor- rower letters of credit (each, an "L/C") or guarantees of payment (each such guaranty, an "L/C Guaranty") with respect to letters of credit issued by an issuing bank for the account of Borrower in an aggregate undrawn and unreimburs- ed amount (taking into account any Letters of Credit previously issued and out- standing and calculated after giving effect to any proposed issuance) not to exceed the least of: (i) the Borrowing Base less the amount of outstanding Ad- vances, (ii) the Maximum Amount less the amount of outstanding Advances, or (iii) $40,000,000. Borrower expressly understands and agrees that Agent shall have no obligation to arrange for the issuance by issuing banks of the letters of credit that are to be the subject of L/C Guarantees. Borrower and the Lender Group acknowledge and agree that certain of the letters of credit that are to be the subject of L/C Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall have an expiry date no later than the date on which this Agreement is scheduled to terminate under Section 3.4 (without regard to any potential renewal term) and all such Letters of Credit shall be in form and substance acceptable to Agent in its reasonable discretion. If the Lender Group is obligated to advance funds under a Letter of Credit, the amount so advanced immediately shall be deemed to be an Advance made by the Lender Group to Borrow- er pursuant to Section 2.1 and, thereafter, shall bear interest at the rate then applicable to such Advances under Section 2.6. (b) Indemnification. Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, including payments made by the Lender Group, expenses, and reason- able attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit. Borrower agrees to be bound by the issuing bank's regulations and interpretations of any Letters of Credit guarantied by the Lend- er Group and opened to or for Borrower's account or by Agent's interpretations of any letter of credit issued by the Lender Group to or for Borrower's account, even though this interpretation may be different from Borrower's own, and Bor- rower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistakes, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modi- fications, amendments, or supplements thereto. Borrower understands that the L/C Guarantees may require the Lender Group to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reason- able attorneys fees), or liability incurred by the Lender Group under any L/C Guaranty as a result of the Lender Group's indemnification of any such issuing bank. (c) Supporting Materials. Borrower hereby authorizes and directs any bank that issues a letter of credit guaranteed by the Lender Group to deliver to Agent all instruments, documents, and other writings and property received by the issuing bank pursuant to such letter of credit, and to accept and rely upon Agent's instruc- tions and agreements with respect to all matters arising in connection with such letter of credit and the related application. Borrower may or may not be the "applicant" or "account party" with respect to such letter of credit. (d) Compensation for Letters of Credit. Any and all charges, commissions, reasonable fees, and out-of-pocket costs incurred by the Agent re- lating to the letters of credit guaranteed by the Lender Group shall be con- sidered Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Agent. On the first day of each month, Borrower will pay the Lender Group, for the pro rata benefit of the Lenders, a fee (in addition to the aforementioned charges, commissions, fees, and costs) equal to one and one half percent (1.50%) per annum times the average Daily Balance of the Letters of Credit that were outstanding during the immediately preceding month. Charges, commissions, fees, and costs may be charged to Bor- rower's Loan Account at the time the service is rendered or the commission, fee, or cost is incurred. (e) Cash Collateral. Immediately upon the termination of this Agreement, Borrower agrees to either (i) provide cash collateral to be held by Agent in an amount equal to the maximum amount of the Lender Group's obligations under Letters of Credit, or (ii) cause to be delivered to Agent re- leases of all of the Lender Group's obligations under outstanding Letters of Credit. At Agent's discretion, any proceeds of Collateral received by Agent after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.2(e). (f) Increased Costs. If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application by any governmental authority of any such applicable law, treaty, rule, or regulation, or (ii) compliance by the issuing bank or Agent with any direction, request, or requirement (irrespective of whether having the force of law) of any governmental authority or monetary authority including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect (and any successor thereto): (A) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letters of Credit issued here- under, or (B) there shall be imposed on the issuing bank or the Lender Group any other condition regarding any letter of credit, or Letter of Credit, as applicable, issued pursuant hereto; and the result of the foregoing is to directly or indirectly increase the cost to the issuing bank or the Lender Group of issuing, making, guaranteeing, or maintaining any letter of credit, or Letter of Credit, as applicable, or to reduce the amount receivable in respect thereof by such issuing bank or the Lender Group, then, and in any such case, Agent may, at any time within a rea- sonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as the issuing bank or Agent may specify to be necessary to compensate the issuing bank or the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate set forth in Section 2.6(a) or (b)(i), as applicable. The determination by the issuing bank or Agent, as the case may be, of any amount due pursuant to this Section 2.2(f), as set forth in a certi- ficate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. (g) Participations. (1) Purchase of Participations. Immediately upon issuance of any Letter of Credit in accordance with this Section 2.2, each Lender shall be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty, an undivided interest and participation in the credit support or enhancement provided through the Agent to such issuer in connection with the issuance of such Letter of Credit, equal to such Lender's Pro Rata Share of the face amount of such Letter of Credit (including, without limitation, all obligations of Borrower with respect thereto, and any security therefor or guaranty pertaining thereto). (2) Documentation. Upon the request of any Lender, the Agent shall furnish to such Lender copies of any Letter of Credit, reimbursement agreements executed in connection therewith, application for any Letter of Credit and credit support or enhancement provided through the Agent in connection with the issuance of any Letter of Credit, and such other documenta- tion as may reasonably by requested by such Lender. (3) Obligations Irrevocable. The obligations of each Lender to make payments to the Agent with respect to any Letter of Credit or with respect to any credit support or enhancement provided through the Agent with respect to a Letter of Credit, and the obligations of Borrower to make pay- ments to the Agent, for the account of the Lenders, shall be irrevocable, not subject to any qualification or exception whatsoever, including, without limita- tion, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, setoff, defense or other right which Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), any Lender, the Agent, the issuer of such Letter of Credit, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between Borrower or any other Person and the beneficiary named in any Letter of Credit); (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (v) the occurrence of any Default or Event of Default. 2.3 Payments. (a) Payments by Borrower. (i) All payments to be made by Borrower shall be made without set-off, recoupment, deduction, or counterclaim, except as other- wise required by law. Except as otherwise expressly provided herein, all pay- ments by Borrower shall be made to Agent for the account of the Lenders or Agent, as the case may be, at Agent's address set forth in Section 12, and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time), at the option of Agent, shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (iii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Bor- rower has made such payment in full to Agent on such date in immediately avail- able funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower has not made such payment in full to Agent, each Lender shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Reference Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment, Application, and Reversal of Payments. Except as otherwise provided with respect to Defaulting Lenders, aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Advances to which such payments relate held by each Lender) and payments of the fees (other than fees designated for Agent's, Co-Agent's or PPM America, Inc.'s separate accounts) shall, as applic- able, be apportioned ratably among the Lenders. All payments shall be remitted to Agent and all such payments not relating to principal or interest of specific Advances, or not constituting payment of specific fees, and all proceeds of Col- lateral received by Agent, shall be applied, first, to pay any fees, or expense reimbursements then due to Agent or Co-Agent from Borrower; second, to pay any fees or expense reimbursements then due to the Lenders from Borrower; third, to pay interest due in respect of all Advances, including Agent Loans and Agent Advances; fourth, to pay or prepay principal of Agent Loans and Agent Advances; fifth, ratably to pay principal of the Advances (other than Agent Loans and Agent Advances) and unreimbursed obligations in respect of Letters of Credit; and sixth, ratably to pay any other Obligations due to Agent or any Lender by Borrower. Agent shall promptly distribute to each Lender, pursuant to the applicable wire transfer instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provid- ed for in Section 2.1(h). 2.4 [intentionally omitted] 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to the Lender Group pursuant to Sections 2.1 and 2.2 is greater than either the dollar or percentage limitations set forth in Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Agent for the benefit of the Lender Group, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accord- ance with the priority set forth in Section 2.3(b). 2.6 Interest: Rates, Payments, and Calculations. (a) Interest Rate. All Obligations, except for undrawn Letters of Credit, shall bear interest at a per annum rate of one and three eighths (1.375) percentage points above the Reference Rate. After the Merger, the rate of interest charged on the Obligations will be either: (x) one and one eighths (1.125) percentage points above the Reference Rate; or (y) seven eighths (.875) percentage point above the Reference Rate for any month in which Borrow- er's average unused credit availability based upon Eligible Inventory is $25,000,000 or more. (b) Default Rate. (i) All Obligations, except for undrawn Letters of Credit, shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a per annum rate equal to three (3) percentage points above the pre-default rate, (ii) From and after the occurrence and during the continuance of an Event of Default, the fee provided in Section 2.2(d) shall be increased to a fee equal to three and one half percent (3.50%) per annum times the amount of the undrawn Letters of Credit that were outstand- ing during the immediately preceding month. (c) Minimum Interest. In no event shall the rate of interest chargeable hereunder be less than seven percent (7%) per annum. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum rate, the interest rate chargeable hereunder for the period in question automatically shall be deemed increased to the minimum rate. (d) Payments. Interest hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrower hereby authorizes Agent, at its option, without prior notice to Borrower, to charge such interest, all Lender Group Expenses (as and when incurred), and all installments or other payments due under any Loan Document to Borrower's Loan Account, which amounts thereafter shall constitute Advances hereunder and accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable hereunder. (e) Computation. The Reference Rate as of the date of this Agreement is eight and one-quarter percent (8.25%) per annum. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final deter- mination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, any- thing contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Collection of Accounts. Borrower shall at all times main- tain lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall instruct all Account Debtors with respect to the Accounts, General Intangibles, and Negotiable Collateral of Borrower to remit all Collections in respect there- of to such Lockboxes. Borrower, Agent, and the Lockbox Banks shall enter into the Lockbox Agreements, which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower agrees that all receipts of cash and checks arising out of sales of Inventory in the ordinary course of business shall be deposited by its individual stores into local collection accounts, and that each depositary institution where such collection accounts are maintained shall be irrevocably instructed to immediately forward such Collections to a Lockbox Account. Borrower agrees that all other Collections and other amounts received by Borrower from any Account Debtor or any other source immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby shall be modified by Borrower without the prior written consent of Agent which consent shall not be unreasonably withheld. Upon the terms and subject to the condi- tions set forth in the Lockbox Agreements, all amounts received in each Lockbox Account shall be wired each Business Day into an account (the "Agent's Account") maintained by Agent at a depositary selected by Agent. 2.8 Crediting Payments; Application of Collections. The re- ceipt of any Collections by Agent (whether from transfers to Agent by the Lock- box Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be applied provisionally to reduce the Obligations outstanding under Section 2.1, but shall not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Agent's Account or unless and until such Collection item is honored when pre- sented for payment. From and after the Closing Date, Agent shall be entitled to charge Borrower for one (1) Business Day of `clearance' or `float' at the rate set forth in Section 2.6(a) or Section 2.6(b)(i), as applicable, on all Collec- tions that are received by Agent (regardless of whether forwarded by the Lockbox Banks to Agent, whether provisionally applied to reduce the Obligations under Section 2.1, or otherwise). This across-the-board one (1) Business Day clearance or float charge on all Collections shall be for the sole account of Agent, and such clearance or float charge is acknowledged by the parties to constitute an integral aspect of the pricing of the Lender Group's financing of Borrower, and shall apply irrespective of the characterization of whether receipts are owned by Borrower or Agent, and whether or not there are any outstanding Advances, the effect of such clearance or float charge being the equivalent of charging one (1) Business Day of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Any- thing to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Agent only if it is received into the Agent's Account on or before 11:00 a.m. California time. If any Collection item is received into the Agent's Account after 11:00 a.m. California time it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.9 Borrower's Designated Account. Agent and the Lenders are authorized to make the Advances and to issue the Letters of Credit under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Officer, or without instructions if pursuant to Section 2.6(d). Borrower agrees to establish and maintain Borrower's Designated Account with Borrower's Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by the Lender Group hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested by Borrower and made by the Lender Group hereunder shall be made to Borrower's Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by Agent or the Lenders to Borrower or for Borrower's account, including, Advances, interest accrued, Lender Group Expenses, and any other payment Obligations of Borrower. In accordance with Section 2.8, the Loan Account will be credited with all pay- ments received by Agent from Borrower or for Borrower's account, including all amounts received in the Agent's Account from any Lockbox Bank. Agent shall render statements regarding the Loan Account to Borrower, including principal, nterest, fees, and including an itemization of all charges and expenses consti- tuting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to Agent by registered or certified mail at its address specified in Section 12, written objection thereto describ- ing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Agent for the ratable benefit of the Lender Group (except as otherwise indicated) the following fees: (a) Arrangement Fee. A fee (the "Arrangement Fee") for the account of Agent and PPM America, Inc. in an amount equal to (i) $600,000 less (ii) the amount of the Arrangement Fee paid to Agent for the issuance of a commitment letter respecting this financing. In the event that the Merger occurs on or before October 31, 1996, the Arrangement Fee shall be reduced to $450,000. The balance of the Arrangement Fee shall be fully earned on the Closing Date and shall be payable as follows: (i) $350,000 on August 31, 1996 and the balance, if any, on October 31, 1996, or (ii) if earlier, in full on the date of the Merger. The Arrangement Fee shall be non-refundable when paid. (b) Unused Line Fee. On the first day of each month during the term of this Agreement, a fee in an amount equal to three eighths of one percent (0.375%) per annum times the Average Unused Portion of the Maximum Amount during the prior month; (c) Financial Examination, Documentation, and Appraisal Fees. For each of the respective sole and separate accounts of Agent and, to the extent Co-Agent accompanies Agent under Section 4.6 hereof, Co-Agent: (i) a separate fee of Six Hundred Fifty Dollars ($650) per day per examiner, plus out- of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower performed by the respective personnel employed by Agent and, if applicable, by Co-Agent; (ii) an appraisal fee of One Thousand Five Hundred Dollars ($1,500) per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by the respective personnel employed by Agent and, if applicable, by Co-Agent (it being understood and agreed that, without limiting the generality of Agent's inspection and appraisal rights here- under, Agent shall have the right to have the Eligible Inventory (or any portion thereof) appraised by a qualified appraisal company selected by Agent from time to time for the purpose of determining the value of Eligible Inventory); (iii) the actual charges paid or incurred by Agent and, if applicable, by Co-Agent, if Agent or Co-Agent elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrower or to appraise the Collateral. So long as no Event of Default has occurred, appraisals by appraisal companies shall not be con- ducted more frequently than semi-annually and financial analyses and examina- tions will not be conducted more frequently than quarterly; (d) Loan Fee. On each anniversary of the Closing Date, a fee in an amount equal to three eighths of one percent (0.375%) of the Maximum Amount; provided, however, no loan fee shall be payable by Borrower after the date of Merger; and (e) Agency Fee. On the first day of each month during the term of this Agreement, and thereafter so long as any Obligations are out- standing, an agency fee in an amount equal to $12,500 per month, for the sole account of Agent. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance and Letter of Credit. The obligation of the Lender Group to make the initial Advance or to issue the initial Letter of Credit is subject to the fulfillment, in form and substance to the satisfaction of Agent, Co-Agent and their counsel, of each of the following conditions on or before the Closing Date. In the event that such conditions are not met on or before the Closing Date, then this Agreement shall be null and void, and the Lenders, Agent and Co-Agent shall not have any obliga- tions, responsibilities or liabilities hereunder. (a) the Closing Date shall occur on or before May 31, 1996; (b) Agent shall have received searches reflecting the filing of its financing statements and fixture filings; (c) Agent shall have received each of the following docu- ments, duly executed, and each such document shall be in full force and effect: (i) the Lockbox Agreements; (ii) the Disbursement Letter; (iii) the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination of Existing Lender's Liens in and to the properties and assets of Borrower; (iv) the Mortgages; and (v) the Security Agreements; (d) Agent shall have received a certificate from the Secre- tary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute same; (e) Agent shall have received copies of Borrower's Govern- ing Documents, as amended, modified, or supplemented to the Closing Date, certi- fied by the Secretary of Borrower; (f) Agent shall have received a certificate of status with respect to Borrower, dated within ten (10) days of the Closing Date, by the appropriate officer of the jurisdiction of organization of Borrower, which cer- tificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Agent shall have received certificates of status with respect to Borrower, each dated within ten (10) days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which Borrower is required to be qualified to do business, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.10; (i) Agent shall have received satisfactory opinions of Borrower's counsel; (j) Agent shall have received ALTA Lender's Policies of Title Insurance, or a commitment therefor, from a title company satisfactory to Agent, in an amount satisfactory to Agent, insuring its first priority lien upon each parcel of, or lessee's interest in, the Real Property. Such policies shall contain such endorsements as shall be required by Agent, shall contain only those exceptions acceptable to Agent, and shall be in form reasonably satisfac- tory to Agent. (k) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered or executed or recorded; and (l) Borrower shall have on the Closing Date, (after taking into account the repayment of all existing revolving indebtedness owed to Exist- ing Lender and the replacement of all existing letters of credit issued or ar- ranged by Existing Lender, and net of all accounts payable more than thirty (30) days past due), at least $10,000,000 in the aggregate of unrestricted cash on hand and unused borrowing availability under Section 2.1(a). 3.2 Conditions Precedent to all Advances and all Letters of Credit. The following shall be conditions precedent to all Advances and all Letters of Credit hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, the Lender Group, or any of their Affiliates; (d) the amount of the Obligations, after giving effect to the requested Advance or Letter of Credit, shall not exceed the Availability. 3.3 Condition Subsequent. As a condition subsequent to the making of the initial Advance or the issuance of the initial Letter of Credit, Borrower shall, as soon as available and in any event within thirty (30) days after the Closing Date, deliver to Agent the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be reasonably satisfactory to Agent (the failure by Borrower to so perform or cause to be performed constituting an Event of Default hereunder). 3.4 Term; Automatic Renewal. This Agreement shall become effective upon the execution and delivery hereof by Borrower and the Lender Group and shall continue in full force and effect for a term ending on the date (the "Renewal Date") that is three (3) years from the Closing Date and automa- tically shall be renewed for successive three (3) year periods thereafter, unless sooner terminated pursuant to the terms hereof. Either Borrower or Agent, on behalf of the Lender Group, may terminate this Agreement effective on the Renewal Date or on any anniversary of the Renewal Date by giving the other party at least ninety (90) days prior written notice by registered or certified mail, return receipt requested. Agent shall give Lenders written notice of the pend- ing automatic renewal at least one hundred twenty (120) days before the Renewal Date or such anniversary thereof. Agent must give written notice of Lenders' election to terminate this Agreement if any Lender so instructs Agent at least one hundred (100) days before the Renewal Date or such anniversary thereof. The foregoing notwithstanding, Agent, on behalf of the Lender Group shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrower with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and the continuing security interests of the Lender Group in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and the Lender Group's obligation to provide additional credit hereunder is terminated. 3.6 Early Termination by Borrower. Borrower has the option, at any time upon sixty (60) days prior written notice to Agent, to terminate this Agreement by paying to Agent, for the ratable benefit of the Lender Group, in cash, the Obligations (including an amount equal to the undrawn amount of the Letters of Credit), in full, together with a premium (the "Early Termination Premium") equal to: (a) during the period of time from and after the date of the execution and delivery of this Agreement up to the first anniversary of the Closing Date, three percent (3.0%) times the Maximum Amount; (b) during the period of time from and including the first anniversary of the Closing Date up to the second anniversary of the Closing Date, two percent (2.0%) times the Maximum Amount; (c) during the period of time from and including the second anniversary of the Closing Date up to the Renewal Date, one percent (1.0%) times the Maximum Amount; provided, however, that the Early Termination Premium during the first year of the Facility shall be reduced to an amount equal to one half percent (.50%) of the Maximum Amount if the Merger does not occur, and such pre- payment is made by Borrower from proceeds of an equity or convertible Indebted- ness investment in Borrower of not less than $17,500,000; provided further, how- ever, that if (x) the Merger occurs on or before October 31, 1996, (y) Borrower terminates this Agreement during the earlier of one (1) year immediately follow- ing the Merger or on or before August 31, 1997, and (z) there is no Event of Default that has occurred and is continuing, then Borrower shall not be required to pay an Early Termination Premium. 3.7 Termination Upon Event of Default. If the Lender Group terminates this Agreement upon the occurrence of an Event of Default, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of the Lenders lost profits as a result thereof, Borrower shall pay to Agent, for the ratable benefit of the Lenders, upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Pre- mium shall be presumed to be the amount of damages sustained by the Lenders as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Premium pro- vided for in this Section 3.7 shall be deemed included in the Obligations. 3.8 Voluntary Reduction of Maximum Amount. Borrower shall have the option, at any time after the consummation of the Merger, to permanently reduce the Maximum Amount, without penalty or premium, so long as: (a) no Event of Default has occurred and is continuing; (b) the amount of such reduction is in an increment of $5,000,000 and is equal to or less than $30,000,000; (c) all accrued but unpaid fees on such reduced portion of the Maximum Amount as are owing under Section 2.11 (b) and all Obligations in excess of the reduced Maximum Amount are concur- rently paid in full; and (d) such option may be exercised by Borrower only one time during the term hereof. Such voluntary reduction shall be applied to each Lender's Commitment on a pro rata basis so as to maintain each Lender's Pro Rata Share of all Lenders' Commitments. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower hereby grants to Agent for the benefit of the Lender Group a continuing Lien in all currently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. The Liens of the Agent, for the benefit of the Lender Group, on the Collateral shall attach to all Collateral without further act on the part of the Lender Group or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for the sale of Inventory to buyers in the ordinary course of business and the replacement of Equipment in the ordinary course of business, Borrower have no authority, express or implied, to dispose of any item or portion of the Collateral. Subject to Section 2.3(b), the secured claims of the Lender Group secured by the Collateral shall be of equal priority, and ratable according to the respective Obligations due each member of the Lender Group. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Bor- rower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent for the benefit of the Lender Group. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time, Agent or Agent's designee may (a) notify customers or Account Debtors of Borrower that Borrower's Accounts, General Intangibles, or Negotiable Collateral have been assigned to the Lender Group or that the Lender Group has a security interest therein, and (b) collect Borrower's Accounts, General Intangibles, and Negotiable Collateral directly and charge the out-of- pocket collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group's trustee, any Collections that it receives and immediately will deliver said Collections to Agent for the benefit of the Lender Group in their original form as received by Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Agent, Borrower shall execute and deliver to Agent all fi- nancing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, pledges, assignments, endorsements of certifi- cates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Agent reasonably may request, in form reasonably satisfactory to Agent, to perfect and continue perfected the Lender Group's Liens on the Collateral, and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debt- ors, (c) send requests for verification of Accounts, (d) endorse Borrower's name on any Collection item that may come into the possession of any member of the Lender Group, (e) at any time that an Event of Default has occurred and is con- tinuing, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Agent, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (f) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Bor- rower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (g) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of Agent's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit hereunder is terminated. 4.6 Right to Inspect. Agent and Co-Agent (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect Borrower's Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. Such inspections shall occur during normal business hours unless an Event of Default has occurred and is continuing or the Lender Group deems itself insecure in accordance with Section 1208 of the Code. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to the Lender Group as follows: 5.1 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of liens, claims, security interests, or encumbrances, except for Permitted Liens. 5.2 Intentionally Omitted. 5.3 Eligible Inventory. All Eligible Inventory is now and at all times hereafter shall be of good and merchantable quality. 5.4 Equipment. All of the Equipment owned by Borrower is used or held for use in Borrower's business and is fit for such purposes. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party and are located only at the locations identified on Schedule E-1. 5.6 Inventory Records. Borrower now keeps, and hereafter at all times shall keep, correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost there- for. 5.7 Location of Chief Executive Office; FEIN. The chief execu- tive office of Borrower is located at the address indicated in the preamble to this Agreement. Borrower's FEIN is 58-0382475. After the Merger, the chief executive office of Borrower may,upon notice to Agent in accordance with Section 6.13, be located at 4300 New Getwell Road, Memphis, Tennessee 38118. 5.8 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified could reasonably be expected to have a Material Adverse Change. (b) Borrower does not presently have any direct or in- direct Subsidiaries. 5.9 Due Authorization; No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (ii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Per- mitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the filing of appropriate financing state- ments, fixture filings, and the Mortgages, the execution, delivery, and perform- ance by Borrower of this Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the Loan Documents, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforce- able against Borrower in accordance with their respective terms, except as en- forcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by Borrower to the Lender Group on its properties and assets pursuant to the Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent liti- gation, governmental investigations, or claims, complaints, actions, or prosecu- tions involving Borrower, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) mat- ters arising after the date hereof that, if decided adversely to Borrower, would not be reasonably likely to cause a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements re- lating to Borrower that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited finan- cial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present Borrower's financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.12 Solvency. Borrower is Solvent, and as of the Closing Date, Borrower is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Borrower's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which Borrower is engaged. No trans- fer of property is being made by Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.13 Employee Benefits. Except as provided in Schedule 5.13, each Plan (other than a Multiemployer Plan) is in compliance in all material respects with the applicable provisions of ERISA and the IRC, except where fail- ure to comply could not reasonably be expected to have a material adverse effect on the financial condition of Borrower. Each Plan intended to be qualified under Section401(a) of the IRC (other than a Multiemployer Plan) has been determined by the Internal Revenue Service to be so qualified, and the trusts created thereunder have been determined to be exempt from tax under Section 501 of the IRC, and, to the best knowledge of Borrower, nothing has occurred that would cause the loss of such qualification or tax-exempt status. There are no out- standing liabilities under Title IV of ERISA with respect to any Plan maintained or sponsored by Borrower or any ERISA Affiliate, nor with respect to any Plan to which Borrower or any ERISA Affiliate contributes or is obligated to contribute which could reasonably be expected to have a material adverse effect on the fi- nancial condition of Borrower. No Benefit Plan subject to Title IV of ERISA has any unfunded benefit liability under Section 4001(a)(18) of ERISA (an "Unfunded Benefit Liability") which could reasonably be expected to have a material ad- verse effect on the financial condition of Borrower. Neither Borrower nor any ERISA Affiliate has transferred any Unfunded Benefit Liability to a person other than Borrower or an ERISA Affiliate or has otherwise engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA which could reason- ably be expected to have a material adverse effect on the financial condition of Borrower. Neither Borrower nor any ERISA Affiliate has incurred nor reasonably expects to incur (x) any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan, or (y) any liability under Title IV of ERISA (other than premiums due but not de- linquent under Section 4007 of ERISA) with respect to a Benefit Plan, which could, in either event, reasonably be expected to have a material adverse effect on the financial condition of Borrower. No application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the IRC has been made with respect to any Benefit Plan. No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan which could reasonably be expected to have a material adverse effect on the financial condi- tion of Borrower. 5.14 Environmental Condition. Except as provided in Schedule 5.14, none of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the dis- posal of, or to produce, store, handle, treat, release, or transport, any Haz- ardous Materials. Except as provided in Schedule 5.14, none of Borrower's pro- perties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for environmental remediation pursuant to any environmental pro- tection statute. The Borrower has not received any notice that any lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Borrower has not received a summons, citation, notice, or directive from the federal Environmental Protec- tion Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Haz- ardous Materials into the environment. 5.15 Reliance by the Lender Group; Cumulative. Each warranty and representation contained in this Agreement automatically shall be deemed repeated with each extension of credit hereunder and shall be conclusively pre- sumed to have been relied on by the Lender Group regardless of any investigation made or information possessed by the Lender Group. The warranties and represen- tations set forth herein shall be cumulative and in addition to any and all other warranties and representations that Borrower now or hereafter shall give, or cause to be given, to the Lender Group. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit here- under shall be available and until full and final payment of the Obligations, and unless the Lender Group shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Accounting System. Maintain a standard and modern system of accounting in accordance with GAAP with ledger and account cards or computer tapes, disks, printouts, and records pertaining to the Collateral which contain information as from time to time may be requested by Agent. Borrower also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to its Inventory. 6.2 Collateral Reporting. Provide Agent with the following documents at the following times in form satisfactory to Agent: (a) as requested by Agent from time to time, daily flash sales results, (b) on Tuesday of each week for the week ending on the prior Saturday, a detailed calculation of the Borrowing Base with Inventory reports specifying Borrower's cost of its Inven- tory by category, (c) on a monthly basis, as soon as available but, in any event by no later than the twenty fifth (25th) day of each month during the term of this Agreement, a summary aging, by vendor, of Borrower's accounts payable and any book overdraft and an Inventory report specifying Borrower's cost of its Inventory by category, with additional detail showing additions to and deletions from its Inventory, (d) no less frequently than weekly, a report detailing all amounts due and payable by Borrower (i) to JBI Holding Company, Inc. ("JBI") pursuant to the License Agreement, dated December 1, 1994 between Borrower and JBI, together with all amounts receivable from JBI under the License Agreement, (ii) to any consignor to Borrower of goods arising out of Borrower's sales of such consigned goods, together with all amounts receivable from such consignor arising out of such consignment relationship; and (e) such other reports as to the Collateral or the financial condition of Borrower as Agent may reasonably request from time to time. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent and Co-Agent: (a) as soon as available, but in any event within thirty (30) days after the end of each month during each of Borrower's fiscal years, a company prepared balance sheet, income statement, and cash flow statement covering Borrower's operations during such period; and (b) as soon as available, but in any event within ninety (90) days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year, audit- ed by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been pre- pared in accordance with GAAP. Borrower shall request its accountants to deliver to Agent and Co-Agent, concurrently with the completion of the above described annual statements, a certificate of such accountants addressed to Agent and Co- Agent stating that such accountants do not have knowledge of the existence of any Default or Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and cash flow statement, and, if prepared, such accountants' letter to management. Together with the above, Borrower also shall deliver to Agent and Co-Agent Borrower's, and after the Merger, Fred's, Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower or Fred's, as applicable, with the Securities and Ex- change Commission, as soon as the same are filed, or any other information that is provided by Borrower or Fred's, as applicable, to its shareholders, and any other report reasonably requested by the Lender Group relating to the Collateral or the financial condition of Borrower. Each month, together with the financial statements provided pursuant to Section 6.3(a), Borrower shall deliver to Agent and Co-Agent a certificate in the form of Exhibit 6.3, addressed to the Lender Group and signed by its chief financial officer to the effect that: (i) all reports, statements, or computer prepared information of any kind or nature delivered or caused to be delivered to Agent hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition of Borrower, (ii) the representations and warranties contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) for each month that also is the date on which a financial covenant in Section 6.11 or Section 7.10 is to be tested, a certifi- cate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in Section 6.11 or Section 7.10, as applicable, and (iv) on the date of delivery of such certificate to Agent there does not exist any condition or event that constitutes a Default or Event of Default (or, in each case, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). Borrower shall have issued written instructions to its inde- pendent certified public accountants authorizing them to communicate with Agent and to release to Agent whatever financial information concerning Borrower that Agent may reason- ably request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties (other than legal counsel) to deliver to Agent, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Agent any information they may have regarding Borrower's business affairs and financial conditions. 6.4 Tax Returns. Cause to be delivered to Agent copies of Borrower's future federal income tax returns, and any amendments thereto, within thirty (30) days of the filing thereof with the Internal Revenue Service. 6.5 Intentionally Omitted. 6.6 Returns. Returns and allowances, if any, as between Borrower and its customers shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execu- tion and delivery of this Agreement. 6.7 Title to Equipment. Upon Agent's request, Borrower immediately shall deliver to Agent, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.8 Maintenance of Equipment. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Except for Equipment that is encumbered by a Mortgage, and Equipment that may be purchased in accord- ance with Section 7.10, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and the Equipment is now and shall at all times remain personal property. 6.9 Taxes. Except for Permitted Protests, all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property shall be paid in full, before delinquency or before the expiration of any extension period. Except for Permitted Protests, Borrower shall make due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to execute and deliver to Agent, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, in- cluding those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish or cause to be furnished to Agent proof satisfactory to Agent indicating that Borrower has made such payments or deposits. 6.10 Insurance. (a) At its expense, Borrower shall keep the Collateral and the Real Property insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordi- narily insured against by other owners in similar businesses. Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Col- lateral and the Real Property, as well as insurance against larceny, embezzle- ment, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Agent. All such policies of insurance (except those of public liability and property damage in respect of real property) shall contain a lender's loss pay- able endorsement in a form reasonably satisfactory to Agent, showing Agent as loss payee thereof, as its interest appears, and shall contain a waiver of war- ranties, and shall specify that the insurer must give at least ten (10) days prior written notice to Agent before canceling its policy for any reason. Bor- rower shall deliver to Agent certified copies of such policies of insurance and evidence of the payment of all premiums therefor. All proceeds payable under any such policy shall be payable to Agent for the benefit of the Lender Group to be applied on account of the Obligations. 6.11 Financial Covenants. Prior to the Merger, maintain the following: (a) Tangible Net Worth. Tangible Net Worth of not less than $24,000,000 as determined at the end of each fiscal quarter of each fiscal year of Borrower; (b) Working Capital. Working Capital of not less than $40,000,000, measured on a fiscal quarter-end basis; (c) Current Ratio. A ratio of Consolidated Current Assets divided by Consolidated Current Liabilities of at least one and one tenth to one (1.1:1.0), measured on a fiscal quarter-end basis; and (d) Total Liabilities to Tangible Net Worth Ratio. A ratio of Borrower's total liabilities divided by Tangible Net Worth of not more than nine to one (9.0:1.0), measured on a fiscal quarter-end basis. After the Merger, maintain the following: (a) Tangible Net Worth. Tangible Net Worth of not less than $1,000,000 as determined at the end of each fiscal quarter of each fiscal year of Borrower; (b) Working Capital. Working Capital of not less than $30,000,000, measured on a fiscal quarter-end basis; (c) Current Ratio. A ratio of Consolidated Current Assets divided by Consolidated Current Liabilities of at least one to one (1.0:1.0), measured on a fiscal quarter-end basis; and (d) Total Liabilities to Tangible Net Worth Ratio. A ratio of Borrower's total liabilities divided by Tangible Net Worth of not more than one hundred sixty to one (160:1.0) measured on a fiscal quarter-end basis. In addition, Borrower's aggregate net losses after May 31, 1996 shall not exceed $10,000,000 (net of Non-Cash Losses, if any, recorded as a result of additional store closings (but in no event more than $250,000 per store closing or more than $2,500,000 for all such store closings in any fiscal year of Borrower) and non-cash losses resulting from accounting pronouncements issued after the Closing Date). 6.12 No Setoffs or Counterclaims. All payments hereunder and under the other Loan Documents made by or on behalf of Borrower shall be made without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.13 Location of Inventory and Equipment. Keep its Inventory and Equipment only at the locations identified on Schedule 6.13; provided, however, that Borrower may amend Schedule 6.13 so long as such amendment occurs by written notice to Agent not less than thirty (30) days prior to the date on which such Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provide any financing statements or fixture filings necessary to perfect and continue perfected the Liens of the Lender Group on such assets and also provides to Agent a Collateral Access Agreement. Borrower shall not keep any of its Inventory at a location owned by or leased to Fred's or any other of Fred's Affiliates, nor shall Borrower keep any Inventory of Fred's or any of Fred's Affiliates at any location owned by or leased to Borrower. 6.14 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to have a Material Adverse Change. 6.15 Employee Benefits. (a) Furnish to the Agent (i) promptly, and in any event within thirty (30) Business Days after Borrower knows or has reason to know that an ERISA Event has occurred, a written statement of the chief financial officer of Borrower describing such ERISA Event and any action that is being taking with respect thereto by Borrower or any ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC shall be furnished to the Agent, (ii) promptly, and in any event within three (3) Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communica- tions received by or, to the knowledge of Borrower, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within fifteen (15) Business Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Agent, upon Agent's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distri- buted to employees or former employees of Borrower; (ii) the most recent deter- mination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Borrower or any ERISA Affil- iate to each such plan and copies of the collective bargaining agreements re- quiring such contributions; (vi) any information that has been provided to Borrower or any ERISA Affiliate regarding withdrawal liability under any Multi- employer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrower under any Retiree Health Plan. 6.16 Leases. Pay, or cause to be paid, when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Agent shall be entitled, in its discretion, and without the necessity of declaring an Event of Default, to reserve an amount equal to such unpaid amounts against the Bor- rowing Base. To the extent that Agent does not receive Collateral Access Agree- ments for all of Borrower's locations on Schedule E-1 within sixty (60) days of the date hereof, Agent shall be entitled, in its reasonable discretion, to establish reserves against the Borrowing Base, in addition to any such reserves otherwise established under this Section 6.16, for the maximum amount of any potential liability of Borrower to those landlords who have not entered into such Collateral Access Agreements, under any applicable state statute providing for landlord liens, liens for distress or distraint or similar statutory provi- sions. 6.17 Collateral Access Agreements. Borrower shall use its best efforts to obtain and deliver to Agent Collateral Access Agreements for all of Borrower's locations set forth on Schedule E-1. The failure to obtain any such Collateral Access Agreement after using best efforts shall not constitute an Event of Default. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement; (b) Indebtedness set forth in the latest financial statements of Borrower submitted to Agent on or prior to the Closing Date (other than amounts owed to the Existing Lender that will be repaid on the Closing Date); (c) Indebtedness secured by Permitted Liens; and (d) refinancings, renewals or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or re- newal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals or extensions do not result in an in- crease in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or exten- sions do not result in an increase in the rate of interest charged (other than in the case of capital leases), an increase in the amortization (other than in the case of capital leases to the extent arising out of an increase in the rate of interest charged), a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended or the taking of additional collateral or guarantees, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to the Lender Group as those applicable to the refinanced Indebtedness. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(d) and so long as the replacement Liens only cover those assets or property that secured the original Indebtedness). 7.3 Restrictions on Fundamental Changes. Except for the Merger and the reverse stock split contemplated by the Merger Agreement, enter into any acquisition, merger, consolidation, reorganization, or recapitalization, or re- classify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business, property, or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all of the properties, assets, stock, or other evidence of beneficial ownership of any Person. In the case of a recapitalization of Borrower, such recapitalization shall not be completed without the prior written consent of Agent which consent shall not be unreasonably withheld. 7.4 Extraordinary Transactions and Disposal of Assets. Enter into any transaction not in the ordinary and usual course of Borrower's busi- ness, including the sale, lease, or other disposition of, moving, relocation, or transfer, whether by sale or otherwise, of any of Borrower's properties or assets other than (a) sales of Inventory to buyers in the ordinary course of Borrower's business as currently conducted, and (b) the opening or relocation by Borrower of up to ten (10) stores and the closing by Borrower of up to ten (10) stores in any fiscal year. 7.5 Change Name. Change Borrower's name, FEIN, corporate structure (within the meaning of Section 9402(7) of the Code) or identity, or add any new fictitious name. 7.6 Guarantee. Except for indemnifications of directors and officers pursuant to Delaware law and Borrower's By-Laws, guarantee or otherwise become in any way liable with respect to the obligations of any third Person, except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Agent. 7.7 Restructure. Make any change in its financial structure, the principal nature of its business operations (other than the addition of pharmacies to Borrower's stores), or the date of its fiscal year (other than to conform with Fred's after the Merger). 7.8 Prepayments. (a) Except in connection with a refinancing permitted by Section 7.1(d) prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness of Borrower owing to any third Person, other than the Obliga- tions in accordance with this Agreement; and (b) directly or indirectly, amend, modify, alter, in- crease, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness per- mitted under Sections 7.1(b), (c), or (d). 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Capital Expenditures. Make capital expenditures where the aggregate amount of such capital expenditures in any fiscal year of Borrower is in excess of $8,000,000. 7.11 Consignments. Consign any of Borrower's Inventory or sell any of Borrower's Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.12 Distributions. Except for reasonable tax allocation pay- ments to Fred's following the Merger, and payments of not more than $400,000 in respect of shares as required to consummate the reverse stock split contemplated to occur in connection with the Merger, make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or pur- chase, acquire, redeem, or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding. 7.13 Accounting Methods. Modify or change its method of accounting except as may be necessary to comply with GAAP. 7.14 Investments. Directly or indirectly make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (a) the acquisition of the securities of (whether debt or equity), or other interests in, a Person, (b) loans, advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person except for the acquisition of pharmacy In- ventory and related assets made in accordance with all applicable federal, state and local laws and where the purchase price paid by Borrower for such pharmacy Inventory and related assets does not exceed $200,000, per acquisition, and would not, in the aggregate with all such other purchases made in the same Fiscal Year, exceed $1,200,000. 7.15 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate except for: (a) the Fred's Transactions; (b) reasonable tax allocation payments to Fred's following the Merger; and (c) transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Agent, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate; provided, however, that no trans- action between Borrower, on the one hand, and Fred's or any of Fred's Affil- iates, on the other hand, shall be permitted under this Section 7.15 if the por- tion of Borrower's aggregate net account receivable due from Fred's or such Affiliates relating to Fred's Transactions that is more than thirty (30) days old exceeds $250,000 outstanding at any one time. 7.16 Suspension. Suspend or go out of a substantial portion of its business. 7.17 Intentionally Omitted. 7.18 Use of Proceeds. Use the proceeds of the Advances made hereunder for any purpose other than: (a) on the Closing Date, (i) to repay the outstanding principal, accrued interest, and accrued fees and expenses of Borrower owing to Existing Lender, and (ii) to pay transactional costs and ex- penses incurred in connection with this Agreement; and (b) thereafter, consist- ent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.19 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Without thirty (30) days prior written notification to Agent, relocate its chief executive office to a new location, unless, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Liens of the Lender Group and also provides to Agent a Collateral Access Agreement. The Inventory and Equipment of Borrower shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Agent's prior written consent which consent shall not be unreasonably withheld. 7.20 No Prohibited Transactions Under ERISA. Directly or indirectly: (a) Engage in any prohibited transaction which is rea- sonably likely to result in a material civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemp- tion is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) terminate any Benefit Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any ERISA Affil- iate under Title IV of ERISA; (e) fail to make any required contribution or payment to any Multiemployer Plan; (f) fail to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend a Plan resulting in an increase in current liability for the plan year such that Borrower, any Subsidiary of Borrower, or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or reasonably would be ex- pected to result in a claim against or liability of Borrower, or any ERISA Affiliate in excess of $1,000,000. 7.21 Merger. Notwithstanding anything to the contrary contain- ed in this Agreement or the Loan Documents, the Merger, as disclosed to the Lender Group as of the Closing Date, has been consented to by the Lender Group to the extent that such consent is necessary to avoid an Event of Default arising solely out of the consummation of the Merger. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable or when de- clared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations; 8.2 If either Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sec- tion 6.2 which failure or neglect continues for five (5) or more days, or in the case of Sections 6.3, 6.4, 6.13, 6.15, or 6.16 which failure or neglect contin- ues for ten (10) or more days, or any other term, provision, condition, cove- nant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between such Borrower and the Lender Group; 8.3 If there is a Material Adverse Change that is not solely a material adverse change in the financial operations or condition of Borrower at a time when all financial covenants under the relevant portions of Section 6.11 have been met; 8.4 If any material portion of Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; 8.5 If an Insolvency Proceeding is commenced by Borrower; 8.6 If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolv- ency Proceeding is not timely controverted; (c) the petition commencing the In- solvency Proceeding is not dismissed within forty-five (45) calendar days of the date of the filing thereof; provided, how- ever, that, during the pendency of such period, Agent and any other members of the Lender Group shall be relieved of any obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7 If Borrower is enjoined, restrained, or in any way pre- vented by court order from continuing to conduct all or any material part of its business affairs; 8.8 If a notice of Lien, levy, or assessment (other than a Permitted Lien) is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instru- mentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien (other than a Permitted Lien), whether choate or other- wise, upon any of an Borrower's properties or assets and the same is not paid on the payment date thereof; provided, however, that no such notice of Lien, levy, or assessment, and no such Lien, shall constitute an Event of Default hereunder to the extent that Borrower is diligently pursuing the cure thereof by appro- priate means and that (a) the aggregate amount in respect of all such Liens or notices under this provision is less than $50,000, (b) such Lien, levy or as- sessment is not a federal tax lien, and (c) such Lien, levy or assessment is satisfied within thirty (30) days of the date that it arose; provided further, however, that Agent may establish a reserve as provided under Section 10 during the pendency of such period; 8.9 If a judgment or other claim becomes a Lien upon any mate- rial portion of Borrower's assets and such judgment is not satisfied or released within thirty (30) days of the date thereof. 8.10 If there is a default in any material agreement to which Borrower is a party with one or more third Persons resulting in a right by such third Persons, irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder; 8.11 If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment in respect of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.12 If any material misstatement or material misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to the Lender Group by Borrower or any officer, employee, agent, or direct- or thereof, or if any such material warranty or material representation is with- drawn; or 8.13 If (a) with respect to any Plan, there shall occur any of the following which could reasonably be expected to have a material adverse effect on the financial condition of Borrower: (i) other than with respect to any Multiemployer Plan, the violation of any of the provisions of ERISA; (ii) other than with respect to any Multiemployer Plan, the loss by a Plan intended to be a Qualified Plan of its qualification under Section 401(a) of the IRC; (iii) the incurrence of liability under Title IV of ERISA; (iv) a failure to make full payment when due of all amounts which, under the provisions of any Plan or applicable law, Borrower or any ERISA Affiliate is required to make; (v) the filing of a notice of intent to terminate a Plan under Sections 4041 or 4041A of ERISA; (vi) a complete or partial withdrawal of Borrower or an ERISA Affiliate from any Plan; (vii) the receipt of a notice by the plan administrator of a Benefit Plan that the PBGC has instituted proceedings to terminate such Plan or appoint a trustee to administer such Plan; (viii) a commencement or increase of contributions to, or the adoption of or the amendment of, a Plan; and (ix) the assessment against Borrower or any ERISA Affiliate of a tax under Section 4980B of the IRC; or (b) the Unfunded Benefit Liability of all of the Benefit Plans of Borrower and its ERISA Affiliates shall, in the aggregate, exceed $1,000,000. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence and during the continuation of an Event of Default, Agent may, pursuant to Sections 17.4 and 17.5 do one or more of the following on behalf of the Lender Group, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting the Lender Group's rights in and Liens on the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Agent considers commercially reasonable, and in such cases, Agent will credit Borrower's Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Intentionally Omitted; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Agent considers necessary or reasonable to protect the Lender Group's Liens on the Collateral. Borrower agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent as Agent may designate. Borrower authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collate- ral, or any part of it, and to pay, purchase, contest, or compromise any Lien or charge that in Agent's determination appears to conflict with the Lender Group's Liens and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being ex- pressly waived), and without constituting a retention of any collateral in sat- isfaction of an obligation (within the meaning of Section 9505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Bor- rower held by the Lender Group (including any amounts received in the Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, and any amounts received in the Lockbox Accounts, to secure the full and final repayment of all of the Obliga- tions; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Agent hereby is granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Agent determines is commercially reasonable. It is not necessary that the Col- lateral be present at any such sale; (k) Agent shall give notice of the disposition of the Collateral as follows: (1) Agent shall give Borrower and each holder of a security interest in the Collateral who has filed with Agent a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made and the proposed terms of such sale; (2) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least five (5) days before the date fixed for the sale, or at least five (5) days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Col- lateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (3) If the sale is to be a public sale, Agent also shall give notice of the time and place by publishing a notice one time at least five (5) days before the date of the sale in a newspaper of general circu- lation in the county in which the sale is to be held; (l) The Lender Group may credit bid and purchase at any public sale; and (m) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to Borrower. 9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No ex- ercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. Except for Permitted Protests, if Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased pro- perties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its discretion and without notice, may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses. Any such payments made by Agent shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group any Event of Default under this Agree- ment. Agent need not inquire as to, or contest the validity of, any such expense, tax, Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpay- ment, notice of any default, nonpayment at maturity, release, compromise, set- tlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. So long as the Lender Group complies with its obligations, if any, under Section 9207 of the Code, the Lender Group shall not in any way or manner be liable or responsi- ble for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or de- struction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, each Lender, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys- in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitt- ed by law) from and against any and all claims, demands, suits, actions, invest- igations, proceedings, and damages, and all reasonable attorneys fees and dis- bursements and other costs and expenses actually incurred in connection there- with (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, en- forcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any in- vestigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespec- tive of whether any Indemnified Person is a party thereto), or any act, omis- sion, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall not have any obli- gation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indem- nified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational docu- ments which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by prepaid telex, overnight courier, telefacsimile, or telegram (with messenger delivery speci- fied) to the relevant party at its address set forth below: If to Borrower: ROSE'S STORES, INC. P.H. Rose Building 218 South Garnett Street Henderson, North Carolina 27536 Attn: Ms. Jeanette R. Peters, Chief Financial Officer Fax No. 919.430.2930 Prior to the merger with copies to: PROSKAUER ROSE GOETZ & MENDELSOHN LLP Counsel to Rose's Stores, Inc. 1585 Broadway New York, New York 10036-8299 Attn: Michael E. Foreman, Esq. Fax No. 212.969.2900 After the Merger with copies to: FRED'S INC. 4300 New Getwell Road Memphis, Tennessee 38118 Attn: Mr. Bruce D. Smith, Chief Financial Officer Fax No. 901.365.6815 And to: WARING COX 50 North Front Street Suite 1300 Memphis, Tennessee 38103 Attn: Samuel D. Chafetz, Esq. Fax No. 901.543.8006 If to Agent or to the Lender Group in care of Agent: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Business Finance Division Manager Fax No. 310.575.3435 with copies to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 South Figueroa Street, Suite 2400 Los Angeles, California 90017-5704 Attn: Robert C. Colton, Esq. Fax No. 213.896.0400 and to: PPM FINANCE, INC. 225 West Wacker Drive, Suite 1200 Chicago, Illinois 60606 Attn: F. John Stark, III Fax No. 312.635.0053 and to: ANDERSON, KILL, OLICK & OSHINSKY P.C. 1251 Avenue of the Americas New York, New York 10020-1182 Attn: Gloria J. Frank, Esq. Fax No. 212.278.1733 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to all other parties. All notices or demands sent in accordance with this Section 12, other than notices by the Lender Group in connection with Sections 9504 or 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) days after the deposit thereof in the mail. Borrower ac- knowledges and agrees that notices sent by the Lender Group in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or transmitted by telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF THE LENDER GROUP, IN ANY OTHER COURT IN WHICH THE LENDER GROUP SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP EACH REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers de- livered to the Lender Group may be destroyed or otherwise disposed of by the Lender Group four (4) months after they are delivered to or received by the Lender Group, unless Borrower requests, in writing, the return of said docu- ments, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 15.1 Assignments and Participations. (a) Any Lender may, with the written consent of Agent, assign and delegate to one or more Eligible Transferees (each an "Assignee") all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connec- tion with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related in- formation with respect to the Assignee, shall have been given to Borrower and Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to Borrower and Agent an Assignment and Acceptance ("Assignment and Acceptance") in the form of Exhibit 15.1; and (iii) the assignor Lender or Assignee has paid to Agent for Agent's sole and separate account a processing fee in the amount of $2,500. Anything contained herein to the contrary notwith- standing, the consent of Agent shall not be required (and payment of any fees shall not be required) if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender. (b) From and after the date that Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations here- under have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obli- gations 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 obli- gations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrower and the Assignee. (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: (1) other than as provided in such Assignment and Acceptance, 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 the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pur- suant hereto; (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto; (3) such Assign- ee confirms that it has received a copy of this Agreement, together with 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; (4) such Assignee will, independently and without reliance upon Agent, such assign- ing 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; (5) such Assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (6) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commit- ments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, which consent shall not be unreasonably withheld, sell to one or more Persons (a "Participant") participating interests in the Obligations, the Com- mitment, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents; provided, however, that (i) the Originating Lender's obligations under this Agreement shall remain un- changed, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower and Agent shall continue to deal solely and directly with the originating Lender in connection with the Originat- ing Lender's rights and obligations under this Agreement and the other Loan Doc- uments, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the sole and exclusive right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such participant is participating; (B) reduce the interest rate applicable to the Obligations here- under in which such Participant is participating; (C) release all or a material portion of the Collateral (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating; (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender; or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums; (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts out- standing under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; (vi) in the case of Foothill, Foothill, together with its parents, Subsidiaries, and Affiliates, retain for their own account, at all times, aggregate Commitments constituting not less than $20,000,000; and (vii) in the case of Jackson, Jackson, together with its parents, Subsidiaries, and Affiliates, retain, for their own account, at all times, aggregate Commit- ments constituting not less than $40,000,000. The rights of any Participant shall only be derivative through the Lender with whom such Participant partici- pates and no Participant shall have any direct rights as to the other Lenders, Agent, Co-Agent, Borrower, the Collections, the Collateral, or otherwise in re- spect of the Advances. No Participant shall have the right to participate di- rectly in the making of decisions by the Lenders among themselves. The provi- sions of this Section 15.1(e) are solely for the benefit of the Lender Group, and Borrower shall have no rights as a third party beneficiary of any of the provisions in this Section. (f) In connection with any such assignment or partici= pation or proposed assignment or participation, a Lender may disclose to a third party all documents and information which it now or hereafter may have relating to Borrower or Borrower's business, provided that such Lender enters into a con- fidentiality agreement with such third party in the form provided by Borrower to Agent prior to the Closing Date. (g) Notwithstanding any other provision in this Agree- ment, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applic- able law. 15.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provid- ed, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assign- ment shall be absolutely void. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and its rights and duties hereunder pursuant to Section 15.1 and, except as express- ly required pursuant to Section 15.1, no consent or approval by Borrower is required in connection with any such assignment. 16. AMENDMENTS; WAIVERS. 16.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and Borrower and acknowledged by Agent, do any of the following: (a) increase or extend the Commitment of any Lender; (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Advances which is required for the Lenders or any of them to take any action hereunder; (e) increase the advance rate with respect to Advances (except for the restoration of an advance rate after the prior reduction there- of), or change Section 2.1(b); (f) amend this Section or any provision of the Agreement providing for consent or other action by all Lenders; (g) release Collateral other than as permitted by Sec- tion 17.11; (h) increase the sublimit for credit available against Eligible Inventory (currently contained in clause (y) of Section 2.1(a)); (i) change the definition of "Required Lenders"; (j) release Borrower from any Obligation for the pay- ment of money; or (k) amend any of the provisions of Article 17. and, provided further, that no amendment, waiver or consent shall, unless in writing and signed by Agent or Co-Agent, as the case may be, affect the rights or duties of Agent or Co-Agent, respectively, under this Agreement or any other Loan Document; and, provided further, that the limitation contained in clause (e) above shall not be deemed to limit the ability of Agent to make Advances or Agent Loans, as applicable, in accordance with the provisions of Sections 2.1(f), (g), or (k). The foregoing notwithstanding, any amendment, modifica- tion, waiver, consent, termination, or release of or with respect to any provi- sion of this Agreement or any other Loan Document that relates only to the re- lationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 16.2 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement, any other Loan Document, or any present or future supplement hereto or thereto, or in any other agreement between or among Borrower and Agent and/or any Lender, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or the Lenders on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy which Agent or any Lender may have. 17. AGENT; THE LENDER GROUP. 17.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints Foothill as its Agent under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express con- ditions contained in this Article 17. The provisions of this Article 17 are solely for the benefit of Agent and the Lenders; provided, however, that the provisions of Sections 17.10 and 17.11 also shall be for the benefit of Bor- rower. Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obliga- tions or liabilities shall be read into this Agreement or any other Loan Docu- ment or otherwise exist against Agent. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions which Agent is expressly entitled to take or assert under or pursuant to this Agreement and the other Loan Documents, including, making the determinations contemplated by Section 2.1(b). The iden- tification of PPM Finance, Inc. as Co-Agent hereunder shall not create any rights in favor of it in such capacity, except as expressly set forth herein, nor subject it to any duties or obligations in such capacity. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Advances, the Collateral, the Collections, and related matters; (b) execute and/or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim for Lenders other than Jackson or on behalf of Jackson with its written authorization, notices and other written agreements with respect to the Loan Documents; (c) make Advances for itself or on behalf of Lenders as provided in the Loan Documents; (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents; (e) open and main- tain such bank accounts and lock boxes as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections; (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Advances, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents; and (g) incur and pay such Lender Group Ex- penses as Agent may deem necessary or appropriate for the performance and ful- fillment of its functions and powers pursuant to the Loan Documents. 17.2 Delegation of Duties. Except as otherwise provided in this Section, Agent and Co-Agent may execute any of their duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither Agent nor Co-Agent shall be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made in compliance with this Section and without gross negligence or willful misconduct. The foregoing notwithstanding, neither Agent nor Co- Agent shall make any material delegation of duties to subagents or non-employee delegees without the prior written consent of Required Lenders (it being understood that routine delegation of such administrative matters as filing financing statements, or conducting appraisals or audits, is not viewed as a material delegation that requires prior Required Lender approval). 17.3 Liability of Agent-Related Persons. None of the Agent- Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower, or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower, or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of Borrower, or any of Borrower's Subsidiaries or Affiliates. 17.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, con- sent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be gen- uine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders or all Lenders, as applicable, and until such instructions are received, Agent shall act, or re- frain from acting, as it deems advisable so long as it is not grossly negligent or guilty of wilful misconduct. If Agent so requests, it shall first be indem- nified to its reasonable satisfaction by Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders or all Lenders, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 17.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of Agent, Co- Agent or the Lenders, except with respect to actual knowledge of the existence of an Overadvance, and except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has, or is deemed to have, actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders, Agent and Co- Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 17.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders; provided, however, that: (a) Agent may not declare the Obligations immediately due and payable solely by reason of an Event of Default under Section 8.3 unless all Lenders request Agent to do so; (b) At all times, Agent may propose and, with the consent of Required Lenders (which shall not be unreasonably withheld and which shall be deemed to have been given by a Lender unless such Lender has notified Agent to the contrary in writing within three (3) days of notification of such proposed actions by Agent) exercise, any remedies on behalf of the Lender Group other than declaring the Obligations immediately due and payable; and (c) At all times, once Required Lenders or all Lenders, as the case may be, have approved the exercise of a particular remedy or pursuit of a course of action, Agent may, but shall not be obligated to, make all ad- ministrative decisions in connection therewith or take all other actions reason- ably incidental thereto (for example, if the Required Lenders approve the fore- closure of certain Collateral, Agent shall not be required to seek consent for the administrative aspects of conducting such sale or handling of Collateral). 17.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent or Co-Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent and Co-Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regula- tory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, apprai- sals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower, and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to pro- vide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthi- ness of Borrower, and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 17.7 Costs and Expenses; Indemnification. Agent or Co-Agent may incur and pay Lender Group Expenses to the extent Agent or Co-Agent deems reasonably necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including without limiting the generality of the foregoing, but subject to any require- ments of the Loan Documents that it obtain any applicable consents or engage in any required consultation, court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, wheth- er or not Borrower is obligated to reimburse Agent, Co-Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections to reimburse Agent or Co-Agent for such out-of-pocket costs and expenses prior to the distri- bution of any amounts to Lenders. In the event Agent or Co-Agent is not reim- bursed for such costs and expenses from Collections, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent or Co-Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the trans- actions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to the Agent- Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence, bad faith, or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse Agent or Co-Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including attorney fees and expenses) incurred by Agent or Co-Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent or Co-Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this Section shall survive the pay- ment of all Obligations hereunder and the resignation or replacement of Agent. 17.8 Agent and Jackson in Individual Capacity. Foothill, Jack- son and their respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and gene- rally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though Foothill were not Agent hereunder and as if Jackson were not a Lender hereunder without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, Foothill, Jackson or their respective Affil- iates may receive information regarding Borrower or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obliga- tions in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obliga- tions, which waiver Agent and Jackson will each use its reasonable best efforts to obtain), Agent and Jackson shall be under no obligation to provide such in- formation to them. With respect to the Agent Loans and Agent Advances, Foothill shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not Agent, and the terms "Lender" and "Lenders" include Foothill in its individual capacity. 17.9 Successor Agent. Agent may resign as Agent upon forty five (45) days notice to the Lenders. If Agent resigns under this Agreement, Co-Agent shall have the option to become the successor Agent. If Co-Agent elects not to exercise its option to become the successor Agent, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders and Borrower, a successor Agent. Agent may be removed by the Required Lenders and replaced by Co-Agent as suc- cessor Agent upon Agent's breach of or failure to perform any material provision of this Agreement or as provided under applicable law. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 17 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appoint- ment as Agent by the date which is forty five (45) days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall neverthe- less thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above; In the absence of Agent and Co-Agent, for whatever reason, Borrower is deemed to have satisfied its reporting obligations under Section 6.3 so long as Borrower provides the reports required to be provided by Section 6.3 to any one of the Lenders. 17.10 Withholding Tax. (a) If any Lender is a "foreign corporation, partner- ship or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly com- pleted IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Lender and in each suc- ceeding taxable year of such Lender during which interest may be paid under this Agreement, and IRS Form W-9; and (iii) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees to promptly notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percent- age amount, Agent will treat such Lender's IRS Form 1001 as no longer valid. (c) If any Lender claiming exemption from United States withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Bor- rower to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the IRC. (d) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsec- tion (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other docu- mentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indem- nify Agent fully for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obli- gation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation of Agent. 17.11 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations; and upon payment in full by Borrower of all Obligations under the Loan Documents, Agent shall deliver to Borrower, at Borrower's sole cost and expense, all UCC-3 termi- nation statements and any other documents necessary to terminate the Loan Docu- ments and release the Liens with respect to the Collateral; (ii) constituting property being sold or disposed of if a release is required or desirable in con- nection therewith and if Borrower certifies to Agent that the sale or disposi- tion is permitted under Section 7.4 of this Agreement or the other Loan Docu- ments (and Agent may rely conclusively on any such certificate, without further inquiry); (iii) constituting property in which Borrower owned no interest at the time the security interest was granted or at any time thereafter; or (iv) con- stituting property leased to Borrower under a lease that has expired or been terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not release any Lien on any Collateral without the prior writ- ten authorization of the Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 17.11; pro- vided, however, that (i) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or war- ranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower is cared for, protected or insured or has been encumbered, or that the Liens of the Lender Group have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 17.12 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, with- out the express consent of Agent, and that it shall, to the extent it is lawful- ly entitled to do so, upon the request of Agent, set off against the Obliga- tions, any amounts owing by such Lender to Borrower or any accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any se- curity interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) Subject to Section 17.8, if, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff or otherwise, any proceeds of Collateral or any payments with respect to the Obligations of Bor- rower to such Lender arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender shall promptly (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in same day funds, as applicable, for the account of all of the Lenders and for applica- tion to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such ex- cess payment received shall be applied ratably as among the Lenders in accord- ance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 17.13 Agency for Perfection. Agent and each Lender hereby ap- points Co-Agent and each other Lender as agent for the purpose of perfecting the Liens of the Lender Group in assets which, in accordance with Division 9 of the UCC can be perfected only by possession. Should Co-Agent or any Lender obtain possession of any such Collateral, Co-Agent or such Lender, as the case may be, shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver such Collateral to Agent or in accordance with Agent's instructions. 17.14 Payments by Agent to the Lenders. All payments to be made by Agent to Co-Agent or the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to the instructions set forth on Schedule C-1, or pursuant to such other wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium or interest on revolving advances or otherwise. 17.15 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent and Co-Agent to enter into this Agreement and the other Loan Documents relating to the Col- lateral, for the ratable benefit (subject to Sections 2.3(b) and 4.1) of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent, Co-Agent, Required Lenders, or all Lenders, as applicable, in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent, Co-Agent, Required Lenders, or all Lenders, as applicable, of their respective powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By signing this Agree- ment, each Lender and Co-Agent: (a) is deemed to have requested that Agent furnish Co- Agent or such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") pre- pared by Agent, and Agent shall so furnish Co-Agent and each Lender with such Reports; (b) expressly agrees and acknowledges that Agent (i) does not make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report; (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party perform- ing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon Borrower's books and records, as well as on representations of Borrower's personnel; (d) agrees to keep all Reports and other material in- formation obtained by it pursuant to the requirements of this Agreement in ac- cordance with its reasonable customary procedures for handling confidential in- formation; it being understood and agreed by Borrower that in any event Co-Agent or such Lender may make disclosures (a) reasonably required by any bona fide potential or actual Assignee, transferee, or Participant in connection with any contemplated or actual assignment or transfer by Co-Agent or such Lender of an interest herein or any participation interest in such Lender's rights hereunder, (b) of information that has become public by disclosures made by Persons other than Co-Agent or such Lender, its Affiliates, assignees, transferees, or parti- cipants, or (c) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by ap- plicable law, statute, regulation, or court order, Co-Agent or such Lender shall notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof; and (e) without limiting the generality of any other indem- nification provision contained in this Agreement, agrees: (i) to hold Agent, Co-Agent and any such other Lender preparing a Report harmless from any action the indemnifying Co-Agent or Lender may take or conclusion the indemnifying Co- Agent or Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Co-Agent or Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower; and (ii) to pay and protect, and indemnify, defend and hold Agent, Co-Agent and any such other Lender preparing a Report harmless from and against, the claims, actions, pro- ceedings, damages, costs, expenses and other amounts (including, attorney costs) incurred by Agent, Co-Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Co-Agent or Lender. In addition to the foregoing: (x) Any Lender or Co-Agent may from time to time request of Agent in writing that Agent provide to such Lender or Co-Agent a copy of any report or document provided by Borrower to Agent, and, upon receipt of such request, Agent shall provide a copy of same to such Lender or Co-Agent promptly upon receipt thereof; (y) To the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or informa- tion from Borrower, any Lender or Co-Agent may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's or Co-Agent's notice to Agent, whereupon Agent promptly shall request of Borrower the addi- tional reports or information specified by such Lender, and, upon receipt there- of, Agent promptly shall provide a copy of same to such Lender or Co-Agent; and (z) Any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to Co-Agent and each Lender. 17.17 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any Advances shall constitute the several (and not joint) obligations of the re- spective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such Advances not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing con- tained herein shall confer upon any Lender any interest in, or subject any Lend- er to any liability for, or in respect of, the business, assets, profits, loss- es, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 17.7, no member of the Lend- er Group shall have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make Advances, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 18. GENERAL PROVISIONS. 18.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower and the Lender Group. 18.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 18.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 18.4 Severability of Provisions. Each provision of this Agree- ment shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 18.5 [Intentionally Omitted] 18.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver a manually executed counter- part of this Agreement but the failure to deliver a manually executed counter- part shall not affect the validity, enforceability, and binding effect of this Agreement. 18.7 Revival and Reinstatement of Obligations. If the incur- rence or payment of the Obligations by Borrower or the transfer by Borrower to the Lender Group of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is re- quired to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 18.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. In the event of a conflict between the terms of this Agreement and the terms of the Mortgages de- livered in connection herewith, the terms of the Loan Agreement shall control, provided, however, that the mere absence of a provision in this Agreement shall not be construed as in conflict with affirmative provisions in the Mortgages. 18.9 Fred's Not Liable. Borrower, Agent, Co-Agent, and the Lenders agree that, irrespective of whether the Merger shall take place, Fred's does not presently have and will not incur as a result of the Merger, any obli- gations to the Lender Group arising out of this Agreement or the Loan Documents, nor is it guaranteeing any Obligations of Borrower. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. ROSE'S STORES, INC., a Delaware corporation By /s/ Jeanette R. Peters Title: Chief Financial Officer PPM FINANCE, INC., a Delaware corporation, as Co-Agent By /s/ Stuart Lissner Title: Vice President JACKSON NATIONAL LIFE INSURANCE COMPANY, a Michigan life insurance company, as a Lender By: PPM AMERICA, INC., a Delaware corporation, its attorney-in-fact By /s/ Stuart Lissner Title: Vice President FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and a Lender By /s/ James Callas Title: Senior Vice President EX-10.3 4 RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Suzanne Witkowsky FUTURE ADVANCE DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT THIS DOCUMENT SECURES OBLIGATIONS WHICH CONTAIN PROVISIONS FOR A VARIABLE RATE OF INTEREST STATE OF NORTH CAROLINA ) ) ss. COUNTY OF VANCE ) FUTURE ADVANCE DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT ("Deed of Trust") made this 21st day of May, 1996, between ROSE'S STORES, INC, a Delaware corporation ("Grantor") having an office at 218 South Garnett Street, Henderson, North Carolina 27536, as trustor, and DAVID L HUFFSTETLER, whose address is Two Hanover Square, Suite 2000, Raleigh, North Carolina 27601, as trustee ("Trustee") and FOOTHILL CAPITAL CORPORATION, a California corporation, having an office at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333, Attn: Business Finance Division Manager, individually as a lender, and as agent for and on behalf of the financial institutions ("Lenders") who may from time to time be parties to the Loan Agreement (as hereinafter defined). WITNESSETH FOR THE PURPOSE OF SECURING the following described obligations, liabilities and indebtedness of Grantor: (a) the payment of all loans, advances, indebtedness, obligations and liabilities in the aggregate principal amount of One Hundred Twenty Million Dollars ($120,000,000), to be paid in accordance with the terms and with interest as set forth in that certain Loan and Security Agreement of even date herewith to which Foothill Capital Corporation, as agent, PPM Finance, Inc., as co-agent, the financial institutions parties thereto as lenders, and Grantor are parties (the "Loan Agreement": Foothill Capital Corporation and any successor agent pursuant to the Loan Agreement is hereby defined as "Beneficiary": capitalized terms not otherwise defined herein have the same meaning as in the Loan Agreement) including, without limitation, those contained in Section 11 therein, and all modifications, extensions and/or renewals thereof, and all other instruments, agreements and documents referred to or contemplated thereby, pursuant to which, among other things, Beneficiary and Lenders have agreed to make revolving loans to Grantor evidenced by the Loan Agreement, which may be made, repaid and readvanced in accordance with the Loan Agreement, (b) the payment and performance of all indebtedness and obligations of Grantor arising under this Deed of Trust, and other documents executed by Grantor in connection herewith, (c) any and all advances made by Beneficiary or Lenders to protect or preserve the Mortgaged Property (as hereinafter defined) or the security interest or lien created hereby on the Mortgaged Property, or for taxes, assessments or insurance premiums as hereinafter provided or for the performance of any of Grantor's obligations hereunder or for any other purpose provided herein (whether or not the original Grantor remains the owner of the Mortgaged Property at the time of such advance); (d) payment of any money advanced by Beneficiary to Grantor, or its successors, with interest thereon, evidenced by notes (indicating that they are so secured); (e) any and all renewals, extensions, modifications, substitutions, replacements or consolidations of the indebtedness described in clauses (a), (b), (c) or (d) above; and (f) all other obligations, liabilities and indebtedness of every kind and character now or hereafter owing by Grantor to Lenders or Beneficiary, however created, incurred or evidenced, direct or indirect, absolute or contingent, whether owing under the Loan Agreement, this Deed of Trust or under any and all other instruments, agreements and documents referred to or contemplated by the Loan Agreement, including, without limitation, all "Obligations" of Trustor to Beneficiary or Lenders, as such term is defined in the Loan Agreement, and in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration, Grantor has granted, bargained, sold, alienated, enfeoffed, released, conveyed and confirmed, and by these presents does grant, bargain, sell, alienate, enfeoff, release, convey and confirm unto the Trustee, and his heirs, successors and assigns in trust, WITH POWER OF SALE, all its estate, right, title and interest in, to and under any and all of the property located in the City of Henderson, County of Vance, State of North Carolina, and more particularly described in Exhibit A attached hereto and made a part hereof, including all easements, rights, privileges, tenements, hereditaments and appurtenances thereunto belonging or in anywise appertaining, and all of the estate, right, title, interest, claim, demand, reversion or remainder whatsoever of Grantor therein or thereto, either at law or in equity, in possession or expectancy, now or hereafter acquired, including, without limitation, all and singular the ways, waters, water courses, water rights and powers, liberties, privileges, sewers, pipes, conduits, wires and other facilities furnishing utility or other services to the property (collectively, the "Land"); TOGETHER with all of the right, title and interest of Grantor in and to all buildings, structures and improve- ments now or hereafter erected on the Land including all plant equipment, apparatus, machinery and fixtures of every kind and nature whatsoever now or hereafter located on or forming part of said buildings, structures and improvements (collectively, the "Improvements"; the Land and Improvements being herein- after collectively referred to as the "Premises"); TOGETHER with all of the right, title and interest of Grantor in and to the land lying in the bed of any street, road, highway or avenue in front of or adjoining the Premises; TOGETHER with any and all award and awards hereto- fore made or hereafter to be made by any governmental autho- rities to the present and all subsequent owners of the Premises which may be made with respect to the Premises as a result of the return of excess taxes paid on the Mortgaged Property, the exercise of the right of eminent domain, the alteration of the grade of any street or any other injury to or decrease of value of the Premises, which said award or awards are hereby assigned to Beneficiary and Beneficiary, at its option, is hereby authorized, directed and empowered to collect and receive the proceeds of any such award or awards from the authorities making the same and to give proper receipts and acquittances therefor, and to apply the same as hereinafter provided; and Grantor hereby covenants and agrees to and with Beneficiary, upon request by Beneficiary, to make, execute and deliver, at Grantor's expense, any and all assign- ments and other instruments sufficient for the purpose of assigning the aforesaid award or awards to Beneficiary free, clear and discharged of any and all encumbrances of any kind or nature whatsoever; TOGETHER with all goods, Equipment (as defined in the Loan Agreement), Inventory (as defined in the Loan Agreement), building materials, chattels and articles of personal property (other than personal property which is or at any time has become Hazardous Substances, as defined in the Loan Agreement), including any interest therein, now or at any time hereafter affixed to, attached to, or used in any way in connection with or to be incorporated at any time into the Premises, or placed on any part thereof but not attached or incorporated thereto, together with any and all replacements thereof, appertaining and adapted to the complete and compatible use, enjoyment, occupancy, operation or improvement of the Premises (collectively, the "Chattels"); TOGETHER with leases of the Premises or the Chattels or any part thereof now or hereafter entered into and all right, title and interest of Grantor thereunder, including, without limitation, cash or securities deposited thereunder to secure performance by the lessees of their obligations there- under (whether such cash or securities are to be held until the expiration of the terms of such leases or applied to one or more of the installments of rent coming due immediately prior to the expiration of such terms) and all rights to all insurance proceeds and unearned premiums arising from or relating to the Premises and all other rights and easements of Grantor now or hereafter existing pertaining to the use and enjoyment of the Premises and all right, title and interest of Grantor in and to all declarations of covenants, conditions and restrictions as may affect or otherwise relate to the Premises; TOGETHER with all sales agreements, deposit receipts, escrow agreements and other ancillary documents and agreements entered into with respect to the sale to any purchasers of any part of the Premises, and all deposits and other proceeds thereof; TOGETHER with all permits, plans, licenses, speci- fications, subdivision rights, tentative tract maps, final tract maps, security interests, contracts, contract rights or other rights as may affect or otherwise relate to the Premises; TOGETHER with all rights of Grantor in or to any fund, program or trust monies and any reimbursement therefrom directly or indirectly established, maintained or administered by any governmental authority or any other individual or entity which is designed to or has the effect of providing funds (whether directly or indirectly or as reimbursement) for the repair or replacement of storage tanks (whether above or below ground) located on the Premises or the remediation or cleanup of any spill, leakage or contamination from any such tank or resulting from the ownership, use or maintenance of any such tank or to compensate third parties for any personal injury or property damage; TOGETHER with all rents, issues, profits, revenues, income and other benefits to which Grantor may now or here- after be entitled from the Premises or the Chattels (which Premises, titles, interests, awards, Chattels, easements, rents, income, benefits, ways, waters, rights, powers, liber- ties, privileges, utilities, tenements, hereditaments, appur- tenances, reversions, remainders, rents, issues, profits, estate, property, possession, claims and demands, are herein- after collectively referred to as the "Mortgaged Property"); TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee, his heirs, successors and assigns forever. It is the intention of the parties hereto that this Deed of Trust is made and executed to comply with the provisions of N.C.G.S. 45-67 et seq., and shall secure any and all present and future obligations which Grantor now or may hereafter owe to Beneficiary or Lenders (but in no event incurred more than fifteen (15) years after the date hereof), including without limitation, any future loans and advances made by Beneficiary or Lenders pursuant to the Loan Agreement to or for the benefit of Grantor, up to a maximum aggregate amount of principal indebtedness (excluding accrued but unpaid interest which is added to the principal amount)outstanding at any one time of One Hundred Twenty Million Dollars ($120,000,000). The principal amount of present obligations of Grantor to Beneficiary or Lenders secured hereby is in the sum of $______________ as of the date hereof, and the principal amount of all present and future obligations of Grantor to Beneficiary or Lenders secured hereby is in the sum of One Hundred and Seventy Five Million Dollars ($175,000,000), plus interest, costs and advances made by Beneficiary or Lenders to protect or preserve the Mortgaged Property or the lien hereof on the Mortgaged Property, or for taxes, assessments or insurance premiums as herein provided. Pursuant to N.C.G.S. 45-68(2), Grantor and Beneficiary agree that at the time each obligation is incurred, it shall not be necessary for each such obligation to be evidenced by any written instrument or notation signed by Grantor and stipulating that such obligation is secured by this Deed of Trust. ARTICLE I And Grantor further covenants with the Trustee and Beneficiary as follows: SECTION 1.01. Grantor has good and marketable title to an indefeasible fee estate in the Premises subject to no lien, charge, or encumbrance except such as are approved by Beneficiary in the title policy issued to Beneficiary in connection herewith; that it owns the Chattels free and clear of liens and claims except such as are permitted by the Loan Agreement or approved by Beneficiary; that this Deed of Trust is and will remain a valid and enforceable first and prior lien on the Mortgaged Property subject only to the exceptions referred to above; and that neither the entry nor the performance of and compliance with this Deed of Trust or the Loan Agreement has resulted or will result in any violation of, or be in conflict with, or result in the creation of any deed of trust, lien, encumbrance or charge (other than those created by the execution and delivery of, or permitted by, this Deed of Trust or the Loan Agreement) upon any of the properties or assets of Grantor, or constitute a default under any deed of trust, indenture, contract, agreement, instrument, franchise, permit, judgment, decree, order, statute, rule or regulation applicable to Grantor. Grantor has full power and lawful authority to convey the Mortgaged Property in the manner and form herein done or intended hereafter to be done and will preserve such title, and will forever preserve, warrant and defend the same unto the Trustee and Beneficiary, and will forever preserve, warrant and defend the validity and priority of the lien hereof against the claims of all persons and parties whomsoever. SECTION 1.02. Intentionally Deleted. SECTION 1.03. Intentionally Deleted. SECTION 1.04. Intentionally Deleted. SECTION 1.05. All right, title and interest of Grantor 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, or constructed, assembled or placed by Grantor on the Premises, and all conversions of the security constituted thereby, immediately upon such acquisi- tion, release, construction, assembling, placement or conver- sion, as the case may be, and in each such case, without any further grant, conveyance, assignment or other act by Grantor, shall become subject to the first and prior lien and security interest of this Deed of Trust as fully and completely, and with the same effect, as though now owned by Grantor and specifically described in the granting clause hereof, but at any and all times Grantor will execute and deliver to Trustee or Beneficiary any and all such further assurances, deeds of trust, conveyances or assignments thereof with respect thereto as Beneficiary may reasonably require for the purpose of expressly and specifically subjecting the same to the lien and security interest of this Deed of Trust. SECTION 1.06. Grantor 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 and security interest hereof shall be fully preserved, at the cost of Grantor, without expense to Beneficiary. SECTION 1.07. In the event of the passage, after the date of this Deed of Trust, of any law of the State of North Carolina deducting from the value of the Mortgaged Property for the purpose of taxing the amount of any lien thereon, or changing in any way the laws now in force for the taxation of deeds of trust, or debts secured thereby, for state or local purposes, or the manner of operation of any such taxes so as to adversely affect the interest of Beneficiary, then and in such event, Grantor shall bear and pay the full amount of such taxes, provided that if for any reason payment by Grantor of any such new or additional taxes would be unlawful or if the payment thereof would constitute usury or render the Loan Agreement or the indebtedness secured hereby wholly or partially usurious under any of the terms or provisions of the Loan Agreement or this Deed of Trust, or otherwise, Beneficiary may, at its option, upon thirty (30) days' written notice to Grantor, (i) declare the whole indebtedness secured by this Deed of Trust, with interest thereon, to be immediately due and payable, or (ii) pay that amount or portion of such taxes as renders the Loan Agreement or the indebtedness secured hereby unlawful or usurious, in which event Grantor shall concurrently therewith pay the remaining lawful non-usurious portion or balance of said taxes. SECTION 1.08. In addition to restrictions contained in the Loan Agreement, Grantor will not (i) further encumber, sell, convey or transfer any interest in, or any part of, the Mortgaged Property, or (ii) except as permitted by the Loan Agreement, transfer the presently existing ownership interests in Grantor (including, without limitation, partnership or stock ownership interests, as the case may be) so as to effectively transfer control of Grantor named herein to any other person, firm, corporation or other entity, without the prior written consent of Beneficiary. Any such encumbrance, sale, conveyance or transfer made without Beneficiary's prior written consent shall be an Event of Default hereunder. At Beneficiary's option, Beneficiary's consent to a further encumbrance or transfer shall be subject to an increase in interest rate, modification of loan terms and/or the payment of a fee. SECTION 1.09. Beneficiary and the Trustee shall have access to and the right to inspect the Premises and Chattels at all reasonable times. SECTION 1.10. Intentionally Deleted. SECTION 1.11. If Grantor shall fail to perform any of the covenants contained herein on its part to be performed, Beneficiary may, but shall not be required to, make advances to perform the same, or cause the same to be performed, on Grantor's behalf, and all sums so advanced shall bear interest, from and after the date advanced until repaid, at the lower of (i) the maximum rate permitted by law or (ii) the default rate set forth in the Loan Agreement, shall be a lien upon the Mortgaged Property and shall, at Beneficiary's option, be added to the indebtedness secured hereby. Grantor will repay on demand all sums so advanced on its behalf with interest at the rate herein set forth. This Section 1.11 shall not be construed as preventing any default by Grantor in the observance of any covenant contained in this Deed of Trust from constituting an Event of Default hereunder. SECTION 1.12. Grantor will not commit any waste at or with respect to the Mortgaged Property nor will Grantor do or fail to do anything which will in any way increase the risk of fire or other hazard to the Premises, Improvements or Chattels or to any part thereof. Grantor will, at all times, maintain the Improvements and Chattels in good order and condition and will promptly make, from time to time, all repairs, renewals, replacements, additions and improvements in connection therewith which are needful or desirable to such end. Improvements shall not be removed, demolished or materially altered, nor shall any Chattels be removed except as permitted by the Loan Agreement, or after receipt of the written consent of Beneficiary, provided, however, that if there shall not have occurred an Event of Default, Grantor may make appropriate replacements of Chattels, free of superior title, liens and claims, provided such replacements are immediately made and are of a value at least equal to the value of the Chattels removed. SECTION 1.13. Grantor will immediately notify Beneficiary of the institution of any proceeding for the condemnation or taking by eminent domain of the Mortgaged Property, or any portion thereof. The Trustee and Beneficiary may participate in any such proceeding and Grantor from time to time will deliver to Beneficiary all instruments requested by it to permit such participation. In the event of such condemnation proceedings, or a conveyance in lieu of such taking, the award or compensation payable is hereby assigned to and shall be paid to Beneficiary. Beneficiary shall be under no obligation to question the amount of any such award or compensation and may accept the same in the amount in which the same shall be paid, but shall have no right to bind Grantor or to make settlement of its claim, except to the extent of the interest of the Trustee and Beneficiary. In any such condemnation proceedings the Trustee and Beneficiary may be represented by counsel selected by Beneficiary. The proceeds of any award or compensation so received after reimbursement of any expenses incurred by Beneficiary in connection with such proceedings, shall, at the option of Beneficiary, be applied, without premium, to the repayment of the sums due under the Loan Agreement in such order as Beneficiary may in its sole discretion elect (regardless of interest payable on the award by the condemning authority), or to the cost of restoration of the Improvement or Chattel so taken and other terms as shall be satisfactory to Beneficiary. SECTION 1.14. The assignment of rents, income and other benefits (collectively, "rents") contained in the granting clause of this Deed of Trust shall be fully operative without any further action on the part of Grantor or Beneficiary and specifically Beneficiary shall be entitled, at its option, to all rents from the Mortgaged Property whether or not Beneficiary takes possession of the Mortgaged Property. Grantor hereby further grants to Beneficiary the right (i) to enter upon and take possession of the Mortgaged Property for the purpose of collecting the rents, (ii) to dispossess by the usual summary proceedings any tenant defaulting in the payment thereof to Beneficiary, (iii) to let the Mortgaged Property or any part thereof, and (iv) to apply the rents, after payment of all necessary charges and expenses, on account of the indebtedness and other sums secured hereby. Such assignment and grant shall continue in effect until the indebtedness and other sums secured hereby are paid, the execution of this Deed of Trust constituting and evidencing the irrevocable consent of Grantor to the entry upon and taking possession of the Mortgaged Property by Beneficiary pursuant to such grant, whether or not sale or foreclosure has been instituted. Neither the exercise of any rights under this Section by Beneficiary nor the application of the rents to the indebtedness and other sums secured hereby, shall cure or waive any Event of Default, or notice of default hereunder or invalidate any act done pursuant hereto, but shall be cumulative of all other rights and remedies. The foregoing provisions hereof shall constitute an absolute and present assignment of the rents from the Mortgaged Property, subject, however, to the conditional permission given to Grantor to collect and use the rents until the occurrence of an Event of Default at which time such conditional permission shall automatically terminate; and the existence or exercise of such right of Grantor shall not operate to subordinate this assignment, in whole or in part, to any subsequent assignment by Grantor permitted under the provisions of this Deed of Trust, and any such subsequent assignment by Grantor shall be subject to the rights of the Trustee and Beneficiary hereunder. SECTION 1.15. (a) Grantor will not (i) execute an assignment of the rents or any part thereof from the Mortgaged Property unless such assignment shall provide that it is subject and subordinate to the assignment contained in this Deed of Trust, and any additional or subsequent assignment executed pursuant hereto, or (ii) except where the lessee is in default thereunder, terminate or consent to the cancellation or surrender of any lease of the Mortgaged Property or of any part thereof, now existing or hereafter to be made or (iii) modify any such lease or give consent to any assignment or subletting without Beneficiary's prior written consent, or (iv) accept prepayments of any installments of rent or additional rent to become due under such leases, except prepayments in the nature of security for the performance of the lessee's obligations thereunder, or (v) in any other manner impair the value of the Mortgaged Property or the security of the Trustee or Beneficiary for the payment of the indebtedness secured hereby, or (vi) enter into any lease prohibited under the provisions of the Loan Agreement. (b) Grantor will not execute any lease of all or a substantial portion of the Mortgaged Property except for actual occupancy by the lessee thereunder, and will at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in all leases of the Mortgaged Property now or hereafter existing, on the part of the lessor thereunder to be kept and performed. If any such lease provides for the giving by the lessee of certificates with respect to the status of such leases, Grantor shall exercise its right to request such certificates within five (5) days of any demand therefor by Beneficiary. (c) Grantor shall furnish to Beneficiary, within fifteen (15) days after a request by Beneficiary to do so, a written statement containing the names of all lessees for the Mortgaged Property, the terms of their respective leases, the spaces occupied, the rentals paid and any security therefor. (d) Grantor shall, from time to time upon request of Beneficiary, specifically assign to Beneficiary as additional security hereunder, by an instrument in writing in such form as may be approved by Beneficiary, all right, title and interest of Grantor in and to any and all leases now or hereafter on or affecting the Mortgaged Property, together with all security therefor and all monies payable thereunder, subject to the conditional permission hereinabove given to Grantor to collect the rentals under any such lease. Grantor shall also execute and deliver to Beneficiary any notification, financing statement or other document reasonably required by Beneficiary to perfect the foregoing assignment as to any such lease. SECTION 1.16. Each lease of the Mortgaged Property or of any part thereof entered into after the date hereof shall provide that, in the event of the enforcement by the Trustee or Beneficiary of the remedies provided for by law or by this Deed of Trust, any person succeeding to the interest of Grantor as a result of such enforcement shall not be bound by any payment of rent or additional rent for more than one (1) month in advance, provided, however, that nothing herein set forth shall affect or impair the rights of Beneficiary to terminate any one or more of such leases in connection with the exercise of its or the Trustee's remedies hereunder. ARTICLE II EVENTS OF DEFAULT AND REMEDIES SECTION 2.01. The occurrence of any one or more of the following events shall constitute an event of default ("Event of Default") hereunder: (a) If there shall be an Event of Default (as such term is defined in the Loan Agreement) under the Loan Agreement; or (b) If Grantor shall breach, or be in default of, any of the covenants or provisions contained in this Deed of Trust which breach or default continues for five (5) or more days; or (c) If Grantor shall breach, or be in default of, any chattel mortgage, other deed of trust, security agreement or other document issued thereunder or in connection therewith or herewith. Upon the occurrence of an Event of Default, and in every such case: I. During the continuance of any Event of Default, Beneficiary personally, or by its agents or attorneys may enter into and upon all or any part of the Mortgaged Property, and each and every part thereof, and may exclude the party owning the beneficial interest in same, its agents and servants wholly therefrom; and having and holding the same, may use, operate, manage and control the Mortgaged Property for any lawful purpose and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and upon every such entry, Beneficiary, at the expense of Grantor, from time to time, either by purchase, repairs or construction, may maintain and restore the Mortgaged Property, whereof it shall become possessed as aforesaid, may complete the construction of the Improvements and in the course of such completion may make such changes in the contemplated Improvements as it may deem desirable; may insure or reinsure the same as provided in the Loan Agreement, and likewise, from time to time, at the expense of Grantor, Beneficiary may make all necessary or proper repairs, renewals, replacements, alterations, additions, betterments and improvements to the Mortgaged Property or any part thereof and thereon as it may deem advisable; and in every such case Beneficiary shall have the right to manage and operate the Mortgaged Property, possessed as aforesaid, and to carry on the business thereof and exercise all rights and powers of the party owning such property with respect thereto either in the name of such party or otherwise as it shall deem best; and Beneficiary shall be entitled to collect and receive all earnings, revenues, rents, issues, profits and income of the Mortgaged Property and every part thereof; and after deducting the expenses of conducting the business thereof and of all maintenance, repairs, replacements, alterations, additions, betterments and improvements and all payments which may be made for taxes, assessments, insurance, in payment of any prior deed of trust and prior or other proper charges upon the Mortgaged Property or any part thereof, as well as just and reasonable compensation of Beneficiary for the services of Beneficiary and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, Beneficiary shall apply the moneys arising as aforesaid, first, to the payment of any sums, other than interest and principal due pursuant to the Loan Agreement required to be paid by Grantor under this Deed of Trust, second, to the payment of interest due pursuant to the Loan Agreement, third, to the payment of the principal due pursuant to the terms of the Loan Agreement when and as the same shall become payable (whether by acceleration or otherwise) and finally, in an amount equal to the Early Termination Premium which would have been payable if Grantor had voluntarily prepaid the Loan Agreement. II. Beneficiary, at its option, may declare the entire unpaid balance of the indebtedness secured hereby immediately due and payable and demand that Trustee cause the Mortgaged Property to be sold. III. Trustee, upon so being requested to do by Beneficiary, shall sell the Mortgaged Property under power of sale on the premises or at the courthouse door in Vance County, North Carolina, having first given notice of the time and place of such sale in accordance with the statute in such case provided, and convey the Mortgaged Property so sold to the purchaser in fee, either as a whole or in separate parcels, and in such order as he may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. If the Mortgaged Property consists of several known lots or parcels, Beneficiary may designate the order in which such parcels shall be sold or offered for sale. Any person, including Grantor, Beneficiary, or any Lender may purchase at such sale. IV. Trustee may postpone sale of all or any portion of the Mortgaged Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. V. On and after the occurrence of an Event of Default, Grantor shall pay all rents, issues and profits thereafter received by Grantor from the Mortgaged Property to Beneficiary and to the extent not paid shall hold such amounts as trust funds for the benefit of Beneficiary and such rents, issues and profits shall be deemed "cash collateral" of Beneficiary under 11 U.S.C., as amended. SECTION 2.02. (a) Trustee, after making such sale, and upon receipt of the purchase price, shall make, execute and deliver to the purchaser or purchasers his deed or deeds conveying the Mortgaged Property so sold, but without any covenant or warranty, express or implied, and without any representation, express or implied, as to the existence, or lack thereof, of Hazardous Substances on the Mortgaged Property, and shall apply the proceeds of sale thereof to payment, FIRSTLY, of the expenses of such sale, together with the reasonable expenses of Trustee, including a commission equal to five percent (5%) of the gross proceeds of sale to the Trustee, or his successor, in payment of his services hereunder and of collecting the monies secured by this Deed of Trust and including cost of evidence of title in connection with sale and revenue stamps on Trustee's deed; SECONDLY, of all moneys paid, advanced or expended by Beneficiary under the terms hereof, not then repaid, together with the interest thereon as herein provided; THIRDLY, of the amount of the principal and interest due pursuant to the Loan Agreement then remaining unpaid together with an amount which would have been equal to the Early Termination Premium which would have been paid by Grantor if Grantor had voluntarily prepaid the Loan Agreement; FOURTHLY, in an amount sufficient, as determined in the sole and absolute discretion of Beneficiary, acting in good faith, to satisfy actual or contingent sums owing pursuant to Section 11 of the Loan Agreement ("Impound Sum"), and, if not actually incurred, to be held by Beneficiary (not in trust, without the accrual of interest thereon and without the obligation to segregate such funds) for a period of two (2) years from the date of foreclosure, thereafter to be returned to the person or persons legally entitled thereto, upon satisfactory proof of such right; and LASTLY, the balance or surplus, if any, of such proceeds of sale to the person or persons legally entitled thereto, upon satisfactory proof of such right. (b) In the event of a sale of the Mortgaged Property, or any part thereof, and the execution of a deed or deeds therefor under these trusts, the recitals therein of any matters or facts shall be conclusive proof of the truthfulness thereof and of the fact that said sale was regularly and validly made in accordance with all requirements of the laws of the State of North Carolina and of this Deed of Trust; and any such deed or deeds, with such recitals therein, shall be effectual and conclusive against Grantor and all other persons; and the receipt for the purchase money recited or contained in any deed executed to the purchaser as aforesaid shall be sufficient discharge to such purchaser from all obligations to see to the proper application of the purchase money according to the trusts aforesaid. SECTION 2.03. After the happening of an Event of Default by Grantor under this Deed of Trust and immediately upon the commencement of any action, suit or other legal proceeding by Beneficiary to obtain judgment for the principal of or interest due pursuant to the Loan Agreement and other sums required to be paid by Grantor pursuant to any provisions of this Deed of Trust, or of any other nature in aid of the enforcement of the Loan Agreement, or of this Deed of Trust, Grantor will waive the issuance and service of process and enter its voluntary appearance in such action, suit or proceeding. Further, Grantor hereby consents to the appointment of a receiver or receivers of the Mortgaged Property and of all the earnings, revenues, rents, issues, profits and income thereof. After the happening of any such 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 the Trustee or Beneficiary hereunder, Beneficiary 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 all sums due pursuant to the Loan Agreement to be due and payable, to the appointment of such a receiver or receivers. The Trustee, at Beneficiary's option, is authorized to foreclose this Deed of Trust subject to the rights of any tenants of the Property, and the failure to make any such tenants parties defendant to any such foreclosure proceedings and to foreclose their rights will not be, nor be asserted by Grantor to be, a defense to any proceedings instituted by Beneficiary to collect the sums secured hereby or to collect any deficiency remaining unpaid after the foreclosure sale of the Property. SECTION 2.04. During the continuance of an Event of Default, Beneficiary shall have the following rights and remedies: (i) Beneficiary or its employees, acting by themselves or through a court-appointed receiver, may enter upon, possess, manage, operate, dispose of, and contract to dispose of the Mortgaged Property or any part thereof; take custody of all accounts; negotiate with governmental authori- ties with respect to the Mortgaged Property's environmental compliance and remedial measures; take any action necessary to enforce compliance with any Act, including but not limited to spending rents to abate the problem; make, terminate, enforce or modify leases of the Mortgaged Property upon such terms and conditions as Beneficiary deems proper; contract for goods and services, hire agents, employees, and counsel, make repairs, alterations, and improvements to the Mortgaged Property necessary, in Beneficiary's judgment, to protect or enhance the security hereof; incur the risks and obligations ordinarily incurred by owners of property (without any personal obligation on the part of the receiver); and/or take any and all other actions which may be necessary or desirable to comply with Grantor's obligations hereunder and under the Loan Agreement. All sums realized by Beneficiary under this subparagraph, less all costs and expenses incurred by it under this subparagraph, including attorneys' fees, and less such sums as Beneficiary deems appropriate as a reserve to meet future expenses under the subparagraph, shall be applied on any indebtedness secured hereby in such order as Beneficiary shall determine. Neither application of said sums to said indebtedness, nor any other action taken by Beneficiary under this subparagraph shall cure or waive any Event of Default or notice of default hereunder, or nullify the effect of any such notice of default. Beneficiary, or any employee or agent of Beneficiary, or a receiver appointed by a court, may take any action or proceeding hereunder without regard to (a) the adequacy of the security for the indebtedness secured hereunder, (b) the existence of a declaration that the indebtedness secured hereby has been declared immediately due and payable, or (c) the filing of a notice of default. (ii) With or without notice, and without releasing Grantor from any obligation hereunder, to cure any default of Grantor and, in connection therewith, Beneficiary or its agents, acting by themselves or through a court appointed receiver, may enter upon the Mortgaged Property or any part thereof and perform such acts and things as Beneficiary deems necessary or desirable to inspect, investi- gate, assess, and protect the security hereof, including with- out limitation of any of its other rights: (a) to obtain a court order to enforce Beneficiary's right to enter and inspect the Mortgaged Property, to which the decision of Beneficiary as to whether there exists a release or threatened release of a Hazardous Substances onto the Mortgaged Property shall be deemed reasonable and conclusive as between the parties hereto; and (b) to have a receiver appointed to enforce Beneficiary's right to enter and inspect the Mortgaged Property for Hazardous Substances. All costs and expenses incurred by Beneficiary with respect to the audits, tests, inspections, and examinations which Beneficiary or its agents or employees may conduct, including the fees of the engineers, laboratories, contractors, consultants, and attorneys, shall be paid by Grantor. All costs and expenses incurred by Trustee and Beneficiary pursuant to this subparagraph (including without limitation court costs, consultant fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment) shall bear interest at the Default Rate set forth in the Loan Agreement from the date they are incurred until said sums have been paid. (iii) To seek a judgment that Grantor has breached its covenants, representations and/or warranties with respect to the environmental matters set forth in the Loan Agreement by commencing and maintaining an action or actions in any court of competent jurisdiction for breach of contract, whether commenced prior to or after foreclosure of the Mortgaged Property, and to seek the recovery of any and all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other out-of- pocket costs or expenses actually incurred by Beneficiary (collectively, the "Environmental Costs") incurred or advanced by Beneficiary relating to the cleanup, remediation or other response action required by any Act or to which Beneficiary believes necessary to protect the Mortgaged Property, it being conclusively presumed between Beneficiary and Grantor that all such Environmental Costs incurred or advanced by Beneficiary relating to the cleanup, remediation, or other response action of or to the Mortgaged Property were made by Beneficiary in good faith. All Environmental Costs incurred by Beneficiary under this subparagraph (including without limitation court costs, consultant fees and attorneys' fees, including, without limitation, such costs and fees which may be incurred during the pendency of a case pursuant to 11 U.S.C., whether incurred in litigation or not and whether before or after judgment) shall bear interest at the rate set forth in Section 2.6(b)(i) of the Loan Agreement (the "Default Rate") from the date of expenditure until said sums have been paid. Beneficiary shall be entitled to bid, at the sale of the Mortgaged Property, the amount of said costs, expenses and interest in addition to the amount of the other obligations hereby secured as a credit bid, the equivalent of cash. Grantor acknowledges and agrees that notwithstanding any term or provision contained herein or in the other Loan Documents (as defined in the Loan Agreement), the Environmental Costs shall be exceptions to any nonrecourse or exculpatory provision of the Loan Documents, and Grantor shall be fully and personally liable for the Environmental Costs hereunder, and such liability shall not be limited to the original principal amount of the obligations secured by this Deed of Trust, and Grantor's obligations shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance, or any other transfer of the Mortgaged Property or this Deed of Trust. For the purposes of any action brought under this subparagraph, Grantor hereby waives the defense of laches and any applicable statute of limitations. (iv) To waive its lien against the Mortgaged Property or any portion thereof, whether fixtures or personal property, to the extent such property is found to be environ- mentally impaired and to exercise any and all rights and remedies of an unsecured creditor against Grantor and all of Grantor's assets and property for the recovery of any deficiency and Environmental Costs, including, but not limited to, seeking an attachment order. As between Beneficiary and Grantor, Grantor shall have the burden of proving that Grantor or any related party (or any affiliate or agent of Grantor or any related party) was not in any way negligent in permitting the release or threatened release of the Hazardous Substances. Grantor acknowledges and agrees that notwithstanding any term or provision contained herein or in the Loan Agreement, all judgments and awards entered against Grantor shall be exceptions to any nonrecourse or exculpatory provision of the Loan Documents, and Grantor shall be fully and personally liable for all judgments and awards entered against Grantor hereunder and such liability shall not be limited to the original principal amount of the obligations secured by this Deed of Trust and Grantor's obligations shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance, or any other transfer of the Mortgaged Property or this Deed of Trust. For the purposes of any action brought under this subparagraph, Grantor hereby waives the defense of laches and any applicable statute of limitations. (v) Nothing contained herein shall be construed to limit any and all rights that Beneficiary has at law or pursuant hereto. SECTION 2.05. No remedy herein conferred upon or reserved to the Trustee or Beneficiary is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of the Trustee or Beneficiary to exercise any right or power occurring upon the Event of Default shall impair any such right or power or shall be construed to be a waiver thereof or an acquiescence therein; and every power and remedy given by this Deed of Trust to the Trustee or Beneficiary may be exercised from time to time and as often as may be deemed expedient by the Trustee or Beneficiary. Nothing in this Deed of Trust or in the Loan Agreement shall affect the obligation of Grantor to pay the principal of, interest on, and Early Termination Premium payable pursuant to the Loan Agreement in the manner and at the time and place therein respectively expressed. SECTION 2.06. To the extent permitted by law, Grantor 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; nor claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the marshalling of the Mortgaged Property or on the valuation or appraisal of the Mortgaged Property, or any part thereof, prior or subsequent 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; and Grantor 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 the Trustee or Beneficiary, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Grantor hereby waives the right to require any sale to be made in parcels, or the right to select parcels to be so sold, and there shall be no requirement for marshalling of assets. Grantor hereby further waives any rights it may have under applicable law relating to the prohibition of the obtaining of a deficiency judgment by Beneficiary against Grantor. SECTION 2.07. During the continuance of any Event of Default and pending the exercise by the Trustee or Beneficiary of its right to exclude Grantor from all or any part of the Premises, Grantor agrees to pay the fair and reasonable rental value for the use and occupancy of the Mortgaged Property for such period and upon default of any such payment, will vacate and surrender possession of the Premises to the Trustee or Beneficiary or to a receiver, if any, and in default thereof may be evicted by any summary action or proceeding for the recovery or possession of Premises for non-payment of rent, however designated. SECTION 2.08. Without affecting the personal liability of any person, firm, corporation or other entity, including Grantor (other than any person released pursuant hereto), for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust for the full amount of the indebtedness remaining unpaid upon any property not reconveyed pursuant hereto, Beneficiary and Trustee are respectively authorized and empowered as follows: Beneficiary may, at any time and from time to time, either before or after the maturity or the expiration of the Loan Agreement, and without notice: (a) release any person liable for the payment of any of the indebtedness, (b) make any agreement extending the time or otherwise altering the terms of payment of any of the indebtedness, (c) accept additional security therefor of any kind, (d) release any property, real or personal, securing the indebtedness. Trustee may, without liability therefor and without notice, at any time and from time to time so long as the lien or charge hereof shall subsist, but only upon the written request of Beneficiary and presentation of this Deed of Trust for endorsement: (a) consent to the making of any map or plat of the Land, (b) join in granting any easement thereon or in creating any covenants restricting use or occupancy thereof, (c) reconvey, without warranty, any part of the Mortgaged Property, (d) join in any extension agreement or in any agreement subordinating the lien or charge hereof. SECTION 2.09. This Deed of Trust constitutes a Security Agreement under the laws of the State of North Carolina so that Grantor hereby grants to Beneficiary and Beneficiary shall have and may endorse a security interest in any or all of the Mortgaged Property which may or might now or hereafter be or be deemed to be personal property, fixtures or property other than real estate (collectively, "Personal Property") and Grantor agrees to execute, as debtor, such financing statement or statements as Beneficiary may now or hereafter reasonably request in order that such security interest or interests may be perfected pursuant to such laws. Notwithstanding the foregoing, Grantor and Beneficiary agree that any Personal Property which may be considered real property shall be conclusively presumed to be real property. Notwithstanding any release of any or all of the property included in the Premises which is deemed "real property", any proceedings to foreclose this Deed of Trust, or its satisfaction of record, the terms hereof shall survive as a security agreement with respect to the security interest created hereby and referred to above until the repayment or satisfaction in full of the obligations of Grantor as are now or hereafter evidenced by the Loan Agreement. SECTION 2.10. During the continuance of any Event of Default, Beneficiary shall have all of the rights and remedies of a secured party under the Uniform Commercial Code (the "Code") of the State of North Carolina, and specifically the right to direct notice and collections of any obligation owing to Grantor by any lessee. In addition to its rights to foreclose this Deed of Trust, Beneficiary shall have the right to sell the Personal Property or any part thereof, or any further, or additional, or substituted Personal Property, at one or more times, and from time to time, at public sale or sales or at private sale or sales, on such terms as to cash or credit, or partly for cash and partly on credit, as Beneficiary may deem proper. Beneficiary shall have the right to become the purchaser at any such public sale or sales, free and clear of any and all claims, rights of equity of redemp- tion in Grantor, all of which are hereby waived and released. Grantor shall not be credited with the amount of any part of such purchase price, unless, until and only to the extent that such payment is actually received in cash. Notice of public sale, if given, shall be sufficiently given, for all purposes, if published not less than five (5) days prior to any sale, in any newspaper of general circulation distributed in the city in which the property to be sold is located or as otherwise required by the Code. The net proceeds of any sale of the Personal Property which may remain after the deduction of all costs, fees and expenses incurred in connection therewith, including, but not limited to, all advertising expenses, broker's or brokerage commissions, documentary stamps, recording fees, foreclosure costs, stamp taxes and counsel fees, shall be credited by Beneficiary against the liabili- ties, obligations and indebtedness of Grantor to Beneficiary secured by this Deed of Trust and evidenced by the Loan Agreement. Any portion of the Personal Property which may remain unsold after the full payment, satisfaction and discharge of all of the liabilities, obligations and indebted- ness of Grantor to Beneficiary shall be returned to the respective parties which delivered the same to Beneficiary. If at any time Grantor or any other party shall become entitled to the return of any of the Personal Property here- under, any transfer or assignment thereof by Beneficiary shall be, and shall recite that the same is, made wholly without representation or warranty whatsoever by, or recourse whatsoever against Beneficiary. SECTION 2.11. All rights, remedies and powers provided by Sections 2.01-2.10 hereof may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law in the jurisdiction in which the Premises are located, and all such provisions are intended to be subject to all applicable provisions of law which may be controlling in such jurisdiction and to be limited to the extent necessary so that they will not render this Mortgage invalid, illegal or unenforceable under the provisions of any applicable law. ARTICLE III MISCELLANEOUS SECTION 3.01. 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 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. SECTION 3.02. All notices or demands by any party relating to this Deed of Trust or any other agreement entered into in connection herewith shall be in the form set forth in the Loan Agreement. The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 3.02 other than notices by Beneficiary in connection with Sections 9504 or 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) calendar days after the deposit thereof in the mail. Grantor acknowledges and agrees that notices sent by Beneficiary in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or transmitted by telefacsimile or other similar method permitted by law. SECTION 3.03. Whenever in this Deed of Trust the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person or persons entitled to receive such notice. SECTION 3.04. All of the grants, covenants, terms, obligations, provisions and conditions herein contained shall run with the land and shall apply to, bind and inure to the benefit of, the successors and assigns of Grantor and Beneficiary and to the successors of the Trustee. SECTION 3.05. Intentionally Deleted. SECTION 3.06. Intentionally Deleted. SECTION 3.07. Notwithstanding the appointment of any receiver, liquidator or trustee of Grantor, or of any of its property, or of the Mortgaged Property, or any part thereof, the Trustee shall be entitled to retain possession and control of all property now or hereafter held under this Deed of Trust. SECTION 3.08. If Grantor shall default in the payment of any sums due pursuant to the terms of the Loan Agreement, or this Deed of Trust such default shall be, and be deemed to be, an attempt by Grantor to avoid the Early Termination Premium payable by Grantor pursuant to the terms of the Loan Agreement and consequently, upon such default Beneficiary shall be entitled to collect such Early Termination Premium from Grantor with the same effect as if Grantor had voluntarily elected to prepay the principal sum evidenced by the Loan Agreement. SECTION 3.09. Grantor hereby waives and relin- quishes unto, and in favor of Beneficiary, all benefit under all laws, now in effect or hereafter passed, to relieve Grantor in any manner from the obligations assumed and the obligation for which this Deed of Trust is security or to reduce the amount of the said obligation to any greater extent than the amount actually paid for the Mortgaged Property, in any judicial proceedings upon the said obligation, or upon this Deed of Trust. SECTION 3.10. Neither Grantor nor any other person now or hereafter obligated for payment for all or any part of the indebtedness secured hereby shall be relieved of such obligation by reason of the failure of Beneficiary to comply with any request of Grantor or of any other person so obligated to take action to foreclose on this Deed of Trust or otherwise enforce any provisions hereof or under the Loan Agreement or by reason of the release, regardless of consideration, of all or any part of the security held for the indebtedness secured hereby, or by reason of any agreement of stipulation between any subsequent owner of the Mortgaged Property and Beneficiary extending the time of payment or modifying the terms hereof without first having obtained the consent of Grantor or such other person; and in the latter event Grantor and all other such persons shall continue to be liable to make payment according to the terms of any such extension or modification agreement, unless expressly released and discharged in writing by Beneficiary. SECTION 3.11. By accepting or approving anything required to be observed, performed or fulfilled or to be given to Beneficiary pursuant to this Deed of Trust, including (but not limited to) any certificate, balance sheet, statement of profit and loss or other financial statement, survey, appraisal or insurance policy, Beneficiary shall not be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not be or constitute any warranty or representation with respect thereto by Beneficiary. SECTION 3.12. Beneficiary may from time to time, without notice to Grantor or to the Trustee, and with or without cause and with or without the resignation of the Trustee substitute a successor or successors to the Trustee named herein or acting hereunder to execute this trust. Upon such appointment and without conveyance to the successor Trustee, the latter shall be vested with all title, powers and duties conferred upon the Trustee herein named or acting hereunder. Each such appointment and substitution shall be made by written document executed by Beneficiary, containing reference to this Deed of Trust and its place of record, which when duly filed for record in the proper office, shall be conclusive proof of proper appointment of the successor Trustee. The procedure herein provided for substitution of the Trustee shall be conclusive of all other provisions for substitution, statutory or otherwise. SECTION 3.13. Intentionally Deleted. SECTION 3.14. Intentionally Deleted. SECTION 3.15. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS GRANTED BY THIS DEED OF TRUST SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA AND IN ALL OTHER RESPECTS THIS DEED OF TRUST SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. SECTION 3.16. Simultaneously with, and in addition to, the execution of this Deed of Trust, Grantor, and/or related or affiliated entities of Grantor, has executed and delivered as security for the Loan Agreement a mortgage or deed of trust on parcels of property which may or may not be outside the boundaries of this county. Grantor agrees that the occurrence of an Event of Default hereunder, or under any of such other mortgages or deeds of trust, shall be an Event of Default under each and every one of such mortgages and deeds of trust, including this Deed of Trust, permitting Beneficiary to proceed against any or all of the property comprising the Mortgaged Property or against any other security for the Loan Agreement in such order as Beneficiary, in its sole and absolute discretion may determine. Grantor hereby waives, to the extent permitted by applicable law, the benefit of any statute or decision relating to the marshalling of assets which is contrary to the foregoing. Beneficiary shall not be compelled to release or be prevented from foreclosing this instrument or any other instrument securing the Loan Agreement unless all indebtedness evidenced by the Loan Agreement and all items hereby secured shall have been paid in full and Beneficiary shall not be required to accept any part or parts of any property securing the Loan Agreement, as distinguished from the entire whole thereof, as payment of or upon the Loan Agreement to the extent of the value of such part or parts, and shall not be compelled to accept or allow any apportionment of the indebtedness evidenced by the Loan Agreement to or among any separate parts of said property. IN WITNESS WHEREOF, Grantor has caused this Deed of Trust to be executed, under seal, as of the day and year first above written. ATTEST: "GRANTOR" /s/ G. Templeton Blackburn, II ROSE'S STORES, INC., George Templeton Blackburn, II, a Delaware corporation Secretary {CORPORATE SEAL} By /s/ Jeanette R. Peters Jeanette R. Peters Chief Financial Officer EX-10.4 5 RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Suzanne Witkowsky FUTURE ADVANCE DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT THIS DOCUMENT SECURES OBLIGATIONS WHICH CONTAIN PROVISIONS FOR A VARIABLE RATE OF INTEREST STATE OF NORTH CAROLINA ) ) ss. COUNTY OF VANCE ) FUTURE ADVANCE DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT ("Deed of Trust") made this 21st day of May, 1996, between ROSE'S STORES, INC, a Delaware corporation ("Grantor") having an office at 218 South Garnett Street, Henderson, North Carolina 27536, as trustor, and DAVID L HUFFSTETLER, whose address is Two Hanover Square, Suite 2000, Raleigh, North Carolina 27601, as trustee ("Trustee") and FOOTHILL CAPITAL CORPORATION, a California corporation, having an office at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333, Attn: Business Finance Division Manager, individually as a lender, and as agent for and on behalf of the financial institutions ("Lenders") who may from time to time be parties to the Loan Agreement (as hereinafter defined). WITNESSETH FOR THE PURPOSE OF SECURING the following described obligations, liabilities and indebtedness of Grantor: (a) the payment of all loans, advances, indebtedness, obligations and liabilities in the aggregate principal amount of One Hundred Twenty Million Dollars ($120,000,000), to be paid in accordance with the terms and with interest as set forth in that certain Loan and Security Agreement of even date herewith to which Foothill Capital Corporation, as agent, PPM Finance, Inc., as co-agent, the financial institutions parties thereto as lenders, and Grantor are parties (the "Loan Agreement": Foothill Capital Corporation and any successor agent pursuant to the Loan Agreement is hereby defined as "Beneficiary": capitalized terms not otherwise defined herein have the same meaning as in the Loan Agreement) including, without limitation, those contained in Section 11 therein, and all modifications, extensions and/or renewals thereof, and all other instruments, agreements and documents referred to or contemplated thereby, pursuant to which, among other things, Beneficiary and Lenders have agreed to make revolving loans to Grantor evidenced by the Loan Agreement, which may be made, repaid and readvanced in accordance with the Loan Agreement, (b) the payment and performance of all indebtedness and obligations of Grantor arising under this Deed of Trust, and other documents executed by Grantor in connection herewith, (c) any and all advances made by Beneficiary or Lenders to protect or preserve the Mortgaged Property (as hereinafter defined) or the security interest or lien created hereby on the Mortgaged Property, or for taxes, assessments or insurance premiums as hereinafter provided or for the performance of any of Grantor's obligations hereunder or for any other purpose provided herein (whether or not the original Grantor remains the owner of the Mortgaged Property at the time of such advance); (d) payment of any money advanced by Beneficiary to Grantor, or its successors, with interest thereon, evidenced by notes (indicating that they are so secured); (e) any and all renewals, extensions, modifications, substitutions, replacements or consolidations of the indebtedness described in clauses (a), (b), (c) or (d) above; and (f) all other obligations, liabilities and indebtedness of every kind and character now or hereafter owing by Grantor to Lenders or Beneficiary, however created, incurred or evidenced, direct or indirect, absolute or contingent, whether owing under the Loan Agreement, this Deed of Trust or under any and all other instruments, agreements and documents referred to or contemplated by the Loan Agreement, including, without limitation, all "Obligations" of Trustor to Beneficiary or Lenders, as such term is defined in the Loan Agreement, and in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration, Grantor has granted, bargained, sold, alienated, enfeoffed, released, conveyed and confirmed, and by these presents does grant, bargain, sell, alienate, enfeoff, release, convey and confirm unto the Trustee, and his heirs, successors and assigns in trust, WITH POWER OF SALE, all its estate, right, title and interest in, to and under any and all of the property located in the City of Henderson, County of Vance, State of North Carolina, and more particularly described in Exhibit A attached hereto and made a part hereof, including all easements, rights, privileges, tenements, hereditaments and appurtenances thereunto belonging or in anywise appertaining, and all of the estate, right, title, interest, claim, demand, reversion or remainder whatsoever of Grantor therein or thereto, either at law or in equity, in possession or expectancy, now or hereafter acquired, including, without limitation, all and singular the ways, waters, water courses, water rights and powers, liberties, privileges, sewers, pipes, conduits, wires and other facilities furnishing utility or other services to the property (collectively, the "Land"); TOGETHER with all of the right, title and interest of Grantor in and to all buildings, structures and improve- ments now or hereafter erected on the Land including all plant equipment, apparatus, machinery and fixtures of every kind and nature whatsoever now or hereafter located on or forming part of said buildings, structures and improvements (collectively, the "Improvements"; the Land and Improvements being herein- after collectively referred to as the "Premises"); TOGETHER with all of the right, title and interest of Grantor in and to the land lying in the bed of any street, road, highway or avenue in front of or adjoining the Premises; TOGETHER with any and all award and awards hereto- fore made or hereafter to be made by any governmental autho- rities to the present and all subsequent owners of the Premises which may be made with respect to the Premises as a result of the return of excess taxes paid on the Mortgaged Property, the exercise of the right of eminent domain, the alteration of the grade of any street or any other injury to or decrease of value of the Premises, which said award or awards are hereby assigned to Beneficiary and Beneficiary, at its option, is hereby authorized, directed and empowered to collect and receive the proceeds of any such award or awards from the authorities making the same and to give proper receipts and acquittances therefor, and to apply the same as hereinafter provided; and Grantor hereby covenants and agrees to and with Beneficiary, upon request by Beneficiary, to make, execute and deliver, at Grantor's expense, any and all assign- ments and other instruments sufficient for the purpose of assigning the aforesaid award or awards to Beneficiary free, clear and discharged of any and all encumbrances of any kind or nature whatsoever; TOGETHER with all goods, Equipment (as defined in the Loan Agreement), Inventory (as defined in the Loan Agreement), building materials, chattels and articles of personal property (other than personal property which is or at any time has become Hazardous Substances, as defined in the Loan Agreement), including any interest therein, now or at any time hereafter affixed to, attached to, or used in any way in connection with or to be incorporated at any time into the Premises, or placed on any part thereof but not attached or incorporated thereto, together with any and all replacements thereof, appertaining and adapted to the complete and compatible use, enjoyment, occupancy, operation or improvement of the Premises (collectively, the "Chattels"); TOGETHER with leases of the Premises or the Chattels or any part thereof now or hereafter entered into and all right, title and interest of Grantor thereunder, including, without limitation, cash or securities deposited thereunder to secure performance by the lessees of their obligations there- under (whether such cash or securities are to be held until the expiration of the terms of such leases or applied to one or more of the installments of rent coming due immediately prior to the expiration of such terms) and all rights to all insurance proceeds and unearned premiums arising from or relating to the Premises and all other rights and easements of Grantor now or hereafter existing pertaining to the use and enjoyment of the Premises and all right, title and interest of Grantor in and to all declarations of covenants, conditions and restrictions as may affect or otherwise relate to the Premises; TOGETHER with all sales agreements, deposit receipts, escrow agreements and other ancillary documents and agreements entered into with respect to the sale to any purchasers of any part of the Premises, and all deposits and other proceeds thereof; TOGETHER with all permits, plans, licenses, speci- fications, subdivision rights, tentative tract maps, final tract maps, security interests, contracts, contract rights or other rights as may affect or otherwise relate to the Premises; TOGETHER with all rights of Grantor in or to any fund, program or trust monies and any reimbursement therefrom directly or indirectly established, maintained or administered by any governmental authority or any other individual or entity which is designed to or has the effect of providing funds (whether directly or indirectly or as reimbursement) for the repair or replacement of storage tanks (whether above or below ground) located on the Premises or the remediation or cleanup of any spill, leakage or contamination from any such tank or resulting from the ownership, use or maintenance of any such tank or to compensate third parties for any personal injury or property damage; TOGETHER with all rents, issues, profits, revenues, income and other benefits to which Grantor may now or here- after be entitled from the Premises or the Chattels (which Premises, titles, interests, awards, Chattels, easements, rents, income, benefits, ways, waters, rights, powers, liber- ties, privileges, utilities, tenements, hereditaments, appur- tenances, reversions, remainders, rents, issues, profits, estate, property, possession, claims and demands, are herein- after collectively referred to as the "Mortgaged Property"); TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee, his heirs, successors and assigns forever. It is the intention of the parties hereto that this Deed of Trust is made and executed to comply with the provisions of N.C.G.S. 45-67 et seq., and shall secure any and all present and future obligations which Grantor now or may hereafter owe to Beneficiary or Lenders (but in no event incurred more than fifteen (15) years after the date hereof), including without limitation, any future loans and advances made by Beneficiary or Lenders pursuant to the Loan Agreement to or for the benefit of Grantor, up to a maximum aggregate amount of principal indebtedness (excluding accrued but unpaid interest which is added to the principal amount)outstanding at any one time of One Hundred Twenty Million Dollars ($120,000,000). The principal amount of present obligations of Grantor to Beneficiary or Lenders secured hereby is in the sum of $______________ as of the date hereof, and the principal amount of all present and future obligations of Grantor to Beneficiary or Lenders secured hereby is in the sum of One Hundred and Seventy Five Million Dollars ($175,000,000), plus interest, costs and advances made by Beneficiary or Lenders to protect or preserve the Mortgaged Property or the lien hereof on the Mortgaged Property, or for taxes, assessments or insurance premiums as herein provided. Pursuant to N.C.G.S. 45-68(2), Grantor and Beneficiary agree that at the time each obligation is incurred, it shall not be necessary for each such obligation to be evidenced by any written instrument or notation signed by Grantor and stipulating that such obligation is secured by this Deed of Trust. ARTICLE I And Grantor further covenants with the Trustee and Beneficiary as follows: SECTION 1.01. Grantor has good and marketable title to an indefeasible fee estate in the Premises subject to no lien, charge, or encumbrance except such as are approved by Beneficiary in the title policy issued to Beneficiary in connection herewith; that it owns the Chattels free and clear of liens and claims except such as are permitted by the Loan Agreement or approved by Beneficiary; that this Deed of Trust is and will remain a valid and enforceable first and prior lien on the Mortgaged Property subject only to the exceptions referred to above; and that neither the entry nor the performance of and compliance with this Deed of Trust or the Loan Agreement has resulted or will result in any violation of, or be in conflict with, or result in the creation of any deed of trust, lien, encumbrance or charge (other than those created by the execution and delivery of, or permitted by, this Deed of Trust or the Loan Agreement) upon any of the properties or assets of Grantor, or constitute a default under any deed of trust, indenture, contract, agreement, instrument, franchise, permit, judgment, decree, order, statute, rule or regulation applicable to Grantor. Grantor has full power and lawful authority to convey the Mortgaged Property in the manner and form herein done or intended hereafter to be done and will preserve such title, and will forever preserve, warrant and defend the same unto the Trustee and Beneficiary, and will forever preserve, warrant and defend the validity and priority of the lien hereof against the claims of all persons and parties whomsoever. SECTION 1.02. Intentionally Deleted. SECTION 1.03. Intentionally Deleted. SECTION 1.04. Intentionally Deleted. SECTION 1.05. All right, title and interest of Grantor 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, or constructed, assembled or placed by Grantor on the Premises, and all conversions of the security constituted thereby, immediately upon such acquisi- tion, release, construction, assembling, placement or conver- sion, as the case may be, and in each such case, without any further grant, conveyance, assignment or other act by Grantor, shall become subject to the first and prior lien and security interest of this Deed of Trust as fully and completely, and with the same effect, as though now owned by Grantor and specifically described in the granting clause hereof, but at any and all times Grantor will execute and deliver to Trustee or Beneficiary any and all such further assurances, deeds of trust, conveyances or assignments thereof with respect thereto as Beneficiary may reasonably require for the purpose of expressly and specifically subjecting the same to the lien and security interest of this Deed of Trust. SECTION 1.06. Grantor 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 and security interest hereof shall be fully preserved, at the cost of Grantor, without expense to Beneficiary. SECTION 1.07. In the event of the passage, after the date of this Deed of Trust, of any law of the State of North Carolina deducting from the value of the Mortgaged Property for the purpose of taxing the amount of any lien thereon, or changing in any way the laws now in force for the taxation of deeds of trust, or debts secured thereby, for state or local purposes, or the manner of operation of any such taxes so as to adversely affect the interest of Beneficiary, then and in such event, Grantor shall bear and pay the full amount of such taxes, provided that if for any reason payment by Grantor of any such new or additional taxes would be unlawful or if the payment thereof would constitute usury or render the Loan Agreement or the indebtedness secured hereby wholly or partially usurious under any of the terms or provisions of the Loan Agreement or this Deed of Trust, or otherwise, Beneficiary may, at its option, upon thirty (30) days' written notice to Grantor, (i) declare the whole indebtedness secured by this Deed of Trust, with interest thereon, to be immediately due and payable, or (ii) pay that amount or portion of such taxes as renders the Loan Agreement or the indebtedness secured hereby unlawful or usurious, in which event Grantor shall concurrently therewith pay the remaining lawful non-usurious portion or balance of said taxes. SECTION 1.08. In addition to restrictions contained in the Loan Agreement, Grantor will not (i) further encumber, sell, convey or transfer any interest in, or any part of, the Mortgaged Property, or (ii) except as permitted by the Loan Agreement, transfer the presently existing ownership interests in Grantor (including, without limitation, partnership or stock ownership interests, as the case may be) so as to effectively transfer control of Grantor named herein to any other person, firm, corporation or other entity, without the prior written consent of Beneficiary. Any such encumbrance, sale, conveyance or transfer made without Beneficiary's prior written consent shall be an Event of Default hereunder. At Beneficiary's option, Beneficiary's consent to a further encumbrance or transfer shall be subject to an increase in interest rate, modification of loan terms and/or the payment of a fee. SECTION 1.09. Beneficiary and the Trustee shall have access to and the right to inspect the Premises and Chattels at all reasonable times. SECTION 1.10. Intentionally Deleted. SECTION 1.11. If Grantor shall fail to perform any of the covenants contained herein on its part to be performed, Beneficiary may, but shall not be required to, make advances to perform the same, or cause the same to be performed, on Grantor's behalf, and all sums so advanced shall bear interest, from and after the date advanced until repaid, at the lower of (i) the maximum rate permitted by law or (ii) the default rate set forth in the Loan Agreement, shall be a lien upon the Mortgaged Property and shall, at Beneficiary's option, be added to the indebtedness secured hereby. Grantor will repay on demand all sums so advanced on its behalf with interest at the rate herein set forth. This Section 1.11 shall not be construed as preventing any default by Grantor in the observance of any covenant contained in this Deed of Trust from constituting an Event of Default hereunder. SECTION 1.12. Grantor will not commit any waste at or with respect to the Mortgaged Property nor will Grantor do or fail to do anything which will in any way increase the risk of fire or other hazard to the Premises, Improvements or Chattels or to any part thereof. Grantor will, at all times, maintain the Improvements and Chattels in good order and condition and will promptly make, from time to time, all repairs, renewals, replacements, additions and improvements in connection therewith which are needful or desirable to such end. Improvements shall not be removed, demolished or materially altered, nor shall any Chattels be removed except as permitted by the Loan Agreement, or after receipt of the written consent of Beneficiary, provided, however, that if there shall not have occurred an Event of Default, Grantor may make appropriate replacements of Chattels, free of superior title, liens and claims, provided such replacements are immediately made and are of a value at least equal to the value of the Chattels removed. SECTION 1.13. Grantor will immediately notify Beneficiary of the institution of any proceeding for the condemnation or taking by eminent domain of the Mortgaged Property, or any portion thereof. The Trustee and Beneficiary may participate in any such proceeding and Grantor from time to time will deliver to Beneficiary all instruments requested by it to permit such participation. In the event of such condemnation proceedings, or a conveyance in lieu of such taking, the award or compensation payable is hereby assigned to and shall be paid to Beneficiary. Beneficiary shall be under no obligation to question the amount of any such award or compensation and may accept the same in the amount in which the same shall be paid, but shall have no right to bind Grantor or to make settlement of its claim, except to the extent of the interest of the Trustee and Beneficiary. In any such condemnation proceedings the Trustee and Beneficiary may be represented by counsel selected by Beneficiary. The proceeds of any award or compensation so received after reimbursement of any expenses incurred by Beneficiary in connection with such proceedings, shall, at the option of Beneficiary, be applied, without premium, to the repayment of the sums due under the Loan Agreement in such order as Beneficiary may in its sole discretion elect (regardless of interest payable on the award by the condemning authority), or to the cost of restoration of the Improvement or Chattel so taken and other terms as shall be satisfactory to Beneficiary. SECTION 1.14. The assignment of rents, income and other benefits (collectively, "rents") contained in the granting clause of this Deed of Trust shall be fully operative without any further action on the part of Grantor or Beneficiary and specifically Beneficiary shall be entitled, at its option, to all rents from the Mortgaged Property whether or not Beneficiary takes possession of the Mortgaged Property. Grantor hereby further grants to Beneficiary the right (i) to enter upon and take possession of the Mortgaged Property for the purpose of collecting the rents, (ii) to dispossess by the usual summary proceedings any tenant defaulting in the payment thereof to Beneficiary, (iii) to let the Mortgaged Property or any part thereof, and (iv) to apply the rents, after payment of all necessary charges and expenses, on account of the indebtedness and other sums secured hereby. Such assignment and grant shall continue in effect until the indebtedness and other sums secured hereby are paid, the execution of this Deed of Trust constituting and evidencing the irrevocable consent of Grantor to the entry upon and taking possession of the Mortgaged Property by Beneficiary pursuant to such grant, whether or not sale or foreclosure has been instituted. Neither the exercise of any rights under this Section by Beneficiary nor the application of the rents to the indebtedness and other sums secured hereby, shall cure or waive any Event of Default, or notice of default hereunder or invalidate any act done pursuant hereto, but shall be cumulative of all other rights and remedies. The foregoing provisions hereof shall constitute an absolute and present assignment of the rents from the Mortgaged Property, subject, however, to the conditional permission given to Grantor to collect and use the rents until the occurrence of an Event of Default at which time such conditional permission shall automatically terminate; and the existence or exercise of such right of Grantor shall not operate to subordinate this assignment, in whole or in part, to any subsequent assignment by Grantor permitted under the provisions of this Deed of Trust, and any such subsequent assignment by Grantor shall be subject to the rights of the Trustee and Beneficiary hereunder. SECTION 1.15. (a) Grantor will not (i) execute an assignment of the rents or any part thereof from the Mortgaged Property unless such assignment shall provide that it is subject and subordinate to the assignment contained in this Deed of Trust, and any additional or subsequent assignment executed pursuant hereto, or (ii) except where the lessee is in default thereunder, terminate or consent to the cancellation or surrender of any lease of the Mortgaged Property or of any part thereof, now existing or hereafter to be made or (iii) modify any such lease or give consent to any assignment or subletting without Beneficiary's prior written consent, or (iv) accept prepayments of any installments of rent or additional rent to become due under such leases, except prepayments in the nature of security for the performance of the lessee's obligations thereunder, or (v) in any other manner impair the value of the Mortgaged Property or the security of the Trustee or Beneficiary for the payment of the indebtedness secured hereby, or (vi) enter into any lease prohibited under the provisions of the Loan Agreement. (b) Grantor will not execute any lease of all or a substantial portion of the Mortgaged Property except for actual occupancy by the lessee thereunder, and will at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in all leases of the Mortgaged Property now or hereafter existing, on the part of the lessor thereunder to be kept and performed. If any such lease provides for the giving by the lessee of certificates with respect to the status of such leases, Grantor shall exercise its right to request such certificates within five (5) days of any demand therefor by Beneficiary. (c) Grantor shall furnish to Beneficiary, within fifteen (15) days after a request by Beneficiary to do so, a written statement containing the names of all lessees for the Mortgaged Property, the terms of their respective leases, the spaces occupied, the rentals paid and any security therefor. (d) Grantor shall, from time to time upon request of Beneficiary, specifically assign to Beneficiary as additional security hereunder, by an instrument in writing in such form as may be approved by Beneficiary, all right, title and interest of Grantor in and to any and all leases now or hereafter on or affecting the Mortgaged Property, together with all security therefor and all monies payable thereunder, subject to the conditional permission hereinabove given to Grantor to collect the rentals under any such lease. Grantor shall also execute and deliver to Beneficiary any notification, financing statement or other document reasonably required by Beneficiary to perfect the foregoing assignment as to any such lease. SECTION 1.16. Each lease of the Mortgaged Property or of any part thereof entered into after the date hereof shall provide that, in the event of the enforcement by the Trustee or Beneficiary of the remedies provided for by law or by this Deed of Trust, any person succeeding to the interest of Grantor as a result of such enforcement shall not be bound by any payment of rent or additional rent for more than one (1) month in advance, provided, however, that nothing herein set forth shall affect or impair the rights of Beneficiary to terminate any one or more of such leases in connection with the exercise of its or the Trustee's remedies hereunder. ARTICLE II EVENTS OF DEFAULT AND REMEDIES SECTION 2.01. The occurrence of any one or more of the following events shall constitute an event of default ("Event of Default") hereunder: (a) If there shall be an Event of Default (as such term is defined in the Loan Agreement) under the Loan Agreement; or (b) If Grantor shall breach, or be in default of, any of the covenants or provisions contained in this Deed of Trust which breach or default continues for five (5) or more days; or (c) If Grantor shall breach, or be in default of, any chattel mortgage, other deed of trust, security agreement or other document issued thereunder or in connection therewith or herewith. Upon the occurrence of an Event of Default, and in every such case: I. During the continuance of any Event of Default, Beneficiary personally, or by its agents or attorneys may enter into and upon all or any part of the Mortgaged Property, and each and every part thereof, and may exclude the party owning the beneficial interest in same, its agents and servants wholly therefrom; and having and holding the same, may use, operate, manage and control the Mortgaged Property for any lawful purpose and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers; and upon every such entry, Beneficiary, at the expense of Grantor, from time to time, either by purchase, repairs or construction, may maintain and restore the Mortgaged Property, whereof it shall become possessed as aforesaid, may complete the construction of the Improvements and in the course of such completion may make such changes in the contemplated Improvements as it may deem desirable; may insure or reinsure the same as provided in the Loan Agreement, and likewise, from time to time, at the expense of Grantor, Beneficiary may make all necessary or proper repairs, renewals, replacements, alterations, additions, betterments and improvements to the Mortgaged Property or any part thereof and thereon as it may deem advisable; and in every such case Beneficiary shall have the right to manage and operate the Mortgaged Property, possessed as aforesaid, and to carry on the business thereof and exercise all rights and powers of the party owning such property with respect thereto either in the name of such party or otherwise as it shall deem best; and Beneficiary shall be entitled to collect and receive all earnings, revenues, rents, issues, profits and income of the Mortgaged Property and every part thereof; and after deducting the expenses of conducting the business thereof and of all maintenance, repairs, replacements, alterations, additions, betterments and improvements and all payments which may be made for taxes, assessments, insurance, in payment of any prior deed of trust and prior or other proper charges upon the Mortgaged Property or any part thereof, as well as just and reasonable compensation of Beneficiary for the services of Beneficiary and for all attorneys, counsel, agents, clerks, servants and other employees by it properly engaged and employed, Beneficiary shall apply the moneys arising as aforesaid, first, to the payment of any sums, other than interest and principal due pursuant to the Loan Agreement required to be paid by Grantor under this Deed of Trust, second, to the payment of interest due pursuant to the Loan Agreement, third, to the payment of the principal due pursuant to the terms of the Loan Agreement when and as the same shall become payable (whether by acceleration or otherwise) and finally, in an amount equal to the Early Termination Premium which would have been payable if Grantor had voluntarily prepaid the Loan Agreement. II. Beneficiary, at its option, may declare the entire unpaid balance of the indebtedness secured hereby immediately due and payable and demand that Trustee cause the Mortgaged Property to be sold. III. Trustee, upon so being requested to do by Beneficiary, shall sell the Mortgaged Property under power of sale on the premises or at the courthouse door in Vance County, North Carolina, having first given notice of the time and place of such sale in accordance with the statute in such case provided, and convey the Mortgaged Property so sold to the purchaser in fee, either as a whole or in separate parcels, and in such order as he may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. If the Mortgaged Property consists of several known lots or parcels, Beneficiary may designate the order in which such parcels shall be sold or offered for sale. Any person, including Grantor, Beneficiary, or any Lender may purchase at such sale. IV. Trustee may postpone sale of all or any portion of the Mortgaged Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. V. On and after the occurrence of an Event of Default, Grantor shall pay all rents, issues and profits thereafter received by Grantor from the Mortgaged Property to Beneficiary and to the extent not paid shall hold such amounts as trust funds for the benefit of Beneficiary and such rents, issues and profits shall be deemed "cash collateral" of Beneficiary under 11 U.S.C., as amended. SECTION 2.02. (a) Trustee, after making such sale, and upon receipt of the purchase price, shall make, execute and deliver to the purchaser or purchasers his deed or deeds conveying the Mortgaged Property so sold, but without any covenant or warranty, express or implied, and without any representation, express or implied, as to the existence, or lack thereof, of Hazardous Substances on the Mortgaged Property, and shall apply the proceeds of sale thereof to payment, FIRSTLY, of the expenses of such sale, together with the reasonable expenses of Trustee, including a commission equal to five percent (5%) of the gross proceeds of sale to the Trustee, or his successor, in payment of his services hereunder and of collecting the monies secured by this Deed of Trust and including cost of evidence of title in connection with sale and revenue stamps on Trustee's deed; SECONDLY, of all moneys paid, advanced or expended by Beneficiary under the terms hereof, not then repaid, together with the interest thereon as herein provided; THIRDLY, of the amount of the principal and interest due pursuant to the Loan Agreement then remaining unpaid together with an amount which would have been equal to the Early Termination Premium which would have been paid by Grantor if Grantor had voluntarily prepaid the Loan Agreement; FOURTHLY, in an amount sufficient, as determined in the sole and absolute discretion of Beneficiary, acting in good faith, to satisfy actual or contingent sums owing pursuant to Section 11 of the Loan Agreement ("Impound Sum"), and, if not actually incurred, to be held by Beneficiary (not in trust, without the accrual of interest thereon and without the obligation to segregate such funds) for a period of two (2) years from the date of foreclosure, thereafter to be returned to the person or persons legally entitled thereto, upon satisfactory proof of such right; and LASTLY, the balance or surplus, if any, of such proceeds of sale to the person or persons legally entitled thereto, upon satisfactory proof of such right. (b) In the event of a sale of the Mortgaged Property, or any part thereof, and the execution of a deed or deeds therefor under these trusts, the recitals therein of any matters or facts shall be conclusive proof of the truthfulness thereof and of the fact that said sale was regularly and validly made in accordance with all requirements of the laws of the State of North Carolina and of this Deed of Trust; and any such deed or deeds, with such recitals therein, shall be effectual and conclusive against Grantor and all other persons; and the receipt for the purchase money recited or contained in any deed executed to the purchaser as aforesaid shall be sufficient discharge to such purchaser from all obligations to see to the proper application of the purchase money according to the trusts aforesaid. SECTION 2.03. After the happening of an Event of Default by Grantor under this Deed of Trust and immediately upon the commencement of any action, suit or other legal proceeding by Beneficiary to obtain judgment for the principal of or interest due pursuant to the Loan Agreement and other sums required to be paid by Grantor pursuant to any provisions of this Deed of Trust, or of any other nature in aid of the enforcement of the Loan Agreement, or of this Deed of Trust, Grantor will waive the issuance and service of process and enter its voluntary appearance in such action, suit or proceeding. Further, Grantor hereby consents to the appointment of a receiver or receivers of the Mortgaged Property and of all the earnings, revenues, rents, issues, profits and income thereof. After the happening of any such 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 the Trustee or Beneficiary hereunder, Beneficiary 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 all sums due pursuant to the Loan Agreement to be due and payable, to the appointment of such a receiver or receivers. The Trustee, at Beneficiary's option, is authorized to foreclose this Deed of Trust subject to the rights of any tenants of the Property, and the failure to make any such tenants parties defendant to any such foreclosure proceedings and to foreclose their rights will not be, nor be asserted by Grantor to be, a defense to any proceedings instituted by Beneficiary to collect the sums secured hereby or to collect any deficiency remaining unpaid after the foreclosure sale of the Property. SECTION 2.04. During the continuance of an Event of Default, Beneficiary shall have the following rights and remedies: (i) Beneficiary or its employees, acting by themselves or through a court-appointed receiver, may enter upon, possess, manage, operate, dispose of, and contract to dispose of the Mortgaged Property or any part thereof; take custody of all accounts; negotiate with governmental authori- ties with respect to the Mortgaged Property's environmental compliance and remedial measures; take any action necessary to enforce compliance with any Act, including but not limited to spending rents to abate the problem; make, terminate, enforce or modify leases of the Mortgaged Property upon such terms and conditions as Beneficiary deems proper; contract for goods and services, hire agents, employees, and counsel, make repairs, alterations, and improvements to the Mortgaged Property necessary, in Beneficiary's judgment, to protect or enhance the security hereof; incur the risks and obligations ordinarily incurred by owners of property (without any personal obligation on the part of the receiver); and/or take any and all other actions which may be necessary or desirable to comply with Grantor's obligations hereunder and under the Loan Agreement. All sums realized by Beneficiary under this subparagraph, less all costs and expenses incurred by it under this subparagraph, including attorneys' fees, and less such sums as Beneficiary deems appropriate as a reserve to meet future expenses under the subparagraph, shall be applied on any indebtedness secured hereby in such order as Beneficiary shall determine. Neither application of said sums to said indebtedness, nor any other action taken by Beneficiary under this subparagraph shall cure or waive any Event of Default or notice of default hereunder, or nullify the effect of any such notice of default. Beneficiary, or any employee or agent of Beneficiary, or a receiver appointed by a court, may take any action or proceeding hereunder without regard to (a) the adequacy of the security for the indebtedness secured hereunder, (b) the existence of a declaration that the indebtedness secured hereby has been declared immediately due and payable, or (c) the filing of a notice of default. (ii) With or without notice, and without releasing Grantor from any obligation hereunder, to cure any default of Grantor and, in connection therewith, Beneficiary or its agents, acting by themselves or through a court appointed receiver, may enter upon the Mortgaged Property or any part thereof and perform such acts and things as Beneficiary deems necessary or desirable to inspect, investi- gate, assess, and protect the security hereof, including with- out limitation of any of its other rights: (a) to obtain a court order to enforce Beneficiary's right to enter and inspect the Mortgaged Property, to which the decision of Beneficiary as to whether there exists a release or threatened release of a Hazardous Substances onto the Mortgaged Property shall be deemed reasonable and conclusive as between the parties hereto; and (b) to have a receiver appointed to enforce Beneficiary's right to enter and inspect the Mortgaged Property for Hazardous Substances. All costs and expenses incurred by Beneficiary with respect to the audits, tests, inspections, and examinations which Beneficiary or its agents or employees may conduct, including the fees of the engineers, laboratories, contractors, consultants, and attorneys, shall be paid by Grantor. All costs and expenses incurred by Trustee and Beneficiary pursuant to this subparagraph (including without limitation court costs, consultant fees and attorneys' fees, whether incurred in litigation or not and whether before or after judgment) shall bear interest at the Default Rate set forth in the Loan Agreement from the date they are incurred until said sums have been paid. (iii) To seek a judgment that Grantor has breached its covenants, representations and/or warranties with respect to the environmental matters set forth in the Loan Agreement by commencing and maintaining an action or actions in any court of competent jurisdiction for breach of contract, whether commenced prior to or after foreclosure of the Mortgaged Property, and to seek the recovery of any and all costs, damages, expenses, fees, penalties, fines, judgments, indemnification payments to third parties, and other out-of- pocket costs or expenses actually incurred by Beneficiary (collectively, the "Environmental Costs") incurred or advanced by Beneficiary relating to the cleanup, remediation or other response action required by any Act or to which Beneficiary believes necessary to protect the Mortgaged Property, it being conclusively presumed between Beneficiary and Grantor that all such Environmental Costs incurred or advanced by Beneficiary relating to the cleanup, remediation, or other response action of or to the Mortgaged Property were made by Beneficiary in good faith. All Environmental Costs incurred by Beneficiary under this subparagraph (including without limitation court costs, consultant fees and attorneys' fees, including, without limitation, such costs and fees which may be incurred during the pendency of a case pursuant to 11 U.S.C., whether incurred in litigation or not and whether before or after judgment) shall bear interest at the rate set forth in Section 2.6(b)(i) of the Loan Agreement (the "Default Rate") from the date of expenditure until said sums have been paid. Beneficiary shall be entitled to bid, at the sale of the Mortgaged Property, the amount of said costs, expenses and interest in addition to the amount of the other obligations hereby secured as a credit bid, the equivalent of cash. Grantor acknowledges and agrees that notwithstanding any term or provision contained herein or in the other Loan Documents (as defined in the Loan Agreement), the Environmental Costs shall be exceptions to any nonrecourse or exculpatory provision of the Loan Documents, and Grantor shall be fully and personally liable for the Environmental Costs hereunder, and such liability shall not be limited to the original principal amount of the obligations secured by this Deed of Trust, and Grantor's obligations shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance, or any other transfer of the Mortgaged Property or this Deed of Trust. For the purposes of any action brought under this subparagraph, Grantor hereby waives the defense of laches and any applicable statute of limitations. (iv) To waive its lien against the Mortgaged Property or any portion thereof, whether fixtures or personal property, to the extent such property is found to be environ- mentally impaired and to exercise any and all rights and remedies of an unsecured creditor against Grantor and all of Grantor's assets and property for the recovery of any deficiency and Environmental Costs, including, but not limited to, seeking an attachment order. As between Beneficiary and Grantor, Grantor shall have the burden of proving that Grantor or any related party (or any affiliate or agent of Grantor or any related party) was not in any way negligent in permitting the release or threatened release of the Hazardous Substances. Grantor acknowledges and agrees that notwithstanding any term or provision contained herein or in the Loan Agreement, all judgments and awards entered against Grantor shall be exceptions to any nonrecourse or exculpatory provision of the Loan Documents, and Grantor shall be fully and personally liable for all judgments and awards entered against Grantor hereunder and such liability shall not be limited to the original principal amount of the obligations secured by this Deed of Trust and Grantor's obligations shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance, or any other transfer of the Mortgaged Property or this Deed of Trust. For the purposes of any action brought under this subparagraph, Grantor hereby waives the defense of laches and any applicable statute of limitations. (v) Nothing contained herein shall be construed to limit any and all rights that Beneficiary has at law or pursuant hereto. SECTION 2.05. No remedy herein conferred upon or reserved to the Trustee or Beneficiary is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of the Trustee or Beneficiary to exercise any right or power occurring upon the Event of Default shall impair any such right or power or shall be construed to be a waiver thereof or an acquiescence therein; and every power and remedy given by this Deed of Trust to the Trustee or Beneficiary may be exercised from time to time and as often as may be deemed expedient by the Trustee or Beneficiary. Nothing in this Deed of Trust or in the Loan Agreement shall affect the obligation of Grantor to pay the principal of, interest on, and Early Termination Premium payable pursuant to the Loan Agreement in the manner and at the time and place therein respectively expressed. SECTION 2.06. To the extent permitted by law, Grantor 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; nor claim, take or insist upon any benefit or advantage of any law now or hereafter in force providing for the marshalling of the Mortgaged Property or on the valuation or appraisal of the Mortgaged Property, or any part thereof, prior or subsequent 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; and Grantor 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 the Trustee or Beneficiary, but to suffer and permit the execution of every power as though no such law or laws had been made or enacted. Grantor hereby waives the right to require any sale to be made in parcels, or the right to select parcels to be so sold, and there shall be no requirement for marshalling of assets. Grantor hereby further waives any rights it may have under applicable law relating to the prohibition of the obtaining of a deficiency judgment by Beneficiary against Grantor. SECTION 2.07. During the continuance of any Event of Default and pending the exercise by the Trustee or Beneficiary of its right to exclude Grantor from all or any part of the Premises, Grantor agrees to pay the fair and reasonable rental value for the use and occupancy of the Mortgaged Property for such period and upon default of any such payment, will vacate and surrender possession of the Premises to the Trustee or Beneficiary or to a receiver, if any, and in default thereof may be evicted by any summary action or proceeding for the recovery or possession of Premises for non-payment of rent, however designated. SECTION 2.08. Without affecting the personal liability of any person, firm, corporation or other entity, including Grantor (other than any person released pursuant hereto), for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust for the full amount of the indebtedness remaining unpaid upon any property not reconveyed pursuant hereto, Beneficiary and Trustee are respectively authorized and empowered as follows: Beneficiary may, at any time and from time to time, either before or after the maturity or the expiration of the Loan Agreement, and without notice: (a) release any person liable for the payment of any of the indebtedness, (b) make any agreement extending the time or otherwise altering the terms of payment of any of the indebtedness, (c) accept additional security therefor of any kind, (d) release any property, real or personal, securing the indebtedness. Trustee may, without liability therefor and without notice, at any time and from time to time so long as the lien or charge hereof shall subsist, but only upon the written request of Beneficiary and presentation of this Deed of Trust for endorsement: (a) consent to the making of any map or plat of the Land, (b) join in granting any easement thereon or in creating any covenants restricting use or occupancy thereof, (c) reconvey, without warranty, any part of the Mortgaged Property, (d) join in any extension agreement or in any agreement subordinating the lien or charge hereof. SECTION 2.09. This Deed of Trust constitutes a Security Agreement under the laws of the State of North Carolina so that Grantor hereby grants to Beneficiary and Beneficiary shall have and may endorse a security interest in any or all of the Mortgaged Property which may or might now or hereafter be or be deemed to be personal property, fixtures or property other than real estate (collectively, "Personal Property") and Grantor agrees to execute, as debtor, such financing statement or statements as Beneficiary may now or hereafter reasonably request in order that such security interest or interests may be perfected pursuant to such laws. Notwithstanding the foregoing, Grantor and Beneficiary agree that any Personal Property which may be considered real property shall be conclusively presumed to be real property. Notwithstanding any release of any or all of the property included in the Premises which is deemed "real property", any proceedings to foreclose this Deed of Trust, or its satisfaction of record, the terms hereof shall survive as a security agreement with respect to the security interest created hereby and referred to above until the repayment or satisfaction in full of the obligations of Grantor as are now or hereafter evidenced by the Loan Agreement. SECTION 2.10. During the continuance of any Event of Default, Beneficiary shall have all of the rights and remedies of a secured party under the Uniform Commercial Code (the "Code") of the State of North Carolina, and specifically the right to direct notice and collections of any obligation owing to Grantor by any lessee. In addition to its rights to foreclose this Deed of Trust, Beneficiary shall have the right to sell the Personal Property or any part thereof, or any further, or additional, or substituted Personal Property, at one or more times, and from time to time, at public sale or sales or at private sale or sales, on such terms as to cash or credit, or partly for cash and partly on credit, as Beneficiary may deem proper. Beneficiary shall have the right to become the purchaser at any such public sale or sales, free and clear of any and all claims, rights of equity of redemp- tion in Grantor, all of which are hereby waived and released. Grantor shall not be credited with the amount of any part of such purchase price, unless, until and only to the extent that such payment is actually received in cash. Notice of public sale, if given, shall be sufficiently given, for all purposes, if published not less than five (5) days prior to any sale, in any newspaper of general circulation distributed in the city in which the property to be sold is located or as otherwise required by the Code. The net proceeds of any sale of the Personal Property which may remain after the deduction of all costs, fees and expenses incurred in connection therewith, including, but not limited to, all advertising expenses, broker's or brokerage commissions, documentary stamps, recording fees, foreclosure costs, stamp taxes and counsel fees, shall be credited by Beneficiary against the liabili- ties, obligations and indebtedness of Grantor to Beneficiary secured by this Deed of Trust and evidenced by the Loan Agreement. Any portion of the Personal Property which may remain unsold after the full payment, satisfaction and discharge of all of the liabilities, obligations and indebted- ness of Grantor to Beneficiary shall be returned to the respective parties which delivered the same to Beneficiary. If at any time Grantor or any other party shall become entitled to the return of any of the Personal Property here- under, any transfer or assignment thereof by Beneficiary shall be, and shall recite that the same is, made wholly without representation or warranty whatsoever by, or recourse whatsoever against Beneficiary. SECTION 2.11. All rights, remedies and powers provided by Sections 2.01-2.10 hereof may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law in the jurisdiction in which the Premises are located, and all such provisions are intended to be subject to all applicable provisions of law which may be controlling in such jurisdiction and to be limited to the extent necessary so that they will not render this Mortgage invalid, illegal or unenforceable under the provisions of any applicable law. ARTICLE III MISCELLANEOUS SECTION 3.01. 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 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. SECTION 3.02. All notices or demands by any party relating to this Deed of Trust or any other agreement entered into in connection herewith shall be in the form set forth in the Loan Agreement. The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 3.02 other than notices by Beneficiary in connection with Sections 9504 or 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or three (3) calendar days after the deposit thereof in the mail. Grantor acknowledges and agrees that notices sent by Beneficiary in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or transmitted by telefacsimile or other similar method permitted by law. SECTION 3.03. Whenever in this Deed of Trust the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person or persons entitled to receive such notice. SECTION 3.04. All of the grants, covenants, terms, obligations, provisions and conditions herein contained shall run with the land and shall apply to, bind and inure to the benefit of, the successors and assigns of Grantor and Beneficiary and to the successors of the Trustee. SECTION 3.05. Intentionally Deleted. SECTION 3.06. Intentionally Deleted. SECTION 3.07. Notwithstanding the appointment of any receiver, liquidator or trustee of Grantor, or of any of its property, or of the Mortgaged Property, or any part thereof, the Trustee shall be entitled to retain possession and control of all property now or hereafter held under this Deed of Trust. SECTION 3.08. If Grantor shall default in the payment of any sums due pursuant to the terms of the Loan Agreement, or this Deed of Trust such default shall be, and be deemed to be, an attempt by Grantor to avoid the Early Termination Premium payable by Grantor pursuant to the terms of the Loan Agreement and consequently, upon such default Beneficiary shall be entitled to collect such Early Termination Premium from Grantor with the same effect as if Grantor had voluntarily elected to prepay the principal sum evidenced by the Loan Agreement. SECTION 3.09. Grantor hereby waives and relin- quishes unto, and in favor of Beneficiary, all benefit under all laws, now in effect or hereafter passed, to relieve Grantor in any manner from the obligations assumed and the obligation for which this Deed of Trust is security or to reduce the amount of the said obligation to any greater extent than the amount actually paid for the Mortgaged Property, in any judicial proceedings upon the said obligation, or upon this Deed of Trust. SECTION 3.10. Neither Grantor nor any other person now or hereafter obligated for payment for all or any part of the indebtedness secured hereby shall be relieved of such obligation by reason of the failure of Beneficiary to comply with any request of Grantor or of any other person so obligated to take action to foreclose on this Deed of Trust or otherwise enforce any provisions hereof or under the Loan Agreement or by reason of the release, regardless of consideration, of all or any part of the security held for the indebtedness secured hereby, or by reason of any agreement of stipulation between any subsequent owner of the Mortgaged Property and Beneficiary extending the time of payment or modifying the terms hereof without first having obtained the consent of Grantor or such other person; and in the latter event Grantor and all other such persons shall continue to be liable to make payment according to the terms of any such extension or modification agreement, unless expressly released and discharged in writing by Beneficiary. SECTION 3.11. By accepting or approving anything required to be observed, performed or fulfilled or to be given to Beneficiary pursuant to this Deed of Trust, including (but not limited to) any certificate, balance sheet, statement of profit and loss or other financial statement, survey, appraisal or insurance policy, Beneficiary shall not be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not be or constitute any warranty or representation with respect thereto by Beneficiary. SECTION 3.12. Beneficiary may from time to time, without notice to Grantor or to the Trustee, and with or without cause and with or without the resignation of the Trustee substitute a successor or successors to the Trustee named herein or acting hereunder to execute this trust. Upon such appointment and without conveyance to the successor Trustee, the latter shall be vested with all title, powers and duties conferred upon the Trustee herein named or acting hereunder. Each such appointment and substitution shall be made by written document executed by Beneficiary, containing reference to this Deed of Trust and its place of record, which when duly filed for record in the proper office, shall be conclusive proof of proper appointment of the successor Trustee. The procedure herein provided for substitution of the Trustee shall be conclusive of all other provisions for substitution, statutory or otherwise. SECTION 3.13. Intentionally Deleted. SECTION 3.14. Intentionally Deleted. SECTION 3.15. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE CREATION, PERFECTION AND ENFORCEMENT OF THE LIENS GRANTED BY THIS DEED OF TRUST SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA AND IN ALL OTHER RESPECTS THIS DEED OF TRUST SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA. SECTION 3.16. Simultaneously with, and in addition to, the execution of this Deed of Trust, Grantor, and/or related or affiliated entities of Grantor, has executed and delivered as security for the Loan Agreement a mortgage or deed of trust on parcels of property which may or may not be outside the boundaries of this county. Grantor agrees that the occurrence of an Event of Default hereunder, or under any of such other mortgages or deeds of trust, shall be an Event of Default under each and every one of such mortgages and deeds of trust, including this Deed of Trust, permitting Beneficiary to proceed against any or all of the property comprising the Mortgaged Property or against any other security for the Loan Agreement in such order as Beneficiary, in its sole and absolute discretion may determine. Grantor hereby waives, to the extent permitted by applicable law, the benefit of any statute or decision relating to the marshalling of assets which is contrary to the foregoing. Beneficiary shall not be compelled to release or be prevented from foreclosing this instrument or any other instrument securing the Loan Agreement unless all indebtedness evidenced by the Loan Agreement and all items hereby secured shall have been paid in full and Beneficiary shall not be required to accept any part or parts of any property securing the Loan Agreement, as distinguished from the entire whole thereof, as payment of or upon the Loan Agreement to the extent of the value of such part or parts, and shall not be compelled to accept or allow any apportionment of the indebtedness evidenced by the Loan Agreement to or among any separate parts of said property. IN WITNESS WHEREOF, Grantor has caused this Deed of Trust to be executed, under seal, as of the day and year first above written. ATTEST: "GRANTOR" /s/ G. Templeton Blackburn, II ROSE'S STORES, INC., George Templeton Blackburn, II, a Delaware corporation Secretary [CORPORATE SEAL] By/s/ Jeanette R. Peters Jeanette R. Peters Chief Financial Officer EX-10.5 6 RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Loan Security Dept. SUBORDINATION AGREEMENT NOTICE TO SUBORDINATED CREDITORS: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR SECURITY INTEREST AND OTHER INTERESTS IN THE REAL PROPERTY BECOMING SUBJECT AND SUBORDINATE TO SOME OTHER OR LATER SECURITY INSTRUMENT. STATE OF NORTH CAROLINA ) ) ss. COUNTY OF VANCE ) SUBORDINATION AGREEMENT, dated as of May 21, 1996, among (1) FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), as Agent for itself and the other financial institutions ("Lenders") who may from time to time be parties to the Loan Agreement, as defined below (Foothill, as Agent and as Lender in the Loan Agreement, as defined below, and all Lenders therein are collectively, the "Banks") under that certain Loan and Security Agreement (the "Loan Agreement") dated as of even date herewith among Rose's Stores, Inc., a Delaware corporation ("Mortgagor") and the Banks and (2) M.J. SHERMAN & ASSOCIATES, INC., a New York corporation, as trustee (the "Trade Trustee") under that certain Letter of Credit and Mortgage Trust Agreement dated as of May _, 1995 between Mortgagor and the Trade Trustee, as amended by that certain Consent and Amendment to Subordination Agreement (the "Amendment to Subordination") dated April 29, 1996, and executed by The First National Bank of Boston ("FNBB"), The CIT Group/Business Credit, Inc. ("CIT"), BankAmerica Business Credit, Inc., Congress Financial Corporation (New England), NatWest Bank, N.A., LaSalle Business Credit, Inc., Sanwa Business Credit Corporation, and Trade Trustee (as amended, the "Trade Credit Trust Agreement"), and (3) ALAN H. PETERSON, Substitute Trustee, whose address is Two Hanover Square, 434 Fayatteville Street, Mall, Raliegh, North Carolina 27602, as Trustee under the PAGE Subordinate Mortgage, as defined below (the "Subordinate Mortgage Trustee"). R E C I T A L S A. WHEREAS, that certain real property, and all improvements and fixtures thereon, which is located in the County of Vance, State of North Carolina, and whose legal description is set forth on Exhibit "A" attached hereto and hereby incorporated herein by reference (the "Mortgaged Property") is encumbered by the following deeds of trust: (i) That certain Deed of Trust, Assignment of Rents and Security Agreement (the "Old Senior Mortgage") executed by Mortgagor, as trustor and FNBB as "Administrative Agent" and for itself as a "Bank" under that certain Revolving Credit Agreement (the "Old Loan Agreement") dated as of April 28, 1995 entered into among Mortgagor, FNBB, and CIT as a "Bank" under the Old Loan Agreement, as beneficiary, dated as of April 27, 1995 and recorded on April 27, 1995 in Book 748, at Page 729 in the office of the Register of Deeds of the County of Vance, State of North Carolina (the "Official Records"). (ii) That certain Second Deed of Trust, Assignment of Rents and Security Agreement (the "Subordinate Mortgage") dated as of May 8, 1995 executed by Mortgagor, as trustor to the Subordinate Mortgage Trustee, as trustee for the benefit of the Trade Trustee, as beneficiary, recorded in Book 749, at Page 499 in the Official Records, which Second Deed of Trust was amended by the certain First Amendment to Second Deed of Trust, Assignment of Rents and Security Agreement dated as of April 29, 1996 and thereafter recorded in the Official Records. WHEREAS, the Subordinate Mortgage is subordinate, junior, and subject to the Old Senior Mortgage, both by operation of law and as a result of that certain Subordination Agreement dated May 8, 1995 and executed by FNBB, CIT, and the Trade Trustee, as amended by the Amendment to Subordination; WHEREAS, contemporaneously herewith, the Banks are extending financial accommodations to Mortgagor by means of the Loan Agreement; WHEREAS, the obligations of Mortgagor under the Loan Agreement shall be secured by those certain two Future Advance Deeds of Trust, Assignments of Rents, and Security Agreements of even date herewith (the "Senior Mortgage"), executed by Mortgagor, as trustor, to David L. Huffstetler, as trustee, for the PAGE benefit of Foothill, in its capacity as agent for the Banks, as beneficiary, which Senior Mortgage shall be recorded in the Official Records; WHEREAS, the Trade Trustee has a direct financial stake in the financial health of Mortgagor and will benefit from the loans and advances to be made by the Banks under the Loan Agreement; WHEREAS, the Banks are unwilling to enter into the Loan Agreement unless the Trade Trustee executes and delivers this Agreement; WHEREAS, the Subordinate Mortgage at present is subordinate, junior, and subject to the Old Senior Mortgage and the Trade Trustee acknowledges and consents to the subordination to the Senior Mortgage of its Subordinate Mortgage, which Subordinate Mortgage would be senior to the Senior Mortgage but for this Agreement and the Trade Trustee has requested the Subordinate Mortgage Trustee to join with it in the execution of this Agreement; NOW, THEREFORE, in consideration of the foregoing, of the premises, and for ten dollars and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Capitalized terms used in this Agreement shall have the same meaning given to them in the Loan Agreement. In addition, the following terms shall have the indicated meanings whenever identified by initial capital letters (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Agreement" means this Subordination Agreement. "Drawing Event" shall mean any of the following events occurring after the date hereof and on or before the Draw Termination Date: (a) there shall have occurred a default in the payment of principal or interest on the obligations under and as defined in the Loan Agreement and such payment default shall have continued for a period of at least thirty (30) days and not been cured or waived at any time; or (b) the Mortgagor shall have commenced a bankruptcy case under Section 301 of title 11 of the United States Code; or (c) Foothill, in its capacity as agent for the Banks, shall have, by notice in writing to Mortgagor, declared all amounts owing with respect to the Loan Agreement and to the Notes, if any, to be immediately due and payable. "Draw Termination Date" means the earlier of (i) either (a) April 29, 1997 or (b) in the event and only in the event that there exists on April 29, 1997, a continuing default in the payment of principal or interest under and as defined in the Loan Agreement, the earlier of (x) the date thirty one (31) days after such payment default occurred, (y) the date such payment default has been cured or waived and (z) May 30, 1997 and (ii) in the event that the Mortgagor (or any successor by merger or otherwise) enters into a substitute working capital facility that is not by its terms secured by a security interest in the Mortgagor's inventory, the effective date of such facility. "Plan" shall mean the Modified and Restated First Amended Joint Plan of Reorganization of Rose's Stores. Inc. dated April 19, 1995 and approved by the United States Bankruptcy Court for the Eastern District of North Carolina on April 24, 1995 in the bankruptcy proceeding (Case No. 93-013655-ATS) of Rose's Stores, Inc. as debtor and debtor in possession. "Senior Indebtedness" means any indebtedness at any time owed by Mortgagor to the Banks under or on account of any of the Senior Loan Documents, including, but not limited to, indebtedness for principal, interest, reimbursement obligations, expenses, charges and other sums owed pursuant to the Senior Loan Documents, and any advances, readvances, extensions, or increases from time to time of any of the foregoing. "Senior Liens" means any lien, mortgage, pledge, security interest, collateral assignment, charge or encumbrance of any kind pursuant to or created by the Senior Mortgage or any of the other Senior Loan Documents. "Senior Loan Documents" means, collectively, the Loan Agreement, all notes issued from time to time pursuant to the Loan Agreement (the "Notes"), if any, the Senior Mortgage and all other agreements and documents executed and delivered from time to time pursuant to or in connection with the Loan Agreement. "Subordinate Indebtedness" means any indebtedness at any time owed by Mortgagor and secured by the Subordinate Mortgage, including, but not limited to, the Trade Debt Note, expenses, charges and other sums owing pursuant to the Subordinate Loan Documents. "Subordinate Liens" means any lien, mortgage, pledge, security interest, collateral assignment, charge or encumbrance of any kind on the Mortgaged Property pursuant to or created by the Subordinate Loan Documents. "Subordinate Loan Documents" means, collectively, the Subordinate Mortgage, the Trade Debt Note and the Trade Credit Trust Agreement and all related documents, agreements and instruments evidencing or creating the Subordinate liens or the Subordinate Indebtedness. "Trade Debt Note" means that certain Trade Debt Note, dated the date hereof, in the maximum principal amount of Fifteen Million Dollars ($15,000,000) made by the Mortgagor to the Trade Trustee, as such note may from time to time be amended, amended and restated, supplemented, modified, extended or replaced. "Trade Letter of Credit" means that certain letter(s) of credit issued by the Administrative Agent for the benefit of the Trade Trustee, as such letter of credit may be amended, amended and restated, supplemented, renewed, replaced or otherwise modified from time to time. (b) References herein to each of the Loan Agreement, the Notes, the Senior Mortgage, this Agreement, the Security Agreement and the other Senior Loan Documents shall mean, in the case of each such document, such document as amended, supplemented, modified, restated or assigned from time to time, including, without limitation, all consents and waivers issued under or in connection with any thereof. As set forth in Section 6 below, the Subordinate Loan Documents may not be amended, amended and restated, supplemented, modified, extended or replaced or assigned, and the Subordinate Indebtedness may not be increased or extended, without the prior written consent of the Banks in each instance. (c) As employed herein, the term "Banks" means Foothill, as Agent for Lenders and for itself as Lender, and all Lenders under the Loan Agreement. Trade Trustee acknowledges that additional lending institutions may from time to time become Lenders under the Loan Agreement and that from time to time one or more lending institutions that are Lenders under the Loan Agreement may cease to be one of the Lenders under the Loan Agreement. Accordingly, as employed herein the term Lenders means each lending institution that as of any date of determination is a Lender under the Loan Agreement. 2. Subordination of Liens. (a) By means of this Agreement, the Subordinate Mortgage and all other Subordinate Liens, and all the rights, powers, and privileges of the Subordinate Mortgage Trustee and the Trade Trustee thereunder are hereby made unconditionally subject, subordinate, junior, and inferior to the Senior Mortgage and all other Senior Liens, with full knowledge and understanding of the effect thereof by Trade Trustee. The Trade Trustee agrees and acknowledges that the Banks have a first priority perfected security interest in the Mortgaged Property pursuant to the Senior Mortgage, the other Senior Loan Documents, and the Plan. The Subordinate Liens are and shall remain subject and subordinate to the Senior Liens, regardless of the actual order of attachment, perfection, recordation or filing of the Senior Loan Documents evidencing the Senior Liens and of the Subordinate Mortgage and regardless of any provision in the Senior Loan Documents or the Subordinate Loan Documents, any applicable law or decision or any other circumstance; and the terms, conditions and covenants of the Subordinate Loan Documents and all of the rights of the Trade Trustee thereunder (including, without limitation, any rights of the Trade Trustee to insurance proceeds, condemnation awards and rents) are hereby made subject and subordinate to the terms, conditions and covenants of the Senior Loan Documents and all of the rights of the Banks thereunder. The Trade Trustee agrees not to contest or support any other person or entity, in contesting, in any proceeding the priority or the validity or enforceability of the Senior Liens. (b) In furtherance of the foregoing, but not in limitation thereof, the Trade Trustee hereby assigns and releases to the Banks (i) all of its right, title, interest or claim, if any, in and to the proceeds of all policies of insurance covering the Mortgaged Property or any part thereof, for payment of the Senior Indebtedness or other disposition thereof in accordance with the provisions of the Senior Loan Documents, and (ii) all of its right, title, interest or claim, if any, in and to all awards or other compensation made for any taking or condemnation of any part of the Mortgaged Property, for payment of the Senior Indebtedness or other disposition thereof in accordance with the provisions of the Senior Loan Documents. In the event that following any such payment or disposition of the insurance proceeds or condemnation awards any balance remains, then such excess shall be made payable to the order of the Trade Trustee to be allocated among the Trade Trustee, Mortgagor and such other parties as may be entitled thereto in accordance with the Subordinate Loan Documents and applicable law. (c) During the term of this Agreement, the Subordinate Liens shall be subject and subordinate to any and all leases, now existing or hereafter entered into, between Mortgagor and any third party for any part of the Mortgaged Property. 3. Enforcement Action by the Trade Trustee. The Trade Trustee agrees that, so long as this Agreement is in effect, it will not, without the prior written consent of the Banks, take any action to foreclose or realize upon any of the Subordinate Loan Documents or the Subordinate Liens or commence, prosecute or participate in any administrative, legal or equitable action, or take any other enforcement action, or assert any right or remedy whatsoever against Mortgagor or the Mortgaged Property under the Subordinate Loan Documents, whether under applicable state law, in any Bankruptcy Proceeding (as defined in Section 5 hereof) or otherwise, unless, in the case of each such action (hereinafter an "Enforcement Action"), at or prior to the time at which the Trade Trustee wishes to take such Enforcement Action, all Senior Indebtedness shall have been paid in full in cash and all commitments in respect of the Senior Loan Documents shall have terminated. The Trade Trustee waives any equitable rights to marshalling of assets or proration of security interests and agrees that it shall not, without first obtaining the written consent of the Banks, join as a party defendant in any suit to enforce its rights under the Subordinate Loan Documents any lessee under any lease of any portion of the Mortgaged Property. The Trade Trustee shall immediately assign and pay over to the Banks any property (or the proceeds thereof) acquired by the Trade Trustee in contravention of this Agreement. 4. Other Prior Liens. The Trade Trustee shall not acquire, by subrogation or otherwise, any lien upon or other estate, right or interest in the Mortgaged Property or any part thereof (including but not limited to any such lien, estate, right or interest which may arise in respect of real estate taxes or assessments or other governmental charges) which is or may be prior in right to the Senior Liens. 5. Bankruptcy of Mortgagor. Any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith relative to Mortgagor or the Mortgaged Property, or any proceedings for voluntary liquidation, dissolution or other winding up of Mortgagor, whether or not involved in insolvency or bankruptcy is hereinafter referred to as a "Bankruptcy Proceeding"). The Trade Trustee agrees not to take any action in opposition to the Banks in any Bankruptcy Proceeding with respect to the Senior Mortgage or the Mortgaged Property, or any position inconsistent with any position taken by the Banks in any Bankruptcy Proceeding and to exercise its rights and remedies in any Bankruptcy Proceeding with respect to the Subordinate Mortgage or the Mortgaged Property in such a manner as Senior Mortgagee may direct. 6. Additional Prohibited Actions. The Trade Trustee shall not amend, supplement, modify, restate or assign, or grant any waivers, consents or extensions under, the Subordinate Loan Documents or any of them, without first receiving the written consent of the Banks thereto in each instance, which consent may be withheld in the sole and absolute discretion of the Banks. Any such amendment, supplement, modification, restatement, assignment extension, waiver or consent in violation of the foregoing shall be void. 7. Notice of Default under Subordinate Loan Documents. The Trade Trustee shall promptly after becoming aware thereof notify the Banks of any default under the Subordinate Loan Documents or a request or direction by the beneficiaries of the Trade Credit Trust Agreement or the Trade Committee (as defined in the Trade Credit Trust Agreement) that a drawing be made under the Trade Letter of Credit or that the Trustee take any action including, without limitation, the exercise of remedies in respect of the Subordinate Mortgage or the Subordinate Liens. The Trade Trustee shall deliver to the Banks a copy of any notice of default or similar notice delivered to Mortgagor under the Subordinate Loan Documents, such delivery to be made simultaneously with the delivery of the notice of default or similar notice to Mortgagor. 8. Releases; Consents; Further Action. (a) At any time and from time to time upon or after the Banks or a designee of the Banks take any action to foreclose or realize upon any of the Senior Loan Documents or the Senior Liens or commence, prosecute or participate in any administrative, legal or equitable action, or take any other enforcement action, or assert any right or remedy whatsoever against Mortgagor or the Mortgaged Property under the Senior Loan Documents, whether under applicable state law, in any Bankruptcy Proceeding (as defined in Section 5 hereof) or otherwise, the Trade Trustee shall promptly perform such acts and execute and deliver to the Banks such documents and instruments to release, or evidence the release of, all or any part of the Mortgaged Property from the Subordinate Mortgage or the Subordinate Liens as the Banks or a designee of the Banks may request. (b) If the Banks shall propose to grant any waiver or consent under any of the Senior Loan Documents, the Trade Trustee shall, promptly following request therefor from the Banks, execute and deliver to the Banks such agreements as shall be reasonably requested by the Banks to evidence the waiver or consent of the Trade Trustee under the Subordinate Loan Documents to the same matter or thing constituting the subject of such proposed waiver or consent by the Banks, which waiver or consent of the Trade Trustee shall become effective concurrently with the effectiveness of such waiver or consent given by the Banks. (c) The Trade Trustee agrees at any time to execute and deliver to the Banks for recording or filing, at the Mortgagor's sole cost and expense and at the request of the Banks (or at the cost and expense of the Banks if the Mortgagor is unable to pay such costs and expenses), such amendments to any Subordinate Loan Documents as the Banks in its reasonable discretion shall consider necessary or appropriate to establish or to evidence the priority of the Senior Liens established pursuant to this Agreement, and shall take all such steps as shall be necessary or appropriate or as the Banks may direct to maintain such priority in effect and of record. The Trade Trustee agrees at any time and from time to time to take all such other and further action as the Banks shall reasonably request in order to effectuate the intent of this Agreement and the rights and priorities of the Banks hereunder. (d) The Trade Trustee agrees and acknowledges that notwithstanding anything in the Subordinate Loan Documents to the contrary, it shall not draw under the Trade Letter of Credit unless a Drawing Event occurs. 9. Mortgagor's Obligations to the Trade Trustee Unimpaired. Nothing contained in this Agreement is intended to or shall operate to impair, as between Mortgagor and the Trade Trustee, the obligation of Mortgagor, which is unconditional and absolute (except for the conditions imposed by this Agreement), to pay the Subordinate Indebtedness. 10. Action by Banks. The signature by Foothill (or its successor as Agent under the Loan Agreement) on any consent, request, demand or other action taken in writing hereunder shall constitute conclusive evidence that the same constitutes the consent, request, demand or other action of the Banks for the purposes of this Agreement. 11. Termination. This Agreement shall remain in full force and effect until the earlier of the date on which (a) the Senior Indebtedness shall have been paid in full in cash and all commitments under the Senior Loan Documents shall have been permanently terminated and Banks shall have satisfied and cancelled of record the Senior Mortgage, and (b) the term of the Subordinate Mortgage shall have expired and the Subordinate Mortgage and all other instruments or filings evidencing the Subordinate Liens shall have been cancelled of record. 12. Release of Subordinate Mortgage; Trade Letter of Credit. In the event a Drawing Event has not occurred on or prior to the Draw Termination Date, the Trade Trustee agrees to (i) release the Subordinate Mortgage and all Subordinate Liens and execute and deliver to the Banks such documents and perform such other acts as are requested by the Banks to effectuate such release and (ii) return for cancellation all documents and certificates related to the Trade Letter of Credit and take all other actions requested by the Banks to effectuate such cancellation. Without limiting the generality of the foregoing, and in order to effectuate the provisions of this paragraph and paragraph 8(a), the Trade Trustee is delivering together with this Agreement fully executed and acknowledged release instruments and documents to be held in escrow by the Agent. The Trade Trustee agrees and acknowledges that the Agent may deliver such instruments and documents from escrow to the Banks and the Banks may file or record such release instruments and documents and complete or add any required information (including recording information for the Subordinate Mortgage) in the event that the Banks have not received notice of a Drawing Event on or before the Draw Termination Date or a Drawing Event has not occurred on or before the Draw Termination Date. 13. Extension of Trade Letter of Credit. Provided that no Draw Termination Date has occurred prior to such time, in the event that on or after April 1, 1997 and on or before April 29, 1997, there occurs a default in the payment of principal or interest under and as defined in the Loan Agreement, the Trade Trustee shall have the right, if such payment default is continuing and has not been cured or waived, to extend the expiration date of the Trade Letter of Credit to the earlier of (i) the date thirty one (31)) days after such payment default occurred and (ii) May 30, 1997 in accordance with the terms of the Trade Letter of Credit. If such default in the payment of principal or interest under and as defined in the Loan Agreement is cured or waived after the date of the occurrence thereof, and the expiration date of the Trade Letter of Credit has been extended as provided in the preceding sentence, the Trade Trustee agrees, promptly upon the occurrence of the later of (i) April 30, 1997 and (ii) the date that such payment default has been cured or waived, to return for cancellation all documents and certificates related to the Trade Letter of Credit and take all other actions requested by the Banks to effectuate such cancellation. 14. No Waiver. The failure of the Banks to avail itself of any of the terms, covenants and conditions of this Agreement for any period of time or at any time or times shall not be construed or deemed to be a waiver of the right to do so, and nothing herein contained, nor anything done or omitted to be done by the Banks pursuant hereto shall be deemed a waiver by the Banks of any of its rights or remedies under any of the Senior Loan Documents. 15. Binding Effect. This Agreement shall be binding upon the Trade Trustee and its successors and assigns and shall inure to the benefit of the Banks and their successors and assigns. 16. Amendment. No amendment or waiver of any provision of this Agreement or consent to any departure by the Trade Trustee from the terms of hereof shall in any event be effective unless the same shall be in writing and signed by the Banks and each such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 17. Notices. Any notice, demand or request required hereunder shall be given in writing by any of the following means: (i) personal service; (ii) registered or certified first class mail, postage prepaid, return receipt requested; or (iii) by a nationally recognized overnight courier service, addressed in each case as follows: If to the Banks, to: Foothill Capital Corporation 11111 Santa Monica Blvd. Suite 1500 Los Angeles, California 90025-3333 Attention: Business Finance Division Manager If to the Trade Trustee, to: M.J. Sherman & Associates, Inc. 333 East 68th Street New York N.Y. 10021 Attention: Michael J. Sherman Such addresses may be changed by notice to the other parties given in the same manner as above provided. The first to occur of the date of execution of a receipt or four (4) days after the date of mailing by certified or registered mail shall constitute delivery of notice by mail. The date on which personal delivery with receipt acknowledged or courier delivery with receipt acknowledged is made shall constitute the date of delivery by such means. 18. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 19. Headings. The section headings herein in no way define, limit, extend or interpret the scope of this Agreement or of any particular section hereof. 20. Number and Gender. When the context in which the words are used in this Agreement indicates that such is the intent, words in the singular number shall include the plural and vice-versa. References to any one gender shall include the neuter and the other gender, and references to the neuter shall include both genders, if applicable under the circumstances. 21. Severability. In case any one or more of the provisions contained in this Agreement or any instrument evidencing or securing part or all of the Senior Indebtedness or the Senior Loan Documents shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which is as close as possible to that of the invalid, illegal or unenforceable provisions. 22. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of New York. IN WITNESS WHEREOF, the parties have executed this Subordination Agreement, under seal, the day and the year first above written. ATTEST: FOOTHILL CAPITAL CORPORATION, a California corporation /s/ Signature not shown __________ Secretary By:/s/ Signature not shown [CORPORATE SEAL] Name:_________________________ Title:________________________ ATTEST: M.J. SHERMAN & ASSOCIATES, INC., a New York corporation /s/ Signature not shown __________ Secretary By:/s/ Signature not shown [CORPORATE SEAL] Name:_________________________ Title:________________________ ATTEST: SPRUILLCO, LTD. /s/ Signature not shown By:/s/ Signature not shown __________ Secretary Name:_____________________ [CORPORATE SEAL] Title"____________________ PAGE Acknowledged and Consented to: ROSE'S STORES, INC., a Delaware corporation By:/s/ Signature not shown Name:____________________ Title:___________________ EX-10.6 7 INTELLECTUAL PROPERTY SECURITY AGREEMENT This INTELLECTUAL PROPERTY SECURITY AGREEMENT ("Agreement"), dated as of May 21, 1996, is entered into between ROSE'S STORES, INC., a Delaware corporation ("Debtor") and FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders, as such term is defined in the Loan Agreement, in light of the following: A. Debtor, Lenders, Agent and Co-Agent are, contemporaneously entering into that certain Loan and Security Agreement, dated as of even date (as may hereafter be amended, supplemented or restated from time-to-time in accordance with the terms thereof, the "Loan Agreement"). B. Debtor is the owner of certain intellectual property, identified below, in which Debtor is granting a security interest to Agent. NOW THEREFORE, in consideration of the mutual promises, covenants, conditions, representations, and warranties hereinafter set forth and for other good and valuable consideration, the parties hereto mutually agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1. Definitions. All initially capitalized terms used but not defined in this Agreement shall have the meanings assigned to such terms in the Loan Agreement. In addition, the following terms, as used in this Agreement, have the following meanings: 2. Additional Definitions. The following terms, as used in this Agreement, have the following meanings: "Code" means the California Uniform Commercial Code, as amended and supplemented from time to time, and any successor statute. "Collateral" means: (i) Each of the service marks and rights and interest which are capable of being protected as service marks (including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles, and other source or business identifiers, and applications pertaining thereto), which are pre- sently, or in the future may be, owned, created, acquired, or used (whether pursuant to a license or otherwise) by Debtor, in whole or in part, and all trademark and service mark rights with respect thereto throughout the world, including all proceeds thereof (including license royalties and proceeds of infringement suits), and rights to renew and extend such service marks and service mark rights; (ii) All of Debtor's right to the service marks and trademark registrations listed on Schedule A, attached hereto, as the same may be updated hereafter from time to time; (iii)All of Debtor's right, title and interest to register service mark claims under any state or federal service mark law or regulation of any for- eign country and to apply for, renew, and extend the service mark registra- tions and service mark rights, the right (without obligation) to sue or bring opposition or cancellation proceedings in the name of Debtor or in the name of Agent for past, present, and future infringements of the service marks, registrations, or service mark rights and all rights (but not obligations) corresponding thereto in the United States and any foreign country, and the associated goodwill; (iv) All general intangibles relating to the foregoing; and (v) All proceeds of any and all of the foregoing (including, without limitation, license royalties and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance, or any indemni- ty, warranty, or guaranty payable by reason of loss or damage to or otherwise with respect to the Collateral. "Secured Obligations" means the Obligations (as defined in the Loan Agreement) and the obligations of Debtor hereunder. 3. Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, and the term "including" is not limiting. The words "hereof," "herein," "hereby," "hereunder," and other similar terms refer to this Agreement as a whole and not to any particular provision of this Agree- ment. Any initially capitalized terms used but not defined herein shall have the meaning set forth in the Loan Agreement. Any reference herein to any of the Loan Documents includes any and all alterations, amendments, extensions, modifi- cations, renewals, or supplements thereto or thereof, as applicable. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or re- solved against Agent or Debtor, whether under any rule of construction or other- wise. On the contrary, this Agreement has been reviewed by Debtor, Agent, and their respective counsel, and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of Agent and Debtor. 2. GRANT OF SECURITY INTEREST. Debtor hereby grants to Agent, for the ratable benefit of the Lenders, a first-priority security interest in all of Debtor's right, title, and interest in and to the Collateral to secure the Secured Obligations. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor hereby represents, warrants, and covenants that: 1. Marks. A true and complete schedule setting forth all federal trademark and service mark registrations owned or controlled by Debtor or li- censed to Debtor, together with a summary description and full information in respect of the filing or issuance thereof and expiration dates is set forth on Schedule A; 2. Validity; Enforceability. Each of the service marks and trademarks is valid and enforceable, and Debtor is not presently aware of any past, present, or prospective claim by any third party that any of the service marks are invalid or unenforceable, or that the use of any service marks vio- lates the rights of any third person, or of any basis for any such claims; 3. Title. Debtor is the sole and exclusive owner of the entire and unencumbered right, title, and interest in and to each of the trademarks, ser- vice marks, and trademark and service mark registrations, free and clear of any liens, charges, and encumbrances, including pledges, assignments, licenses, and covenants by Debtor not to sue third persons; 4. Notice. Debtor has used and will continue to use proper statutory notice in connection with its use of each of the trademarks and ser- vice marks; 5. Quality. Debtor has used and will continue to use consistent standards of high quality (which may be consistent with Debtor's past practices) in the manufacture, sale, and delivery of products and services sold or deliver- ed under or in connection with the trademarks and service marks, including, to the extent applicable, in the operation and maintenance of its merchandising operations, and will continue to maintain the validity of the trademarks and service marks; 6. Perfection of Security Interest. Except for the filing of a financing statement with the Secretary of State of North Carolina and filings with the United States Patent and Trademark Office necessary to perfect the security interests created hereunder, no authorization, approval, or other ac- tion by, and no notice to or filing with, any governmental authority or regula- tory body is required either for the grant by Debtor of the security interest hereunder or for the execution, delivery, or performance of this Agreement by Debtor or for the perfection of or the exercise by Agent of its rights hereunder to the Collateral in the United States. 4. AFTER-ACQUIRED TRADEMARK AND SERVICE MARK RIGHTS. If Debtor shall obtain rights to any new trademarks and service marks, the provisions of this Agreement shall automatically apply thereto. Debtor shall give prompt notice in writing to Agent with respect to any new trademarks and service marks, or renewal or extension of any trademark and service marks registration. Debtor shall bear any expenses incurred in connection with future trademarks and service marks registrations. 5. LITIGATION AND PROCEEDINGS. Debtor shall commence and diligently prosecute in its own name, as the real party in interest, for its own benefit, and its own expense, such suits, administrative proceedings, or other action for infringement or other damages as are in its reasonable business judgment necessary to protect the Collateral. Debtor shall provide to Agent any information with respect thereto requested by Agent. Agent shall provide at Debtor's expense all necessary cooperation in connection with any such suits, proceedings, or action, including, without limi- tation, joining as a necessary party. Following Debtor's becoming aware thereof, Debtor shall notify Agent of the institution of, or any adverse determination in, any proceeding in the United States Patent and Trademark Office, or any United States, state, or foreign court regarding Debtor's claim of ownership in any of the service marks, its right to apply for the same, or its right to keep and maintain such service marks rights. 6. POWER OF ATTORNEY. Debtor grants Agent power of attorney, having the full authority, and in the place of Debtor and in the name of Debtor, from time to time following an Event of Default in Agent's discretion, to take any action and to execute any instrument which Agent may deem necessary or advisable to accomplish the pur- poses of this Agreement, including, without limitation, as may be subject to the provisions of this Agreement: to endorse Debtor's name on all applications, documents, papers, and instruments necessary for Agent to use or maintain the Collateral; to ask, demand, collect, sue for, recover, impound, receive, and give acquittance and receipts for money due or to become due under or in respect of any of the Collateral; to file any claims or take any action or institute any proceedings that Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce Agent's rights with respect to any of the Collateral and to assign, pledge, convey, or otherwise transfer title in or dispose of the Collateral to any person. 7. RIGHT TO INSPECT. Debtor grants to Agent and its employees and agents the right to visit Debtor's plants and facilities at which Debtor inspects or stores products sold under any of the service marks, and to inspect the products and quality control records relating thereto at reasonable times during regular business hours. 8. EVENTS OF DEFAULT. Any of the following events shall be an Event of Default: 1. Loan Agreement. An Event of Default shall occur under the Loan Agreement; 2. Misrepresentation. Any representation or warranty made herein by Debtor or in any document furnished to Agent by Debtor under this Agreement is incorrect in any material respect when made or when reaffirmed; and 3. Breach. Debtor fails to observe or perform any covenant, condition, or agreement to be observed or performed pursuant to the terms hereof which materially and adversely affects the Lender Group. 9. SPECIFIC REMEDIES. Upon the occurrence of any Event of Default, Agent shall have, in addition to, other rights given by law or in this Agreement, the Loan Agreement, or in any other Loan Document, all of the rights and remedies with respect to the Collateral of a secured party under the Code, including the following: 1. Notification. Agent may notify licensees to make royalty payments on license agreements directly to Agent; 2. Sale. Agent may sell or assign the Collateral and associated goodwill at public or private sale for such amounts, and at such time or times as Agent deems advisable. Any requirement of reasonable notice of any disposi- tion of the Collateral shall be satisfied if such notice is sent to Debtor five (5) days prior to such disposition. Debtor shall be credited with the net pro- ceeds of such sale only when they are actually received by Agent, and Debtor shall continue to be liable for any deficiency remaining after the Collateral is sold or collected. If the sale is to be a public sale, Agent shall also give notice of the time and place by publishing a notice one time at least five (5) days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held. To the maximum extent permitted by applicable law, Agent may be the purchaser of any or all of the Collateral and associated goodwill at any public sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any public sale, to use and apply all or any part of the Obligations as a credit on account of the purchase price of any collateral payable by Agent at such sale. 10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF AGENT, IN ANY OTHER COURT IN WHICH AGENT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF DEBTOR AND AGENT WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 10. DEBTOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. DEBTOR AND AGENT REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11. GENERAL PROVISIONS. 1. Effectiveness. This Agreement shall be binding and deemed effective when executed by Debtor and Agent. 2. Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Debtor may not assign this Agreement or any rights or duties hereunder without Agent's prior written consent and any prohibited assignment shall be absolutely void. Agent may assign this Agreement and its rights and duties hereunder and no consent or approval by Debtor is required in connection with any such assignment. 3. Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 4. Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Agent or Debtor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted accord- ing to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 5. Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 6. Amendments in Writing. This Agreement can only be amended by a writing signed by both Agent and Debtor. 7. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver a manually executed counter- part of this Agreement but the failure to deliver a manually executed counter- part shall not affect the validity, enforceability, and binding effect of this Agreement. 8. Fees and Expenses. Debtor shall pay to Agent on demand all costs and expenses that the Agent pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Agreement, including: (a) reasonable attorneys' and paralegals' fees and dis- bursements of counsel to Agent; (b) costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) for any amendment, supple- ment, waiver, consent, or subsequent closing in connection with this Agreement and the transactions contemplated hereby; (c) costs and expenses of lien and title searches; (d) taxes, fees, and other charges for filing this Agreement at the United States Patent and Trademark Office, or for filing financing state- ments, and continuations, and other actions to perfect, protect, and continue the security interest created hereunder; (e) sums paid or incurred to pay any amount or take any action required of Debtor under this Agreement that Debtor fails to pay or take; (f) costs and expenses of preserving and protecting the Collateral; and (g) costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) paid or incurred to enforce the security interest created hereunder, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of this Agreement, or to defend any claims made or threatened against the Agent arising out of the transactions contemplated hereby (including preparations for the consultations concerning any such matters). The foregoing shall not be construed to limit any other provisions of this Agreement or the Loan Documents regarding costs and expenses to be paid by Debtor. The parties agree that reasonable attorneys' and paralegals' fees and costs incurred in enforcing any judgment are recoverable as a separate item in addition to fees and costs incurred in obtaining the judgment and that the recovery of such attorneys' and paralegals' fees and costs is intended to sur- vive any judgment, and is not to be deemed merged into any judgment. 9. Notices. Except as otherwise provided herein, all notices, demands, and requests that either party is required or elects to give to the other shall be in writing and shall be governed by the provisions of Section 12 of the Loan Agreement. 10. Termination By Agent. After termination of the Loan Agreement and when Lenders have received payment and performance, in full, of all Obligations, Agent shall execute and deliver to Debtor a termination of all of the security interests granted by Debtor hereunder. 11. Debtors Use of Collateral. Notwithstanding the foregoing, unless and until Agent exercises the rights and remedies accorded to it under the Loan Agreement and by law with respect to the realization upon its security interest in the service marks and trademarks, Debtor shall continue to own, and may use and enjoy, the services marks and trademarks in connection with its business operations, but only in a manner consistent with the preservation of their current substance, validity, registration and the collateral assignment herein contained. 12. Licensing. Notwithstanding anything herein to the contrary, Agent acknowledges that in the ordinary course of its business, Debtor has granted and will hereafter grant licenses of the service marks and trademarks to third parties, including, but not limited to, franchisees, without consent of or notice to Agent. Agent agrees not to take any action inconsistent with the rights of any such licensee pursuant to any license or franchise agreement to use or enjoy the services marks and trademarks. 13. No Action to Halt Use. In the event that Agent exercises any rights and remedies with respect to the realization upon its security interest in the service marks and trademarks, Agent shall not take any action and shall not threaten to take any action to halt any licensee's use and enjoyment of the service marks and trademarks, except as may be provided for in the documents establishing such licensee's rights to use and enjoy the service marks and trademarks. 14. Integration. This Agreement, together with the other Loan Documents, reflect the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written above. FOOTHILL CAPITAL CORPORATION, a California corporation, as agent By:/s/ Signature not shown Title: ROSE'S STORES, INC., a Delaware corporation By:/s/ Signature not shown Title: Senior Vice President EX-27 8
5 This schedule contains summary financial information extracted from Rose's Stores, Inc., Form 10-Q for the quarter ended April 27, 1996, and is qualified in its entirety by reference to such financial statements. 0000085149 ROSE'S STORES, INC. 1,000 3-MOS JAN-25-1997 APR-27-1996 578 0 8,977 298 172,294 185,797 6,136 356 192,538 112,381 0 0 0 35,000 6,212 192,538 150,145 151,225 113,040 149,187 0 0 1,386 652 0 652 0 0 0 652 .07 .07
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